The Fragility of Efficiency and the Coronavirus
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I heard a story recently about 3M (h/t: frequent commenter Boonton). Supposedly, back during the SARS outbreak they decided they should build in some “surge capacity” around the construction of N95 masks. Enough additional capacity that they could double their production at a moment's notice. It was unclear if they actually did that or if they were just thinking about it. And even if they had, it appears that the scope of the current crisis is great enough that it’s not as if this one decision would have dramatically altered the outcome. Still it’s hard to dispute that it would have helped.
The question which immediately suggests itself is how would the market have treated this development? In fact imagine that there were two companies, one who took some portion of their profits and plowed them back into various measures which would help in the event of a crisis and one that didn’t. How do you imagine that the stock market and investors would price these two companies? I’m reasonably certain that the latter, the one who took the profits and disbursed them as dividends, or found some other use for them, would end up with a higher valuation, all else being equal. In other words I would very much expect Wall Street to have punished 3M for this foresight, particularly over a sufficiently long time horizon where there were no additional epidemics, but even in the few years between doing it and needing it.
What this story illustrates is that attempts to maximize the efficiency of an economic system also have the effect of increasing and possibly maximizing the fragility as well. And while, in general, I don’t have much to say about the Coronavirus which hasn’t been said already and better by someone else. I do think that this may be one of the few areas where not enough has been said already and where I might, in fact, have something useful to add to the discussion.
To begin, I want to turn from examining the world we have to looking at the world we wished we had, at least with respect to the virus. And as long as we’re already on the subject of masks we might as well continue in this vein.
As the pandemic progresses one of the big things people are noticing is the difference in the number of infections between the various countries. In particular South Korea, Japan and Taiwan have done much better than places like Italy and Spain. There are of course a number of reasons for why this might be, but there’s increasing anecdotal evidence indicating that the availability of masks might be one part of the equation.
For example, Taiwan is very closely connected to China, and one might expect that they would have gotten the virus quite early. Probably before people really understood what was going on, but definitely well before the recent policies of social distancing really started to be implemented to say nothing of a full on quarantine, and yet somehow, they only have 235 infections, which as of this writing puts them below Utah!
There are of course numerous reasons for why this might be, but I’m more and more inclined to believe that one big factor is that Taiwan is a mask producing juggernaut. In fact as recently as a few days ago they pledged to send 100,000 masks a week to us. They can make this gesture (and I know 100k is actually just a drop in the bucket) because they’re currently producing 10 million masks a day! For a country that only has 24 million people. Meaning that while that won’t quite cover one mask per day per person it’s enough that if people avoid leaving the house unnecessarily and if some masks can be reused they have enough for everyone to be wearing one at all times when they’re out of doors.
South Korea is similar and the big challenge there was not that they weren’t producing enough masks, but to stop exporting the masks they were already making. Finally reports out of Japan indicate that about 95% of people are wearing masks. But more importantly reports were that even before the pandemic around 30-40% were wearing masks just as a matter of habit. Is it possible that this slowed things down enough to allow them to get on top of it once the true scale of the crisis was apparent?
As I was writing this post I did some research on the topic, but before the post was finished Scott Alexander of Slate Star Codex came along, as he frequently does, and released Face Masks: Much More Than You Wanted to Know which is a very thorough examination of the mask question. What he found mostly supports my point, and in particular this story was fascinating:
Some people with swine flu travelled on a plane from New York to China, and many fellow passengers got infected. Some researchers looked at whether passengers who wore masks throughout the flight stayed healthier. The answer was very much yes. They were able to track down 9 people who got sick on the flight and 32 who didn’t. 0% of the sick passengers wore masks, compared to 47% of the healthy passengers. Another way to look at that is that 0% of mask-wearers got sick, but 35% of non-wearers did. This was a significant difference, and of obvious applicability to the current question.
