The Case For Public Factories

The United States has entered an era of short supply: in recent years, Americans have faced episodic shortages in semiconductors and other critical goods during COVID-19 shutdowns, energy price shocks following Russia’s invasion of Ukraine, and now again energy supply disruptions caused by the war with Iran. We have also faced chronic shortages stemming from our failure to build enough housing, our struggle to build out clean energy infrastructure, and our loss of production capacity for shipbuilding, rare earth magnets, and other strategic goods to China and other countries.

These types of shortages are likely to persist in the future as extreme weather, geopolitical tensions, wars, pandemics and diseases, and other ruptures disrupt the global movement of goods. Policymakers and experts are actively searching for solutions, gravitating toward a toolkit of subsidies, tariffs, supply-side regulatory streamlining, and antimonopoly competition.

In a new paper, we propose an addition to that toolkit: public factories. Public factories are just that: government-owned production facilities that exist to provide (or expand) the supply of important goods. We argue that public factories can provide policymakers with an additional powerful and flexible tool to address some of our most urgent challenges. In a separate white paper, one of us (Dodge) illustrates one type of challenge public factories could address: the need to secure supply chains for critical energy components like batteries and transformers.

Perhaps surprisingly, public factories have quietly begun re-entering the industrial policy discourse in recent years on both sides of the aisle: Democratic lawmakers have advocated for public manufacturing of pharmaceutical drugs, and Republican lawmakers have endorsed public production of military drones. Perhaps even more surprisingly, this is not a historical anomaly. Throughout American history – from the founding of the country until the present – the federal government, states, and localities have repeatedly and regularly turned to public factories to produce important goods.

In the defense sector, public factories pre-date the Republic, with the Continental Congress encouraging states to create their own munitions factories during the Revolutionary War. After the war, President George Washington and Secretary of the Treasury Alexander Hamilton successfully advocated for the creation of armories—government-owned weapons factories—in the 1790s to reduce the military’s dependence on lackluster private production and risky foreign supply chains. During World War II, the government built and owned the vast majority of new industrial plants needed for military mobilization, the arsenal – and industry – needed for democracy to defeat fascism.

Public factories have not just been deployed for the national defense and warfighting. All levels of government have created public factories for key inputs to assist industry with domestic production. Public factories have also produced goods for consumers, ranging from ice, milk, and flour, to medicines and vaccines, and even alcoholic beverages.

This history shows where public factories can be useful policy tools, and where they have tradeoffs and drawbacks. Public factories have generally been adopted in order to ensure the production of essential goods, encourage domestic development and innovation, and spur competition and provide positive economic spillovers. They also have important benefits, compared to subsidizing private factories: they directly lead to production of needed goods, rather than relying on private intermediaries with different incentives; they are more efficient in that some of the funding is not captured in the form of private profits; and they make the government’s role salient, enabling political feedback and ensuring that government gets credit for helping people and the economy. As a matter of design, public factories can be owned and operated by the government (“GOGOs”) or government-owned but operated by a private contractor (“GOCOs”). There are tradeoffs between these two approaches, but both have been deployed successfully.

This is a particularly opportune moment to revive public factories. Public factories were largely jettisoned during the market-versus-socialistic ideological contest of the Cold War, and they remained disfavored under the neoliberal era’s preference for privatization, austerity, and trade liberalization. But the current geopolitical moment is very different: the Cold War is in the rear-view mirror, the neoliberal consensus has collapsed, and COVID-19 and a rising China have focused policymakers on right and left on the imperative of domestic production.

As Dodge’s white paper explains, that revival could, for example, use public factories to develop and mass produce next-generation energy storage technologies such as solid-state batteries to help the United States protect its energy security while outcompeting China for control of a cutting-edge strategic technology. Meanwhile, public factories for critical energy components could help update and expand the grid by alleviating the bottleneck for electrical transformers caused by monopolization and producer reluctance to expand capacity.

In an age of recurring supply shocks, policymakers will need a broad and adaptable toolkit to secure the country’s economic wellbeing. Tools like subsidies, tariffs, supply-side abundance, and antimonopoly all have their virtues, but they have not historically been the exclusive modes of American industrial policy. Direct government construction, ownership, and—in some cases—operation of production facilities have long been additional means of securing and expanding domestic supply of critical goods. To expand the industrial policy toolkit, we should relearn the old wisdom of public factories.