Cats, Not Tigers

What we knew as Bidenomics — or what remained of it after the legislative sausage-making overseen by conservative senator Joe Manchin — was also focused on derisking. It was a large-scale program of subsidies, guarantees, and incentives to private capital designed to induce increased supply by enticing private capital to invest, through subsidies and guarantees. In exchange for federal support, the government imposed some requirements to, for example, employ American workers and provide childcare, while additional incentives were offered to projects that pledged to refrain from union-busting.

The abundance agenda argues for continuing with the derisking approach — perhaps with better-designed and more novel financing structures — but it diverges from Bidenomics in one key respect: it combines derisking with a dramatic program of deregulation. Those employment, childcare, and other strings attached to federal largesse, abundists argue, just slowed things down, making it impossible to build at low cost and at speed. Slashing the thicket of requirements and public regulation, they predict, will unleash a surge in investment activity.

In contrast to abundance, an alternative view is that Biden-Manchin industrial policy hamstrung itself from the start, by placing itself at the mercy of private capital. In this view, capital’s profit orientation is too far out of line with the urgent need to build projects like green infrastructure and housing for Bidenomics’ nudging it into action with derisking incentives to work. In short, Bidenomics left itself at the mercy of risk-averse, slow-moving, short-termist investors seeking easy profits.

Abundance places its faith in the idea that private capital, finally freed from onerous regulation, will spring into action and undertake the massive investments required for broad prosperity. However, capitalists don’t want to make stuff; they want to make profits. Production itself, from the perspective of capitalist firms, is merely a by-product of profit-making. And the investors in capitalist firms (think of Boeing) often prefer fast cash in the form of stock buybacks or acquisitions to undertaking productive investments.

In other words, private capital is not a caged tiger, just waiting to be let loose from its confinement. It’s more like an overly cautious and lazy house cat, as likely to sit by its bowl and whine for more easy food as it is to strike out through an open door on an adventure.

To understand why deregulation and derisking is not enough to unleash capital’s animal spirits, it’s helpful to look at two economic sectors central to the abundance agenda: energy and housing. The manufacturing industries essential to the green energy transition are characterized by very high fixed costs, in the form of massive sunk investments in plant and equipment. In high-fixed-cost industries, costs decline as production increases, because the burden of those costs — which remain the same regardless of how much is produced — can be spread out over more output.

This seems like a win-win: more production means lower costs, which should mean lower prices, which should in turn fuel more production. But the sunk nature of those fixed costs exposes manufacturing firms to much greater risk: If demand suddenly contracts, they are still on the hook for the debt incurred to expand production capacity. If demand shrinks far enough, insolvency can result.

Thus, corporations actually hesitate to expand output in response to higher demand, or to invest in new capacity. Instead of increasing production to take advantage of lower costs, they often prefer to raise prices and/or ration output, forcing customers to wait in line. Instead of the investment and production surge expected by abundance agenda advocates in response to a program of subsidies and deregulation, we may instead witness shortages, where there are customers willing to buy even at inflated prices who are unable to make purchases. Indeed, that is precisely the dynamic currently playing out in the turbine manufacturing sector of the energy industry.

The fixed cost problem, meanwhile, is exacerbated by economic concentration: in concentrated industries, raising prices and restricting output in response to rising demand is a safe and profitable response, because firms in such industries don’t fear a rival stepping in to capture their customers with lower prices. As every economics student learns, one feature of monopoly and oligopoly power is higher prices and restricted output. Tacit collusion is a common feature of oligopolistic markets, sustained by public communications in earnings calls and press announcements, or just simple tit-for-tat mutual reciprocity. Real abundance would seem to require, at a minimum, robust antitrust enforcement to combat concentration.

Derisking for Labor

In the 1940s, a confident and ambitious labor movement offered a compelling and comprehensive solution to the oligopoly problem, which was especially pronounced in the heavy manufacturing sectors represented by the Congress of Industrial Organizations (CIO): nationalized sectoral bargaining, Keynesian aggregate demand management, government-led economic planning, and robust antitrust enforcement.

The CIO, in fact, routinely accused their employers of holding back production in the interests of profit, demanding antitrust investigations in response. In 1940, CIO leader Walter Rether famously contrasted labor’s willingness to ramp up production of military aircraft to fight fascism with the auto industry’s risk-averse refusal to invest.

The ultimate ambition of the CIO was to achieve real abundance — a high-consumption, high-output, high-employment economy — by seizing from capital its jealously guarded unilateral “right to manage,” bringing worker input into pricing, production, and investment decisions. At the high-water mark of CIO power in 1946, the United Auto Workers demanded a 30 percent increase in wages with no increase in prices.

