In new research, Joel Dodge and Ganesh Sitaraman argue that a comprehensive industrial policy to secure American supply chains and ensure access to essential goods should incorporate the deployment of public factories.
Over the last few years, a surprising policy idea has quietly reemerged in the United States: public factories. In 2018, Senator Elizabeth Warren and Representative Jan Schakowsky—both Democrats—introduced the federal Affordable Drug Manufacturing Act, which would authorize the Department of Health and Human Services to directly manufacture select generic drugs to sell to patients at affordable prices. Just last year, Senators Ted Cruz, John Cornyn, Tom Cotton, and John Boozman—all Republicans—introduced the SkyFoundry Act, which would create a government-owned and -operated production facility for small military drones.
Public factories are facilities that are owned by the government and exist to provide or expand the supply of important goods. While perhaps unexpected, public factories in fact have a venerable, if largely forgotten, tradition within American industrial policy. As policymakers seek new and effective ways to respond to today’s most urgent economic challenges, we argue in a new paper that public factories should be part of the industrial policy toolkit.
Policymakers are increasingly coming to understand that the proclaimed triumph of laissez-faire neoliberalism at the “end of history” failed to anticipate a panoply of economic and social issues tied to globalization. Instead, domestic economies have come under increasing strain from geopolitical tensions, supply shocks, natural disasters, and global pandemics. In the wake of neoliberalism’s failures, scholars and policymakers have turned to industrial policy and even economic nationalism through a range of tools: tariffs, subsidies, and tax credits to reshore production; deregulation and deproceduralization to speed up production; and competition policies to diversify production.
Each of these approaches has value, but they are all blunt instruments that rely on indirect mechanisms to generate domestic production. Tariffs and subsidies rely on carrot-and-stick incentives to alternatively punish foreign production or coax domestic production. Supply-side reforms following the “abundance” policies promoted by center-left liberals count on changes to legal and regulatory policies to ease building. Antimonopolists hope reforms to corporate structures and finance will ultimately expand the number of firms, change their behavior to prevent stifling growth, and reshape the way they spend toward greater investment.
These tools can also require exacting precision to execute. Policymakers must allocate the correct value of subsidy (or tariff) to change firm behavior—a figure that can be a moving target as market conditions shift—or they must rewrite regulatory rules. Such “bankshot” industrial policies all rely on faith that calibrating the right incentive structure will eventually lead private actors to generate the socially optimal level of production that we want. But hoping the investment calculus of profit-driven firms aligns with public policy goals can pin too much faith on the private sector: firms may well change course from reshoring or expanding production if shifting business conditions alter their profit calculations.
Public factories offer an alternative. From the founding of the United States through to the present, policymakers have turned to public factories to produce important goods in sectors ranging from defense and steel to healthcare and agriculture. Public factories were deployed during the American Revolution, helped George Washington and Alexander Hamilton secure a reliable supply of high-quality weapons for the new country after the revolution, helped the Union win the Civil War, and powered the American arsenal of democracy toward victory in World War II. Public factories have produced consumer goods like ice, milk, flour, medicines, vaccines, and even alcoholic beverages.
In the U.S., public factories have generally been deployed to ensure production of an essential good. They have been used to address market failures or when exigencies call for production beyond what the market can provide. For example, during World War II, President Franklin Delano Roosevelt recognized that the market’s profit demands would hinder it from making the necessary capital investments at the speed and volume that the war required. He relied on a massive network of public factories (mostly government-owned, contractor-operated) to meet wartime production needs instead.
At other junctures, policymakers have used public factories to spur the domestic development of industry and improve markets. In some instances, public factories can be more efficient and cost effective than subsidizing private production by more effectively overcoming business uncertainty and avoiding capture by shareholders.
Skeptics may worry that public factories could face certain drawbacks and risks, including corruption, mismanagement, and over-deployment. While these concerns are worth taking seriously, the history and practice of public factories in the U.S. suggest they may be overstated. Many public factories were often established in response to private sector abuse and corruption. And many public factories achieved admirable levels of performance and financial self-sustainability. For instance, since 1919, North Dakota has operated a state-owned flour mill. To this day, it is profitable, remits half its profits back to the state, and remains the country’s largest flour mill.
We believe this is the right moment to reconsider public factories. Cold War politics largely cast aside public factories, as the market-oriented U.S. confronted the collectivist Soviet Union, and the subsequent neoliberal period did little to revive the idea. But as geopolitical eras have changed and supply chain insecurity has emerged as a constant threat, there has been a remarkable expansion in the political appetite for previously disfavored or abandoned economic policy tools, from tariffs to industrial policy subsidies to government equity stakes. Public factories are an old idea whose time has once again come.
Author’s Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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