How to Forget the Lessons of the Pandemic

The Biden administration and the Republican Party need to remember what happened when the world fell apart.

Welcome to BIG, a newsletter on the politics of monopoly power. If you’d like to sign up to receive issues over email, you can do so here.

Today’s issue is about how the old guard are trying to pretend that Trump and the pandemic never happened. It’s been a few years, and the memory of those initial days of Covid, when we didn’t know if we’d be able to get medicine or semiconductors, have faded. So now officials like Treasury Secretary Janet Yellen, as well as semiconductor CEOs, are trying to take us back to the policies of the 1990s and 2000s that got us into the mess we’re in.

The fight is getting brutal, with chip firms Intel and Nvidia trying to get key architects behind the new domestically-focused semiconductor strategy fired so they can use U.S. taxpayer subsidies to expand production in China. But it’s much broader than that, and involves pushback on antitrust, bank regulation, and trade.

If the Biden administration and Congress don’t act with more urgency, the consequences could be dire.

Four days ago, Donald Trump went on YouTube and attacked the Biden administration for allowing medical shortages to get worse. “China produces 95% of all ibuprofen, 91% of hydrocortisone, 70% of all Tylenol, and nearly half of all penicillin,” he said. “Can you imagine that?” He also went off on how cancer drugs are often unavailable, and how dependent we are on China for active pharmaceutical ingredients.

You won’t see Trump’s arguments in most of the media, because journalists don’t focus on what Trump says when it comes to policy. But Trump is right: medical shortages are a serious crisis in the U.S., and they are getting worse. Last week, for instance, a Pfizer plant that makes a quarter of the firm’s sterile injectables used in America was damaged by a tornado.

This problem isn’t a result of Covid; drug shortages have been going on since the early 2000s, a result of monopolization and bad trade rules. But it was Covid that brought them home as a core challenge to our way of life, and revealed the philosophy that fostered them.

That philosophy was as follows. For much of the 1990s and 2000s, the idea of a flat globalized world, intertwining trade and capital flows, was a Tom Friedman-peddled utopian vision, spurred by trade agreements and corporate strategy. The idea was, U.S. firm would monopolize and consolidate production, because big is efficient. Then, China would provide investment capital, American firms would transfer technology and get a huge sugar rush of an immediate profit boost as factories moved from the U.S. to China, and China would eventually democratize.

There were many arguments for why this kind of ‘engagement’ policy framework made sense, from the comparative advantage economic rationale, to to the notion that it was a huge moral boon that China’s government lifted a billion people out of poverty, to democracy promotion, to the arrogance of assuming American had infinite power and wealth to fritter away. But what we learned during the pandemic, when every nation shut down borders and exports to ensure it could supply what it needed for itself, is that what we were actually doing was facilitating the Chinese government’s strategy of monopolizing a series of key industrial sectors, from solar panels to masks to semiconductors to food preservatives.

Indeed, in many ways, China as a nation-state looks a lot like Amazon with an army, using a whole host of predatory pricing practices to capture market power, and ultimately, move industrial and scientific capacity from the West to itself.

As former government official Clyde Prestowitz noted, China’s goal, from their perspective, makes a lot of sense. “China is not the villain here,” he wrote. “It has told us plainly and clearly that it means to beat us soundly at our own game. I may not like that China is doing that, but I cannot blame it for wrongdoing in any way.” Indeed, what China is doing is what every emerging nation-state does - including the U.S. in the 19th century. But it’s not good for us, for our democratic system, or for world peace.

Many of the arguments for intertwining the U.S. and China in the mid-2000s, what was called ‘Chimerica’ by a host of consulting firms facilitating it, had a ring of truth. Chinese subsidies did make a bunch of products cheaper, China did get much wealthier, and U.S. firms did make a lot of money. But losing an industrial base, as we chose to do, has costs as well, and these became extremely clear during the pandemic. By 2019, the list of products we couldn’t make in the U.S. was extremely long, and included Nylon products, optical scanners, medical equipment, consumer robotics, electronics, all types of clothing, and specialty chemicals. We can’t even print enough bibles, as one bible lobbyist told the trade representative’s office in 2019. As it turns out, it’s really important to be able to make stuff you need in a pinch, which is something the Chinese did not need to learn, but apparently, we did.

There are many reasons to be wary of dependencies, from geopolitical tension to potential accidents, but the basic idea is the same as being wary of monopolies - don’t put all your eggs in one basket. And Covid wasn’t the only time that lesson was brought home. Over the past fifteen years, we’ve witnessed economy-wide bank failures, much higher medical costs, as well as widespread recognition that tech firms like Google and Meta foster dangerous social instability. America has a monopoly crisis that has lowered wages, killed resiliency in our supply chains, and undermined our ability to engage in free speech. Meanwhile, the people who fostered and profited from these problems remain in charge.

In many ways, Trump was elected to address these problems. And he did make some stabs in the right direction. In 2018, he raised tariffs by 25% across a host of categories, including semiconductors, put out an executive order on medical supplies, and restricted certain technologies from Chinese firms like Huawei dumping into world markets. He renegotiated NAFTA with Democratic support. And despite the wailing from both parties and Wall Street, these moves did start to change supply chains, albeit nowhere near enough.

