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The U.S. Department of the Treasury last week released its final rule for the $350 billion in State and Local Fiscal Relief Funds (SLFRF) provided by the American Rescue Plan Act (ARPA). This rule provides clarity to states and localities, including tribal and territorial governments, on what they can do with the substantial federal resources made available to them through the ARPA. The rule also encourages state and local governments to spend the fiscal relief rapidly and directly, prioritizing economic recovery and equity.
This final rule replaces the interim final rule that has been in place since May 2021, and in this final guidance from Treasury, three new elements stand out. First, the rule expands governments’ ability to use the funds to hire and retain public-sector employees. Second, the rule provides new options to assist low-income workers and families dealing with the economic impact of COVID. Finally, the rule recognizes “the disproportionate impact of the pandemic on people of color,” and adds additional uses for ARPA funds to address inequities exacerbated by the pandemic.
The $350 billion, passed as part of the American Rescue Plan signed into law by President Biden in March 2021, is designed to help state and local governments mitigate the public health and economic impact of COVID. More than $200 billion has already been distributed, with the rest being disbursed starting in May of this year. Recipient governments can use the funds for many purposes, so long as they fall under one of these broad categories:
The final rule was developed after reviewing hundreds of public comments, including comments from EPI. While it does not go into effect until April 1, Treasury has indicated that state and local governments can begin using the new rules immediately if they choose. Note: Rulemaking is a regular part of the implementation of major legislation. Rules provide greater specificity and set the parameters under which recipients of funds can use them (see this useful primer here). Treasury can seek repayment of funds spent in a manner inconsistent with the final rule.
Restoring public-sector capacity
The final rule greatly expands the ability of state and local governments to hire and retain public-sector employees. Public employment has not only declined abruptly since the beginning of the pandemic, it has also never fully recovered from the huge job cuts following the Great Recession more than a decade ago. Women and Black workers are typically hit hardest by public-sector jobs cuts, contributing to the ongoing gaps in wages and employment.
The interim final rule only allowed recipient governments to hire staff in order to achieve the same employment levels they had in February 2020. However, as we noted above, many state and local governments still had employment shortfalls in February 2020 relative to pre-Great Recession trends. To reach truly adequate levels of staffing—particularly when COVID mitigation places huge additional demands on schools and public agencies—EPI recommended that Treasury allow governments to use ARPA funds to hire at a level 5-10% above the pre-COVID baseline. The final rule does this, allowing recipients to increase payrolls to 7.5% above the pre-pandemic level. It also allows the use of ARPA funds to offer retention incentives and other forms of extra compensation to keep employees from moving to different jobs, which is important as we are in one of the most fluid job markets we’ve ever seen.
There are still 900,000 fewer public-sector jobs compared with before the pandemic. Nearly two-thirds of the job losses are in state and local governments—and that number is only worsening. It may seem beside the point to allow governments to exceed pre-pandemic levels when they are so far below, but this is where flexibility can be helpful. In the final rule, a new standard allowance of $10 million further supports smaller local governments to calculate revenue loss and spend this amount on government services. If a state government, for example, isn’t able or willing to restore public-sector jobs and services, now cities and counties have the chance to use ARPA funds to cover the gaps in public services. The devastation of the pandemic has shown all too clearly that the public sector needs to be strengthened, and the new rule will help.
More options to help low-income workers and their families
COVID has been especially hard for those who were in dangerous situations prior to the pandemic. Low-income workers are less likely to have been vaccinated, are more likely (even if vaccinated) to have to stop working to care for someone else with COVID, and often work in dangerous occupations that increase their risk of becoming ill.
Direct economic assistance to low-income workers is a simple and effective way to support them through the ongoing economic shocks of the pandemic. The final rule expands options already available to policymakers. For example, they are now allowed to use ARPA funds for financial services to the “unbanked and underbanked,” which will make it easier to help those without regular access to our financial system.
The rule also expands the ability of governments to help low-income families with health insurance costs. While the interim final rule only allowed the use of ARPA funds to help with the costs of COVID treatment, the final rule allows for funds to be used for health insurance deductibles, co-pays, or premiums of impacted households, even if those costs were not directly related to COVID.
