Why Trump is so reluctant to put the economy on a war footing
In some ways, of course, this crisis is very different from a military conflict. Huge swaths of the U.S. population did not have to stay home from work during World War II out of fear of contracting a plague. But for the parts of the economy that are still functioning — the parts that must continue to function for the sake of America's public health response — it is very similar, in that both required a sudden, extreme spike in the supplies of specialized equipment, way above and beyond the normal levels of demand.
You would think, therefore, that wartime conditions call for wartime economic policy and thinking. But on that front, the Trump administration's response so far has been abysmal. They've failed to learn from history, and they've failed to grasp the inherent limitations of market capitalism in meeting this sort of dire short-term need.
The biggest single issue has been the White House's use of — or, more precisely, its failure to use — the Defense Production Act (DPA). That's the 1950 law that allows the federal government to make loans and investments to expand industrial capacity, force private companies to prioritize government orders over other contracts, and even determine where a business' products go and who gets them. Congress and the Trump administration have embraced massive deficit spending to provide households and businesses relief from the economic pain of the stay-at-home orders sweeping the country. But in terms of the material response to the virus itself, the White House's approach has been quite hands-off: For weeks, Trump refused to explicitly invoke the DPA, and "has elected to rely on the volunteerism of the private sector," as The New York Times put it.
In the last week or so, the White House has somewhat reversed course. Trump finally invoked the DPA on March 27 to demand General Motors produce more ventilators (though he reportedly had not actually ordered any ventilators from GM, as of Friday). Then he invoked the DPA again last Thursday, April 2, to order a handful of companies to add to ventilator production as well as crank up the manufacture of medical masks. White House economic adviser Peter Navarro, a man with little regard for the free trade-friendly mainstream, was recently named coordinator of Defense Production Act policy, which could well presage more aggressive use of the law in the future. But thus far, the president's use of the DPA has been disorganized and haphazard.
Between that and the long delay, a cascading crisis has resulted: America still faces appalling shortages of the tests needed to detect the coronavirus, of masks and other protective gear health workers need to safely care for the sick, and of the ventilators that can save the lives of people with the most severe cases of COVID-19. New York City, the epicenter of the U.S. outbreak, reportedly has half the 30,000 ventilators it will need, while the national shortfall could easily run into the hundreds of thousands.
Even more perverse is the way America's market economy — which is supposed to use prices to link this demand for ventilators and masks and everything else up with the suppliers that provide them — has broken down in the face of the coronavirus crisis. Circumstances are changing so fast that hospitals, state governments, and city governments don't always know how much equipment they'll need. Hospitals are actually reluctant to put in orders, lest they miscalculate and wreck their finances. "The risk is that [the equipment will] never be used, and hospitals can't eat the cost," Julie Letwat, a lawyer specializing in health care at McGuireWoods in Chicago, told the Washington Post. "Most hospitals in this country are not profitable." That same uncertainty leads buyers to suddenly renege on their purchases: the U.S. Coast Guard ordered one million face masks in mid-March from a contractor called Clean Harbors, then changed it to a mere 200,000 masks, then canceled entirely. Letwat told the Post that ventilator manufacturers could actually significantly scale up production within a few months, but this mix of reluctant and self-contradictory buyers means the demand isn't there to push them to do so, despite the seeming overwhelming need of the crisis.
Meanwhile, middlemen and vendors have sprung up trying to make quick fortunes by offering caches of critical supplies, not necessarily with assurances of quality. State governors — such as Andrew Cuomo of New York and J.B. Pritzker of Illinois — are increasingly incensed about how they're all forced to outbid one another for desperately-needed equipment, driving prices sky high. (State laws against price gouging generally don't apply to purchases by state governments themselves.) New York state, for instance, has been paying as much as 15 times the usual prices. "It's like being on eBay with 50 other states bidding on a ventilator," Cuomo vented to reporters. "And then, FEMA gets involved and FEMA starts bidding! And now FEMA is bidding on top of the 50! So FEMA is driving up the price. What sense does this make?" All these price hikes just further add to the market's inability to get supply to actually match up with demand.
