Thursday, March 19, 2020

The Defense Production Act and Central Pandemic Planning

By Michael Abramowicz - March 19, 2020 at 10:53AM

President Trump yesterday invoked the Defense Production Act, without actually issuing any orders pursuant to the statute. Part of the goal of this statute is to ensure that there is sufficient domestic capacity to meet national needs in times of emergency. For example, "the United States Government should encourage the geographic dispersal of industrial facilities in the United States to discourage the concentration of such productive facilities within limited geographic areas that are vulnerable to attack by an enemy of the United States." In the wake of the COVID-19 pandemic, such concerns seems sensible. Many countries have restricted exports of critical goods, making it imperative that we have a domestic supply chain for those goods.

It's too late for advanced planning. The statute, however, also empowers the government during an emergency. As explained in an excellent history of the statute prepared by the Congressional Research Service:

Containing seven separate titles, the DPA allowed the President, among other powers, to demand that manufacturers give priority to defense production, to requisition materials and property, to expand government and private defense production capacity, ration consumer goods, fix wage and price ceilings, force settlement of some labor disputes, control consumer credit and regulate real estate construction credit and loans, provide certain antitrust protections to industry, and establish a voluntary reserve of private sector executives who would be available for emergency federal employment.

Some of these, such as the power to "give priority to defense production" and to "fix wage and price ceilings," amount at least in some measure to switching from a market economy to a command economy. The wage and price controls and some other powers have lapsed and are no longer in force, but some remain. For example, under 50 U.S.C. § 4511(a),

The President is hereby authorized (1) to require that performance under contracts or orders (other than contracts of employment) which he deems necessary or appropriate to promote the national defense shall take priority over performance under any other contract or order, and, for the purpose of assuring such priority, to require acceptance and performance of such contracts or orders in preference to other contracts or orders by any person he finds to be capable of their performance, and (2) to allocate materials, services, and facilities in such manner, upon such conditions, and to such extent as he shall deem necessary or appropriate to promote the national defense.

Meanwhile, Onur Ozgode offers an interesting tweetstorm with some relevant history. He argues that we are not capable of activating Defense Production Act emergency powers, because "we got rid of the mobilizers" and therefore no longer have the relevant expertise. It is plausible that running a command economy is a skill and that a government might improve with practice. What is less plausible is the claim that the emergency requires that the government switch to a command economy for certain kinds of purchasing. Indeed, Ozgode notes that when the government decided it needed to control critical materials during World War II, it ultimately used a relatively free-market method involving tokens, which he terms a "critical material backed money system."

But of course there is no need even for such half-way measures. The government can purchase commodities that it needs using dollars, offering more dollars if necessary to compete with alternative private uses of commodities. Indeed, the use of ordinary currency helps make the trade-offs that government faces more transparent.

Why might one think that the government should switch to a command economy during the current pandemic? Or, differently stated, why wouldn't companies that have the ability and incentive to produce needed goods and services (such as ventilators or hand sanitizer) do so on their own? Perhaps one reason is price controls from anti-price-gouging statutes. The camel's nose at work: once the government starts enacting some restrictions, suddenly more government action is needed to offset the reduced incentives provided by the market. A different but related explanation is that we might be ethically uncomfortable with the results of market allocation. At least in the short term, production capacity may be limited, and we might not want billionaires buying their own personal hospital-grade ventilators and ICU beds. The power to prioritize government purchasing may be responsive to this concern. But one can imagine other powers might accomplish the same thing. For example, the government could enact a temporary ban on private individuals' purchasing medical equipment currently in shortage for their own personal use, allowing such a ban to lapse in a time frame that would allow the market to adjust over the long-term to greater demand for ventilators.

The danger is that once the government increases its involvement, it will be tempted to increase production capacity by interfering in markets rather than by offering more money. There is no reason that the government should be in talks to prod car manufacturers to produce more ventilators. If pushed to switch production by anything other than economic incentives, manufacturers may not put as much effort into the task as necessary. For example, they might simply wait patiently for parts manufacturers to increase their supply, rather than offering them large incentives for production. Sure, the government can then try to persuade other companies to start producing more parts, but if the government must get involved in each link of the supply chain, fast production will not occur. If, on the other hand, manufacturers believe that the government will pay a sufficient amount for ventilators (an amount much higher than the typical cost), they will have incentives to overcome problems. I have previously described one approach for the government to stimulate ventilator production, but the more general point is that if we want more ventilators, the government or hospitals will need to offer more money, not interventions in the supply chain.


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