Strengthening water, sewer, and broadband infrastructure, and ensuring equitable access to those jobs
Additionally, the final rule expands eligible uses for investments in water and sewer infrastructure, including lead remediation and water quality testing projects needed in schools and child care facilities. The range of eligible stormwater management projects has grown, which will help communities address the increasing stress on water and sewer infrastructure caused by long-standing underinvestment and the impacts of climate change.
The final rule also further broadens and clarifies eligibility for broadband infrastructure investments and continues the interim final rule’s recommendation that contracts for major projects incorporate project labor agreements (PLAs), community benefit agreements, local hire provisions, or prevailing wage standards to ensure public spending helps create equitable access to quality jobs. State and local governments need to set strong labor standards to ensure that water, sewer, and broadband infrastructure projects funded by ARPA dollars provide good jobs at good wages. Worker power is an important part of safely exiting the pandemic.
Undoing the pandemic’s disproportionate impact on people of color
The pandemic has only heightened existing racial inequities. Black women make 11% to 27% less than white men in essential jobs like education, medicine, and child care, and Black and Hispanic workers are less likely to be able to telework. While the 2020 CARES Act and related legislation helped mitigate the worst economic impacts of the pandemic, racial gaps in wages and employment are stubbornly persistent, with Black workers more likely to lose their jobs and less likely to return to work, as the economy has ebbed and flowed.
The final rule has expanded the allowed uses of funds to help households and communities disproportionately impacted by the pandemic. A key area is housing. As Harvard’s Joint Center for Housing Studies has shown, Black and Hispanic renters face a greater threat of eviction during the pandemic, with the risk especially greater among older renters of color.
The most recent Census data show that 11% of all renters are not at all confident in their ability to pay rent. That number increases to 16% of Black renters and 17% of Hispanic renters. The final rule expands allowed uses of ARPA funds to increase rental assistance, relocate families to neighborhoods with higher economic opportunity, and improve vacant and abandoned properties to create more affordable housing.
The rule also confirms the interim final rule’s protections for those experiencing housing insecurity during the pandemic. More programs will be allowed like the one in Kansas City, for instance, which used ARPA funds to provide legal counsel to all tenants facing eviction. Secure housing leads to better health, educational, and employment outcomes, and state and local governments should make it a high priority as we continue to struggle with the Omicron variant.
Eliminating obstacles to premium pay for essential workers
The final rule also expands allowed uses of premium pay (often called hazard pay) for essential workers. Premium pay gives policymakers an option to address a four-decade pattern of increasing income inequality that is leaving Black and Brown workers further behind. Workers of color are far more likely to be employed in the front-line occupations that are eligible for premium pay. Those working in jobs where they are exposed to COVID-19 every day are more at risk of contracting the virus and spreading it to their families and loved ones.
State and local governments may have been hesitant to provide premium pay because they were not sure who was eligible to receive it, but the final rule should dispel that uncertainty. There is a list of occupations eligible for premium pay, covering health care, food service, education, logistics, and other parts of our economy that we all discovered were truly essential these past two years. The steps needed to determine if eligible workers perform “essential work” are easy to understand and leave little room for error.
Additionally, the final rule clarifies that recipients of premium pay should be earning at or less than 150% of their state or county’s average annual wage and should be non-exempt employees under the Fair Labor Standards Act. Premium pay to eligible workers not meeting those requirements will require written justification to the Treasury Department.
So far, only a few states have considered premium pay for essential workers. More should, and local governments ought to do so as well.
State and local governments should use fiscal relief funds to boost the recovery
The final rule should eliminate any remaining uncertainty on the part of state, territorial, tribal, and local governments about what are and are not allowed uses of ARPA funds. Now is the time to spend those funds. Almost half the dollars allocated to states in 2021 remain unspent, and the rest of the $350 billion will be coming soon. By leaving ARPA dollars unspent, state and local governments will not help end the pandemic, will not strengthen their states’ economies, and will not help address inequities.
Policymakers should engage community groups, workers, and families in need, and start getting these funds to the people and places where they’ll have the greatest impact.
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Sometime in the spring of 2020, Sam O’Leary’s phone began ringing off the hook.
The callers were managers from the auto and aerospace industries. They were all seeking help from his industrial 3D printing business in Germany, SLM, in producing vital parts that were suddenly becoming scarce as the Covid-19 pandemic disrupted international shipping.
