War On Inflation, Part 3: Resuming Leadership In High Capacity Battery Manufacture

Last week, in the first installment of the series of which the present column is second, I showed how strikingly similar the state of American industry is now to the state of American industry when the Second World War broke out. The Roosevelt Administration, in close collaboration with the leaders of the most important manufacturing industries of the day, converted us virtually overnight from a country with negligible aircraft, naval and cargo vessel, tank and other military vehicle, munitions, and strategic materials industries into the world’s great ‘Arsenal of Democracy.’

           What had enabled this, I indicated, was a unique institutional pairing that we had also used during the First World War, not to mention the nation’s early industrialization along Hamiltonian lines. This pairing has always involved an interagency coordination board comprising Cabinet-level executive agencies and private sector industry leaders on the one hand, and a federal financing bank that could finance all board-formulated strategic manufacturing plans on the other hand.

           I then showed how my InvestAmerica Plan, devised early last year and advocated by myself and my New Consensus colleagues ever since, replicates precisely this pairing so as to enable our country quickly to restore self-sufficiency, reclaim global industrial leadership, and prevent domestic price inflation by massively levering-up the nation’s productive capacity.

           Plank I of the Plan, a National Reconstruction and Development Council comprising Cabinet officials and strategic industry leaders, would be an updated version of the War Industries Board and War Production Board of the two World War eras. Plank II of the plan, upgrading the capacities of the already-existing Federal Financing Bank housed in Treasury, would similarly update the World War eras’ War Finance Corporation and Reconstruction Finance Corporation.  

           In order both (a) to show how the Plan works to ‘turbocharge’ key strategic American industries on the one hand, and (b) to roadmap actual revitalizations of the key strategic industries of today and tomorrow on the other hand, I am producing a series of ‘Case Studies,’ of which the present column is part. Yesterday I started with semiconductors (a.k.a. ‘microprocessors,’ ‘chips,’ or ‘microchips’) – an industry that the US invented and then led the world in for decades until recently. More than with any other industry, our offshoring of this one has led to the most pronounced supply chain disruptions, consumer price inflations, and strategic vulnerabilities that confront us right now.

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           Another industry in which the US once led and has now relinquished its lead, however, bids fair to be nearly as critical as semiconductors in the near future. I refer to the high-capacity power storage modes – a.k.a. ‘batteries’ – that the world’s accelerating transition to electric vehicles (‘EVs’) and renwable sources of power generation is already beginning to foreground. Why has the US surrendered its leadership in this industry, and how might we reclaim it at all five critical stages of battery production – (1) raw material extraction and accumulation, (2) raw material processing or refinement, (3) battery cell fabrication, (4) battery packaging and manufacture, and (5) battery material recycling and reuse stages?

           In order to attain self-sufficiency and global leadership in battery production, the US public sector must forcefully aid the US private sector at the front end at least until ‘critical mass’ in domestic production is reached. The reasons are several.

For one thing, prospective US producers would for the time being be heavily dependent on foreign demand – especially Chinese and European demand – for EVs in order for private investment in domestic battery manufacturing capacity, a particularly costly proposition, to be profitable.

This is especially so in view of the second reason warranting public sector involvement – the daunting enormity of capacity construction expense. Yet foreign – especially Chinese – demand for US batteries at volumes warranting such outlays cannot be reasonably expected to materialize in the face both of sharpening geopolitical competition between China and the US and the tendency of producers at one stage of battery production and use to colocate where producers at other stages of production and use congregate. 

Third, other nations and trading blocs – Europe, India, and again especially China – are themselves massively and strategically subsidizing their own domestic EV and battery industries, in hopes both of avoiding dependency and of attaining world leadership in these all-important industries. US firms at present enjoy no equivalent to that apart from the EV charging buildout provisions of the newly passed bipartisan infrastructure bill – a helpful start, but no more than a start.

Fourth, continued access to the essential material inputs to the battery production process (stage 1) is anything but guaranteed to American producers, given increasingly aggressive Chinese efforts both to ban exports of strategically important raw materials and to secure exclusive access to the extraterritorial locales from which many of these materials are extracted – a form of ‘preclusive buying’ of the kind pioneered by the US’s RFC (predecessor to my proposed upgrades to FFB) in the early months of the Second World War.

And finally fifth, production in the battery is heavily reliant upon a well-educated and highly skilled workforce, a now dwindling part of the US labor market.

Over none of these factors does private sector US industry have any control. American manufacturers cannot control demand for their products, the costs of supplies and facilities, the subsidies other nations strategically supply to their domestic producers, the efforts that competing nations make to secure preclusive access to material inputs, or the level of education of or other supports, such as child daycare and housing, for the American labor force.

