National Competitiveness from the Bottom Up: Reflections from the Build Back Better Regional Challenge
Below is the Nowak Metro Finance Lab Newsletter shared biweekly by Bruce Katz.
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(co-authored with Colin Higgins, Avanti Krovi, Sarena Martinez and Brian Reyes)
Over the past two months, the five of us have been part of a community of practice selected by the Economic Development Administration to coach the winners of the $1 billion Build Back Better Regional Challenge (“BBBRC”). Along with partners at America Achieves, the Federation of American Scientists, the National League of Cities, and others, we have spent a great deal of time reflecting on what the BBBRC means for American competitiveness in this moment.
To recap, the BBBRC, implemented as part of the $1.9 trillion American Rescue Plan Act, is aimed at advancing US competitiveness by scaling distinctive industry clusters, driving quality job growth and achieving equitable outcomes. The program has been smartly structured as a multi-phased process. The funding — up to $500,000 for technical assistance grants awarded to winners of a first phase, and between $25 million and $100 million for project execution awarded to a smaller group of final applicants — was large enough to attract 529 applicants from across the country.
In December, the Department of Commerce announced the 60 winners of Phase 1. Our work with partners in the community of practice has principally focused on helping a very diverse set of communities and coalitions sharpen their applications. We have provided advice on issues ranging from the strength, geography and governance of regional clusters, to the coherence and alignment of disparate projects to the framing and practice of equitable economic development.
Through the process, we have made some discoveries about the state of the economy and the state of American competitiveness from the ground up. These discoveries, described below, are timely given renewed Congressional action around national competitiveness policy and the Biden Administration’s effort to give definition to “modern supply side economics,” a new approach to economy shaping in the United States that puts a name to trends that commentators like Ezra Klein, Derek Thompson, and Noah Smith, among others, have been observing.
Put simply: a ground up view on the advanced economy both validates federal efforts but also compels more expansive actions across the whole government and with the private and philanthropic sectors.
The National Context for Competitiveness
In the past two months, the Biden Administration and Congress have resumed progress on the innovation portion of the stalled Build Back Better agenda. In January, the House passed the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology and Economic Strength (America COMPETES) Act. The House bill now needs to be reconciled with the US Innovation and Competition Act (USICA), which passed the Senate last year. The House and Senate bills, while differing in many respects, provide $50 billion for semiconductor manufacturing and over $200 billion for future technology investment (a detailed description of their finer points can be found here).
During the same period, Treasury Secretary Janet Yellen gave a major speech to the Virtual Davos session of the World Economic Forum. Yellen provided the best explanation to date of the Biden Administration’s economic growth strategy, using the term “modern supply side economics” to contrast it with Keynesian and traditional supply-side approaches.
Secretary Yellen’s description of the growth agenda was clear and succinct:
“Modern supply side economics … prioritizes labor supply, human capital, public infrastructure, R&D, and investments in a sustainable environment. These focus areas are all aimed at increasing economic growth and addressing longer-term structural problems, particularly inequality. The recently enacted Bipartisan Infrastructure Bill and the Build Back Better legislation that remains under consideration in Congress incorporate this modern supply side approach.
A country’s long-term growth potential depends on the size of its labor force, the productivity of its workers, the renewability of its resources, and the stability of its political systems. Modern supply side economics seeks to spur economic growth by both boosting labor supply and raising productivity, while reducing inequality and environmental damage. Essentially, we aren’t just focused on achieving a high topline growth number that is unsustainable — we are instead aiming for growth that is inclusive and green.”
This explanation stands in sharp contrast to traditional “supply side economics,” an alternative plan for national growth that has dominated Republican thinking since the Reagan Administration. As Yellen described, the traditional definition of supply side economics:
“… also seeks to expand the economy’s potential output, but through aggressive deregulation paired with tax cuts designed to promote private capital investment. It is, unquestionably, important to properly implement regulation and maintain a pro-growth tax code, but they are not sufficient and can often be overdone.”
