Industrial Policy Synergies: Industrial Policy + Macroeconomic Policy

The passage of the CHIPS and Science Act and the Inflation Reduction Act signals that policymakers on both sides of the aisle¹ have acknowledged a role for a national industrial strategy to shore up our country’s national and economic security.² These first steps toward reviving industrial policy as a focus of economic policy allow macroeconomic policymakers to ask a new range of questions as they consider government’s role in creating a stable macroeconomy, averting economic crises, and dampening economic downturns. If industrial policy is now an explicit and stated objective of economic policymaking, do policymakers need a new set of crisis response tools at the ready to stabilize critical industries at moments of acute disruption or systemic risk?

The Biden administration found itself having to answer that question in real time during the disruptions to key industrial supply chains that first occurred at the onset of the COVID-19 pandemic and then again due to Russia’s invasion of Ukraine. The financial sector is one sector which has a set of macro-stabilization tools. As the supply chain crisis recedes from headlines and shows some signs of improving,³ experts should now take more time to debate how future supply-side shocks could be handled.

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Whether or not government should take action in response to an acute shock to a critical supply chain is open to debate. Supply chains are by and large run and controlled by the private sector: They are the systems by which companies make and move the goods they sell to businesses and consumers. Government intervention in private markets always raises important concerns about privatizing gains and socializing losses, often showcasing the “tails you lose, heads I win” dynamic that both distorts markets and breeds public mistrust in government and corporations.

That said, governments often face a difficult set of imperfect choices when macroeconomic stability is at stake—as was the case during the pandemic-induced recession. Getting employment, inflation, and/or aggregate demand under control after a systemic shock, like a financial panic, or an exogenous shock, like a war, has long been a recognized focus of economic policy in the US. Stabilizing output, however, like other supply-side interventions, has not been a central focus in recent decades. But in theory, stabilizing aggregate supply or expanding productive capacity can be a tool in reestablishing macroeconomic stability. In only one sector of the economy—the financial sector and money supply—do we have an agreed-upon set of policy tools to stabilize supply through the Fed’s monetary policy function.

During the post-2020 supply chain crises, it became clear that some supply chains have an outsized impact on the macroeconomy, whether through inflation, GDP, or employment. The chips shortage revealed a quintessential example of such a supply chain. In 2021, nearly one in five workers were employed in a sector that uses chips, and the shortage drove one-third of core inflation and knocked 1 percent off US GDP.⁴

If certain supply chain vulnerabilities pose a systemic risk to the economy, should government take action to blunt the impacts of an acute disruption in a given supply chain? And if so, when should government intervene, what should be the goals of public intervention, and how should government act?

The administration’s first answer to these questions was to develop proactive supply chain analytic and response capabilities across government, and therefore the president issued Executive Order 14017 on America’s supply chains in his first month in office.⁵ Within one year, seven agencies issued first-of-their-kind diagnoses and prescriptions on six key industrial bases, and new supply chain offices were established at the Department of Health and Human Services, the Department of Transportation, and the Department of Energy.⁶ This executive order, and the quadrennial review process it establishes for regular analysis and planning, can help us get ahead of potential vulnerabilities.⁷

However, as that new longer-term capability was being built, the administration faced unique supply chain challenges posed by the post-pandemic and then post-war economy. A White House-led Supply Chain Disruptions Task Force was set up to build the capacity to diagnose and respond to acute disruptions. This Task Force paired sectoral experts with the macroforecasting teams at the Council of Economic Advisors and Treasury to share quantitative and qualitative data. This allowed economists across the interagency to develop a shared outlook for the semiconductor, transportation, and food and agriculture sectors and assess the variety of supply- and demand-side factors contributing to acute supply chain stresses. It also enabled interdisciplinary teams to leverage that data to develop potential policy responses.

The Task Force focused on the chip shortage first, driven in part by the percent of GDP at stake and the large numbers of workers being impacted by furloughs and shutdowns. The administration was effectively able to wield three tools to help stabilize this supply chain. First, it leveraged its convening power to bring together leaders of firms that produce chips, such as Intel and Taiwan Semiconductor Manufacturing Company (TSMC), with leaders of firms that use chips, like General Motors (GM) and Medtronic. This helped increase the quality and quantity of direct communication between senior executives in companies at opposite ends of the semiconductor supply chain, who were typically not in direct relationship with one another: GM did not work directly with TSMC to source chips—GM’s first- and second-tier suppliers held that relationship. This convening power was used to drive private-sector problem-solving, with follow-up meetings held to encourage both accountability and action. By the fall of 2021, automakers and chip companies began to announce new strategic partnerships.⁸