“I didn’t do a single day away from the office,” says O’Leary, who took to showing off the company’s specialised machines to clients over video calls. His customers’ worries were always the same, he says: “I’ve got a massive problem, I need to de-risk, I need to reshore.”
SLM’s customers had hitherto used its technology for niche applications, such as producing gooseneck brackets for planes and brake callipers for performance vehicles.
But, despite the increased cost and complexity of 3D printing metal components, they turned to the technology for more commonplace parts — such as hinges that keep regular car seats in place.
So, while many other industrial businesses saw their order intake slow to a standstill, revenues at the Lübeck-based company — whose shares had fallen to record lows before the pandemic hit — grew by more than a quarter in 2020.
Sales were on track to have increased by a similar amount in 2021. For 2022, O’Leary expects SLM’s sales to grow by 40 per cent.
High-profile disruptions to global supply chains in the past couple of years — including the temporary blockage of the Suez Canal, floods and fires in Texas and Japan, as well as ongoing semiconductor production bottlenecks — have led to similarly rosy forecasts for the rest of the so-called “additive manufacturing” sector.
Last year, a study by Lux Research estimated that the market for 3D printed parts, which was worth $12bn in 2020, would grow to well over $50bn by the end of the decade.
Governments across the world have sought to address how, and where, components are made. In Germany, the recent chronic shortage of semiconductors led to millions fewer cars being produced than customers wanted to order. As a result, it is one of many countries to have pledged to support the “reshoring” of crucial component manufacturing to protect their economies.
But, despite such enthusiasm, evidence increasingly points to the fact that businesses like SLM are serving a small market.
A survey of European companies conducted by EY in the early spring lockdowns of 2020 found that more than four-fifths were considering bringing their supply chains closer to home. When the same survey was conducted in April last year, however, that view was shared by just 20 per cent of respondents.
Similarly, only 15 per cent of the multinational companies surveyed by the Association of German Chambers of Industry and Commerce (DIHK) said they would relocate production.
Their stance was echoed by sports goods group Adidas. Just five years ago, the company launched a scheme to build factories in Germany and the US that would use local materials and advanced manufacturing techniques, such as 3D printing, to produce bespoke trainers for nearby customers.
It had to all but abandon this plan as the Covid-19 pandemic began. But, after supply chain disruptions cut Adidas’ revenue growth by around €600 million in the three months to the end of September 2021, boss Kasper Rorsted was adamant that he had not changed his view on reshoring manufacturing.
“We have approximately 800,000 people deployed in our [suppliers’] factories,” he said in November. “It is an illusion to believe that you can move an industry that has grown over 30 years in Asia, to a very sophisticated industry, to some regions.”
Even if that was theoretically possible, Rorsted added, raw materials would still need to be sourced from around the world to produce the parts, making the prospect of reshoring a “total illusion”.
“You wouldn’t even be able to find the people [that would need to do the work currently being done in Asia],” he said.
Economists in Germany are also unconvinced.
“If the EU were to decouple even partially from international supply networks, this would considerably worsen the standard of living for people inside the EU as well as for its trading partners, and should thus be avoided by all means,” warns Alexander Sandkamp. He is one of the authors of a study by the Kiel Institute for the World Economy that suggested that regionalising production would cost Europe hundreds of billions of euros.
The recent flood disasters in Germany, which cost the country €40bn, according to insurance group Munich Re, was further proof that “shocks can also occur on our doorstep,” Sandkamp adds.
Even SLM’s O’Leary is quick to add a caveat to his company’s bullish forecast.
“We work primarily with regulated industries,” he says. “So, if you’re in an aerospace supply chain . . . you don’t just buy a 3D printer and say: ‘OK, well, I’ve decided to move away from my supplier wherever [they are] in the world and I’m going to do this in-house’.”
A recent development programme with a major UK aero-engine manufacturer, he adds, took two years to get up and running, due to the time needed to install the necessary machines on-site and get the necessary approvals from Britain’s Civil Aviation Authority.
“The demand is definitely increasing,” says O’Leary. “But there’s also a reality in that this is a technology and a change that is regulated and takes time.”
