I went into this pandemic with a low opinion of government. But even I never could have imagined the extent to which the crisis would discredit arguments for big government. The ineptitude of the US government seems almost beyond belief.
On January 23rd, I was trying to buy surgical masks in New Zealand and found all the pharmacies were sold out. At roughly the same time, here’s what was going on in America:
To be clear, it is not that they [economists] want the public to miss out on life-saving products. Quite the contrary. They believe that soaring prices stimulate greater output, and that policies to cap costs might limit supplies and so do more harm than good. In 2012 the University of Chicago surveyed 32 eminent economists about legislation that banned price gouging during a weather-related emergency. Only three supported the ban; more than half criticised it. Similar views have been aired in recent weeks. An economist with the Cato Institute, a conservative think-tank, lamented the “madness” of anti-gouging rules, saying that profits are what entice firms to meet rising demand for safety equipment.
Yet a closer look at one key piece of equipment—masks—during the coronavirus crisis shows that this standard view needs revamping. Economists are normally loth to tamper with prices, the most basic element of any market. But little about this pandemic has been normal. Price signalling alone would have been inadequate to the challenge of ensuring vast increases in supply.
“We are the last major domestic mask company,” he wrote on Jan. 23. “My phones are ringing now, so I don’t ‘need’ government business. I’m just letting you know that I can help you preserve our infrastructure if things ever get really bad. I’m a patriot first, businessman second.”In the end, the government did not take Bowen up on his offer. Even today, production lines that could be making more than 7 million masks a month sit dormant.

READER COMMENTS
Mark Z
May 10 2020 at 2:25pm
The Economist: “Price signalling alone would have been inadequate to the challenge of ensuring vast increases in supply.”
This may be sort of true: to cover high fixed costs, many buyers would need to be more willing to pay upfront or give downpayments to producers, which firms are usually willing to do when they’re desperate, but hospitals and governments apparently less so. If price increases are necessary but not sufficient – which the Economist seems to concede with its phrasing – to increase supply adequately, that doesn’t bolster the case for anti-price gouging laws. It bolsters the case for doing the other things necessary to boost supply.
Scott Sumner
May 10 2020 at 4:56pm
Exactly.
Matthias Goergens
May 11 2020 at 5:56am
Hospitals should have long term fixed price contracts, and perhaps a few call options in a hypothetical futures market for masks.
Buyers generally don’t need to pre-pay their long term contracts.
All very similar to eg markets for fuel or food or electricity.
Michael Sandifer
May 10 2020 at 2:26pm
Scott,
You make some good points, but I don’t know how one could be surprised at how bad the federal government’s been, given who’s at the top. Sure, there would have been mistakes under any President, like some of those made by the CDC, for example, but we wouldn’t have had quite the banana republican response we’ve witnessed.
Also, while I agree on price gouging, I assume you’re glossing over the issue for the sake of brevity. In practice, social norms often limit price gouging.
I’m okay with high market prices reflecting shortages during crises, but think the government should step in to pay those prices when called for. The fact we’re still not doing this doesn’t surprise me much, given my opinion of the bumbling fascists currently in office.
Jon Murphy
May 10 2020 at 3:01pm
I disagree. None of the examples contained herein deal with any decision Trump made. These are bureaucratic decisions; they would have been made the same if Hilary was president.
Alan Goldhammer
May 10 2020 at 3:22pm
A President Clinton would not have had Jared Kushner anywhere near the White House. A lot of the ineptness early on was at the very senior levels, all of whom are political appointees.
Jon Murphy
May 10 2020 at 4:14pm
True, but my point is all that is irrelevant. How the CDC runs is not subject to political appointments. The FDA blocking tests and slow-tracking medicine is not subject to political appointments. The refusal to take Mr. Bowen’s company up on their offer is not subject to political appointments.
Alan Goldhammer
May 10 2020 at 5:59pm
CDC and public health in general have been starved for funds. Why do you think we cannot do the kind of track and trace that will be needed as things open up? There is a shortage of trained personnel. It doesn’t take a lot of work to get people able to do this kind of work. There are a lot of people who are out of work right now and won’t be coming back to work as their jobs are probably gone. A lot of them can be put to work in this area. Of course this kind of thinking is way too obvious except to those of us with that background.
Jon Murphy
May 10 2020 at 8:02pm
Again, irrelevant. Congress sets the budgets. But as a point of fact, the CDC’s budget has been increasing in real terms just about every year since I was born in ’89.
Because they outlawed all tests except their own. See also the story Scott links to.
Michael
May 11 2020 at 7:07am
This isn’t necessarily true. During the Ebola crisis, Obama appointed someone (Ron Klain) whose job was to coordinate the efforts of the federal government. I think that counts as a poltiical appointment, even though we aren’t talking about a Senate confirmed position, agency head, or whatever. Klain wasn’t a public health or infectious disease expert, he was there because he knows how to work within the complexity of the federal government bureaucracy and get things done.
