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Why Can't America Handle the Coronavirus Crisis?
Or How to Make Things in America Again
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Last week I updated you on the negotiations in Congress over the coronavirus. I also asked you how the crisis is hitting your businesses and why it’s so hard to make things that we need for the crisis, like medical supplies, in America. Today I’m going to share what you told me. I’ll also outline why America, and much of the West in general, is so ill-equipped for this disease.
To understand how seriously our policymakers are taking the disease, here’s a joke picture of Congressman Matt Gaetz right before voting on the Coronavirus package.
Before the main event, some house keeping. I was on Le Show podcast with Harry Shearer.
Why Can’t America Handle the Coronavirus Crisis?
The stock market was down by roughly 8% today, and the Trump administration seems to have no coherent view of what to do in the face of an epidemic. The response has been pretty ugly, everything from the Centers for Disease Control refusing to allow states to test people for coronavirus to White House official Larry Kudlow going on TV saying that the stock market declines are an opportunity to buy stocks. Most of the people I know in politics are in a state of shock, unable to know what to do with an institutional breakdown of this magnitude.
Without downplaying the immediate catastrophic response, I’ll note that the roots of this dysfunction are deeper than just Donald Trump’s sense of denial of an event he can’t control. America has not handled crises well for twenty years now. For example, here’s a piece I wrote on the status of New York City utility Con Ed before Hurricane Sandy hit the city, summarizing a report put together by their unionized workforce.
The union noted a lack of redundancy in voltage equipment, smart meters paid for by the stimulus that were never turned on, and a lack of basic supplies. “Our members have worked on cable so old,” said the report, “that it has paper insulation, and on utility poles that were installed in the 1930s and remain in service today.”
The company used to have a policy of keeping a “safety stockpile” of basic supplies on hand in the event of an emergency. No longer. So when Sandy hit, Con Ed ran out of utility ladders and utility cable. It had to rush order parts that did not work on Con Ed systems, including “entire truckloads of utility transformers” which the utility could not return “because of their specialized nature.”
Imagine that. Before Hurricane Sandy hit the city, Con Ed didn’t bother stocking up on ladders. Ouch.
The reason America can’t handle the Coronavirus is the same reason we can’t do anything else right. We don’t let the people who do the work have any say over how or whether the work is done. That’s why America has mishandled various wars, the response to Katrina, the financial crisis, big tech monopolies, Boeing, the Iowa caucuses, and the crisis with Hurricane Maria in Puerto Rico. American institutions are organized entirely around the short-term horizon of financiers, and these financiers seek to create monopolies and to grab cash by thinning out supply lines and generating hidden risk.
Here’s how one reader put it when wondering where all our tax money goes.
Having served in the military and received an Ivy-league business education, I think the answer is simple: Our taxes pay for management consultants who make slides and defense contractors who can't build anything. We also bail out the financiers (who deplore socialism) when they make bad decisions.
To put it a different way, this is who has been in charge of most of our political, cultural, and economic institutions for decades now.
How Should America Handle the Coronavirus Crisis?
Ok, so what should we do?
The basic answer can be divided into pandemic response, and then longer-term restructuring. I don’t have much to add on pandemic medical response, but in terms of the immediate economic crunch, it boils down to having Congress find out what is happening in the economy and then throw cash out the window to people and industries in distress. Last week, I asked you what you’re seeing out there in terms of business activity.
Many of you are having problems because conferences are being canceled. One music promoter told me she is going to be significantly damaged by the cancelation of major music and tech event South by Southwest. Others are noting that expos for new product displays aren’t going to happen, which means that orders won’t come from distributors. And then there’s the problem of just being unable to produce. Here’s a note from someone in Washington state.
We have a business where you can't really 'work from home'. It's producing, manufacturing, shipping, receiving. I emailed my Senators (Murray and Cantwell) to tell them they need to get way out in front of this. If this continues like this with closings, social distancing, hoarding, we may be heading toward a Depression. Small businesses will be closing en masse.
The easy policy answer here is to just shovel money out the door, both to individuals and to businesses affected by the Coronavirus. That’s what the Treasury bond interest rate is screaming; no one else wants to spend, and in such a moment, the government should borrow at exceptionally low rates and do the spending the private sector won’t do. Already ex-Goldman Sachs CEO and Trump advisor Gary Cohn is saying we’re going to have to bail out the airline industry. If the big guys are going to get a bailout, why not the rest of us?
So that’s the economic response. Then there’s the longer term restructuring. We should be focused on addressing the following problem, which is that we can’t produce enough domestically, especially things we need like medicine. To deal with that, I’ve been doing research, and asking those of you in business why it’s so hard to make things in America. Here’s the problem, and the solution.
How to Make Things in America Again: CLIMB
Why can’t we make things here? Well one reason is that American finance and politics is set up to destroy, not build. As just one example of many, a software entrepreneur wrote in Forbes today about what happened when he sought financing to grow his healthy business. In talking to hundreds of private equity firms, their basic approach was to offer to invest in order to generate a quick return. As one put it, “Man, there’s a lot of meat on the bone here!” The businessman was taken aback at the naked avarice and lack of coherent understanding of what it takes to *build.*
Financiers are a huge problem, but not the only one. I’ll put the ingredients for making things in five buckets. I always found acronyms annoying, but they do stick with you. This one is called CLIMB, and it stands for Capital, Labor, Inputs, Markets, and Brainpower. That’s what a coherent policy response would like if we wanted to make things domestically and make them well.