Additional reporting by Olaf Storbeck
In October last year, Volvo Group unveiled the world’s first vehicle made using “green” steel. The autonomous electric truck weighed eight tonnes and was designed for use in quarries and mines.
It was the result of an industrial partnership between Swedish steelmaker SSAB, the state-owned electricity generator Vattenfall, and iron-ore miner LKAB. Their aim was to make the first steel free of fossil fuel by replacing the coking coal traditionally used in its manufacture with green hydrogen.
The partnership, dubbed “Hybrit”, is at the cutting-edge of European industry efforts to develop more energy-efficient, low-carbon manufacturing techniques.
Many initiatives were already under way before the coronavirus hit, but the pandemic has focused industrial leaders’ minds on the importance of reshaping and strengthening supply chains, and coping with longer-term challenges — in particular, climate change.
“It is no longer about the lowest cost producer, it is about resilience in your supply chain,” says Stephen Phipson, chief executive of British trade body, Make UK.
Manufacturing executives in the UK, he points out, are re-evaluating ‘just-in-time’ manufacturing processes and how much inventory to hold in future to ensure greater resilience. The importance of skills has also moved up the agenda, especially as companies battle to attract and maintain workers after the pandemic, which has left many short of staff.
But business leaders caution that wholesale transformation will not happen overnight.
A survey by McKinsey last November underlined the challenges. In a previous survey, in May 2020, most companies stated that they planned to pursue several paths to improve supply-chain resilience, including diversifying supply bases. But, in practice, by the end of 2021, most had mainly increased their inventories.
The more recent survey found that 61 per cent of companies had increased inventory of critical products and 55 per cent had taken action to ensure they had at least two sources of raw materials. Only 11 per cent had “nearshored” production, to avoid the risks of disruption from geographically remote suppliers.
Duncan Johnston, UK manufacturing leader at Deloitte, says: “Changing things in manufacturing takes time. You can’t change what was a global supply chain into something that is more near-shored or UK-centric very quickly”.
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The same, he says, is true of sustainability ambitions. While companies have done some thinking about it, they have not yet “really embarked on the substantial journey that is needed to reduce carbon emissions in the UK economy”.
Manufacturers face several challenges along the way. Apart from reducing the emissions in their own processes, they need to consider those in their supply chain. They need to find new ways to power their activities and, in some cases, such as the automotive sector, completely re-engineer their products.
Heavy manufacturing industries, such as steel and cement, are among those at the forefront of efforts to decarbonise countries’ economies. Outside of power generation, the iron and steel sector is the largest industrial producer of carbon dioxide. It accounts for 7 per cent-9 per cent of all direct fossil fuel emissions, according to the World Steel Association.
To meet global climate and energy goals, the steel industry’s emissions must fall by at least half by the middle of the century, according to the International Energy Agency. Achieving such a reduction will require more than incremental improvements in the efficiency of traditional blast furnaces.
“We have come to a point where, in terms of efficiency improvement efforts, there is not much more room left,” says Martin Pei, chief technical officer at SSAB. “It is really breakthrough technology that we are looking at now.”
In the blast furnace process, companies use carbon to take oxygen from iron ore to get iron. SSAB will instead use clean hydrogen gas, produced in a facility called an electrolyser powered by Sweden’s abundant renewable electricity. The output will be a solid intermediate, called sponge iron, which goes into an electric arc furnace, where it is mixed with scrap and refined into steel.
The successful production of Volvo’s first heavy-duty truck shows that the “whole value chain works,” says Pei.
SSAB has estimated that metal from its hydrogen-based process will, at least initially, be 20-30 per cent more expensive than conventional production. Pei, however, says that customers are keen and that demand for greener steel is growing as more and more companies commit to decarbonising their supply chains.
Policymakers will need to play their part, too, in helping manufacturers transition to a low-carbon economy. For Europe’s steel industry to switch en masse to hydrogen, for example, would require a massive expansion of renewable power. State support would be needed to fund the necessary investment in expanding power grids and other infrastructure to accommodate the transformation to low-carbon economies.
Hydrogen is a prime example. The EU and the UK have both published ambitious plans to develop a hydrogen economy but obstacles remain to making this a commercial reality.