Faced with such uncertainties in respect of supplies and demand on the one hand, and the high cost of plant construction and related machine capital investments on the other hand, shareholder-answerable private sector firms in the US are not acting irrationally in refraining from attempting singlehandedly to build US self-sufficiency and world leadership in the production of batteries and battery packs.

The fact that US firms are acting individually rationally in not leading the charge to national self-sufficiency on the one hand, combined with the fact that not restoring this self-sufficiency in light of the perils described above is collectively irrational on the other hand, lends US dependence on foreign-sourced battery and battery pack manufacture the character of a classic collective action problem. For a collective action problem just is a choice situation in which multiple individually rational decisions aggregate into collectively irrational outcomes.

The solution to collective action challenges, which are ubiquitous in modern macro-economies, is straightforward. What are required are well-considered and well-planned exercises of collective agency – that is, concerted and mindful public action. The InvestAmerica Plan noted in the Introduction above is meant to enable precisely that – collective agency of a kind that renders individual private agency on the part of business firms once again profitable and hence individually rational. How the Plan does this in the realm of battery manufacture is the subject of the next section.

           The key to attaining US self-sufficiency and leadership in high capacity battery production lies in publicly addressing the impediments to rational private investment enumerated above. The InvestAmerica Plan is designed specifically to enable that form of concerted address – both in the battery industry and in the strategically critical industries treated of in my other Case Studies. Here is how the Plan will work in the former industry.

           To begin with, the new Cabinet-reconfiguring Council – Plank I of the Plan – will designate the battery industry a strategically critical sector in need of significant front-end public sector support. The specific Cabinet-level federal agencies whose mandates are implicated by the project of attaining national self-sufficiency and global leadership will then provide specific advice and supportive data where their specific competencies figure in to the revitalization process. In so doing, moreover, they will in effect not only be engaging in strategic planning, but will also be blueprinting the financing task that will be assigned to the FFB in financing the full strategic plan.

           The Department of Commerce, for starters, collaborating closely in Second World War style with industry, the Small Business Administration (SBA), and the Department of Defense (DOD), will likely be the agency best suited to determining how much capacity the US must build or rebuild at each of the five stages of the battery and battery pack production and assembly processes, from materials gathering through assembly and materials recycling, in order to restore national self-sufficiency and indeed global leadership in the field. In so doing, of course, it will have to take account of the scale economies of production at each stage. 

           In light of those economies, in turn, the Department will then estimate how many new facilities have to be built or converted, whether it be a few very large facilities or a somewhat greater number of somewhat smaller facilities. And it will estimate both the costs of building these facilities and the likely profits to be earned in the long term as production ramps up and the products are sold.  

           Input from firms operating in and adjacent to the US battery, EV, and power-generation and –storage industries – firms such as Ford, GM, Rivian, and Tesla, for example, as well as US subsidiaries of Volkswagen and other foreign firms planning to build in the US – will of course have to be solicited too, as occurred in connection with war production during the First and Second World Wars. (Thousands of firms large and small collaborated closely with the federal War Production Board and Reconstruction Finance Corporation during the Second World War mobilization.) And the Department of Justice (DOJ) and Federal Trade Commission (FTC) will weigh in on potential antitrust and market concentration concerns in the interest of promoting an optimal degree of efficiency-inducing competition in the markets that we will be jumpstarting. 

The US Trade Representative (USTR) will likely have additional advice to offer in respect of the foregoing questions, in light of estimated global demand potential for the output of a revitalized domestic battery and EV industry. Similarly, the aforementioned DOD, as well as other federal agencies on the Council that make use of equipment that uses high capacity batteries, will weigh in both on specialized needs in their particular fields of operation, and on how their procurement policies can be made to guarantee a significant source of reliable demand for US battery and EV output.

In this connection, private sector EV manufacturers, power & light companies, defense contractors and other suppliers of advanced equipment to public sector agencies and instrumentalities will be asked to weigh in on anticipated needs too – again as was done in the First and Second World War mobilizations. The same goes for government instrumentalities at all levels – federal, state, and local – that operate fleets of vehicles and/or make use of equipment that has been or can be converted to electric.

The Department of Labor (DOL), meanwhile, together with the Commerce Department and the Department of Education (ED), will identify the labor needs of a revitalized battery industry, current and likely future labor supplies able to meet those needs, and means of addressing shortfalls of the kinds and quantities of labor needed. This will likely require the identification of new forms of, and both existing and needed new facilities for the provision of, such educational ‘upgrades’ as the US workforce will require. The Immigration and Naturalization Service (INS), meanwhile, will be an important contributor too – particularly as highly educated engineers, concerned about pandemic and an ever-more hostile China, find emigration to the US from Taiwan and elsewhere increasingly attractive.

