Producing Our Way Out Of Inflation
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Give Larry Summers credit. He says the quiet part out loud.

As Chief Economist of the World Bank in 1991, when other free trade economists avoided the more awkward implications that their Ricardian arguments bore for non-wealthy nations, Summers came out and said it: African nations’ ‘comparative advantage’ in the global economy would be to store richer nations’ toxic wastes.

Now, thirty years later, as other enthusiasts of Fed monetary tightening tiptoe around what higher rates will mean for the 99 percent of Americans who receive most of their incomes from labor, Mr. Summers openly calls for a high unemployment rate. The object, he effectively admits, is to ‘tame’ inflation by ‘taming’ labor.

These episodes share, as it happens, more than Mr. Summers’ indelicacy. They share a complacent acceptance, as ‘fate,’ of things that are actually matters of choice.

Ricardian ‘comparative advantage’ in global trade, for example, is simply a matter of what nations are equipped to produce or provide at the moment of comparison. Change those capacities, say, by proactively industrializing as America did in the 19th century or as multiple African countries have been doing since the later 1990s, and your comparative advantage changes as well. You move from toxic-waste-taker to automobile-maker.

The same holds of our current inflation troubles. People of Summers’s old school Phillips Curve persuasion often cite not only … well, the Phillips Curve, but also Pinochet’s favorite economist, Milton Friedman. They’ll tell you not only that low unemployment and low inflation amount to a ‘tradeoff,’ but also that ‘inflation is always and everywhere a monetary phenomenon.’

That adage, alas, is always and everywhere half true.

Inflation is a money-to-goods relation. You can change it by changing either or both terms of the relation. You can work on demand for goods as expressed in money, or on supplies of the goods purchased by money.

Why do people like Summers tend to look only or mainly to money and demand, hence to the Fed and its monetary policy, and never to goods or supplies, hence to the nation’s industrial policy? Probably for the same reason they looked only to what African nations were able to do in the early 1990s, rather than to what they could make themselves able to do by the later 1990s – to produce. It is as if background conditions were immutable to people like Summers, incapable of alteration in the cause of continuous production and real wealth-generation.

Had Alexander Hamilton thought like that, we’d still be a mere shipper of unfinished resources to Britain, effectively still its colony. Then a British Larry Summers would doubtless propose that our comparative advantage, too, would by now be to store Great Britain’s toxic wastes.

Happily that’s not what happened. But consider our background conditions right now – ones Larry Summers apparently thinks products of fate rather than policy even though he himself helped to bring them about from the Clinton White House: For thirty years plus we have ‘outsourced’ our productive capacity, along with its jobs, to countries a world away. This has enriched company owners (‘the 1%’) at the expense of company workers – and, now, with global supply chains disrupted by war and pandemic, of consumers as well.

Was that all fate? Well, the pandemic might have been, but the outsourcing wasn’t. We did it on purpose – both during the years that Bill Clinton had Larry Summers in his White House, and during the years that George W. Bush had indistinguishable economists in the same offices.

But what we did on purpose, we can undo on purpose. We can bring our production back home and commence an industrial renaissance. We can leapfrog the past several decades straight on to the industries of tomorrow, supplying the goods that we’ve ‘too much money’ now ‘chasing’ and the well-paying jobs that were once an American birthright.

Doubt this? Consider America’s position in mid-1940, after the Nazis stunned everyone by overrunning France in six weeks. President Roosevelt and his Cabinet understood what this meant. It meant that the threat to America and other free countries was more imminent than had been appreciated, and that the US would have to reclaim its industrial capacity, wiped out by the Great Depression, virtually overnight.

Roosevelt famously called for the manufacture of 50,000 warplanes per year – this in a country that had produced barely 3,000 the year before. This call was equally famously mocked at the time as ‘unrealistic.’

Yet the US was manufacturing tens, then scores of thousands of warplanes per annum virtually overnight. And not just planes. Also tanks, trucks, warships, cargo ships, artillery, small arms, ammunition, housing for war production workers, schools for their children… We even started new industries from scratch – synthetic rubber, for instance, once Japanese invasion inconveniently ended our access to natural rubber in the South Pacific.

How did we do all of this? By combining the strengths of the public and private sectors alike. Building on Woodrow Wilson’s WWI era War Industries Board (WIB) and War Finance Corporation (WFC) models, FDR’s War Production Board (WPB), Reconstruction Finance Corporation (RFC), and other bodies coordinated efforts and supplied both financing and plant. Private sector firms then used the provided facilities to do what they knew how to do best – produce.

WWII was won in America’s planning bureaus and factories at least as much as on oceans and battlefields. And the capacity we built up to do it powered the most productive and prosperous peacetime economy in history after we’d won.

Our challenge today is the same. The industries of tomorrow are already emerging – semiconductors, high capacity batteries, electric vehicles and their charging infrastructure, dirigibles, rare earth metals, wind power, solar power, heat pumps, advanced pharmaceuticals, … The US invented most of these new technologies and the uses to which their inputs are put, but does virtually no manufacturing in them now.

My colleagues at New Consensus and I have urged Mr. Biden since 2020 to empanel a 21st century counterpart to Wilson’s WIB and FDR’s WPB – what we call a National Reconstruction and Development Council – to coordinate a return of the US to global productive preeminence in all of the industries of tomorrow. This Council, like its predecessors, would include all relevant White House Cabinet officials and all American leaders of relevant industries. Its purpose would be nothing short of coordinating a comprehensive reindustrialization of America – in all of the earth-friendly industries of tomorrow.

Our plan also upgrades the Treasury’s Federal Financing Bank (FFB) to enable it to do just as much financing of redevelopment as Wilson’s WFC and FDR’s RFC did of the WWII mobilization. The object must be, in a slogan, to ‘Make America Make Again.’ The object must be to make America the world’s preeminent manufacturer and exporter again. If we could be the world’s ‘Arsenal of Democracy’ in the 1940s, we can certainly be the world’s ‘Arsenal of Planetary Preservation and Progress’ now.

It’s sometimes said that if all you have is a hammer, everything looks like a nail. Well, if you think all you have is the Fed, everything might likewise look like a Friedmanite ‘monetary phenomenon.’ We have much more than the Fed, though, and it’s high time we used what we have to turn Summers-style ‘fate’ into FDR-style choice once again. Nothing short of a revived Hamiltonianism will do now. Let us get to it.

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