Saturday, March 28, 2020

Defense production vs. markets

Take your bets which produces more ventilators faster.

From Marginal Revolution. First quoting New York Times,
The White House had been preparing to reveal on Wednesday a joint venture between General Motors and Ventec Life Systems that would allow for the production of as many as 80,000 desperately needed ventilators to respond to an escalating pandemic when word suddenly came down that the announcement was off.
The decision to cancel the announcement, government officials say, came after the Federal Emergency Management Agency said it needed more time to assess whether the estimated cost was prohibitive. That price tag was more than $1 billion, 
The president went on to invoke the defense production act, to somehow force companies to do it.

At $1.2-$1.5 billion that’s $15,000-$18,750 per ventilator which is well below the standard price of $25,000-$50,000 
FEMA are you out of your minds? Haggling over $1 billion and wasting time? 

Lack of ventilators (and simple masks and gowns) are costing the Federal taxpayer $2,000 billion immediately, and $1,000 billion per month or so of lost GDP, to say nothing of 80,000 lives.  80,000 ventilators would have been a great deal at $10 billion!

It is a classic example of how bureaucracies follow rules and cannot be expected to think. Sure, stocking up ahead of time we want a good deal. FEMA bureaucrats follow rules to get a good deal. With opportunity costs thousands of times larger, we don't. But they're not allowed to think.

Which reminds me. Dear FEMA: The virus has been around since January. Why has nobody thought until just now that ordering up some masks, shields and ventilators might be a good idea?
Trump also named Peter Navarro as the national Defense Production Act policy coordinator for the federal government. 
It will be fun to see if GM and Ford now actually do produce ventilators faster than other companies and ever become a significant source of supply, or if Mr. Navarro's interference leads to one snafu after another.

BTW, one reason we're short of such a basic commodity as masks is tariffs on Chinese goods. Which by the way have just been suspended, a little noticed concession to common sense. But the Chinese, who could send us masks and ventilators quickly, are hardly in a mood to do so.

Of course invoking the defense production act is political. Everyone in the Administration understands this basic economics.  I was listening to NPR coverage this morning and the only criticism from reporters and largely democratic governors was that Trump wasn't "doing enough" or had not invoked it soon enough. Well, now they get their way.

Contrary good news from MR
Now that the CDC and the FDA have gotten out of the way, we are producing more tests.
Honeywell and 3M are already ramping up production of N95 masks. We should arrange with China to buy more. The Federal Government is playing a useful role by buying surgical masks from companies like Hanes. Ironically, we will be importing them from Latin America....
Using U.S.-grown cotton, the masks are being produced in Hanesbrands’ sewing factories in El Salvador, Honduras and the Dominican Republic.
These factories would normally be producing T-shirts, underwear, socks, sweatpants and sweatshirts.
(Note the stupid requirement to use American Cotton.)
One of many stupid requirements still in place. Perhaps there is a silver lining, that people are starting to see how many regulatory and protectionist weeds impede production in the US.


  1. Alas, I fear, am certain, that this avoidable idiocy will be followed by a call for more and better regulation, not more markets. Probably genetic and hence, heritable. I give up.

    1. The sensible response is to invest relatively less in preparing for the remote possibility of a physical invasion and more on medical preparation for the statistical inevitability of a future viral "invasion".

    2. I do not understand the political attachment that America has to cotton production given the history of that crop in the United States.

    3. It is not all of America that has this attachment. It is only a handful of states and some congressional districts that are so attached. Given the DC sausage making machine, the interested Congress critters can steer policy their way over the mild objections of whatever free marketers may be involved. Said “free marketers” may be securing goodies for their districts in exchange for letting this slide.

    4. The cartelization of cotton was done about the same time as it came to peanuts, tobacco, et al. Under FDR the Democrats from the 'solid south' created quotas for their traditional crops. Today in Arizona subsidized cotten still grows inside Phoenix, thanks to Federal subsidies. This helps deplete the Colorado River since Arizona benefitted also from Republican public works since WW2 to get the water for population growth and more cotton fields.

  2. Keep writing on this. I'm assigning your last blogpost on to my undergrads. The factoids and links to media articles on my slides might be useful. This episode is good for teaching regulation.
    - Eric Rasmusen, Indiana U.

  3. Leadership at private companies can be just as bone-headed and incompetent as leadership at FEMA. To suggest that government is everywhere and always an impediment is pretty convincing evidence of an ideologue, not a rational smart thinker

    1. Bravo, anonymous, that's exactly right. Bad governance (whether private or public) is the villain, not (solely) the government.

      In public discourse conservatives--John Cochrane very much included--have profoundly and misleadingly conflated these two concepts, doing our society lasting harm. It's ideology on display.

      P.S. a kudo to Cochrane for elsewhere presenting a very constructive and pragmatic idea: group testing. I very much appreciated the positive spirit of that Cochrane post.

    2. Anonymous wrote, "is ... evidence of an ideologue, not a rational smart thinker".

      Alas, Anonymous, this isn't exactly right. Cochrane is both a distinguished academic (very, very smart) and quite the ideologue. A more famous case of this phenomenon is Milton Friedman.

      That these discordant qualities coexist in the same public intellectual is the difficult conundrum for our society.

    3. Yes and no. Hopefully not garbling the late Gordon Tullock too much, with simple, observable things, such as collecting a salt tax, the choice of institution matters not. But for complex tasks, the incentives in government and private firms differ drastically.

