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Our Corona Response’s Missing Ingredient – Mobilize The Supply Side!

Modern economics developed out of pre-modern political economy, and much that is valuable in the former is a legacy of the latter. One of the most valuable – if not indeed the most valuable – of contributions made by the late 18th century political economists was their highlighting what are today often called productive ‘synergies.’

Most people who cite Adam Smith in the modern era cite him for the ‘invisible hand’ trope – the idea that there is sometimes an implicit rational order imminent in what might look on the surface to be unplanned interactive behavior among market participants. That idea is often misused by people less clever than Smith in ways that would have scandalized the master himself. But probably more shocking to Smith than modern abuse of the spontaneous order idea would be failure to cite a related but different contribution he made to our understanding of productive activity.

I refer to the ‘division of labor’ Smith highlighted as the real secret of wealth-generation, or what he called ‘opulence.’ The ‘wealth of nations,’ Smith emphasized, proceeds from the gains that are had from coherently coordinated productive activity on the part of productive agents. When all agents play to their individual strengths, he observed, and when all that ‘playing’ is coherently coordinated, the gains to productive activity are transformative.

You are probably familiar with this idea as it manifests in more contemporary idioms today. I mean the notions of ‘specialization,’ ‘synergies,’ and ‘wholes’ being ‘more than the sum[s] of their parts.’ The plain fact of the matter is that productive organization carried out by productive units of more than one person consists not only in what is organized, but also in the fact that it is organized. For ‘organization’ implies structure in addition to what ever is structured, and this means the specific relations among productive agents are as important as are those agents themselves in productive processes.

Now, why am I sitting back in the arm chair or desk chair talking about 18th century Scottish Enlightenment thinkers, you might ask, while there is a plague abroad in the land that now threatens us all? Do I simply have too much time on my hands now that we’re all doing that ‘social distancing’ I opened with, such that I find myself tempted for now to make up for lost Paris café conversation with column-writing?

Well, ‘there is,’ indeed, ‘that.’ I do have more time and occasion to reflect on such things for the moment – as, I imagine, do you. But there is more to the story than that. For the observations above are occasioned by the Coronavirus pandemic itself, and come to mind when we think about what to do about it.

The thing is, ‘social distancing’ is completely antithetical to productive activity itself. It is one of the most formidable impediments imaginable to just those productive synergies that Smith took to be key to ‘the wealth of nations.’ When we work productively, we nearly always are working together. (’Not me, us.’) And much of the work we must do together we do together ‘under one roof.’ Even granting that much of our work in today’s ‘information economy’ can be done ‘remotely’ – i.e., ‘at a [social] distance’ – from one another, the plain fact remains that most of the material producing we do must be done within mutually close physical proximity to one another. If this strikes you as dubious, you might want to look for an affordable face-mask, a pulmonary ventilator, or even a roll of bathroom tissue right now.

Which brings me to our still-accelerating Coronavirus pandemic and its already-calamitous and still-worsening economic fallout…

Thanks to the repo and capital markets’ current volatility and all the mitigation measures now being discussed as prospective responses, it is tempting to liken our current travails to those of 2008-2009. That is all well and good, but it can be misleading.

Our present crisis is not just a financial crisis. It is not even merely a monetary or aggregate demand crisis. It is also a production crisis. And in a sense, this time, unlike the last time, the production crisis is primary.

Think about it for a moment… thousands of firms are under stress because they cannot produce and then sell. (‘Social distancing’ empties ‘shop floors’ like everything else.) Firms in distress furlough labor and so labor falls under stress too. Furloughed workers then spend less, further distressing our firms, and so … Rinse and repeat – each iteration of the production shutdown, spending shutdown, additional production shutdown, etc. is worse than its predecessor, ‘downward spiral’ style.

But the fact that the current crisis is only secondarily a financial and macroeconomic crisis is actually good news, in a sense. For it means the solution lies ready to hand. The solution is to rehabilitate production itself, by rehabilitating our capacities to work together. How? Partly by redesigning what productive processes we can along lines that allow for what I’ll call ‘remote synergies.’ And partly by rapidly ramping up the production of all that is necessary to return to close physical proximity to one another.

We see strategies of the first sort – the remote synergies sort – developing quickly already. (Aren’t we a remarkable species?!) That is what all the ‘at-home’ work is about. But there seems to be little if anything being said about face-mask, protective clothing, and other protective gear development done with a view to enabling people to work physically closely again. So much of what we produce requires that kind of closeness that the single most helpful supply side measure that we could take right now would be to enable that closeness itself once again.

What might we do about this? Well, why not publicly offer substantial rewards to anyone who significantly improves current designs of protective gear of this kind, and then massively subsidize its mass production and distribution? Why not also, while at it, suspend any intellectual property (IP) rules that might ‘chill’ or impede such inventive, productive, and distributive activity? That way we stay provisioned, and avoid any inflationary pressures that income-support measures now being developed might generate if the proceeds are spent on supplies that stay scarce.

