Portside

A Crisis of Supply and Demand

The Corona Virus crisis is a crisis of both economic supply and economic demand. The supply crisis is triggered by factories closing to protect factory workers and other businesses doing the same (to protect workers or consumers). The demand side of the crisis is triggered by the fact that workers laid off often don’t have as great incomes, because many service businesses are closed or see less business for obvious reasons. The market, which often works as a useful coordinating mechanism, has proven to be limited in solving the supply and demand problems generated by this crisis.

Cutting interest rates won’t provide a meaningful alternative to these supply and demand problems. Instead, we must ask basic questions about how resources are organized in society. The basic questions center on the role which security policies and globalization have played in diverting nations from priorities in health, welfare and equitable economic development. The health crisis is partially a production crisis.

On the one hand, governments have invested in obsolete “hard power” military missions that increasingly waste resources needed to combat environmental and health crises. On the other hand, a team of writers at The New York Times have explained how globalization and outsourcing sustain the production crisis: “a shortage of masks has become a bottleneck slowing the rollout of testing, which experts say is crucial to containing the virus.” Various “companies are struggling to quickly expand their mask-making capacities, in part because of broken overseas supply chains and some countries’ restrictions on exporting protective gear during the crisis.”

The Threat of the Next Great Depression

A March 20, 2020 article by Laurence Darmiento in The Los Angeles Times discussed the potential of a Great Depression: “experts are grappling with a situation as novel as the virus that caused it, and they really don’t know how much our high-tech, interconnected and consumption-oriented economy can endure.” He quotes Roger Framer of UCLA and Warwick as follows: “The longer this disruption goes on, the more likely it will have a permanent effect…Three weeks we can bounce back from, three months is not so clear.” A report on March 17th on the USA noted about 18% of adults reported that “they had hours cut or had been laid off, with the workers in lower-income households hit hardest.” Moody’s Analytics claimed that “nearly 80 million U.S. jobs” have different risk levels with Darmiento suggesting  “it’s more likely some 10 million workers could either be laid off, furloughed or see their hours and wages cut.” While teleworking can help some, Darmiento noted: “Cashiers, waiters, construction workers and others in the blue-collar workforce don’t have that luxury as they sit at home without pay.”

Dion Rabouin in Axios went further in an article entitled, “Coronavirus could force the world into an unprecedented depression.” Rabouin began his essay as follows: “In its latest repricing of the economy, the market sees the now-expected global recession caused by the coronavirus outbreak morphing into an economic depression unlike any the world has seen in generations.” He identified “the big picture” by stating that “bankers and traders are looking to sell everything that isn’t nailed down to boost cash positions and hunker down for the worst.” Rabouin pointed to Deutsche Bank economists who predicted a “severe global recession occurring in the first half of 2020” and “quarterly declines in GDP growth we anticipate substantially exceed anything previously recorded going back to at least World War II.”

CNN on March 21st published a story, “Coronavirus spreads, raising threat of global economic depression.” An earlier CNN story on March 19th quoted former Trump economist Kevin Hassett as follows: “We’re going to have to either have a Great Depression, or figure out a way to send people back to work even though that’s risky…Because at some point, we can’t not have an economy, right?”

Finally, Nouriel Roubini, the business and economics scholar, wrote on March 24, 2020: “With the COVID-19 pandemic still spiraling out of control, the best economic outcome that anyone can hope for is a recession deeper than that following the 2008 financial crisis. But given the flailing policy response so far, the chances of a far worse outcome are increasing by the day.” He continued: “Not even during the Great Depression and World War II did the bulk of economic activity literally shut down, as it has in China, the United States, and Europe today. The best-case scenario would be a downturn that is more severe than the [2008 financial crisis] (in terms of reduced cumulative global output) but shorter-lived, allowing for a return to positive growth by the fourth quarter of this year. In that case, markets would start to recover when the light at the end of the tunnel appears.”

Roubini expressed doubts that the best-case would occur, however. One reason was that “the public-health response in advanced economies has fallen far short of what is needed to contain the pandemic, and the fiscal-policy package currently being debated is neither large nor rapid enough to create the conditions for a timely recovery.” Therefore, he concluded that “the risk of a new Great Depression, worse than the original – a Greater Depression – is rising by the day.”

A Depression Defined by Institutional Bottlenecks and Health Security Challenges

The bottlenecks in the economic/health system revolve around the following: a) vaccine production, b) protective equipment, c) ventilators and d) the design of workplaces. One way to respond to the failure of the market and private capitalist system is to supplement it with another kind of system that organizes supply or demand. A March 16, 2020 story in The Financial Times referred to Jagjit Chadha, director of the National Institute for Economic and Social Research, “who said policymakers could consider the kind of measures seen in a wartime ‘command economy’ — using spare capacity in manufacturing or the hotel sector for efforts to fight the virus, or training people for health work.”

