Transcript: How To Actually Fix The U.S. Economy – Elisabeth Reynolds

First and foremost, supply chains.

I went down to Washington, I had a real privilege of working for the National Economic Council in the White House as Special Assistant President for Manufacturing. And I went down, my first job in government, very enthusiastic with a lot of ideas about how to revitalize manufacturing in this country. And from day one to my final day, I was working on supply chain crises in this country.

Everyone will recall the global pandemic and what havoc that wreaked to global supply chains, to our transportation and logistics systems. We had problems accessing low-commodity projects like PPE, personal protective equipment for our first responders. We had challenges accessing semiconductors, high-value-added inputs to our auto industry and medical device industries. We saw the U.S. economy very, very vulnerable. And supply chains actually threatened our national and economic security.

Critical Supply Chain Vulnerabilities

First, semiconductors themselves. Who knew that 90% of our advanced semiconductors were actually sourced from one company in one region in the world? Well, actually, a lot of people did. We knew this for a long time. But at the time, we’d been emphasizing efficiency, not resiliency. And so this wasn’t perceived as a problem for the country. But of course, it was a problem for the country, and in fact, it had a very direct impact on our economy. A third of inflation in 2021 was generated by the auto industry and the shortage of semiconductors.

Another example, chassis, intermodal chassis. You may not remember, but I certainly do, that at one point in time, we had over 100 ships at anchor at the port of L.A. Long Beach, trying to bring goods into this country. It was a very serious challenge. And one of the challenges we had was we did not have enough intermodal chassis, the chassis that you put on the back of a truck and move a container from a ship onto the truck and to its final destination.

So we needed more chassis. Where could we find more chassis? Well, it turns out that several years beforehand, a number of chassis manufacturers in the U.S. had filed a petition to the U.S. government and said, “You know, our industry has been wiped out by a flooding of the market, by Chinese imports that undercut our prices.” And in May of 2021, the U.S. government put a 200 percent tariff on the importation of Chinese chassis manufacturers, who, by the way, today control 85 percent of the market. But we, at that time, we did not have domestic production ready to go, and we didn’t have imports. So it really exacerbated the challenge.

Third example, drug manufacturing, our generic drugs, 90 percent of prescriptions are filled with generic drugs, which is a great thing. Generic drugs come at a cheaper price, and that’s really good for consumers. At the same time, that cheaper price comes at a cost, which means we don’t invest a lot in innovation. We don’t invest in a lot of resilience in the supply chain. So 85 percent of generic drug ingredients, the active pharmaceutical ingredient, is made in India and China. And over the pandemic and over longer years than that, we’ve had real supply chain challenges with our drug supply. In fact, this year, at the beginning of the year, we had 300 different drugs that were considered in active shortage. And so for the benefits of the cheaper drugs, we’re also dealing with a really challenging supply chain, where a concentration of the supply is putting at risk our health security.

Climate Change and Economic Impact

The next challenge, climate change, and it’s very sobering to talk about this topic today after we’ve seen the impact of Hurricane Milton last night and Hurricane Helene last week. But climate change is an existential threat to the planet. But even if you didn’t believe that, you would have to take seriously the economic impact of these adverse weather effects we’re having.

So in 2023, we had the most number of billion-dollar weather events for the country, 28 of them, which added up to over about $95 billion of economic impact on the economy. So what does this mean? First of all, we know that 2024 is likely to look worse. And years ahead, it will look worse. What it means is we’re going to be rebuilding our infrastructure, and we have to rebuild it in ways that are sustainable and decarbonized. We also have to rebuild our energy innovation system and invest in renewable energy.

Geopolitical Challenges

A third trend, the geopolitical landscape. We all are aware that when Russia invaded Ukraine, the U.S. stepped up and provided significant support to Ukraine. At the same time, we’ve seen tensions rise with China in terms of their ambitions for the South China Sea. All of this is putting an enormous stress on our defense industrial base. And we have seen the challenges with supplying basic munitions and also more innovative products.

