- Interview by
- Zephyr Teachout
Shocks expose the strength of a system, or its weaknesses. With the threat of a global pandemic, the fault lines in our health-care system and our broader economy are becoming clearer.
While I was, throughout January and early February, ignoring the coronavirus and telling people not to get panicked, I noticed that Matt Stoller, the author of the recent book Goliath: The 100-Year War Between Monopoly Power and Democracy, was constantly bringing it up, suggesting that it could upend the world as we know it and that we should stop making political predictions without taking into account the impact of a pandemic.
And so, when the stock market started crashing, I called Stoller. We had a wide-ranging conversation that quickly led to how the Chicago School consumer welfare paradigm — which posits that the only reason a monopoly should ever be considered harmful is if it raises prices and harms consumers — is making all of us less safe this year, and how we should rethink industrial policy around ideas like productive capacity.
For Stoller, the coronavirus is deadly not just because of its infectiousness, but because of the way we have spent forty years — since Ronald Reagan — building a system that is designed to pay out big profits to financiers, and that is fragile and capable of quick collapse.
His big message to the Left is that we need to get ahead of the crisis through rewriting the rules of financial markets and making major investments in domestic manufacturing capacity. The coronavirus, he argues, is making the argument for antitrust — single sources of supply for all kinds of suddenly essential medical needs are leading to shortages and could cause huge price jumps.
In other words, the coronavirus is exposing a major foundational myth at the heart of Chicago School thinking: that efficiency, maximalist free trade policy, and the consumer welfare standard are stable systems. All lead to short term profits and long term risk. We should replace those with a more diverse and stable set of economic values: redundancy in supply chains, diversity in production locations, productive capacity, and universal programs.
And because this pandemic is serious — and won’t be the last — we need to act quickly.
You’ve said that Donald Trump’s response is disastrous, but you’ve also been critical of Democrats. What is the main thing people are missing in response to the coronavirus?
Well, I think that the basic problem is that we don’t have people in power that really understand risk. And they don’t understand production, the physical reality of our world.
Before the coronavirus, about a hundred drugs were in shortage in the United States. The reason is because we have consolidated our suppliers.
We have had a whole series of shortages throughout the economy that have kind of been masked for quite a while. So when there was a hurricane in Puerto Rico, because we’ve placed all our production of saline solution in Puerto Rico, we had shortages of saline solution in hospitals all over the country. When [Hurricane] Sandy hit New York, we didn’t have enough safety ladders, so it took like longer to repair. And New York almost ran out of food after Sandy.
When there was an earthquake in Taiwan in 1998, we saw microchip shortages that go into products from toys to automobiles all over the world.
So we’ve been seeing what are effectively industrial supply shocks for about twenty-five years, but they’ve never really hit in force — just like we had financial crises in the 1970s and 1980s, but that didn’t really hit in force until 2008.
I think I am still missing some steps connecting the pandemic to nonmedical supply-chain disruptions. What I understand is that under most projections, COVID-19 is going to become basically universal. If it is universal, why would it then have an impact on supply chains?
The coronavirus may become endemic to the population, like the flu. But you have to use quarantines. The quarantine policy doesn’t stop the virus from hitting everyone, but it is necessary to stop the virus from hitting everyone at the same time. A medical system that has to handle 5 million people who need intensive care is going to be overwhelmed, and only 100,000 people are going to be able to get intensive care, so lots of people are going to die unnecessarily, right?
So the reason you’re trying to slow the spread is so you can slow the distribution, the load on the health-care system.
It’s important that there be a lot of different sources of supply of important inputs. If you have fifty companies, each of which runs a factory, then you’re going to have each CEO of these companies have to pay a lot of attention to their factory. Nobody ever washed a rented car, right? With these very consolidated supply chains, it’s absentee ownership on a massive scale, and it’s a huge problem.
So we need more redundancy and competition, and we need massive domestic production.
I put the necessary response from the government into four buckets:
The first bucket is immediate pandemic response, which would be things like getting the testing going as quickly as possible. Make sure it’s free, fully fund the Centers for Disease Control and Prevention (CDC), all that stuff, fund vaccine research.
The second is huge grants to states and cities to deal with social dislocation. The states and the cities are going to be the ones that are making sure there’s food distribution, making sure there aren’t social breakdowns, and they need money and they need support. So just putting a bunch of money into their hands.
Number three, you need small business support, because basically a lot of small businesses have weak balance sheets, and they’ll just go under as the economy slows, so you need to have financing available for them.
And four, you need to address the supply chain problem. You need investigators to go in and try to understand the supply chain bottlenecks, and then you need something like the bailout or the Reconstruction Finance Corporation in the 1930s, which finances new sources of supply or finds ways of getting other sources of supply. Part of the investigation is to figure out rationing or close substitutes. And part of it is just to build as quickly as possible sources of domestic supply.
So how do you take these supply chain issues and connect that to federal trade policy, to NAFTA (the North American Free Trade Agreement), for example?