The U.S. faces a critical shortage in protective masks because much of production has been outsourced. Farhad Manjoo at The New York Times described the shortage as rooted in “a very American set of capitalist pathologies — the rise and inevitable lure of low-cost overseas manufacturing, and a strategic failure, at the national level and in the health care industry, to consider seriously the cascading vulnerabilities that flowed from the incentives to reduce costs.” In less polite terms, transnational outsourcing corporations represent a Fifth Column, part of a long-term trend seen in how politicians and others have sold out the nation to short-term profit making.

A report in The New York Times explains how the Command Economy could take the form of a U.S. president using “the Defense Production Act “which was passed by Congress at the outset of the Korean War and grants presidents extraordinary powers to force American industries to ensure the availability of critical equipment.” President Trump said recently “that he had used the law to spur the production of ‘millions of masks,’ without offering evidence or specifics about who was manufacturing them or when they would reach health workers.”

The Times noted that when the Defense Production Act was originally passed, it “granted President Harry S. Truman the power to spur the production of aluminum, titanium and other needed materials during wartime.” It has since “been used for both the prevention of terrorism and to prepare for natural disasters.” While some U.S. companies are cooperating with the Trump Adminstration efforts, “without the Defense Production Act, the government will lack the ability to channel these supplies to areas that need it most — or to persuade companies to act quickly and without regard for their profits.”

What does the “command economy” mean, however, when globalization hollows out supply chains? How can the state bark orders at factories that are so subject to vertical or horizontal disintegration that they can’t deliver the goods? By March 27, The New York Times reported that President Trump threatened to “invoke the Defense Production Act, which would enable the federal government to mobilize privately-held companies to produce critically-needed supplies.” Yet, it was “not clear that will speed the process.” In the case of ventilators, their complexity means that they use “upwards of 1,500 unique parts from more than a dozen nations, and the manufacturers say they will be limited in part by the availability of parts.”

The Solution is Economic and Political Redesign

Returning to the question of ventilator production and the design of workplaces, we confront various design questions. These questions involve production design and political/economic design. When it comes to Ford and GM making ventilators a recent report in Politico noted: “Automakers are offering up their factories to help solve the shortage of ventilators needed to treat an expected crush of coronavirus patients, but production likely won’t begin for months — too late to help ease the immediate need.”

One key problem is the need for social distancing which requires a redesign of the assembly line. Flavio Volpe, head of the Automotive Pars Manufacturers’ Association in Canada explained: “If you were to start a new production line making medical goods, from scratch, you could design [social distancing] into the line and for a lot of these, they’ll have to be made in medical clean rooms…You’re addressing, by definition, a whole bunch of the concerns that employees have on the cleanliness and the spread in the workforce.”

A German/Swiss Company called Schilling Engineering has a homepage in which they profile different kinds of turnkey clean rooms. Here we see very clearly a variety of clean room solutions which could be developed for factories in the U.S. and elsewhere. Willis Whitfield, an American, was the inventor of the clean room. A profile in The New York Times explains what he accomplished: “His clean rooms blew air in from the ceiling and sucked it out from the floor. Filters scrubbed the air before it entered the room. Gravity helped particles exit. It might not seem like a complicated concept, but no one had tried it before. The process could completely replace the air in the room 10 times a minute. Particle detectors in Mr. Whitfield’s clean rooms reported showing numbers so low — a thousand times lower than other methods — that some people did not believe the readings, or Mr. Whitfield.”

The development of a facility to make ventilators is not simply a production design problem. It is also a political economic design problem. By the auto industry’s own admission, they lack proper cleanrooms such that there will be a production lag in producing them. Where then could such clean rooms be found? Well, it turns out that various countries have a number of such rooms only they are designed to meet security needs which correspond often to threats that are either: a) non-existent or b) exaggerated. I am of course speaking of the so-called “defense industry.”

The SOSCleanRoom site explains the sectors having such cleanrooms as follows: “The optics and defense industries use cleanrooms for many applications, including microelectronic, biotech and pharmaceutical, and medical device[s].” Such “applications also include things like chip making for controlling missiles, radar and electronic components, laser development for guidance systems and even biological components for vaccines and test agents.” A 2010 study shows that cleanrooms are not only used in the defense industry, but also in “biotechnology, microelectronics, pharmaceuticals and nanotechnology.” They vary in “size from small to complex multilevel structures with large serviced equipment and utilities.”