The Biden administration continued and expanded these policies. On semiconductors, they worked with Japan and the Netherlands to put export controls on high-end semiconductor equipment. Congress passed the CHIPS Act to boost domestic production. These policies have worked. Before export controls took effect, in October, 2022, forecasts for worldwide semiconductor fabrication investment showed China as the number one destination by 2026, and the U.S. was fourth. After controls took effect, America jumped to second, with South Korea as the top investment area. China fell to sixth. That’s an immense policy success.

It’s not just semiconductors, of course. In 2021, the White House released a supply chain report in the first 100 days that keyed in on four different sectors: semiconductors, batteries, critical minerals, and pharmaceuticals. And Biden did act, on some of these sectors. The Inflation Reduction Act has fostered domestic investment in batteries and critical mineral supplies, moving electric vehicle production to the U.S., and boosting manufacturing across the board.

via “Unpacking the Boom in U.S. Construction of Manufacturing Facilities”

Trump, and then Biden, addressed other serious problems with American institutions. It was Trump who brought the antitrust merger case against AT&T and Time Warner, which failed, but also the monopolization case against Google, which Biden continued and will go to trial this September. Biden has dramatically expanded on what Trump began, resurrecting a whole host of new anti-monopoly laws, and appointing Lina Khan to run the Federal Trade Commission, Jonathan Kanter at the Antitrust Division, and Rohit Chopra as a key bank regulator. Insulin prices are coming down, mergers have collapsed, factory investment is way up, and innovation in electric vehicles and hearing aids is exploding.

So a lot has changed. The problem is that, unlike in the New Deal, the old order was never actually displaced from its position of power and legitimacy. In 1932, just before he took office, Franklin Delano Roosevelt discussed the politics of the stock market collapse. “The public has burned its fingers in the flame of wild speculation and has learned to fear the fire,” he said. “While it still fears the fire is the time for us to act.” FDR implemented a different philosophy of governance, using the recent memory of the crisis to reorganize our social hierarchy. The point of the New Deal he engineered wasn’t a specific policy framework, but to structure society so that the failed financial elite was displaced, and the public itself could govern.

Though today most of us know of the many failures of the last fifteen years, the philosophy of the old order has never been displaced, as neither Trump nor Biden articulated a different and sustainable governing arrangement. And so the pushback is severe.

Take semiconductors. Despite the immense success of Biden’s export controls, Intel and Nvidia, two massive semiconductor companies, have launched a public relations campaign to get rid of them. Intel CEO Pat Gelsinger, coming straight from Beijing to D.C., is telling Congress and others that if the U.S. continues to restrict semiconductor investment in China, his firm will not open new fabs in Ohio. Here’s what he said at the Aspen Security Forum:

"Right now, China represents 25% to 30% of semiconductor exports. Right, if I have 25% to 30% less market, I need to build less factories. Right? You know, we believe you want to maximize our exports to the world. We want to maximize selling fish, not fishing rods, right, you know, across the world, including China."

He continued, "You can't walk away from 25% to 30% and the fastest growing market in the world and expect that you remain funding the [research and development] and the manufacturing cycle that we've released ... This is strategic to our future, we have to keep funding the [research and development], the manufacturing, etc. Today, we have over 1,000 companies on the entities list, many of which have nothing to do with national security and nothing to do with security concerns in China."

This argument is absurd. Intel’s problem is that the company is no longer very good at efficiently making high end chips. If Intel could actually produce the kinds of semiconductors that Apple or Qualcomm or other firms wanted, the corporation would be building fabs as quickly as it could to meet customer demand. Right now, the key firm that can make high end chips is Taiwan Semiconductor. TSMC’s customers would love another option. If Intel can’t fix its internal cultural issues and learn to make chips again, that’s not because of export controls or the CHIPS Act. It’s squarely because Gelsinger failed at his job. Whether fabs are built in Ohio is purely on whether Intel can do what customers need. (There are other hoary excuses peddled by semiconductor firms, like a lack of skilled labor in America, but as Lee Harris found, those are usually an excuse not to hire union workers who do know how to build things.)

Yet, Intel, and Nvidia, which are both squeezed by China, are seeking not only to convince D.C. policymakers that export controls are bad, but as Bill Bishop noted, are actually trying to fire the architects of export controls at the National Security Council, as well as think tankers trying to deal with China’s attempt at monopolization. And keep in mind, these controls have pushed investment in U.S. semiconductor fabrication from fourth place to second, and China from first to sixth, and there are massive subsidies for Intel. Still, it’s not enough to succeed, the old order will not be placated.

China’s investment response has been to pour money into making less advanced semiconductors, underpricing Western producers so they can seize control of the kinds of chips that go into things like cars and remote controls. China can no longer control the best stuff, but they are seeking to monopolize lower end chips critical to making our society function. Here too the answer should be obvious - tariffs. When a foreign would-be monopolist is trying to destroy your industry by offering subsidized prices, tariffs are the answer. But Janet Yellen and the Treasury Department, as well as Gina Raimondo at Commerce, are hostile to that idea. John Kerry was recently in China, so was Henry Kissinger, both preaching ‘engagement,’ aka a return to the early 2000s. The old order will not be placated.