Here too the examples of the First and Second World War mobilizations are instructive, as the welcoming of foreign-educated nuclear and other scientists, and the training of millions of new skilled workers, was required in order for America’s newly constructed and converted vehicle, aircraft, shipping, and munitions factories to operate at capacity. Here again, furthermore, both public and private sector educational institutions – including community colleges and vocational training schools – will be asked for the benefit of their expertise and capacities, while being aided in expanding their capacities.        

           The Department of Labor also, now in tandem with the Departments of Energy (DOE), Interior (DOI), and Transportation (DOT), will weigh in on optimal locations for new production sites as recommended by the Departments of Commerce and Defense. The factors that will bear upon these optimal siting decisions will be several.

           One factor will be the comparative needs of specific regions or demographics of the country – especially recently blighted areas – for new production and employment opportunities. Another will be proximity to sites at which battery inputs additional to labor – the materials listed above at stage 1 – are abundant or readily procured. And yet another will be proximity either to existing communications and transport networks or to places where new such networks can be readily constructed.

           Here again, the example of the First and Second World War mobilizations is instructive, inasmuch as entire transportation networks were built to enable ready shipment in and out of productive inputs to, and outputs from, new manufacturing facilities, respectively.

           The Department of Housing and Urban Development (HUD), too, will likely weigh in on housing needs and home construction opportunities for newly enlarged labor forces in places where new productive facilities are to be built. Here again the example of the Second World War mobilization is instructive. For entire neighborhoods and housing units had to be newly constructed to accommodate rapidly expanding workforces in area where new plants were constructed. (The RFC accordingly established the Defense Homes Corporation to meet the need.) Schools and daycare centers quickly followed, as did new power, water, and sewage facilities.

           The US Army Corps of Engineers – with 35,000 employees, the largest construction ‘company’ in the world – will also be an important source of information and advice, not to mention actual construction, both in respect of these facilities and in respect of plant construction itself.

           As the Council develops a strategic Battery Industry Catalyzation plan along the lines just elaborated, its financing arm – the FFB, Plank II of the Investamerica Plan – will develop a corresponding financing plan. The specific forms of financing that will be optimal will undoubtedly vary according to which of the five Phases in the semiconductor and circuit board production process is under consideration. They also will vary across the complementary industrieshome building, school building, road paving, power and water routing, etc. – that revitalizing and scaling-up battery manufacturing capacity will complementarily necessitate.

The US already leads the world in cutting edge technology, for example, and is accordingly more in need of maintaining its lead than of jumpstarting a new industry. Where materials mining and refining, cell fabricating and packaging, and recycling are concerned, by contrast, significant site construction from scratch is going to be requisite. Meanwhile, some domestic and foreign firms – notably Tesla, General Motors, Ford, Rivian, and Volkswagen – are planning to build at least some new manufacturing capacity in the US, and might accordingly require less public encouragement than will domestic firms not yet planning any such market-entry or capacity expansion

In this connection, the recently passed bipartisan infrastructure bill, which earmarks some $7.5 billion (half of what was originally planned) to finance a build-out of EV charging stations to encourage more EV use, while also affording tax credits for purchases of domestically produced EVs and batteries, is a helpful development – in effect enabling commencement of some FFB investment activity in this sector. Relative to the need, however, which industry analysts believe to be orders of magnitude larger what is now earmarked, the measure can be considered no more than a down payment. (We will also have to take care, going forward, not to harm Canadian and Mexican suppliers, as the North American production chain is well-integrated in a manner that benefits our closest allies in addition to ourselves.)

In any event, the form of financing supplied will be determined according to two criteria: first, speed and efficiency in reaching national self-sufficiency; and second, assuring the profitability of FFB investments in the long run, the FFB’s predecessor the RFC having been the only federal agency in its day that added to government income rather than subtracting from it. Indeed, unlike during the Second World War when post-Depression banks were on the ropes, today the FFB can form consortia of combined public and yield-hungry private sector investors, including both public and private employee pension funds, to assure Americans a direct financial stake in the success of its own productive revitalization efforts.

           In sum, then, the situation that the US now faces where batteries and power storage are concerned is strikingly reminiscent of that it faced in the lead-up to the Second World War. There is both immediate existential need and spectacular longer-term ‘postwar’ opportunity. Owing to the impediments laid out above, however – themselves reminiscent of counterpart challenges that confronted the US at the time of the Pearl Harbor attack – the US private sector lacks both the resources and the rational profit incentives to restore US leadership on its own.

           Though the urgency of actual imminent war is, thankfully, lacking in the present instance unlike in the twentieth century, the need to restore US self-sufficiency and global leadership in semiconductors and circuit boards surely counts as what the great American philosopher William James would have called ‘the moral equivalent of war.’ And with a ‘new cold war’ between the US and some of its competitor nations already now regrettably looking possible, we appear to be reaching a point where we needn’t speak about mere moral equivalents.

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