Misdiagnosis can be fatal in a pandemic. Treating the economic effects of the global COVID-19 epidemic as a conventional recession means prescribing the wrong medicine and harming the patient.
This is a supply-side recession, not a demand-side recession. The shortfall includes intensive care beds, ventilators, protective gear for healthcare workers, and other medical supplies. Thanks to these shortages, as well as insufficient trained medical personnel, hospitals may soon be overwhelmed everywhere by the demands for treatment of coronavirus victims.
To slow the spread of the virus while augmenting existing medical supplies and personnel, governments are promoting social distancing and sheltering in place, both euphemisms for quarantine. This is the opposite of what governments typically do in demand-side recessions, when they encourage firms to hire additional workers and consumers to shop and dine out.
Dealing with the economic effects of de facto nation-wide quarantines, by means like sending firms and citizens emergency funds, is important. But the focus on the economic fall-out of social distancing threatens to distract governments from the other essential task. The most important being the production and deployment of medical supplies in sufficient quantities to minimize the shortfall experienced by hospitals as the pandemic peaks in the months or years ahead.
Here, the model should be the wartime mobilization of industry. In the two world wars, the US government found it expedient to finance and coordinate industrial mobilization with the help of state capitalism. In World War One, the US employed a government-owned corporation, the War Finance Corporation. During World War Two, the US turned to the Reconstruction Finance Corporation (RFC).
Modeled on the War Finance Corporation, the RFC was created in 1932 by the Hoover administration to stabilize insolvent banks and other private institutions. Herbert Hoover’s successor as president Franklin D. Roosevelt greatly expanded the mandate of the RFC to provide emergency relief for state and local government work relief programs and mortgage insurance.
The wartime incarnation of the RFC is the most relevant today. To mobilize the US economy during World War Two, the RFC created eight wartime subsidiaries, including the Defense Plant Corporation, the Petroleum Reserve Corporation, and the Rubber Reserve Company, which helped to create an entirely new synthetic rubber industry to replace imports from Asian countries conquered by Japan. The equivalent today would be government financing of rapid expansion of the domestic manufacture and export of critical medical supplies like ventilators and protective medical gear for doctors and nurses.
To this end, my colleague the economist James Galbraith and I have proposed that the US government establish a Health Finance Corporation (HFC). A wholly-owned government corporation, the HFC would have the power to make grants or loans to industrial firms, nonprofit academic research labs, and state and local governments to promote medical-industrial production and research. Unlike a conventional government agency, a government-owned corporation, capitalized with government seed money, can raise funds from capital markets by issuing its own bonds backed by government. European examples of entities like this include the European Investment Bank (EIB) and Germany’s state-owned development bank, the KfW. And unlike partisans in legislatures delaying appropriations bills with squabbles over ideology or special-interest politics, a government corporation can act quickly in a prolonged emergency, while still being accountable to elected politicians.
In a conventional recession or depression, the government is the lender of last resort. In a war or warlike emergency that requires industrial mobilization, the government is the investor of first resort. To his credit, Boris Johnson has called on British industry to produce more critical medical equipment and Donald Trump has spoken of reviving America’s long-dormant Defense Production Act. But much more needs to be done. Every major industrial nation needs to prevent shortages of ventilators and other hospital equipment by acting as a state capitalist, ramping up medical-industrial production and training in its use not only for its own people but also for poor countries. The model of the RFC shows the way.