That in and of itself is a reason for investing in our defense industrial base. But we also have to be aware of the importance of these advanced technologies. These advanced technologies, whether it’s in microelectronics, biomanufacturing, are important for our defense capabilities and military superiority. But they’re also important for the economic future of the country. They’re at the core of future industries that are going to drive economic prosperity for the country.

Income Inequality and Economic Insecurity

A fourth trend is income inequality. So at the heart of populism is economic insecurity. Economic insecurity can make people stake out other people, look for answers in authoritarian figures, easy slogans. The fact is we’ve had in this country increasing income inequality, as has existed in a lot of other countries as well. Democratic norms and processes have been threatened. And part of our way of addressing that is to address income inequality.

This chart shows over a 70-year period essentially productivity gains and average compensation and put them together. And if you look at those two top lines, you’d say, well, compensation is largely tracking productivity growth. This is a good thing. But if you take out of that top line on average compensation workers who have a four-year college degree or are managers or supervisors, you get the bottom two lines, which show what’s happened for the other workers, the other 50% of the working age population in this country. And largely they’ve seen flat growth on compensation.

We have what we call the great divergence in the early 80s. And while we have seen an uptick to these numbers, largely based on the tight labor market during the pandemic, as well as changes to the minimum wage, the fact is this is a structural challenge for the country.

So for all of these forces, from supply chains to climate to the geopolitical tensions to income inequality, we have an enormous convergence, which says, what is our response to this? How are we going to change the direction and the trajectory of all of these forces? And so what we’ve seen is a policy response in the United States and in many other places.

So for the last several decades, the model that the U.S. has followed is largely a market’s no best model. The free market

What’s best for the bottom line of a company is not necessarily best for the country. What we’ve seen over time is that private sector investment has been under-investing in key areas for the economy, areas that are strategic and economic and make a real difference in our larger long-term growth.

So what is the response to this? Well, one of the responses has been that the U.S. is leaning into industrial strategy. Industrial strategy is when the federal government decides that there are certain areas that are important for the future of the country, technologies and industries, and tries to crowd in private sector investment, channel and shape private sector investment to the outcomes we’re looking for.

We have had a major effort at this in the last couple years that has been actually mostly bipartisan in nature to try and shape that investment because the federal government is never going to have enough money to build the kind of economy we want. We really need private sector investment to make that happen.

So in the last couple of years, we’ve started and embarked on a new trajectory and will bring about a trillion dollars into the economy over the next decade and leverage trillions more of private sector investment. What has it done?

It’s investing in resilient supply chains by investing in our semiconductors, critical minerals, also our defense industrial base. It’s investing in renewable energy, whether it’s solar, wind, nuclear, hydrogen, geothermal, any new renewable sources that have zero emissions that provide a pathway forward for the country.

It’s invested in physical infrastructure – rail, port, bridges, highways, broadband – all of that with an effort to decarbonize some of those investments. All of this, of course, while trying to build quality jobs. The challenge in this country is not the quantity of jobs, but the quality of jobs. We need to invest in training, we need to improve wages, and we have to increase worker voice.

Technology as a Competitive Advantage

The final factor that I think is important for us to discuss, particularly here at the Berkshire Innovation Center, is the role of technology, and this is an area, of course, that is a real competitive advantage for the United States.

Advanced manufacturing technologies and production processes have been transforming over the last few years. Whether we see it in robotics, in 3D printing, in AI, we have a meeting of the physical world and the digital world. So now, we have an opportunity to develop, to basically generate data, interpret that data, and use it for insights that can improve yield, safety, quality, and productivity. All of that, which can also help augment workers and improve wages.

Advanced manufacturing technologies, again, are a real sweet spot for the United States, and this is an area where we can lead globally.