Legislators in the 1990s and 2000s implemented a whole set of policies that led us to pool risk in hidden ways throughout our supply chains. Deregulation led us to pull risk off balance sheets for banks.
And NAFTA was an important part of that, because NAFTA makes it easier to move factories away from where they produce goods for. So a factory in Cleveland is making medicine for people in Cleveland — but if you move it to Mexico, it’s less resilient, because it’s harder to get stuff from Mexico to Cleveland.
The reason we’ve killed a lot of our redundancy in supply is because of the power buyers — like Walmart — across the economy. In the medical sector, it’s not Walmart, it’s what are called “group purchasing organizations” (GPOs), which are basically hotel or hospital cartels that buy medical supplies. And then there are also GPOs for drugs. Because there’s only three or four of them, they squeeze the supplier so aggressively that there’s no margin in making generic pharmaceuticals or medical supplies.
So you see the creation of power sellers, and often, to eke out as much margin as possible, they will move supply chains to China.
So we need to have critical manufacturing capacity quickly built in the United States so that when there is a shock to the system in China or elsewhere, we can survive that shock. What would that look like?
It’s not just tweaking trade policy, or doing some antitrust, or doing some federal spending. You need all of the above. You need another New Deal.
We also need a financial system that underwrites productive economic activity. Right now, our financial system finances private equity guys to go and loot factories. And that’s crazy.
We need to have a financial system based on lending to people who are going to do interesting and useful things. And that’s going to require a whole revamp.
So I can already anticipate the smoke coming out of your ears when I ask this, but it’s important: won’t people say that the markets can take care of that themselves — that now we have a pandemic, we will see money flow to manufacturing in the United States?
The underpinning all of our policy framework, everything from trade to regulations to antitrust, is this notion of consumer welfare and efficiency. We’ve focused on making sure that we have cheap consumables in every sector. And the antitrust people have always said that the law protects competition, not competitors: How does that improve consumer prices? They have really looked down on the idea that producers have rights.
And that’s true in the trading world, too, right? If you can’t compete against China, that’s your own problem, and if China wants to subsidize their own steel manufacturers, great. That attitude treats all this productive capacity as irrelevant — the only thing that matters is what we can consume immediately tomorrow.
That whole philosophical framework, we’ve got to chuck it. We should replace it with a more balanced approach that looks at productive capacity.
You can see this if you think about labor monopsony power, where companies are consolidating a market over labor. This is a power buyer issue, and that should be a red flag that you’re destroying capacity. And if our antitrust enforcers had been looking at the capacity to gain power over suppliers instead of just consumer prices, then our antitrust enforcers would have recognized that we’re seeing consolidation on the buying side. There were red flags all over the place.
So we can’t just keep the same legal framework and ask the market to adjust, even with a major subsidized manufacturing push.
I’ll put it this way: private equity is a bunch of arsonists, and they’re going around and burning things down. And what we’re saying is we need to be rebuilding things. But we also need to stop those people from burning everything down.
So yes, you can put together a plan, and you can finance the rebuilding of things. But if you don’t stop the arsonist, they’re just going to burn it down again. Indeed, we should invest a lot in manufacturing. But even if we were able to do that competently, unless we get rid of this framework that says short-term consumption is the only thing that matters and productive capacity is irrelevant, they’ll just do the same thing over again.
We have to do a lot of industrial policy, a lot of financing. A lot of relearning industrial arts.
How much do you think it’s going to cost?
I think it’s going to cost between $300 and $500 billion. Chuck Schumer proposed $8.5 billion, which is a pittance. Trump said $2.5 billion, which is a joke.
What is that going toward?
That’s going toward pandemic response vaccine development and then supporting small business, the four buckets I laid out earlier, supporting small-business supply chains.
Right now, the Treasury market is screaming for the government to borrow money and spend it. We should be doing that.
And even if you borrow $600 billion and just spend it on grants to cities and states, that’s probably money well spent anyway. This is the kind of thing that’s like the financial crisis, you want to get ahead of it.
You’ve said some very positive things about the Democratic response, but that the scale is just too small.
A lot of our libertarian framework that we’re operating under right now is just going to seem like a joke in a month.
I think democratic socialists are thinking hard, and that’s really important. And the people that are behind Bernie Sanders, and Bernie, understand industrial structures in a fundamental way, because they understand that labor is an important input into making things.
That’s true. When I met him in 1994 explaining his anti-NAFTA vote. it was all about labor.
Regarding the coronavirus, by the way, I’m laying out what I think is a moderate baseline. It’s always possible that this disappears, the weather warms up, and it actually turns out it’s not a big deal. In that case, I would be overjoyed to be wrong. I do not want our supply chains to collapse. My ideal scenario for this is that it is scary but not destructive.
But honestly, I am looking at the Trump administration, and they are just idiots, and it’s really embarrassing. They just put Larry Kudlow on the virus response team with Mike Pence and Steve Mnuchin.
Jon Stokes says that in the twentieth century, pandemic response was about saving lives, and now it’s about saving markets. And that’s just crazy. And I don’t think that’s isolated to the United States. That’s insane, and I don’t think we should tolerate that.