On the other hand, when we turn to the US and Europe, in contrast to Southeast Asia, there is definitely not a culture of mask-wearing and even if there had been, most of those countries apparently imported masks from places like Taiwan and China (a point I’ll return to) meaning that when those countries stopped exporting masks there were even fewer available here, enough that people started worrying about not having even enough for the healthcare providers. Once this problem became apparent various authorities started telling people that masks were ineffective. A policy which has since been called out for not merely being wrong, but contradictory, counterproductive and undermining trust in the authorities at a time when they needed it most.
For most people, myself included, it’s just common sense that wearing a mask helps, the only question is how much? Based on evidence out of the countries just mentioned, and the SSC post I would venture to say that they help quite a bit. Also they’re cheap. Particularly when weighed against the eventual cost of this pandemic.
We’ve all learned many new things since the pandemic began, one of the things I didn’t realize was how bad the SARS epidemic was and how much the current precautions and behavior of the Southeast Asian countries is based on lessons learned during that epidemic. And while it’s understandable that I might have missed that (particularly since I didn’t start blogging until 2016) the CDC and the federal government on the other hand should have been paying very close attention. In fact, you would have expected that they might have taken some precautions in case something like that happened again or worse, started in the US. (Though to be fair, we don’t have wet markets, if that is where it started. As if we didn’t already have enough conspiracy theories.) Instead the US Government’s response has been borderline criminal. (Other people have done a much better job of talking about this than I could, but if you’re interested in a fairly short podcast just about the delay of testing that avoids sensational accusations, check out this Planet Money episode.)
To continue using the example of masks, I think it’s worth asking what it would have taken for the government to have a one month supply for every single person in the country. Stockpiled against a potential pandemic. According to this Wired article, before the pandemic 100 disposable masks were going for $3.75, let’s be conservative and round up and say that masks cost 4 cents a piece. From there the math is straightforward: 330 million people X 30 days X $0.04, is ~$400 million dollars, or 3% of the CDCs budget, or less than what the federal government spends in an hour. Still, I’ll agree, that’s a fair amount of money. But remember that’s the absolute maximum it would cost. I’d actually be surprised if once you factored in the huge economy of scale that we couldn’t do it for a 10th of that or even a 20th of that. And it would presumably have been cheaper still to just buy the necessary machinery for making masks and then mothball it, with a “break in case of emergency” sign on the door. Once you factor in all the potential cost savings, it’s hard to imagine that this would have cost more than $25 million (in fact if the government wants to offer me a $25 million contract to make it happen for next time I would be happy to take it.) And when you consider that it’s probably going to end up costing the US over a trillion dollars, plus the expected odds of something like this happening, you start to wonder why on earth they didn’t do this and countless other things that might have come in handy. (A strategic toilet paper reserve? I’m just saying.)
When you consider all of the budgetary cuts that were proposed for the CDC, which have emerged in the wake of the pandemic, and which generally involved only tens of millions of dollars, it seems unlikely that even $25 million would be allocated just for masks, but why is that? With a federal budget of $3.8 trillion why are we so concerned about $25 million? (It’s the equivalent of worrying about $25 when you make $3.8 million a year.) I understand people who are opposed to government spending, heck I’m one of them, but this also seems like one of those classic cases where people balk at spending anything to prevent a crisis, while somehow simultaneously being willing to bury the problem in a giant mountain of money once the crisis actually hits. It would be one thing if we refused to spend the money regardless of the circumstances, but if recent financial news is any indication we’re obviously willing to spend whatever it takes, just not in any precautionary way. (Somewhat related, my post from very early in the history of the blog about the Sack of Baghdad. Whatever the federal government and the CDC were doing in the months leading up to this, it was the wrong thing.)
One assumes that this desire to cut funds from even an agency like the CDC, where budgets are tiny to begin with, and where, additionally, the cost of failure is so large, must also come from the drive for efficiency we already mentioned or it’s modern bureaucratic equivalent. Which I understand, and to an extent agree with. We shouldn’t waste money, whether it’s taxpayer money or not. But given the massive potential cost of a pandemic, even if one never emerged, it seems clear that this spending wouldn’t have been a waste. But how do we get to there from here? How do we make sure this drive to save money and increase efficiency doesn’t create priorities which are so lean that they can’t spare any thought for the future. How do we avoid punishing companies who exercise foresight, like the example of 3M? Or how do we ensure that governmental agencies are making reasonable cost benefit calculations which take into account the enormous expense of future calamities, and then taking straightforward precautions to prevent or at least mitigate those calamities?