Capital: Businesses need money to start up, to keep going, and to expand, so running a manufacturing concern requires having a financial system that supports such activity. We do not have such a system right now. Now supposedly, interest rates right now are exceptionally low, so it would seem that it would be easy to get money for profitable ventures. But it’s not, because the institutions that can offer capital are looking for either totally safe assets like government bonds or crazy high returns that can only come from grabbing market power or looting.
In other words, monopolies and private equity can borrow money, but people who do useful things that get 6-10% returns have a much harder time doing so. This is largely because small banks have collapsed, and small banks are the networks through which productive enterprises borrow money. According to the Institute for Local Self-Reliance, “In 2018, community-based financial institutions made 52 percent of all small business loans, even though they controlled only 16 percent of banking assets.” MIT scholar Suzanne Berger noted that as big bankers buy local banks, local bankers with “intimate understanding of local manufacturing” disappear, making borrowing to make things hard. The government should fix this with a renewed emphasis on small business lending, as Marco Rubio suggests.
Labor: People make things. Workers, skilled labor, managers, and entrepreneurs. Yet as a lot of businesses will tell you, they can’t find workers or competent production managers. And this isn’t just a function of wages, but the fact that there just aren’t the skilled, semi-skilled, and managerial workers in America anymore. Offshoring jobs for decades means that parents tell their kids ‘Don’t go into skilled manual labor,’ and they don’t.' This is changing, but this story on the U.S. furniture industry trying to reshore production after decades of layoffs makes the point.
One answer is the Catawba Valley Furniture Academy here, created by local companies struggling to find skilled employees in partnership with Catawba Valley Community College. Furniture makers are also, for the first time, creating internal training programs and adding benefits such as free health clinics.
“My dad has been in furniture his whole life,” said Nathaniel Kaylor, a 21-year-old student at the academy. “He told me from the get-go to stay out of it. You get old fast. Go to college.”
A real public commitment to fund these kinds of educational institutions, as well as a commitment to putting production *here* is key to ensuring people learn the skills they need to make things. Similarly, in business schools, the people who have executive level experience in production are the losers, the cool kids are the private equity Blackstone alums. This is a huge problem, and business schools need to reorient their focus. That will happen if we eliminate or radically restrict private equity.
Inputs: Building things requires an ecosystem of production so you can find the inputs. For instance, making a sweatshirt requires strings, material, and zippers. All these used to be found in mid-town Manhattan in the ‘garment district,’ but that ecosystem of inputs is gone. So too across most of our industries, such as electronics. Here’s what one electrical engineer told me: “NOTHING happens without Chinese suppliers. Circuit boards, parts, housings, packaging, printing. Anyone who says MADE IN USA is... well... let's just call it "stretching the definition". We are SO dependent on China, that I have been studying Mandarin. I have a special book which translates obscure things like "surface mount tantalum capacitor", because guess where the only place in the world is, that they come from?”
Rebuilding an ecosystem of inputs is going to require sustained investment by public entities, as well as aggressive trade rules that prohibit dumping, predatory practices, and private equity looting.
Markets: Starting a business means being to count on buying in open markets for what you need, and being able to reach customers in open markets for what you sell. Coercion and fraud kill productive activity. Multiple small business owners told me about how hard it is to sell through monopolies at this point. Corporations like Amazon basically take all your margin, and pharmacies are being destroyed by pharmacy benefits managers and drug distributors. Having open markets in which to buy and sell goods is essential if you are going to start a business and succeed. That means reinvigorating antitrust law.
Brainpower: A big part of production is just knowing how to make things, both in terms of academic innovation and production on the line. As one manufacturer told me, “Innovation doesn’t just hover above the Great Plains… It is built on steady incremental changes and knowledge learned out of basic manufacturing.” This is distinct from labor in that it is about ecosystems of production, like having a well-trained workforce versus having Silicon Valley as an ecosystem of digital technology or 19th century Pittsburgh as an ecosystem of metallurgy.
Prior to the 1990s, a lot of knowledge of production in America was held within large vertically integrated large corporations like IBM, Dupont, Boeing and General Electric. The U.S. did a lot of infrastructure investment and procurement, along with antitrust to ensure the decentralization of this capacity. In China and Germany, governments emphasized strong research consortia as well as training regimes and state support. All three of these models ensured that unskilled labor, skilled labor, engineers, and academics could interact in productive ways.
In the U.S., we have gutted our knowledge base for decades, and corrupted our universities. The end of antitrust and the prioritization of private equity led to a large scale looting of our corporations. Newer Goliaths like Microsoft, Google, Facebook, and Amazon do not generate the public good spinoffs because they do not have to face antitrust scrutiny. Addressing the brainpower problem is similar to the input problem.
So that’s the gist of the problem, and the solution. CLIMB. Can we do that? I think so. It will require sustained investment over many years, based on a political consensus that we need to be making things here again. I’m seeing that consensus reemerge, on both the right and the left. Trump’s chaotic approach to an epidemic is quite scary, but if we want to be a free people we don’t really have much of a choice but to rebuild a political consensus that we have to be able to take care of ourselves and produce what we need.
I’ll be submitting a version of this essay to the House of Representatives’s Small Business Committee, so if you have more thoughts on how the coronavirus is affecting business, let me know either by emailing me or leaving a comment by clicking on the title of this email newsletter and going to the bottom.
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