These kinds of measure are in no way unprecedented.

When Pearl Harbor was bombed in late 1941, and even some years before that event when its likelihood was already looking nontrivial, we in the U.S. took precisely such measures. President Roosevelt summoned manufacturers to the White House and asked what we would have to do to multiply many-fold our capacity to produce and distribute steel, fuel, B-29s, Sherman tanks, other war materiel, and – crucially – civil defense gear. Those discussions yielded much fruit, and within very little time we had instituted a War Production Board (WPB) that oversaw the building of new plants, the repurposing of existing plants, the establishment and repurposing of distribution networks and channels, and all other tasks implicated by the need of a rapid productive mobilization.

The WPB built upon precedent, moreover – specifically, the War Industries Board (WIB) established in 1917 to oversee mobilization for the First World War. The WPB for its part worked in close collaboration with the Reconstruction Finance Corporation (RFC), the already-existent financing arm of the New Deal which, significantly, had been expressly patterned after the War Finance Corporation (WFC) established in 1917 to work with the aforementioned WIB in overseeing mobilization for U.S. entry into the First World War.

(Aside: Isn’t it odd that the only national crises we seem to see fit to deem urgent enough to establish public-agency/public-corporation teams like the WIB/WFC and WPB/RFC pairings have to be wars? It’s not as though wars were the only activities in need of coordination and funding; and certainly we have often faced, as we now face, what the great American philosopher William James dubbed ‘the moral equivalent of war.’)

Both the WFC and the RFC directly financed mobilization, using a remarkable variety of, and indeed many remarkably innovative, means. They made outright grants in some cases, purchased equity stakes in private sector firms in other cases, and provided inexpensive credit or loan guarantees in still other cases. (The WFC’s other close partner in this era, the Fed, even invented the repo markets we hear so much about today.) Intriguingly, both the WFC and RFC invested so effectively that they ran profits over the entireties of their durations – in the RFC’s case, from 1932 through 1957. These profits were then either remitted to the US Treasury or plowed back into yet more investments.

You might not know it, but in a sense you have already heard of the RFC. The reason is that you have heard of many of its subsidiaries, which, unlike the WFC and RFC themselves, are still with us today. I refer to the Small Business Administration (SBA), the Federal Housing Administration (FHA), the Export-Import Bank (EXIM Bank), and the Federal National Mortgage Association (FNMA), among others.

My colleague Professor Omarova and I have been advocating a new, updated rendition of the RFC for some years now, the idea being to treat national development as a perpetual, never-ending process in need of a permanent overseer and facilitator. (To paraphrase our national poet, Bob Dylan, ‘[a nation] not busy being born is busy dying.’)

Our National Investment Authority (NIA), proposed from 2015 to this day, would develop and regularly update a coherent national development strategy, then assist with coordinating and financing its execution by public and private sector agents alike.

A related and more recent proposal of my own – a National Investment Council (NIC) patterned after both the RFC and the Financial Stability Oversight Council (FSOC), and accordingly comprising the heads of all federal agencies dealing with national infrastructure – would focus on advancing the Green New Deal in particular. And more recently still – just last week, and quite independently – my brilliant and ever-inspiring friends and colleagues Mike Lind and Jamie Galbraith have proposed an explicitly temporary Health Finance Corporation (HFC) to address the current Coronavirus fallout in particular. I cannot recommend their proposal too highly – nor, it seems, can Senator Sanders, who only yesterday proposed a rendition of it. (I pray that this means he is listening to Jamie and Mike.)

Whether you think a more permanent and plenary national development and financial mobilization authority like the NIA or NIC, or a more temporary and carefully targeted authority like the HFC best suited to the present moment, it seems clear that something like one of these models is going to be urgently needed if we mean to deal seriously with the extensive systemic fallout already radiating from the current viral outbreak. Our challenges are much more numerous, much more formidable, and much more far-reaching, than most seem to realize yet.

For this is, again, a production crisis as much as it is a consumption or financial crisis. Both demand side and supply side measures will be crucial, as will be measures enabling coherent coordination and financing of our national response. This is not a task to which financial regulators, small White House ‘task forces,’ or even the Fed and Treasury alone are well suited. It is a task for a comprehensive, Great Depression and Second World War era mobilization authority. For we are indeed faced by ‘the moral equivalent of war,’ such that our WWI era WIB/WFC pairing, and our Great Depression and WWII era WPB/RFC pairing, must be trotted out once again – and perhaps kept this time even after the current crisis is passed. May Congress now turn to designing and legislatively enabling just such an authority at once, for however long is required.

Read the original here.

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