Convert the Defense and Pharmaceutical Industries

The defense industry is a key sector because it utilizes many cleanrooms and is vast in scale. The aerospace industry can also make ventilators. Deloitte recently documented how vast the defense industry is. On the global level, “defense expenditure is expected to grow between 3 and 4 percent in 2020 to reach an estimated US$1.9 trillion, as governments worldwide continue to modernize and recapitalize their militaries.” Much of the growth was “driven by increased defense spending in the United States, as well as in other regions, such as China and India.” Here we have an industry that already has many cleanrooms and the production capacity to eventually convert to making other equipment in safe assembly lines.

While the U.S. and other governments should study the possibilities for converting defense and other industries, one should also note that the U.S. defense industry potentially is seeking further government support: “The U.S. aerospace and defense sector is feeling the impact of the coronavirus, with companies limiting travel, defense trade events scuttled and contingency planning underway.” Politicians should leverage any defense industry requests for support by demanding conversion in exchange.

In theory the U.S. defense industry should have been immune to shocks in supply chains, but this industry has also gone global on certain production items. Defense News pointed to the U.S. Chamber of Commerce’s Defense and Aerospace Export Council’s president, Keith Webster who explained that “‘Buy-America’ regulations and other controls mean the U.S. defense industry’s supply chains may be less susceptible to disruption than some consumer sectors, where reliance on China-made components is more widespread.” The F-35 fighter aircraft is a supply chain that is very much “globally linked,” however.

Thus, the globalization of defense production reveals the how economic considerations hollow out the security of the U.S. and others seeking cost savings. Yet, defense products were supposed to be “beyond economic considerations” according to the dogma of many economists. In this dogma, defense products meet “security considerations” and thus we can’t talk about shifting budgets from military items because these items are defined by security needs rather than economic choices. Yet, our current use of defense or military resources increasingly represents an economic, political and security opportunity cost.

In 2018, the cleanroom-rich global pharmaceutical industry was worth $1.2 trillion dollars according to statistics published by Statista. Some of the capacity of this industry could in theory be converted to more severely needed medical-related products. The pharmaceutical industry, however, is part of the larger medical industrial complex which has often acted against public interest. Barbara and John Ehrenreich were among the first to address this sector in a 1970 book entitled, The American Health Empire: Power, Profits and Politics. In the 1960s there was a boom in health industries that was largely based on “government subsidization of the market.” Over many years the government “directly or indirectly fed dollars into the gaping pockets of the dealers in human disease.” These payments include direct funding for health care, education of health workers, hospital construction, and tax deductions for individuals’ medical expenses. The government has also aided “nonprofit hospitals” with tax exemptions and supported basic chemical and biological research worth billions of dollars. In 1966, Medicare and Medicaid, launched “the biggest government subsidy of all.”

Much like the defense industry, which has received trillions of dollars of government and taxpayer support over the years, the medical industrial complex also represents a system that robs the public interest. As the Ehrenreichs explained: “Much of the money which flows through the delivery system to the health industry’s drug and hospital supply and equipment companies never returns to the delivery system in any medically useful form, or in any form at all.” As much as “five to ten percent is raked off directly as profits, and these by and large vanish into the larger economy, going to stockholders and going to finance the companies’ expansions into other enterprises.” Increasingly “health industry firms are conglomerates, whose holdings in drugs or hospital supplies help finance their acquisitions in cosmetics, catering, or pet food.”

Some Early Data on Other Industrial Platforms

Some early data is available on alternative platforms for making ventilators and other medical-related equipment. David E. Sanger, Maggie Haberman and Zolan Kanno-Youngs at The New York Times reported on March 26th about a joint venture production arrangement between auto giant General Motors and Ventec Life Systems. The plan was originally expected to lead to the production of up to 80,000 ventilators. In this plan, General Motors (GM) would have retooled an automotive parts plant in Kokomo, Ind. with the ventilators manufactured using Ventec’s technology. The announcement about an actual deal was called because “the Federal Emergency Management Agency said it needed more time to assess whether the estimated cost was prohibitive.” In addition,  government officials claimed “that an initial promise that the joint venture could turn out 20,000 ventilators in short order had shrunk to 7,500, with even that number in doubt.”

The joint venture provides us with many useful pieces of information about the possibilities for GM to diversify. First, GM says “there’s no issue with retooling,” i.e. there are no technical diversification barriers. This assessment was shared by Ventec. GM has expertise in manufacturing, purchasing and logistics which were viewed as complementary capacities for Ventec. Nevertheless, FEMA believes it “would have to select multiple manufacturers, in part to avoid the risk that one production line runs into technical trouble.”

