Symposium | The Middle-Out Moment Is Here

Finally, a Public Investment Boom

By Neale Mahoney Aaron “Ronnie” Chatterji

Tagged Biden AdministrationIndustrial Policy

The U.S. government is once again making large public investments, which are one of the key pillars of middle-out economics. We witnessed this phenomenon firsthand as economists working in the Biden Administration. The American Rescue Plan, the Bipartisan Infrastructure Law, the CHIPS and Science Act, and the Inflation Reduction Act collectively represent a massive public investment in American infrastructure and manufacturing. They also provide the rare example of ambitious legislative accomplishments in a closely divided Congress where gridlock is the norm. Two of the bills passed with bipartisan majorities, and the other two garnered strong support across a diverse set of Democrats. Why did the stars align for such significant public investments in the early years of the Biden Administration?

The political alignment after the 2020 election, with Democrats controlling the presidency and both chambers of Congress, created an opportunity for the Biden Administration to move forward on investments in two priority areas: transportation infrastructure and climate. The case for public investment in infrastructure is well established among academics and lawmakers, dating back to President Eisenhower’s bet on an Interstate Highway System. With visible reminders of decaying infrastructure in every community, the idea of making a large investment to repair and maintain roads, rails, and runways, as well as other critical infrastructure, is hardly a radical one. However, previous attempts at transformative investments failed so frequently that they spawned an “infrastructure week” meme, illustrating how difficult it was to implement even an idea that had so much support. President Biden’s legislative experience played a key role in making this large public investment a reality.

The case for public investment in climate-friendly technologies is newer but has still been a priority among Democrats and many economists for years. Given the threat of global climate change and the importance of batteries, electric vehicles, and renewable energy sources, there is a strong argument for using public investment to accelerate the development, commercialization, and scaling of these technologies. When the right political configuration arose, it was clear that some kind of investment would be made in this domain.

While public investments in infrastructure and climate were always going to be part of the governing agenda for a Democratic President, two additional factors made the case for government action stronger and broader in its appeal. First, the disruptions from the COVID-19 pandemic and its aftermath added more urgency to calls for large public investment. The pandemic revealed weaknesses in our public health infrastructure and our ability to manufacture personal protective equipment quickly. The snarled supply chains and resulting shortages of the post-pandemic period elevated conversations on supply chain resilience to the top of the agenda, boosting the rationale for public investments that would help ensure a reliable supply of the goods that consumers need to buy every day, from baby formula to prescribed drugs.

Second, escalating tensions between the United States and China contributed a new urgency to the public investment agenda. The Chinese have long pursued industrial policy in key sectors of the economy, inspiring many commentators to recommend that the United States do the same. But the national security case for public investment is really what powered the bipartisan support for the CHIPS and Science Act. The twin risks that China might control key technologies, like the advanced semiconductors that could power AI-guided weapons, and that tensions over Taiwan might disrupt the supply of chips from TSMC—Taiwan’s major chip manufacturer, which produces roughly 90 percent of the world’s most advanced computer chips—clarified the importance of making public investments in manufacturing critical technologies. Taken together, these two additional factors supercharged the Biden Administration’s public investment agenda and increased its odds of success.

In short, a rare constellation of factors aligned to allow the Biden Administration to deliver on long-sought public investment goals. As we’ll argue below, these investments are well designed to address critical market failures. If we can do the hard work of implementation, they will serve as an exemplar of public investment for decades to come.

The case for this variety of public investment has support among economists and policy wonks. While economists believe that markets are often efficient, there is broad agreement in the profession that market failures exist and that there is an important role for the government in addressing them. Take the case of physical infrastructure. Economists have long argued that appropriate investments in transportation infrastructure can boost economic activity. Lower travel costs make it possible for workers to commute to a large set of firms, providing those companies with a deeper pool of workers to hire from. Lower transportation costs also provide firms access to more potential customers and provide customers with more firms to purchase from. The resulting markets are thicker and more dynamic, raising economic productivity and social welfare.

Similarly, the argument for making public investments in basic research to accelerate the energy transition is strong. Economics teaches us that basic research is hard to monetize due to its diffuse and delayed benefits. Government has an important role to play in funding basic research to fill this void. The Inflation Reduction Act (IRA) allows for new investments in research at the Department of Energy and our national labs to address this issue. While other parts of the IRA, such as domestic content requirements, have been more controversial among economists, the idea of the government investing in basic research has strong bipartisan support and significant academic research to back it up.

Beyond these traditional arguments, the public investment boom under the Biden Administration was supported by the recognition of a newly relevant class of market failures. The geopolitical context surrounding chips harkens back to a type of market failure that has been rarely contemplated since the Cold War. If the production of chips is highly concentrated in one part of the world, it could become a choke point during conflict. No individual firm would have the appropriate incentive to geographically diversify production. But the government would have a compelling interest in making a large public investment to correct for this kind of market failure. This rationale was powerful in creating the conditions for the CHIPS and Science Act to pass.