You are making the implict assumption that, at the time, Obama could have hired anyone (say, Jared Kushner) or no one into that role and it would not have made a difference in the Ebola response.
That might be true, but it seems like a dubious proposition, and one that you have yet to support with any evidence.
I’m not, BTW, making the argument that the difference in death toll between Ebola and Covid-19 (2 US deaths vs 80K and counting) means anything in and of itself. These are obviously very different crises involving pathogens that behave very differently.
Jon Murphy
May 11 2020 at 10:14am
True, but again irrelevant. He had no authority over how the agencies work, the rules they have/enforce, etc. The decisions the CDC, FDA, etc are making is irrespective of the President (that is the point of bureaucracy, after all).
Michael
May 11 2020 at 12:48pm
Not irrelevant. Or, at least, you haven’t made the case as it why it is irrelevant. If Administration A can manage the bureaucracy better than Administration B, such that Administration A is able to better achieve desired policy outcomes, why should evaluation of government performance not take that into consideration?
As the article Scott quoted notes.
If a competent President of the United States wanted those production lines to be churning out masks instead of sitting dormant, they absolutely would be. (This is, of course, a separate question from whether having those lines churning out masks is a good idea and from what should be done with the masks once produced.) But even if the initial decision not to engage that producer was made within an agency well below the Presidential level, it is ridiculous to argue that that could not have been changed in the ensuing months, if the President wanted it changed.
Jon Murphy
May 12 2020 at 9:21am
Assumes facts not in evidence. Neither A nor B manages the bureaucracy. That’s the whole point of bureaucracy; the mission goes on regardless of who is in charge.
On the margin, a president can have effects. But a president is not a dictator.
Michael
May 12 2020 at 11:59am
This is a facially absurd argument. One need only take a cursory glance at agency behavior from 2008 to 2016 and from 2017 to present to discount the idea. One could make all sorts of arguments about better or worse, but it would be wholly absurd to deny major differences or to deny that such differencve were related to who the President was.
Scott Sumner
May 10 2020 at 4:59pm
Social norms can only do so much. There can still be a secondary market where scarce goods are resold to the highest bidder. If those are legal, then anti-price gouging laws (and norms) gradually break down.
Phil H
May 10 2020 at 4:50pm
I can’t read the full article, but I have to say that the logic of this post is not clear. If the claim is that this company would have produced more masks if anyone wanted to buy them… then why isn’t it producing more masks? The fact that the government didn’t choose to buy masks back in January shouldn’t have stopped it. I can’t see what the argument is.
I mean, I get that the government didn’t act with foresight there, but neither did any market player. What’s the distinction being drawn?
Scott Sumner
May 10 2020 at 5:04pm
The quantity supplied is a function of price. The higher the price, the greater the quantity supplied. Perhaps the current price is not high enough to justify opening that production line. But why not?
Don’t forget that we have been told not to use masks because the hospitals are short of masks. So why doesn’t the price go up enough to open the line?
IronSig
May 13 2020 at 6:38am
There’s also the difference between the January and the April labor markets and materials to consider. We could oversimplify and say that masks were in high demand for all of 2020. However, it’s very plausible that it would have been cheaper to hire workers and bid on materials for the mask assembly line in January than today.
Thomas Hutcheson
May 10 2020 at 5:16pm
You do not report on anyone arguing for “big government.”
“Big government” and “price gouging laws” do not seem to be involved in the mask production given as an example. Why did the firm think that the one government agency was the only buyer? What about hospitals or state governments or export markets?
Scott Sumner
May 10 2020 at 9:37pm
I see lots of arguments that “there are no libertarians in a pandemic”.
Mark Bahner
May 10 2020 at 10:25pm
The firm did not assume the U.S. federal government was the only buyer. That was the whole point of Bowen’s email wherein he said:
JFA
May 11 2020 at 6:16am
See my link below on price gouging lawsuits in relation to mask production.
JFA
May 11 2020 at 6:42am
Here’s another article that suggests there was lots of pressure for 3M to crack down on accurate price signals from distributors: https://theintercept.com/2020/04/01/coronavirus-3m-n95-masks-price-gouging/
Regarding export markets: “Although the 1860 N95 masks should cost $1.27 each, according to a price list 3M issued yesterday, the Canadian dealer was charging more than $7 per mask. But the jacked-up price isn’t what killed the deal. Even the major hospital chains were desperate enough to spend the money. Instead, the group’s purchase began to fall apart when the dealer said that the Canadian military had seized 10 million of the masks and then insisted that the group not only commit to buying the remaining 20 million masks but also to five additional monthly purchases of 20 million masks, totaling $140 million.”
If the other governments in the world won’t allow accurate price signals, export markets are not a solution. There has also been the all hoopla over the ban on mask exports, which has somewhat subsided but certainly doesn’t inspire one to pay a huge fixed cost to get manufacturing lines running again.