Second, building off this role as trusted convenor, the Commerce Department conducted a survey of chip producers and users to create a reliable data source that industry on either end of the supply chain could use to make forecasts.⁹ Lack of credible and trustworthy information had led to hoarding and over-ordering behavior on the part of firms using chips, and made it difficult for chip companies to trust their customers’ orders. Without reliable demand-side data, chip producers could not effectively plan their (long) production cycles. While some analysts argued that a structural shift elevating latent demand for chips was underway, executives feared that a cyclical downturn would soon lead to overcapacity and erode margins.¹⁰

Third, the administration deployed diplomatic tools, and the Departments of State and Commerce worked with embassies across Southeast Asia to create a new early alert system to rapidly elevate information about acute disruptions in key plants in key countries. This allowed allies to work together to resolve the disruption more quickly, and companies in the US could be alerted so production cycles in the US could be adjusted to minimize furloughs and shutdowns. In this process, policymakers took steps to consult both management and labor on the appropriate course of action, recognizing that the source of the disruption was a surge in COVID cases that might put workers’ health and safety at risk. To that end, policymakers urged US-based original equipment manufacturers (OEMs) to take steps to support their Asian-based suppliers’ ability to protect the health and safety of workers. In the aftermath of the Delta wave of the COVID virus, auto industry leaders privately noted that the beta version of the early alert system averted weeks of layoffs and furloughs in their plants.¹¹

In the end, though, the government had very limited tools to address the chip shortage. No emergency funding was authorized to allow government to quickly expand domestic supply-side capacity. While there were calls for the Fed to use the Defense Production Act (DPA) to address the shortage, ultimately none of the DPA’s various authorities—neither prioritizing chips for certain industries over others nor investments to expand supply—were invoked.

This contrasts with another supply chain shock that raised health and safety concerns rather than macroeconomic ones—the infant formula shortage. In this shortage, another highly consolidated industry faced a supply-side shock—a temporary shutdown of a major facility due to health and safety concerns—and the administration decided to invoke the Defense Production Act (in this case the DPA’s Title I authority) to make sure certain inputs needed for formula production were being directed to formula manufacturers instead of other industries. The vulnerable nature of the affected population (infants) and the essential nature of the good (nutrition necessary for life) drove a swift response to shore up supply chain vulnerabilities in a supply chain that lacked macroeconomic significance but had severe health significance. In addition, the ability to mount a supply-side response was enabled by pre-existing government capacity: The Department of Health and Human Services had built internal expertise on using the DPA as part of its COVID-management response. The Office of the Assistant Secretary of Health for Preparedness and Response was well versed in how to evaluate the risks and benefits of intervention, and how to underwrite and monitor DPA actions. In this instance, the administration also moved to drive more competition into formula markets by removing trade barriers, thus increasing the longer-term resilience of the supply chain to mitigate against future shortages.¹²

Capital investments are not the only option to boost supply-side capacity, however. Policymakers can also make interventions to expand labor supply and invest in workers.

The Biden approach to the trucking shortage exemplifies this worker-centric approach to an acute supply chain challenge. Constraints in logistics supply chains were a key contributor to inflation in 2021, with ports and trucking being key bottlenecks. Trucks move over 70 percent of all goods in America, and costs had grown more than 20 percent in 2021. Again, government’s first act was to leverage its convening authority to bring together trucking companies, labor leaders, and training providers to discuss opportunities to address the trucker shortage. All agreed that a major barrier to recruiting more drivers was job quality, and that high turnover and an aging workforce were key causes of the shortage. Based on this input, the secretaries of labor and transportation worked together to help industry leaders adopt registered apprenticeships—a high-quality training program supported by the Department of Labor. The result was the spread of a proven earn-and-learn model throughout the trucking industry, with companies and leading industry trade associations all signing up to promote and spread apprenticeships in the industry.¹³ In just three months, the Department of Labor approved over 100 new apprentice programs at companies as diverse as Frito-Lay and Waste Management, which would create over 10,000 new apprentices to address the reported 80,000 driver shortage.

Active labor market policies like workforce development and unemployment insurance programs are designed to smooth labor supply across the business cycle. However, they are typically deployed in a place-based manner, with programs like unemployment insurance run at the local and regional levels to solve local labor supply challenges. In the case of the trucking shortage, the administration was successfully able to create a national sprint to quickly surge labor supply in an industry facing a national shortage. Moreover, the short-term actions to expand labor supply were paired with a longer-term effort to strengthen job quality through a new Driving Good Jobs initiative that paired the Department of Transportation’s expertise on the trucking industry with the Department of Labor’s expertise on job quality. Finally, the administration continued its emphasis on bringing labor and management together to advise on and co-create solutions to industry-wide shocks—demonstrating the power of government, labor, and business collaborations to solve pressing public challenges. This resulted in solutions that centered the needs and concerns of workers, and advanced their calls for improved job quality, to recruit and retain a diverse workforce.

