One of the biggest lessons I had reading through WWII industrial mobilization literature is the waffling that goes on in the early days. Companies are happy to pull more shifts, but reluctant to invest in capital expansion should things resolve themselves pretty quickly. That risk aversion is perfectly sensible to the individual business person. Waffling on investment continued for some time until the government stepped in. It’s facilities investment grew from virtually nil in 1940 to nearly two-thirds of the entire economy in 1942.
With that context, I excerpt some of an EconTalk discussion with Megan McArdle about the difficulty suppliers had meeting the shifting demand for toilet paper.
Russ Roberts: The claim is–and I think this is correct–he made two claims: One, to increase the home supply, you can’t just transfer the roles from work to home because the quality is different and the distribution is different. Right? It’s not easy for the people who sell toilet paper to offices to sell it to grocery stores.
Now, I’m a little bit surprised about that. I wouldn’t think that’d be so hard to fix. But, let’s take that as possibly true.
The second problem, of course, is that you want to make more home quality toilet paper, but it’s a big investment. And, if the pandemic problems last for three months or even a year, it’s just not worth it.
And here’s Megan later discussing capital investment for vaccines and N95 masks:
We should have paid them to build more factories. We should have just spent money like it was going out of style.
But we should have done the same thing with N-95 masks, because N-95 masks are extremely effective at preventing you from getting it as well as preventing you from transmitting it. They’re just a much more effective technology. We had a domestic manufacturer here, Prestige America Tech, who could have… ramped up their production more according to early reports, and they didn’t. And, the reason they didn’t was that you had to buy these very expensive machines and they didn’t want to invest in all that capacity and then get stuck with it and get stuck with the cost of it after the pandemic. And so, they produced what they had the machines to make now.
Well, we should’ve just gone in there and said, ‘You know what? We’ll buy you the machines.’ How many can you get? Put them all in, just roll out these masks.
With hindsight, we know that WWII and Covid-19 were big deals. Investment to our minds makes perfect sense. But in the early days it’s hard to tell what the magnitude will be. And for war, an early move to ramp up capital investment is also provocative, like mobilization timetables in the First World War.
I don’t know what the right answers are on this one. But I think there needs to be some clarity about how the mobilization issue will be addressed. What are triggers that start particular phases? For example, long-lead items like facilities and machine tools should receive direct subsidization first. Because that’s nearly a 3 year timeline and doesn’t result in current weapons output, perhaps there’s a relatively low threshold for this action.
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