As economists J.W. Mason and Andrew Bossie laid out in a very helpful recent paper for the Roosevelt Institute, both actual wartime and the current coronavirus pandemic involve a sudden and massive spike in demand for key resources: In WWII, it was rubber, steel, manufacturing, et cetera; in our present crisis, it's masks, ventilators, other protective medical gear, and all the upstream parts that go into them. Both situations also bring sudden and dramatic increases in uncertainty about what the future holds: no one has any idea what the world will look like a year from now, never mind 10 or 20.
What American policymakers discovered then — and what we're rediscovering now — is that decentralized competitive markets that run on price signals tend to go haywire under these conditions.
The first problem is uncertainty: To justify themselves in a market system, big investment projects — whether it be building new factories to make tanks or new hospitals to treat coronavirus patients — need reliable returns that last for years and years. In a global war or pandemic, there is no assurance that such returns will be forthcoming. Similarly, if you're a hospital under pressure to order a few hundred thousand masks to deal with the current crisis, you want to know things won't shift under your feet again, and you won't be left sitting on a giant stockpile of equipment you didn't need and wasted tons of money on. If you're a manufacturer who's considering ramping up production, you want to know sufficient demand will be there to absorb that greater supply, and that buyers here one day won't be gone the next.
In the chaos of a war or a pandemic, all of these certainties go out the window. A whole lot of industries have to drastically expand what they're doing all at once, and they need to know everyone else is leaping at the same time, to provide the markets to support what they're producing. But without the government keeping everyone on the same page, there is no way to know that. Thus, no one is willing to take risks on big investments and big orders, and the coordination among private actors needed to simply do deals — a constant that's taken for granted in normal times — becomes much harder to come by. Hence the self-defeating reluctance of hospitals, the random cancellation of massive orders, and the negative feedback loop of buyers bidding prices up and up.
"In normal times, market coordination relies on a tacit assumption that current conditions will continue into the future," Mason and Bossie write. "The system quickly breaks down when it is a question of making rapid, large-scale changes in the economy as a whole. Such large-scale transformations need to be actively managed by the national government."
It turns out that market capitalism is sort of like that side character in a zombie apocalypse movie who longs for the staid, comfortable, day-in-day-out sameness of middle class life; and who turns into a useless, blubbering, nervous wreck as soon as the zombies upend society.
That the U.S. government turned towards a massive quasi-socialist experiment in central planning to win World War II was not some deliberate ideological project. Mason and Bossie describe how it was actually a hard-learned result of trial and error: The federal government first tried to coax the private sector into addressing these challenges, by "working with" market forces: It offered businesses and manufacturers tax breaks to incentivize increased production of steel, materials, equipment, tools and vehicles; then it tried guaranteeing loans to encourage companies to build out capacity and ramp up production for the war effort. None of it worked, for all the reasons noted above.
Roosevelt's administration didn't get the results it needed until it took the more direct approach. In rare cases where a whole new industry had to be started from scratch — such as synthetic rubber — the government not only made the investments directly, it built, owned, and operated the production itself. Much more often, the government provided the investment and loans needed to build new factories or expand capacity, then allowed private companies to lease and run them. The government also took on the job of universal purchaser; not only for items like bombs and bullets and airplanes, but for the equipment used to make those frontline necessities. Machine tools, produced by lots of small suppliers around the countries, were needed to keep the wartime factories humming, for instance. The U.S. government made the orders for the machine tools everyone would need, and if it ordered too much, it ate the cost and stored the surplus. This protected contractors and suppliers from haphazard order cancellations, and it made sure demand was high and stable enough to drive production of machine tools up as fast as possible.
In sum, properly managing economic activity in a crisis like this requires an entity that can take enormous risks with money — both to buy supplies and invest in new capacity — without fearing bankruptcy. Thanks to its unique fiscal and monetary powers, the federal government alone fits the bill. And the parallels between what was needed in WWII and what's needed now should be obvious: At a minimum, the federal government must step in as the universal buyer of ventilators and masks and so forth, to make sure demand is both hot and constant, and push suppliers to produce as much and as fast as possible. It should gather information on how much equipment states, localities, and hospitals will need, put in orders sufficient to meet the high-end estimates, and eat the excess.
"[Manufacturers] need to receive assurances from the federal government that they will be compensated, even if health care institutions don't end up needing the equipment," Tom Inglesby and Anita Cicero, with the Johns Hopkins Bloomberg School of Public Health, recently wrote.