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Supply chain shocks will likely continue to hit our economy, and could disrupt our macroeconomic stability. Whether we as a nation are prepared to handle those disruptions deserves further consideration by policymakers. This essay provided a brief glimpse into the Biden supply chain crisis response toolkit, with the hopes of encouraging others to ask what sort of toolkit we need for the future. Before COVID, business leaders waved off the rising evidence that supply chain shocks were increasing in frequency and magnitude.¹⁴ For many, Russia’s war in Ukraine was a rude awakening that these vulnerabilities need to be taken seriously.

In addition to considering whether and how government should act, it is important for business leaders to also reflect on what actions they could take to minimize the frequency and duration of supply-side shocks. For too long, business leaders have focused on short-term efficiency over longer-term resiliency. Moreover, throughout the crisis, we encountered business leaders who lacked visibility into their supply chains, and had no plans in place to enable them to adapt to a disruption. More businesses should be stress testing their own supply chains.

Mounting an effective policy response requires good data and analytics. Much of the data necessary to understand these supply chains, however, is held by businesses, and therefore some methods of public/private coordination are likely necessary to gather actionable data. Should government play a role in encouraging, facilitating, or even mandating industry-led supply chain stress testing, the way systemically significant banks undergo stress tests? That would give policymakers access to data in advance of a crisis, rather than having to negotiate with industry to get access to data during a crisis. If so, which industries or supply chains should be stress tested, and is this something government should mandate, or that industry leaders and corporate boards should take on? What actions can government take to encourage this stress testing: Should it choose the “carrot” of incentives, the “stick” of regulation, or the persuasion of the bully pulpit to induce a behavior change? Given the national security and market-sensitive nature of the information, should the information in these stress tests remain classified or nonpublic? Stress testing would generate data that can help model the magnitude of shocks and transmission channels of those shocks, and enable ex ante conversations about what magnitude of shock warrants action and what magnitude of response is warranted. It can also help policymakers identify ex ante what tools government may need to be prepared to manage these shocks, and which impacts policy should be focused on solving for.

Government capability to create consistent, reliable, and longitudinal publicly available data on select supply chains should also be considered, so that business leaders, policymakers, and advocates alike can have the data they need to plan, understand, and respond. This data would allow policymakers, researchers, and advocates to model the impact disruptions have on the macroeconomy, on different industries, on families, and on workers and to create baseline measures to assess if resiliency has improved or weakened, or if an acute stress has emerged. Public data can also enable the development of private-sector solutions—from insurance products to stockpiling and other hedging techniques.

Should there be a central command center in the federal government to provide a unified view of supply chain weaknesses and to organize cross-agency responses to both acute and chronic stresses? Organizing responses with speed and agility is key. The Disruptions Task Force demonstrated that actions can be taken and have impact within weeks and months.¹⁵ In discussions around the CHIPS and Science Act, Congress debated establishing a supply chain office at the Department of Commerce to take on these responsibilities. While the House bill included a robust office with the capacity to conduct analysis and take action, the proposal ultimately dropped out of the final bill. While both chambers agreed that a monitoring and analysis function was warranted, differences emerged over whether Commerce should be given resources and authority to intervene proactively if a disruption occurs.

Finally, with a new era of industrial policy upon us, macroeconomics will need to develop new tools and techniques to advise policymakers on effective crisis response. Being able to think through the causes and consequences of various shocks can enable us to consider appropriate policy interventions in advance, rather than stumbling from crisis to crisis.¹⁶

Connecting the dots between supply chains and the macroeconomy is methodologically complex, as we learned through the economic forecasting work of the Supply Chain Disruptions Task Force. The deep, industry-specific expertise of our microeconomic teams helped our macroeconomic teams interpret their data and discover data points that could be leading indicators of improvements or declines. Therefore, as economists build new methods for incorporating supply chain analyses into their economic forecasting models, they will likely need to work closely with other disciplines to incorporate analyses of market structure and industry norms, to understand how a shock will impact output, prices, and employment. Indeed, collaboration between academics and the government could ultimately even yield new economic measurements that could help monitor the overall health of the economy.¹⁷