The Abundance Case for Public Factories

Over the last few years, a number of commentators, policy wonks, and elected officials have taken up the cause of abundance. They have sought to dramatically increase the supply of housing, clean energy, and other social goods by way of opening up zoning codes, streamlining environmental review and permitting processes, and otherwise making it easier to build.

Tools like these all have their place in the abundance toolkit, as I’ve written elsewhere. But there’s another tool that ought to join them: public factories. As Ganesh Sitaraman and I detail in a recent paper, production facilities built and owned by the government—and operated by either the government or a private contractor—have a long and storied history in American industrial policy. They can also go a long way toward overcoming market failures causing production bottlenecks that hold back abundance.

Consider World War II. In 1940, the United States began to mobilize industrial production to support its allies’ war effort in Europe. In a fireside chat, President Franklin Roosevelt recognized that private industry was limited in how much it could reasonably produce. “I know that private business cannot be expected to make all of the capital investment required for expansions of plants and factories … which this program calls for at once,” he told the nation. “It would be unfair to expect industrial corporations … to do this, when there is a chance that a change in international affairs may stop or curtail future orders a year or two hence.”

To compensate for the private sector’s limitations, the Roosevelt administration created the Defense Plant Corporation, which rapidly built and owned two-thirds of all new factories constructed for World War II mobilization. By the end of the war, the government owned 25 percent of the country’s total industrial stock, including a majority of its factory space in the aircraft, synthetic rubber, shipbuilding, and aluminum industries. The arsenal of democracy achieved victorious wartime abundance thanks to public factories.

World War II was not the first nor the last time American policymakers deployed public factories to increase supply above and beyond what the private sector could reliably provide. For example, during the Revolutionary War, Pennsylvania created a public factory for gunpowder upon the recommendation of the Continental Congress, fearing that privately-owned powder mills would not finish construction on the timescale demanded by the war effort. After the war, President George Washington and Secretary of Treasury Alexander Hamilton created a series of arsenals—public factories for weapons—to mitigate potential supply bottlenecks from domestic private arms dealers and European exports. During the Progressive Era, a North Carolina city overcame milk producer resistance to its public-health pasteurization mandate by operating its own milk plant. And during COVID-19, public factories were on the table for Operation Warp Speed: Congress authorized the use of government-owned facilities if needed to ramp up production of vaccines, tests, and protective gear.

Private firms can still pose their own bottlenecks to abundance. We see that today with transformers, the critical grid equipment that transmits electricity to homes, businesses, and factories. With surging demand from data centers, electrification, and grid upgrades, transformers have been plagued by shortages and soaring prices, resulting in years-long waits for new units. Yet transformer producers have been unwilling to keep up with rising demand. Transformers are historically a cyclical industry that rises and falls with the housing market. Many producers increased their capacity during the housing boom in the early 2000s, only to be burned by the ensuing market crash and financial crisis. Even with some modest capacity expansions, market analysts still expect an ongoing 30 percent shortfall for power transformers. That has created bottlenecks across the economy in sectors dependent on transformers, delaying new housing developments, grid expansions, renewable energy projects, and even disaster relief efforts.

Today’s transformer bottleneck resembles another historical moment: the steel bottleneck that held back consumer abundance after World War II. Despite surging demand from consumers ready to spend wartime savings on cars and other consumer goods, steelmakers were unwilling to significantly increase production. Scarred by the Great Depression, when plummeting steel demand left them operating at a fraction of full capacity, they were reluctant to make any rapid new capital investments less than two decades later. But this created economy-wide constraints: as the Economic Report of the President in 1948 put it, “There is no point in having capacity to make more automobiles unless we have capacity to supply steel [.]”

In response, in his 1949 State of the Union address, President Harry S. Truman asked Congress “to authorize the construction of [steel production] facilities directly, if action by private industry fails to meet our needs.” As Democrats in Congress drafted legislation to create public steel mills, the steel industry blasted the plan as “socialistic” – a particularly potent charge with the Cold War underway. A few months later, the economy fell into recession, quelling both steel demand and the need for Truman’s proposed public mills. Indeed, public factories largely fell out of favor in the United States during its rivalry with the Soviet Union.

But perhaps it’s time to bring them back. Producer risk aversion often means that the private sector alone cannot rapidly increase supply to achieve abundance. And it’s entirely rational for capital-intensive industries like transformers and steel to hesitate before expanding production capacity at the drop of a hat. To justify building expensive new factories (or expanding existing ones), they need to believe that increasing supply will be profitable over a long time horizon. But what if a current demand increase proves to be a temporary blip? Or what if external conditions clamoring for more supply change? Or what if pro-abundance policy—like production incentives or regulatory reforms—gets reversed by a subsequent political coalition? If any of those what-ifs come to pass, then the firm could be left holding the bag with too much unused capital investment on its hands.

Public factories have an Occam’s razor logic for achieving abundance: if we want more of something, we can just make it ourselves. In some circumstances, public factories may simply be the most direct way to increase supply. Instead of waiting on a chain of market decisionmaking to—possibly—deliver more goods over a long period of time in response to regulatory changes—if doing so is deemed sufficiently profitable—a public factory could guarantee production more immediately. As I proposed in a recent paper, if we need more transformers, the government could just build a public factory and lease it out to a private transformer producer. It’s a win-win policy: the public gets more supply needed for abundant homes and energy (not to mention improved affordability), and the company avoids the long-term risk of holding excess factory capacity.

Of course, for public factories to actually deliver in the near term, they will need to be built quickly. That may require expediting permitting and environmental review processes to ensure that a project significant enough to warrant public investment can get online with speed and priority. The Building Chips in America Act, which streamlined some environmental review for CHIPS Act-funded semiconductor fabs, can be a starting point.

When it comes to securing abundance, public factories have the ability to achieve public production goals on the public’s time frame. It simply may not always be the case that the private sector would automatically produce socially-optimal levels of abundance if it were just unshackled from unnecessary regulation—that there’s a geyser of supply waiting to gush forth if the government stepped out of the way. That may sometimes be true. But it ignores the steady-state tendency in certain critical industries that may nonetheless prefer to produce at something closer to business-as-usual than to launch a breakneck trajectory shift, even when social conditions call for one. When private factories cannot or will not produce enough, public factories can step in to secure abundance.