So for all of these reasons, this convergence, the global forces, the public policy, advanced manufacturing technologies, we’re now at a place where we have an industrial transformation occurring, and we’re just at the cusp of this. It’s going to be one that is more resilient, it’s going to be more sustainable, and it’s going to be more digital.

Why This Agenda Matters

So how are we going to do this? Well, the first point is to say, this is not a nice-to-have agenda, this is a need-to-have agenda. We need this for our national security, that defense industrial base, for our economic security so that we have all the inputs we need for growing the economy and our strong industries.

We need it to decarbonize – 70% of greenhouse gases are generated by the industrial sector. So that’s energy, transportation, manufacturing. As they say, “to decarbonize, we have to re-industrialize.”

We also need it for the technologies of the future and industries of the future. The real tight relationship between manufacturing and innovation has been proven out in many different industries, and so if we know how to manufacture something, we know how to innovate in it, and that’s incredibly important.

Example: If we look at the bio-economy, that’s going to be about a trillion dollars of economic activity over the next decade just in the U.S. We have an enormous advantage in the U.S. in terms of biotech innovation. We need to be as innovative in the bio-manufacturing piece of that.

And then finally, of course, jobs, quality jobs. This agenda provides us an opportunity to create quality jobs through manufacturing. Now manufacturing wages have not kept up with a lot of the rest of the economy, and so average wages, those that are outside of large firms or unionized firms, have really lost a manufacturing premium. But if we can invest in technology and workers together, we actually can increase the productivity and raise wages for workers.

A Three-Part Action Plan

So this is an agenda that I believe is urgent, and I have a few ideas about what I think we should be doing next.

1. Invest in small and medium manufacturers

We need to be investing in the digital capabilities of our small and medium-sized firms. Small and medium-sized manufacturing firms are the backbone of the U.S. manufacturing ecosystem. They represent about 250,000 firms. Now if we just wanted to get 20 percent of those firms to the frontier of digital capabilities, that would be 50,000 firms. We don’t have a mechanism for doing that right now.

We need to lean in. We need the whole manufacturing ecosystem to come in and help with this agenda. We need large firms, OEMs. We need the government. We need our manufacturing intermediaries, the nonprofits who help work. If we can bring that technology to the small and medium-sized firm, we can actually provide them a pathway forward into the future of manufacturing.

2. Scale new technologies

Secondly, we need to scale these technologies in these new industries, not just start. We have a long history of starting entrepreneurial firms in the U.S. We’re the envy of the world in terms of being the startup nation. We need to become the scale-up nation.

Our capital markets have not always been aligned with this. They like asset-light companies, but that’s changing. We’re seeing venture capital come into the space. We’re seeing the public sector find ways to bring more resources, financial resources, to helping hardware-oriented, manufacturing-oriented companies scale. And we need more innovation. We need to find ways that the public and the private sector come together to create new tools and instruments to help those companies not just start in the U.S., but scale in the U.S.

3. Invest in our workforce

Finally, we need to invest in our workforce. This is a billboard that I used to pass daily on the Mass Pike, heading to work. And I think it captures a little bit of the zeitgeist pre-pandemic, which is the robots are coming. They’re coming to take our jobs. They’re going to take our kids’ jobs. We’re going to need a universal basic income. All is lost.

But the reality is the robots have not come for everyone’s jobs. And frankly, if we’d had more robots, we probably would have saved more lives during the pandemic. Our opportunity here is to actually invest in the technology that helps augment workers, not replace workers, because that’s actually how we’re going to get the best out of technology and the workforce.

So we have a lot of different experimentation going on, even here at the Berkshire Innovation Center with the Manufacturing Academy. We need to both train and retrain our existing workforce, and we need to attract the next generation. And the next generation wants some of that new technology, and they want to be part of a future of making things as well.

Conclusion

With that agenda, I hope you’ll agree with me that this is an urgent priority for the country, an enormous opportunity, and I hope you’ll join me in trying to engage in this industrial transformation. Thank you.

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