This pushback is what happens when you don’t reorient your governing philosophy. Like the Bourbon kings of France, the old order is composed of people who “have learned nothing, and forgotten nothing.” The incoherence of the different parts of the administration are almost mind-blowing. The White House tweets almost daily about how much domestic production it is fostering with its policies. Yet this week the Treasury Department released guidelines allowing the use of foreign steel in clean energy products subsidized by the Inflation Reduction Act.

On monopolization, the old guard pushback is vicious. Larry Summers, for instance, has gone after the Biden antitrust enforcers as declaring a ‘war on business’ for trying to update the way we enforce anti-monopoly laws.

Yesterday, Obama-era enforcer Carl Shapiro and Obama Council of Economic Advisor chief Jason Furman penned an op-ed in the Wall Street Journal lauding the losses of the Biden antitrust enforcers in court, and calling for a return to the way things were. Biden has generally upheld his anti-monopolization push, except when it comes to a very important area. Judges. In several cases, it was Biden appointed judges, like Jacqueline Corley, who ruled that monopolies are good and efficient. For the old order, it’s always 1997. (This inchoate dynamic is true in Congress as well - a very obvious way to fix pharmaceutical supply chains, split off pharmacies from middlemen brokers who sell to pharmacies, was downgraded to a study in a Congressional mark-up this week.)

You can see this incoherence in banking as well. While we don’t have enough banks to do the kinds of commercial lending we need, and large and even medium-size banks foster obvious instability, Janet Yellen is pushing aggressively for more bank mergers, with her regulators recently telling regional banks PacWest and Bank of California to merge. This is at the same time as antitrust enforcers and consumer finance regulators are trying to stop consolidation in the sector.

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The key dynamic is that the people who are most aggressive about wielding levers of power to address serious social challenges are the ones targeted by the old guard. There’s a reason the Wall Street Journal editorial page has written seventy four articles attacking Lina Khan, including two on one day yesterday, and largely left the pro-monopoly trade doves alone. It’s not a coincidence Intel and Nvidia are targeting the actual people trying to solve the problems America saw during the pandemic, or that Elizabeth Warren and J.D. Vance receive an especially significant amount of political bile. Actually governing, fixing things, necessarily implies changing our social order. That, the old guard cannot abide. And Biden, though he’s made important nods to significant reform, hasn’t made it totally clear what he wants.

One effect of this approach is that Biden doesn’t get credit for most of what his administration does do, because it’s not clear what he’s trying to do. Another is that his opponents can attack him, legitimately, as failing to do the things he sought to do. That’s why Trump is going after him on pharmaceutical shortages, and rightfully so. Biden’s Health and Human Services Secretary, Xavier Becerra, simply did not follow up on the White House’s priority to reshore and restore pharmaceutical production, opening up this line of attack.

But the most serious impact is on the nation itself. The harms of a lack of overt vision and governance are constant and overwhelming. Sometimes the problems are just annoying, like when Ticketmaster overcharges a family for going to a rodeo, or a business randomly loses its Meta ad account and can no longer seek customers. Sometimes the costs are hidden, like allowing China to monopolize key chip segments, which doesn’t seem like it matters until one day, it very much does. And sometimes the costs are devastating. Every day, people are dying of cancer because they can’t get the drugs they need. But the sentiment that no one’s in charge, and the lack of urgency on the part of our governing class, fosters a loss of faith in our democratic institutions. Voters have chosen a switch in parties in 2006, 2008, 2010, 2014, 2016, 2018, 2020, and 2022. That’s unusually turbulent.

I could go into why we’re experiencing many of our social problems, and I often do. But what I have a hard time conveying is the utter sloth of D.C. I am sometimes in rooms full Washington policymakers who speak off the record about issues like supply chains, regional inequality, or national security. And what you generally see are well-trained lawyers, nicknamed ‘the blob,’ who rarely conceptualize the use of the law to force businesses to operate differently than they always have.

I don’t want to overstate the problem. Trump, and now Biden, really are making significant progress in reorienting our approach to China, trade, and competition. The policy conversation has changed radically over the last decade. More people every day, even in those rooms where some of us blob creatures hang out, understand the importance of using the law to foster our political and economic liberty. We are really bringing back an entire language, a tradition that was dormant for forty years. That doesn’t happen instantly. But just three years ago, we experienced very dangerous supply chain and financial problems, caused by the failures of our finance-friendly philosophy. It would be nice if more people internalized that means we should probably put more faith in the people trying to change our systems to make them more resilient, and less faith in Larry Summers or Janet Yellen.

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cheers,

Matt Stoller

UPDATE: The original piece noted that hundreds drugs could be in shortage due to a tornado hitting a Pfizer plant. Pfizer and the FDA have updated their damage assessment and are projecting possible shortages in 10 drugs. The full FDA drug shortage database is here.