These legislative actions and domestic policy paradigms take on new meaning this week given the events unfolding with Russia’s invasion of Ukraine. We particularly recall the point that National Security Adviser Jake Sullivan made in a December 2018 piece in the Atlantic — in which he argued that to reclaim the mantle of American exceptionalism, a more robust foreign policy must also focus on building the middle class here at home. The global economic upheaval from the continued disruption in commodities markets in wheat and oil (among other items) will undoubtedly have ripple effects through the American economy and our already reeling post-pandemic supply chains.
Each of these heady concepts — American exceptionalism, competitiveness, and modern supply side economics — drives to a similar point: we are in a massively disruptive moment, where old paradigms are being upset by the day. If America is able to maintain clarity in this moment and practically channel these emerging paradigms, we may be able to build the type of economy envisioned by Yellen and Sullivan. Our nation’s success in doing so will be built from the ground up — in the advanced manufacturing facilities, incubators, universities, federal labs, and diverse set of firms that provide the base for our regional economies writ-small and our national economy writ-large.
Five Lessons for Modern Supply Side Economics from The Ground Up
Our engagement with the BBBRC applicants provides a window into what modern supply side economics looks like in practical terms, in real places. Here is what we have learned so far.
First, this is a very disruptive economic moment.
The BBBRC applications reveal that there is deep economic tumult beneath the surface of a relatively fast economic recovery from the depths of the pandemic. The competition brought forward a broad cross-section of practitioners trying to make sense of a changing economy, experiencing waves of disruptive, if not destructive, dynamics. Read together, the applications express the following (only amplified by the international political economic shockwaves emanating from Russia’s invasion of Ukraine):
- The COVID 19 pandemic has reset the context for regional and national competitiveness by upending global supply chains, revaluing domestic supply chains and manufacturing, accelerating remote work and digital commerce, tightening labor supply, and emphasizing business equity. A run-up in the stock market and real estate prices have increased the volume of private capital seeking investable projects.
- Policy changes have opened new possibilities for innovation, regional positioning and supplier diversity. These changes include the electrification of the auto sector, the greening of the nation’s energy supply, the upgrading of the nation’s infrastructure and boosting domestic manufacturing capacity around medical supplies, pharmaceutical products, and high-tech.
- Changes that have been decades-in-the-making are now reaching critical mass. The emergence of new industries (e.g., blue economy & commercial space) and the maturation of next gen technologies (e.g., AI & machine learning) are reshaping metro economies battered by deindustrialization. The geographic concentration of venture capital limits the ability of places to seize this potential.
- U.S. competition policy is unfolding in an uneven international context. Many countries are taking an “old school” approach to industrial policy, subsidizing whole industries or sectors where economies of scale have benefits. To remain competitive, we must develop a uniquely American industrial policy that spurs our decentralized and entrepreneurial spirit.
Second, a new geography of innovation is emerging across the country.
Against the complex backdrop of economic disruption, the BBBRC applications reveal the variegated presence of advanced industries across disparate cities, metropolitan areas, states and regions. Our review of the 60 Phase 1 winning applications shows three distinct categories.
- Traditional clusters: A group of applications describe a singular, mature sector that has dominated an economy for decades (e.g., advanced mobility and advanced aerospace in areas with regional specialization), but now faces competitive threats from inside and outside the United States.
- Convergent clusters: A second group of applications describe multiple industries (e.g., the suite of industries utilizing advanced manufacturing) that are all experiencing the impact of technological advances (e.g., artificial intelligence, robotics, advanced materials) on product design, production practices and talent needs.
- Next generation clusters: A final group of applications show the emergence of nascent industries in communities that have distinctive advantages and are intent on securing first mover positions (e.g., the Blue Economy in coastal regions and the clean tech sector in the middle of the country).
Irrespective of these disparate starting points, the applications show that largely in the absence of a heavy-handed federal policy there is a new approach to driving regional innovation that is emerging organically to adapt to the last couple decades of macroeconomic changes and pandemic-fueled disruptions.
Third, Modern Supply Side Economics comes to life on the ground.
The projects put forward by the Phase 1 winners, for the most part, bring specificity and content to the components of modern supply side economics articulated by Secretary Yellen. The national agenda, in other words, comes to life on the ground. Some key examples:
- For labor supply and human capital, applicants have offered not only customized workforce development, fit to the talent needs of different industries, but also wrap-around services that deliberately provide pathways to opportunity for low-income workers.