Second, the very plant selected by GM was closed in part because of the corona crisis, i.e. the health bottleneck in production looms over this plan: The plan was considered as GM’s “factory floor in Kokomo was grinding to a halt and workers were being sent home — partly because the market was collapsing but also because workers would otherwise risk exposure to the coronavirus.” Similarly, FEMA was also considering multiple production sites because of fears that workers would “contract the very virus the ventilators are being built to defeat.”

Third, past research suggests that the government can be a key agent to steer and promote successful diversification (by generating new markets and contributing to performance specifications). Yet, Sanger and his colleagues report that “the effort to produce [ventilators] has been confused and disorganized.”

Fourth, one reason for delay in the GM-Ventec plan was its cost, yet cost decisions have not stopped overly expensive military production plans. As the Times reported: “The $1.5 billion price tag comes to around $18,000 a ventilator. And the overall cost, by comparison, is roughly equal to buying 18 F-35s, the Pentagon’s most advanced fighter jet. Yet, just last year The New York Times described the F-35s as “America’s Dysfunctional Trillion Dollar Fighter-Jet Program.”

Fifth, the GM-Ventec deal reveals how parts of corporate America are organizing politically to advance ventilator production. The two companies joined a coalition of business executives called StopTheSpread.org in advancing the plan. The network’s homepage claims that “thousands of CEOs, executives, and leaders around the country have committed to #StopTheSpread of COVID-1.”

Finally, in contrast to the hang ups involving GM, innovators at universities and elsewhere are already developing ventilators with no apparent cost barrier or with designs that may not be cost prohibitive. A Sky News report described how a team of persons from Oxford University and King’s College London “took less than a week” to take a plan for a ventilator “from the drawing board to working prototype, so that it can soon help.” They cited Andrew Orr, an Oxford University engineer who said “Sony confirmed that it could turn what is currently a jumble of wires into a printed circuit board – and produce 5000 of them in a week.” While it is too early to tell whether such efforts will be sufficient, they do suggest the possibility that the big overhead production model of GM should be complemented by other efforts to give grants to a decentralized network of producers. Research by Charles Perrow indicates that such a decentralized network could address the vulnerability of a centralized production point.

Social and Economic Reconstruction is Urgently Needed

In sum, we need to begin to investigate how to convert both the military and health industrial complexes to the urgent needs required by the Coronavirus crisis. In Italy, the military has sent technicians to aid the production of ventilators. The logic of the health economic crisis and StopTheSpread.org’s efforts both show how some parts of the business and capitalist class, as well as millions of workers, NGOs, and other groups now have a vested interest in the conversion of another part of the capitalism system. Face-to-face food service industries, industrial manufacturers, airlines, the tourist sector and countless other business sectors whose livelihoods, profits and employees have an immediate and dramatic interest in conversion. The immediate question, however, is whether political and social movement entrepreneurs can seize the opportunities presented by this crisis.

Progressive forces should focus more on how to exploit the looming potential split among business groups rather than simply call for a total redesign of the system outside any specific policy framework. In contrast to an abstract set of proposals for remaking society, we need to figure out how to build new institutional leverage points tied to: a) conversion, b) alternative budget priorities and c) distribution of grants to individuals or businesses. This incremental strategy can tie into the large scale policy discussions that need to occur about ratcheting up production of new health security production runs. One opening is that British universities have begun to play a key role in addressing the health production crisis by developing a ventilator prototype.

Social and economic reconstruction involves the redesign of political, economic and media spaces to advance public needs and interests. The political is reconstructed to advance greater citizen participation and representation. The economic is reconfigured to advance human needs rather than simply profit and pollution. The media is reshaped such that participation and education take preference over political marketing by various vested interests. In addition to Barbara and John Ehrenreich, thinkers like Gar Alperovitz, Barry Commoner, Seymour Melman, Marcus Raskin and Simone Weil, as well as countless others, have each contributed to the ideas of such reconstruction.

The new economic design and conversion changes we require depend on political innovations. The left has been totally derelict in advancing a politics of production, with a few notable exceptions. The right has been wedded to obsolete models of security, markets and limited government. The critical failures of globalization are self evident now. To move beyond these limitations, we need to advance a new institutional platform that can transform media power into political and ultimately economic power. There are various models for doing so, so one of the most urgent problems we face is the crippled political imagination of the societies we live in. This imagination should link cooperative and community ownership, the efforts of the Bernie Sanders presidential campaign, and various other circuits of economic, political and media power.