    4. Correct about boneheaded 'planning ahead' but private companies don't use the force of Executive Orders and threats of tax auditing (except at the local level, with "urban planning").

  4. "Why has nobody thought until just now that ordering up some masks, shields and ventilators might be a good idea?"

    Because the current administration is filled with idiots who reflexively devalue expertise? If Hillary Clinton, or Jeb Bush for that matter, were running the show we'd be in much better shape today. Speaking of devaluing expertise, any thoughts on the debacle at Hoover with that lawyer who thinks he's an epidemiologist?

  5. "Now that the CDC and the FDA have gotten out of the way, we are producing more tests."

    Wishful thinking: "Coronavirus: FDA gives only limited OK to Battelle’s mask-sterilizing technology"

    "The Battelle process uses uses “vapor phase hydrogen peroxide” to sanitize the N95 masks, allowing them to be reused up to 20 times, the company said in a statement. Each of the company’s Critical Care Decontamination Systems can sterilize 80,000 masks per day. One has been sent to New York and two are available to Ohio, Battelle said."

    " [Ohio Governor Michael] DeWine on Sunday said the FDA authorized Battelle to sterilize just 10,000 surgical masks a day."

    “The FDA’s decision to severely limit the use of this life-saving technology is nothing short of reckless,” DeWine said. “Battelle’s innovative technology has the capability to protect healthcare professionals and first responders in Ohio and across the country, but in this time of crisis, the FDA has decided not to support those who are risking their lives to save others.”

    DeWine added, “This is a matter of life and death. I am not only disappointed by this development, but I’m also stunned that the FDA would decline to do all it can to protect this country’s frontline workers in this serious time of need."

    Necessary Background: Battelle Memorial Institute is a private nonprofit applied science and technology development company headquartered in Columbus, Ohio. founded in 1923. It has revenues of $6.2 billion and 3,200 direct employees.

    In addition to operating its own research facilities, as of 2019, Battelle manages or co-manages on behalf of the United States Department of Energy: Brookhaven National Laboratory, Idaho National Laboratory, Lawrence Livermore National Laboratory, Los Alamos National Laboratory, Oak Ridge National Laboratory, and Pacific Northwest National Laboratory. Additionally, Battelle manages the National Biodefense Analysis and Countermeasures Center on behalf of the Department of Homeland Security.

    Battelle is not a fly by night outfit. It is obviously deeply trusted by the Federal Government. The FDA is a bunch of bureaucratic jerks.

  6. Did you get the math right in your exponential growth example? As stated I believe it expresses arithmetic, not exponential, growth? Wouldn't exponential growth compound in some manner?

  7. Here is what happens when the FDA is confronted by an angry Governor who has mobilized the President.

    The FDA is not a monastery of saints, it is sack of bureaucrats who must be beaten constantly to get them out of the way.

    "FDA provides full OK for Battelle mask-sterilizing technology"

    "Late Sunday night, the agency ruled that upgrading its emergency use authorization from partial to full “is appropriate to protect the public health or safety.”

    "After a day of pressure from Ohio Gov. Mike DeWine, the U.S. Food and Drug Administration late Sunday rewrote rules to allow full application of a potentially game-changing Battelle technology to sterilize protective masks worn by those treating coronavirus victims."

    "Late Sunday night, the agency ruled that upgrading its emergency use authorization from partial to full “is appropriate to protect the public health or safety.”

    "The original limitation prompted an angry news release from DeWine and telephone and Twitter exchanges between the governor and President Donald Trump. And the governor, who originally was not going to have a Sunday press briefing, scheduled one to put pressure on Washington to approve the Battelle devices."

    "He called called the FDA “reckless” for dramatically limiting the number of cleaned masks. It was a sharp rebuke from a Republican governor who had refrained from criticizing the Trump administration’s handling of the COVID-19 outbreak."

    "DeWine talked to Trump later in the morning and said the president was willing to help."

    “I have just talked with @realDonaldTrump about this issue, and we had a good conversation. He understands the problem and says he will do everything he can to get this approved today. Thank you, @POTUS,” DeWine tweeted at 11:17 a.m."

  8. The story keeps getting worse. The Battelle system was not something sprung on the FDA in the heat of battle, it was:

    "based on research that Battelle performed for the FDA in 2015 (Richter et al., 2016) to assess the feasibility to decontaminate N95 respirator masks in the event of a PPE shortage resulting from a pandemic."

    I can't make up my mind on what should be done with the FDA. Criminal trials, mass firings, public humiliation. All possibilities.

  9. "one reason we're short of such a basic commodity as masks is tariffs on Chinese goods. Which by the way have just been suspended, a little noticed concession to common sense."

    A grossly misleading statement, as the shortages would have developed with or without the tariffs.

    The author does add "But the Chinese, who could send us masks and ventilators quickly, are hardly in a mood to do so", but this fails to correct his false assertion that the tariffs caused the shortages and tries to imply that China would have exported masks and ventilators to the US if they were not so upset about the tariffs.

  10. Could some of the calls for invoking the DPA be motivated by a desire by producers to get out from under any potential liability for products or devices produced under the Act? Seems to me that given the potentially vindictive nature of scorned bureaucracies or the crass opportunism of personal injury lawyers, this is a valid fear.


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.