- For public infrastructure, applicants have focused on a broad range of investments to enhance the movement of goods, people and ideas (e.g., transportation, broadband) but also build (or renovate) innovative spaces and remediate polluted sites for new growth potential.
- For R&D, applicants have developed strategies to accelerate the commercialization of basic research, promote applied technological innovation and provide entrepreneurs with the start up and scale up capital that is often hard to find outside dominant metros.
- For sustainable environment, applicants are both responding to Administration signals around the shift to renewable energy sources and the decarbonization of the mobility sector and offering solutions to mitigate the growing impacts of climate change on critical sectors.
- On inclusion more broadly, applicants are teasing out the Administration’s call for “equity” in complex and multi-layered ways, calling for concrete approaches to workforce diversity, supplier diversity, founder diversity and locational or spatial diversity (e.g., demonstrable impact on disadvantaged urban neighborhoods and rural communities). Many of the governance coalitions that have been formed to design and deliver these applications also bake in equity through their broad representation of partners and new levels of stakeholder engagement.
Fourth, BBBRC projects hint at the potential impact of a “whole-of-government” approach.
While the projects put forward by the Phase 1 winners match nicely to the components of national competitiveness policy, they also compel the federal government to work harder for innovation across the whole of government. The $1 billion BBBRC allows for radically different types of investments to be made under the umbrella of one, integrated, government program (this is distinct from many other federal funding sources). But there are hundreds of billions of dollars flowing on an annual basis through agencies and programs that are highly compartmentalized and fragmented. The workhorses of the US economy (cities, counties, metropolitan areas, states and regions) are being asked to design and deliver disparate strategies while the federal government remains composed of institutions that are disjointed, siloed and, in the case of military facilities and energy labs, difficult (at best) to work with around innovation.
Beyond projects, the collaborative governance models employed by all Phase 1 winners stand in sharp contrast to the balkanization of federal agencies, which, for the most part, operate as separate silos with disparate rules, requirements, timetables and funding protocols. The BBBRC applications show how research universities, major industrial companies, small and medium sized enterprises, entrepreneurs, investors, community colleges and others are coming together to collaborate to compete. Such collaboration is the only way to connect the dots, often across vast geographies, between the commercialization of research, the development of talent, the formation and scaling of innovative firms and the adoption of cutting edging technologies in companies large, medium and small.
It is critical for the federal government to meet applicants where they are by harmonizing rules, coordinating actions and engaging the ultimate winners on practical ways that federal agencies can maximize the competitive impact of federal investments. We have previously called for a “delivery unit” to unleash the full impact of the federal government’s new programs across federal silos; establishing a “Build Back Better delivery unit” to work with the eventual phase 2 winners as they interface with multiple federal silos may be a good place to start.
Fifth, these projects can only make markets if private funders are engaged.
What became clear to us as we read these applications is that the BBBRC cries out for a more focused effort on maximizing private and philanthropic funding. In the end, public resources alone will not be sufficient to drive the kind of inclusive growth that is the ultimate objective of this competitive program and the Build Back Better agenda more broadly. Private, market-driven capital, in many different forms and for different purposes, will be the ultimate determinant of competitiveness. One promising vehicle for cross-sector collaboration: the BBBRC is being undertaken at the same time that the Department of Treasury is accepting applications under the State Small Business Credit Initiative (“SSBCI”). As we’ve previously written, SSBCI has the potential to catalyze the exact kind of private investment that most communities will need to start and scale enterprising companies that enhance their competitive position.
Philanthropic funding will also be a necessary platform for extending entrepreneurial finance and starting and sustaining governance models. We know EDA is working with Phase 1 winners to coordinate a broader philanthropic effort and we applaud them for that effort; it could not come soon enough.
In conclusion, the Biden Administration and their Congressional allies are writing a new chapter in US competitiveness policy. But the BBBRC reminds us that the decentralized and distributed nature of the US economy is a distinctive national strength, which must be respected and honed through multiple programs and policies, agencies and actions.
Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Colin Higgins is the Deputy Director, Avanti Krovi is a Research Officer and Sarena Martinez and Brian Reyes are Graduate Research Analysts at the Nowak Lab.