The government needs to centrally determine who gets what, so the bidding wars stop; and it needs to see to it that shipping capacity — trucks, planes, and so forth — is available to get those goods where they need to go. We may even need the government to provide loans and capital to expand domestic manufacturers' capacity, given how decades of outsourcing have stretched thin our ability to make these things at home. Finally, the U.S. government will need to be the central coordinator who cuts through the normal layers of bureaucracy to do all this on an extremely expedited basis.
In WWII, we did all this by creating the Defense Plant Corporation, a wartime offshoot of the Reconstruction Finance Corporation, which served similar purposes during the New Deal response to the Great Depression. While the Defense Production Act wasn't passed until the Korean War, its purposes were essentially built off these experiences: Giving the government the tools it needs to direct economic activity in a crisis, using anything from modest adjustments of contracts and flows of goods, all the way up to full-scale industrial planning. In fact, economists such as James Galbraith and other policy experts have already called for the government to respond to the coronavirus pandemic by creating a "Health Finance Corporation," based on this model. And the DPA provides the authority to do just that: "The act could also allow a single federal agency to coordinate the entire industrial response, purchasing all the needed goods and ensure efficient distribution to hospitals," as Politico pointed out.
Of course, the thought of Donald Trump specifically being the executive in charge of this sort of centralized economic management is more than a bit disconcerting: there are enormous opportunities for graft, corruption, and straight-up favoritism towards whomever Trump sees as a loyal ally. But there simply isn't anyone besides the federal government with the concrete powers and capabilities required to respond to the economic consequences of the coronavirus pandemic.
Indeed, you'd think Trump would positively leap at the chance to pick winners and losers and punish his perceived enemies. And yet, while the White House's haphazard deployments of resources and the DPA certainly have the whiff of vindictiveness about them, Trump has largely gone out of his way to avoid aggregating power to himself. Why?
Part of it is surely pure cowardice: Trump is a blowhard, not a leader, and I imagine he's actually terrified of taking real responsibility for managing the crisis in such a direct way. There's also America's long-running cultural prejudice against government direction of the economy. "You know, we're a country not based on nationalizing our business," Trump mused at a press conference in March. "The Federal government is not supposed to be out there buying vast amounts of items and then shipping. You know, we're not a shipping clerk," he added later. And of course, the U.S. Chamber of Commerce has been lobbying the White House against taking the WWII route as well. "[The Defense Production Act] can't produce highly specialized manufacturing equipment overnight," Neil Bradley, the Chamber's executive vice president, told the Times. "It can't convert a refrigerator factory into a ventilator factory." That's true, but irrelevant: the point is the government planning provided by the DPA can affect those changes faster than the capitalist market can if left to its own devices.
Here it's worth returning to World War II once more. In another review of the wartime effort, Mason examines how this central coordination enraged the private industry elite, who complained that "the businessman is just a middleman" for government planners. In one especially telling instance, the head of the government's War Industries Board threatened to take over U.S. Steel if prices didn't come down. When the chairman of the corporation asked how the business could possibly be run without its top executives, the government agent blithely shot back, "Oh, we'll get a second lieutenant or somebody to run it."
While the Roosevelt administration more or less defaulted to central economic planning after all alternatives had been tried, U.S. businesspeople saw the war effort as having explicit political and ideological consequences. The president of Sun Oil company went so far as to say that failing to preserve American capitalism as it was would mean "Hitlerism wins even though Hitler himself be defeated."
"More threatening than taxes, red tape, or even militant unions was the implication of wartime planning that owners were unnecessary to production," Mason observed. "For business... planning and public ownership was clearly seen as a mortal threat to their prestige and power."
In other words, if business owners are superfluous during wartime, why aren't they superfluous in peacetime? Why don't we always run the economy in a democratic and publicly-accountable manner? That's the question businesspeople fear voters will start asking if the U.S. government responds to the coronavirus pandemic the same way it responded to the threat of Nazi Germany and the Axis powers.
We know Trump places business leaders at the center of his worldview; he wants to be respected in their circles, counted as the most powerful among them. We know he views the stock markets as a key metric of his success as a president. If business owners are uncomfortable with the government using the DPA, Trump will imbibe that discomfort and emulate it.
That, I suspect, is why Trump's White House keeps defaulting to leaving private wealth holders and business elites in charge of organizing and carrying out America's response to the coronavirus — even if they are demonstrably unequal to the task.
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