For example, says Phipson, the UK has a “very small innovative sector on hydrogen . . . the challenge is to scale that up”. Britain, he adds, is very good on innovation and research funding but what is needed is “scale-up capital”.
As for funding sources, he says: “There is a big commitment from companies to use private capital but the government also needs to play its part.”
Transforming the workforce to deal with this transition is another concern. Even before the pandemic, manufacturers were worried about the effects of an ageing workforce and how to attract younger talent with more digital skills.
“We don’t know any manufacturing business that has as much in the way of digital skills as they would like,” says Johnston.
Those worries have grown, with many employers emerging from the pandemic with even more unfilled jobs. Phipson wants to see more action from the government on this front, as well.
“[It] needs to get more ambitious about its skills,” he believes. At the moment, the skills shortage is a “drag on growth”.
Ayatollah Ruhollah Khomeini once said the purpose of the 1979 revolution in Iran was to promote Islam, not the economy. Focusing on the latter would reduce human beings to animals, according to the founder of the Islamic republic.
More than four decades later, the regime’s ideology and hostility to the US remain intact but the economy is very much at the forefront of leaders’ minds. New president Ebrahim Raisi has sought to assure Iranians that his priorities were tackling economic woes and boosting their welfare.
The solution has been adopting a “resistance economy” against sanctions imposed by Washington, which accuses Tehran of developing the atomic bomb and fomenting terror operations in the Middle East. Iran can foil hundreds of US punitive measures by focusing on its domestic market; curbing its reliance on imports; increasing exports of non-oil goods to neighbours; and selling more oil to China.
Iran’s leaders say the economy has started growing again as a result. Indeed, the Islamic republic has weathered some of the biggest economic and military threats in recent years, a resilience partly reflected in the World Bank’s latest report.
In its economic forecasts published last week, the international lender said Iran’s economy was “gradually recovering following a lost decade (2011-2020) of negligible economic growth”.
After a two-year contraction, Iran’s gross domestic product grew by 6.2 per cent year on year in the period from March to May, the first quarter of the country’s 2021-22 fiscal year. This was thanks to expansion in oil and services sectors and less stringent Covid-19 restrictions.
Meanwhile, oil production — Iran’s lifeline — is rising: it reached 2.4 mbpd in January-November 2021, although it is still behind the pre-sanction level of 3.8 mbpd in 2017, the bank said.
The positive developments have emboldened Tehran at a time when its diplomats are negotiating with world powers in Vienna to resurrect the 2015 nuclear deal, from which the US under Donald Trump withdrew in 2018. Iran promises it will roll back its huge nuclear advances only if the US lifts all sanctions first and guarantees no other US leader would abandon the deal. Economic resistance would continue if not.
Hardliners in Tehran, who control the Islamic republic’s most powerful bodies, shrug off warnings at home that such a stance could dearly cost the country as well as the regime in the long run.
The World Bank report noted that GDP growth was “from a low base”. It said real GDP in the previous financial year ended in March 2021 stood at the same level as a decade ago “while the country forewent the demographic window of opportunity (a highly educated young population)”. The latest economic rebound “only marginally reduced” the income gap with economies in the Gulf, the report noted.
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In Iran, patience is running thin. Iranians say numbers are meaningless when their purchasing power is being eaten away with 43.4 per cent inflation (even though it has started going down). Inflation coupled with high unemployment and fluctuations in the currency and capital markets is fuelling pessimism.
The government’s plans to further cut subsidies on basic commodities and medicine have heightened inflationary fears. Masoud Mir-Kazemi, Iran’s vice-president for budget affairs, said Iran could at most earn a net income of $16bn in petrodollars next financial year, just enough to import basic commodities and pay civil servants. “We are under sanctions and it’s impossible” not to slash subsidies, he said last week.
But for a regime that came to power through street protests, fears of history repeating itself, this time against the Islamic republic, are never far. Demonstrations are no longer sparked by the educated middle class to demand more social and political freedoms. Recent protests have been mostly over economic woes, whether caused by the government or by a severe drought.
Mehdi Asgari, a member of parliament opposing a cut in subsidies, said last week that more than 10m families struggled with poverty “and millions more [were] heading” in that direction. “They no longer can afford meat and rice and now you want to take away their bread and cheese, too?”
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