Next, market failures can intersect productively with political economy necessities. While many economists favor the elegance of a carbon tax, knee-jerk opposition to taxes and the realities of coalition building in a closely divided Congress necessitated an alternative approach. The subsidies for electric vehicles, batteries, hydrogen, and other key technologies to power the energy transition not only solved this political economy problem but addressed important market failures in the development of scalable renewable energy. When firms invest in basic research and adapt production lines to increase output, they generate knowledge spillovers that can benefit the entire industry. These spillovers, which are not fully internalized by individual firms, provide a textbook rationale for government subsidies to accelerate innovation. We know that China, India, and other emerging countries are projected to contribute the bulk of new greenhouse gas emissions in the coming decades. The difficulty of encouraging these countries to adopt renewable technologies is greatly reduced if the cost of clean energy can be driven below that of dirty alternatives.

In sum, the case for these public investments rests on a strong economic foundation, composed of both longstanding arguments for public investment and new arguments that account for geopolitical risk and the climate crisis. The next question is whether these investments will deliver on their promise.

Since the CHIPS and Science Act was passed, more than $166 billion of private investment in semiconductors has been announced, and there are plans for giant factories called megafabs that will make the most advanced chips all across the country. Similarly, hundreds of billions of dollars of private investment in clean technology has been announced since the IRA was passed. Much of this investment has gone to red states and congressional districts, somewhat unsurprisingly, given the manufacturing footprint of the United States and the suitability of rural areas for large manufacturing plants.

Despite these large public and private investments, there is still much more work to do. First, while the CHIPS and Science Act authorized hundreds of billions of dollars in spending, only $52 billion was actually appropriated. While some additional funding came through in subsequent legislation, the next frontier in public investment is to fully fund the “and Science” portion of the Act. This action would increase funding for the National Science Foundation by $81 billion, doubling its budget over five years; transform the energy research program at the Department of Energy; and catalyze innovation in regions across the country.

Passing legislation that appropriates funding is only the first step. For public investment to work, we actually need to build things. It can take years for proposed chip or battery factories to receive the permits for building an operation. Such delays can undermine public trust in the benefits of public investment. The EV charging stations provided for by the Bipartisan Infrastructure Law have been slow to roll out, illustrating how difficult it is for the federal government to compel states to make timely investments. Further public investments in the electricity grid are needed to move energy from places where it is sunny and windy to the places with the greatest electricity demand.

We also need more capacity in government to craft and evaluate public investment. On supply chains, policymakers should institutionalize processes to assess the risk and economic consequences of shortages and the effectiveness of policy remedies. It is only with an institutional process that the U.S. government can act proactively, rather than reactively, to prospective supply chain risks. The Biden Administration’s announcement last November launching the White House Council on Supply Chain Resilience and several agency-level initiatives was a step in this direction. As part of this effort, the Administration will expand the authorities of the Department of Health and Human Services under Title III of the Defense Production Act to support more investment in supply chains for essential medicines. The Departments of Commerce and Transportation have both established innovative supply chain partnerships to connect data and people across government and between the public and private sectors. These steps will put our nation on solid footing to deal with the next supply chain crisis—or even better, to prevent it before it occurs.

Rigorous, nonpartisan evaluation of the CHIPS and IRA funding is also imperative if the political coalition behind it is to be durable. Careful and transparent assessments will also help guide future investments. Key government agencies like the Department of Commerce and Department of Energy should ensure that researchers have the information they need to undertake program evaluations. Examples might include studies of which types of spillovers in innovation drive down costs and best accelerate the energy transition. Another approach would be to compare economic activity and employment in otherwise similar areas that differ only in whether they received funds. The results would inform our assessment of these public investments as ways to efficiently drive regional economic growth.

Public investment is back in vogue. Politicians understand that it is a rare area with potential for diverse political coalition-building. Policy wonks are increasingly recognizing that these investments stand on a strong economic foundation, part familiar and part new. We must execute them well and carefully measure our successes and failures. Only then can we build the political consensus and economic evidence we need to continue to make necessary public investments in our future.

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Neale Mahoney is a Professor of Economics at Stanford University. From 2022 to 2023, he was a Special Policy Advisor for Economic Policy in the White House National Economic Council.

Aaron “Ronnie” Chatterji is the Mark Burgess and Lisa Benson-Burgess Distinguished Professor of Business and Public Policy at Duke University. He served in senior economic roles in the Biden Administration, first as Chief Economist at the Department of Commerce and later as President Biden’s coordinator for the CHIPS and Science Act at the National Economic Council.

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