Unfortunately, this vision never came to pass. Capital furiously resisted any labor or government interference in its managerial prerogatives and ultimately prevailed. In the postwar labor relations regime that emerged in the Cold War, labor was consigned to a narrow role: bargaining only over wages and working conditions, one company, one plant, at a time.

Manufacturing industries aren’t the only case where the Abundance Agenda’s derisking-plus-deregulation approach falls short. Housing is another. The abundance agenda blames public land-use regulations, in particular zoning rules, for holding back developers from unleashing a building boom allegedly bottled up by red tape. While some land-use reform — particularly in exclusionary wealthy suburbs — is a worthy policy goal as one part of a broader housing agenda that foregrounds public investments, tenant protections, and social housing, land-use reform is unlikely to unleash a building boom on its own.

For one thing, a key input into housing production is land. Land, unlike other inputs to production, is not produced in the market. Moreover, there are no close substitutes for a given parcel: land is an inherently monopolistic asset. In addition, land — particularly land in growing cities — tends to appreciate in value over time, giving it the character of a financial asset. As with other financial assets, this temporal dimension introduces greater complexity and well-known boom-and-bust cycles into housing including herding, bubbles, and market crashes. And furthermore, upzoning land, by allowing more varied or intense use of a given parcel, increases its value.

Just like owners of financial assets, developers in possession of land upzoned for apartments may not build them any time soon, since building now removes the option to build for potentially greater profits five years from now. They may prefer to wait, engaging in the widely observed phenomenon of landbanking.

What is more, because the private market responds to dollars, not people, land parcels that allow apartment buildings may instead be used to build a few mansions, if the mansion developer submits a higher bid than a developer of multifamily housing. A parcel’s “highest and best use,” in a market economy, is what the possessor of the most dollars says it is.

Abundance advocates frequently tout relatively low housing costs in the deregulated, right-to-work Sunbelt compared to New York or California as a kind of trump card. However, part of this disparity reflects simple regional inequality: in poor cities, land is cheaper than in rich cities. This is not a simple Sunbelt vs. Rust Belt story, since poor postindustrial cities in Northern blue states also have low housing costs. While making New York and San Francisco poorer would lower land prices and housing costs, no one would advocate taking that route.

And then there are the harder trade-offs, such as labor costs. Construction worker wages are indeed lower, and working conditions are worse, in the Sunbelt. Six days after abundance darling Texas recently banned cities from mandating water breaks for construction workers, a construction worker died of heatstroke. Is that really the model the rest of the country should follow?

While Klein and Thompson’s book suggests that safety rules are to blame for low productivity growth in construction, the construction industry remains one of the deadliest in the United States. Even accepting the questionable argument that safety rules are the reason the outdoor, seasonal, on-site construction industry has not matched the productivity growth of other industries, how much more dangerous should it be?

For all the focus on zoning and labor, abundists have surprisingly little to say about perhaps the most consequential impediment to construction: high and volatile financing costs. No one, however, can borrow more cheaply than the federal government. Indeed, the chronic instability and boom-and-bust cyclicality of housing and homebuilding makes it an obvious candidate for muscular government intervention. Unfortunately, since the 1940s, despite the promising strides made by a nascent US social housing sector during the early New Deal, the federal government has taken a derisking approach to housing. Abandoning promising early New Deal support for multifamily social housing, US policy ultimately focused instead on facilitating a stable financial market for suburban single-family housing.

It’s worth considering for a moment how robust public investment in social housing would differ from the current derisking approach. Guaranteed and stable demand for construction would transform the dynamics of the boom-and-bust-scarred industry. For example, while it’s common to blame building trades unions for skill shortages during booms by not expanding apprenticeships in lockstep with temporary demand surges, these critics ignore the dynamics creating those shortages.

First of all, single-family housing, and most residential construction in general, is nonunion. But also, given intense boom-and-bust cycles, building trades unions must exercise caution when expanding the supply of trained workers. This is because, in the inevitable bust to come, the resulting labor glut would cause intolerably and destructively high unemployment. However, with guaranteed stable demand for construction, this cycle would be mitigated, if not eliminated. If we are to have derisking for capital, why not for labor too?

In his latest defense of Abundance, Ezra Klein critiques populist skeptics of his proposals, noting that “[m]uch of what our society needs is made by corporations. It is what corporations do, not just what they are, that matters.” This is true. But it is also true that we cannot simply nudge and derisk corporations into doing what we need them to do. The state must discipline them as well.

Trade unionists and social democratic economists have long viewed private capital’s monopoly on investment and production decisions as a threat to any progressive political project. Expansionary fiscal policy will fail to generate full employment if private capital, undertaking an intentional or unintentional capital strike, simply fails to invest. For another, private capital, responding only to profit incentives, will not produce things — such as a livable biosphere — that the market sees little or no value in. Where abundance is not profitable, the private sector, left to its own devices, will not produce it. We can and must demand more from it, and from the public sphere.