Bridging or Overreaching? The Government's Gamble with Supply Chain Control

---

Transportation executives, industry observers, and local politicians nodded approvingly and wholeheartedly welcomed the federal largess. After all, the Bipartisan Infrastructure Bill was a once-in-a-generation investment in the country’s logistics infrastructure. The legislation was long overdue and could help reset the supply-chain mess that caused so much havoc during the pandemic. 

Yet the size and scope of the investment meant more than a refresh of an aging transportation infrastructure.  The federal government had its own plans to develop a permanent and powerful regulatory presence in the nation’s supply chains.   

Did transportation leaders recognize the tradeoff? Recall that, despite its title, the Bipartisan Infrastructure Bill barely passed; in no sense should it be considered bipartisan. Even a modest industry effort to stop it – or gain assurances of limited regulatory initiatives – could have prevailed. 

Instead, the lure of billions for bridges, ports, rails, and roads suppressed dissent. Genuine concerns about government involvement and government overreach could wait.   

Enhance government involvement in supply chains

Last week, President Biden announced the establishment of a White House Council on Supply Chain Resilience. He introduced a series of supply chain-focused initiatives designed to strengthen supply chains considered critical to the country’s economic and national security:     

“I’m charging this group to ensure that our supply chains remain secure, diversified, resilient…into the future. I’ve also directed my cabinet to create an early warning system that uses data to spot supply chain risks to our economic security, our national security, our energy security, and our climate security.”

The initiatives are wide-ranging including,

• $196 million in USDA investments focused on domestic food supply chains.

• National Defense Industrial Strategy supporting defense-critical supply chains.    

• A quadrennial supply chain review by the Council.

• DOT Multimodal Freight Office – that will maintain and improve the performance of the nation’s multimodal freight network.

• Use of the Defense Production Act to make essential medicines in the U.S. and mitigate drug shortage.

• Development of cross-government partnerships to improve supply chain monitoring including Commerce Department’s Supply Chain Center that integrates industry expertise and data analytics for innovative supply chain assessment tools.

• Plans to establish new partnerships with private sector stakeholders to avoid bottlenecks and enable a resilient and competitive freight network.  

It’s about inflation too

Though the supply chain snags that bedeviled the industry have receded – the New York Fed’s Supply Chain Pressure Index saw a record-low reading last month, the administration also emphasized the Supply Chain Council as an important part of the Bidenomics agenda to lower costs for American families,

“- we’re determined to keep working to bring down prices for American consumers and ensure the resilience of our supply chains for the future.”

— Biden Administration

Reality check

Recall the port logjams and empty grocery store shelves were created by government responses to the pandemic. Three years ago, the federal government transferred nearly $2 trillion to households through unemployment insurance benefits, amped-up child tax credits, several rounds of generous stimulus checks, and forgiven student loan payments.  Predictably, this supercharged consumer demand at a time when supply had faltered due to government lockdowns and shutdowns of entire economies. The imbalance of course was a recipe for higher costs, though the Biden administration placed the blame squarely on supply-chains and labeled concomitant inflation as transitory. 

Now, the federal government will reach even deeper into the nation’s supply chains. This may be good politics but it’s generally bad business. Political incentives are frequently at odds with lowering costs and producing efficiencies.    

For example, the infamous Jones Act prevents foreign vessels from moving goods between U.S. ports. Instead, U.S.-built and crewed vessels must be used to transfer the goods. To avoid the higher costs of using Jones-complaint ships, gasoline components are shipped from the Gulf Coast for blending in the Bahamas and then re-shipped to the Northeast.  The Act creates such inefficiencies across many different businesses.    

Will the government eliminate the Jones Act – effectively making maritime shipping a meaningful competitor to rail and trucks?   Unlikely we are more likely to see additional political carve-outs.          

Another example is the Foreign Dredging Act, which requires any dredging that happens in the U.S. to be done with U.S. labor on U.S.-owned ships.  The main consequence is less dredging capacity and higher costs. Thus, dredging doesn’t happen often or is delayed for years. 

Finally, to burnish his reputation as the most pro-Union president in history, Biden updated the Davis-Bacon rules which mandate payment of prevailing wages and fringe benefits on federal contracts. (the Department of Labor will determine prevailing wages). This dramatically increases labor costs on infrastructure projects and adds to the oppressive red tape of future awards and labor agreements.   

Bottom Line

The phrase “Never let a good crisis go to waste” seems apt. The challenges of the COVID-19 pandemic highlighted the importance of a strong supply chain. Using national security, public health, and economic stability as pretexts, governments across the world are now leaping head-first into the supply-chain business. 

But COVID-19 also exposed grave concerns about the government's capacity to manage public health and properly steer the nation’s economy. Yet despite questionable government interventions, supply chains have – with some exceptions – corrected and appear equilibrated as before the pandemic.    

Perhaps transportation leaders and logistics interests simply did not foresee an expanding government role. Or, perhaps, they considered a partnership with the government a far better outcome than the status quo.  

---