Here’s another article describing the seizure of masks in California after the business provided an accurate price signal: https://www.redding.com/story/news/local/2020/04/01/da-1-000-n-95-masks-priced-5-each-seized-red-bluff-store/5108313002/
JFA
May 10 2020 at 7:05pm
Here’s an example of why this isn’t a social norms induced problem: https://www.google.com/amp/s/www.voanews.com/science-health/coronavirus-outbreak/experts-warn-new-round-price-gouging-masks%3Famp.
“If you’re sitting on a warehouse with masks, surgical masks, you’ll be hearing a knock on your door,” Attorney General William Barr said at a White House press briefing on March 23.
On March 26, Texas Attorney General Ken Paxton sued Auctions Unlimited for price gouging after the auctioneer listed more than 750,000 masks for auction, allowing bidding to rise as high as $180 for a pack of 16 masks — or $11.25 per mask.
Matthias Goergens
May 11 2020 at 5:57am
Wow, suing auctioneers for price gouging is rich.
Matthew Waters
May 10 2020 at 8:09pm
I really dislike these comments, equating lack of state capacity with any sort of state function, anywhere. See this thread for the extraordinary rules South Korea has in place, which are *all* through the government.
https://twitter.com/michaelvkim/status/1258994216409001985?s=19
It’s a cheap shot, sure, but between Trump and some Republican governors, the saying looks really true: “Republicans say that government is terrible at its job. Then they’re elected and prove themselves right.”
I generally dislike price gouging laws for natural disaster disruptions, but price gouging for masks is different because the government is paying for most of the masks. If hospitals buy masks, then they’re pseudo-government purchases. Almost all hospital revenue has very heavy government subsidization.
Scott Sumner
May 10 2020 at 9:39pm
I don’t see why the government’s role in purchasing would affect the desirability of price gouging laws. The government has an interest in there being no shortage of masks for hospital use.
Nick
May 11 2020 at 12:54am
And I really dislike apologism for government incompetence, blaming it on lack of state capacity. That’s automatically giving government a free pass. Nothing about this is uniquely Republican. It would have happened regardless of the administration. Diverting the blame onto supporters of small government is a really dishonorable thing to do. I’d recommend that supporters of government action own up the incompetence and come out clean, that governments aren’t flexible, work on emotional impulses instead of objectivity and there’s no clear signaling mechanism, unlike a market, to indicate the average citizen’s preferences.
Whatever the market’s faults are, there is no question that governments are inferior to them in almost every single way.
Mark Z
May 11 2020 at 1:06am
Why would a supply curve not slope upward for a good just because the government has a monopsony on it? And I suspect most hospital systems’ decisions regarding PPE purchases are not determined from on high by the president or governor. Trump’s imbecility isn’t a blank check to excuse the failures of ‘public servants’ all the way down the line, contrary to popular wisdom it seems.
Fred_in_PA
May 11 2020 at 4:41pm
It is unfortunate that the last paragraph (on Rick Bright’s transfer/demotion) appears here. It appears to be a out of place, as Bright’s statement made no direct reference to the Bowen mask offer. It is thus a distraction from the post’s discussion of price & supply.
Michael Pettengill
May 12 2020 at 7:15am
So, taxpayers should pay high rents to speculators who control distribution channels?
Or should government let the free market rationing divert intentionally limited supply, ie, PPE factories in the US were intentionally closed and scraped, so high income people get PPEs and low income people don’t, like nursing homes, home health care workers, low income health clinics, bus drivers, factory workers, cleaners?
After all, the “unskilled” lower class workers never intersect with the wealthy classes, so who cares if they die.
Factory owners can not be charged with price gouging if the high price per unit is to pay for new capital. Ie, a 1 year contract for a hundred million PPE would require building a lot of capital really fast, paying workers premiums to work 24×7, etc, and also paying operators to work lots of overtime. And given the mere 1 year contract, the price needs to pay to build the factory, because who knows whether the factory will have any value after a year.
But a broker buying all the output for 7 cents each and selling them for $1.07 to taxpayers is not increasing production capacity.
Note, the existing PPE is penny wise, pound foolish. The US factories shutting down is proof the US has lost innovation in so many areas. If an immigrant, say a Hamdi Ulukaya, had bought a scrapped factory, he would have developed a premium product so at prices low enough to take over half the market, like Chobani has taken over, and grown yogurt markets. Better would be reusable, longer wear, or similar for basically the same price. Or completely redesigned. By focusing on cost cutting, the existing produce was made worse relative to what technology advance makes possible.
Ricky
May 25 2020 at 12:33am
U.S. factories are shutting down, because of cheap labor. It has nothing to do with innovation.
I’ve been a business owner for 34 years, and I moved my factory to China a decade ago so I would not have to pay $25 dollars an hour (not including mandatory health care) for the same quality work.
Mr. Trump has a very difficult time communicating effectively, but his analysis of the current situation is 100% correct. I’m paying $10 an hour right now. If tariffs cost production to increase to about $20, I’d bring my factory back to the states, or move it to a greener pasture like Vietnam.
So from a business perspective, you are simply wrong. I moved for profit, like everyone else. We are still innovating, we are just employing Chinese, not Americans. Why would I hire an American for twice the price?
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