Somehow all of the activities seem to get coordinated. There’s a taxi to get you to the airport. There’s butter and cheese for lunch on the airplane. There are refineries to make the airplane fuel and trucks to transport it, cement for the runways, electricity for the escalators, and, most important of all, passengers who want to fly where the airplanes are going.2
It is a miracle and we should appreciate it as such. The problem is that it doesn’t always get the job done.
When the job to be done is urgent and resources need to be reallocated quickly, the system can gum up. The issue is not markets per se but the problems of relying on a decentralized process whereby everyone allocates the resources they control on the basis of their own information and preferences. Indeed, the problem we face in a time of war (or pandemic) is that resources, currently controlled by individuals, all need to be applied to a new end, and the task of convincing everyone to choose to do so is unlikely to work out well.
This notion was captured in a 1990 paper by economists Patrick Bolton and Joe Farrell.3 Imagine a situation where we need one factory to produce face masks and another to produce ventilators, but we don’t know which will be able to do each task at the lowest cost. In a market economy, each factory owner might look at the situation and try to work out what to do. One option is that they both jump in and start producing the product they think they will provide most efficiently. They retool for that purpose, but there is a chance that they will end up both choosing the same thing and we will end up with too many face masks and too few ventilators or vice versa. Another option is to wait and see what the other factory chooses to do and then do the opposite. But in this world, we have both factories waiting to see what happens and there is a consequent delay. In other words, decentralization either will not get the job done or will cause it to be delayed.
The alternative is for someone to choose who does what. This is the role of central coordination. This prevents both duplication and delay but opens up another problem: the government may make the wrong choice. The factories may end up producing both goods at a higher cost than otherwise. At times of crisis, however, we do not let the perfect be the enemy of the good and so comfortably resort to centralized resource allocation and bear the potential productive inefficiency.4
There are three areas where in the COVID-19 pandemic, market processes have been abandoned in favor of centralized coordination and control. These include the mobilization of resources to dramatically expand healthcare system capacity, the institution of price controls for certain important goods and services, and the use of blanket restrictions on movement of people. Each of these will be discussed in turn.
Surfing the Curve
The initial responses from governments to the pandemic were to institute progressively strong forms of social distancing in the hope of reducing R0 (the number of people infected people themselves infect). Those responses had the goal of what came to be known as “flattening the curve.” In a scenario where this needs to be done once, this involved a scenario such as depicted in figure 3.1. The task was not so much to reduce the total number who became infected but to spread them out over time to economize on healthcare system resources.
Figure 3.1
Flattening the curve.
The problem is determining how flat we need to go. The flatter the goal, the harder it is to achieve and, moreover, the greater are the consequent costs of prolonged economic harm, social isolation, and the possibilities that there could be a subsequent reemergence of the pandemic, causing us to do it over again.
The healthcare system capacity is likely much lower than the diagram is showing beyond what flattening the curve can actually achieve. This differs by country. Japan has 13 beds per 1,000 people, while the United States has fewer than three beds per 1,000. And this is just one statistic. There are large national differences in key inputs such as ICU beds, ventilators, hospital protective equipment, and healthcare workers. Nonetheless, in most cases, it is clear that policies aimed at reducing R0 have happened too late to prevent healthcare system capacity from being reached. In Italy, doctors are having to make heart-breaking triage decisions to determine which patients would get scarce resources. From an economics perspective, the demand on healthcare resources was going to far outstrip supply. What is more, there was no prospect or desire to use higher prices to deal with the shortage. As Keynes noted for World War II, a plan for rationing was required but no plan was being formulated.
Given this, it is somewhat surprising that more has not been done to dramatically increase the capacity of the healthcare system. It is a policy option that both reduces the cost of overwhelmed capacity and reduces the amount of flatness of the curve and its associated costs. In March 2020, calls are being made for more ventilators and other equipment.5 Most countries had not done what China had done earlier in Wuhan by building entirely new hospitals in just over a week. Everyone marveled at this. I heard: “Wow, we can’t do that.” And this was mostly from the healthcare industry whose basic message for years was how hard it was to provide more. They have had expansion beaten out of them by years of a scarcity mindset.
While flattening the curve can take place and reduce the required capacity expansion, what is required is to surf the curve (see figure 3.2). In this situation, healthcare system capacity would be temporarily expanded so as to cover the unflattened portion of the curve.
Figure 3.2
Surfing the curve.
Building out that capacity requires a new mindset and requires it quickly. The nature of the problem was obvious on the ground. The following are the words of Dr. Daniel Horn (a physician at Massachusetts General Hospital in Boston):
In the face of a global shortage, American industries can step up and quickly produce ventilators. All week, I have been receiving text messages and emails that say things like “By the way, my company makes parts for G.E. ventilators. We just got a big order that we are pushing through as fast as we can.” The General Motors chief executive, Mary T. Barra, announced that G.M. was working closely with Ventec Life Systems, one of a few ventilator companies based in the U.S., to rapidly scale up production of their critically important respiratory products. My colleagues at the nation’s top hospitals are getting phone calls from tech leaders asking for ventilator specs.
Such stories give me hope. But we need the federal government, too.… We need a plan.6
Sound familiar? This is precisely the coordination problem as outlined by Bolton and Farrell. Hospitals alone cannot procure what they need. Some factories can make some parts better than others. And then there is the issue of which hospitals to send them to. There has been little information present, and, in the United States, despite having the powers to do so, no central action has been taken.
This has highlighted the need for a war-like resource allocation mindset. Someone is needed to take control, and, when it came to fast and rapid capacity of healthcare, most countries have an obvious candidate: the military. Mobile Army Surgical Hospitals (or MASH), as portrayed in the TV show, are a part of the armed forces; they just had to be moved to civilian ends. In some countries, this happened with the military preparing and/or building facilities, for example, in Switzerland, Colombia, the Netherlands, Italy, and France. The United States has also redirected hospital ships to California and New York to handle patients with other conditions who might be pushed out of those systems.