You can’t grow the economy by abusing government authority: Defense Production Act Edition
Not long ago, the R Street Institute (RSI) called the Biden administration’s plan to use the Defense Production Act (DPA) for energy the “Pandora’s box of bad policy.” Invoking the DPA is the ultimate bridge to nowhere: it may alleviate interim supply issues, but it offers no incentive for sustainable investment and economy-wide productivity improvements. It merely reshuffles resources from one area of the economy to another by government decree.
Nevertheless, the Biden administration is using the DPA yet again, this time to boost domestic solar panel and heat pump production. This is now the fourth time the administration has used or considered using the DPA in just three months. The recurring use of the DPA by the administration demonstrates a fundamental misunderstanding of how the economy works and will result in detrimental consequences for Americans while politically favored industries are propped up by government officials. It is time for Congress to fulfill its constitutional role and check the power of the executive branch to avoid the substantial risks from this abuse of national security authority.
The problems with using the DPA are twofold, and quite serious. As RSI has previously explained, the long-term incentive of continuous use of the DPA is that political connectedness is more profitable to industry than productivity improvements. Opportunities to circumvent regulations that can stifle competitors or receive government favor that directs resources to one’s benefit incentivize these behaviors and generate a system in which designing affordable products that are of utility to Americans becomes less important than cozying up to politicians.
The other serious problem is that use of the DPA does not incentivize broader productivity growth, rather, its effect is simply to move resources from one part of the economy into another. Using government authority in this way forces less efficient transactions and forgoes a greater economic benefit to achieve the political objective.
Economies may be complex, but how they operate is rather straightforward. They consist of labor (workers), capital (resources) and productivity (the combination of labor and capital to produce new goods). Growing the economy means growing one of these three components. Economies grow naturally as populations grow because there are more workers, and they also grow in response to influxes in capital. The only avenue to long-term sustained growth, though, is productivity growth, where workers and capital produce more per unit of input.
When workers produce more with less, the cost of goods falls (because supply is increased), wages rise (because the value of labor increases)—and living standards generally increase, too. Productivity growth stems from many small decisions that are dispersed among consumers and producers, with individuals incentivized to maximize the value of their spending and reduce the costs of their production. This is what people mean when they refer to “the free market,” and it is responsible for the historic decline of extreme global poverty in recent years.
Politicians, though, are often encouraged to act contrary to the functions of the market. When consumers are facing shortages of commodities, such as gasoline or baby formula, politicians will look to the options they have available to them to address these problems, even if they are temporary. One power the government has, through the DPA, is to force private actors to abandon or accept contracts in the national security interest, and to circumvent existing regulations that are intended to protect consumers and the environment. Since politicians are held accountable through periodic elections, they are incentivized to favor near-term policy priorities over long-run economic growth beyond their tenure of office. Under such conditions, abuse of the DPA is more likely to be politically rewarding, rather than the more appropriate restraint.
The Biden administration’s repeated use of the DPA hints at a fundamental misunderstanding of how the economy works and implies that they view government as the only body that can steer resources in an efficient manner. History, though, teaches otherwise. Politicians need only look to the economic catastrophe that was the Economic Stabilization Act of 1970.
With parallels to the present day, Congress aimed to fight inflation in the early 1970s by giving the president the power to set price controls on food, rent, wages, dividends and so on. The thinking was that the government could combat inflation by simply forcing companies to stop charging more and stop paying employees more. The disastrous effect of this policy cut productivity, rather than inflation, as price caps meant that for many producers it was no longer profitable to function, and they went out of business. Notoriously, farmers drowned their chickens, and the efforts heralded a decade of “stagflation” where high inflation coupled with low productivity caused living standards to fall rather than rise for Americans.
The Biden administration is taking its first steps down a similarly wrongheaded path, in which they believe the federal government can solve every economic problem using its own authority. But the administration is ignoring the implicit tradeoffs and economic destruction they are wreaking.
Central planning fails because growth ultimately depends on consumers voting with their dollars to decide what activities generate the most value. It is not possible for politicians to know the preferences of every consumer and to allocate resources in ways that maximize value for everyone. Simply, the market is subject to the forces of competition, the availability of capital and profit motivation. The market is not subject to the forces of imagination and does not order itself in a way that politicians desire. While politicians can have high opinions of themselves, they cannot and never will be economic oracles.
The Biden administration is no longer just peeking inside Pandora’s box but is looking for a crowbar to open it as wide as possible. The more appropriate solution is for Congress to check the power of the executive and rescind the authority it gave in 1950 through the DPA. Even though the Biden administration’s abuse of the DPA will come at the expense of the American people, the concentration of benefits to politically favored outcomes and dispersion of costs to the broader economy mean that the Biden administration has every incentive to keep abusing the DPA.
Here’s hoping Congress steps in before it’s too late.