One of the most obvious potential solutions, but the one that seems to generate the greatest amount of opposition, is the idea of increasing the price of items like masks during periods of increased demands. Or what most people call “price gouging”. Let’s return to the story of 3M and imagine that instead of price gouging being universally frowned on, that instead it was widely understood and accepted that if there was an emergency 3M was not only allowed, but expected to charge 10 times as much for masks. In that case they’re not just hoping to help people out when the calamity comes, they’re also hoping to make a profit. This is in line with the generally accepted function of business, and presumably stockholders might reward them for their foresight, rather than punish them for not being “efficient” enough. In any case maintaining a surge capacity for mask production would be a gamble they’d be more willing to take.
Notice I said 3M, which is different from people buying up thousands of masks and then reselling them on Amazon. As a generalizable principle, if we were going to do this, I would say that people should be able to raise prices for goods they control as soon as they think they see a spike in demand. So if someone had started stocking up on masks at the first of the year before anyone realized what was going to happen then they ought to be able to sell them later for whatever they think the market would bear. This early buying would have been a valuable signal of what was about to happen. But once the demand is obvious to everyone then 3M should raise their prices (and profit from the foresight of building a second production line) and Costco (or whoever) should raise their prices. I understand that this is not what happens, and that it’s not likely to happen, but if you want a market based approach to this particular problem, this is it.
A governmental solution mostly involves doing the things I already mentioned, like relying on the government to stockpile masks, or to proactively spend money to prevent large calamities. Though you may be wondering how subsidiarity, the principle that issues should be handled at the lowest possible level, factors into things. Clearly state or even local governments could also stockpile masks, or give tax incentives to people for maintaining spare capacity in the manufacture of certain emergency supplies. But as far as I can tell subsidiarity was long ago sacrificed to the very efficiency we’ve been talking about, and thus far I’ve seen no evidence of one state being more prepared than another. Though speaking of tax subsidies, it’s easy to imagine a hybrid solution that involves both the public and private sectors. 3M would have faced a different choice if the government had offered a tax credit for building and maintaining surge capacity in mask construction.
You could also imagine that greater exercise of anti-monopolistic powers might have helped. If you have ten companies in a given sector, rather than one or two you’re more likely to have one company that bets differently, and maybe that bet will be the one that pays off. Additionally globalization has also been a big topic of conversation, and was one of the first effects people noticed about the pandemic. Hardware companies were announcing delays for all of their products because they are all built in China. But we also saw this in our discussion of masks. Most of the mask production also appeared to be in Southeast Asia, and once they decided they needed the masks locally the rest of the world was caught flat-footed. Of course, economists hate the sort of tariffs which would be required to rectify this situation, or even improve it much, and they also mostly hate the idea of breaking up monopolies, but that’s because their primary metric is efficiency and as I’ve been saying from the beginning, efficiency is fragile.
Before moving on, two other things that don’t quite fit anywhere else. First, doesn’t it feel like there should be a lot of “surge capacity” or room to take precautions, or just slack in the modern world? Somehow we’ve contrived a system where there’s basically a car and television for every man, woman and child in America (276.1 and 285 million respectively vs. a population of 327.2 million) but somehow when a real crisis comes we don’t have enough spare capacity to do even as much as nations like Taiwan, Japan and South Korea? As I’ve already suggested, there are obvious difficulties, but doesn’t it feel like we should be wiser and better prepared than we have been in spite of all that?
Second, am I the only one who would have felt a lot better about the huge stimulus package if we weren’t already running a deficit of $984 billion dollars in 2019? This, despite supposedly having a great economy for the last few years? In any rational system you build up reserves during the good years that you can then draw on during the bad years. That does not appear to be what we’re doing at all. I hope the MMT advocates are right and the size of the US government debt doesn’t matter, because if it matters even a little bit then at some point we’re in a huge amount of trouble.
Which brings us back to our topic. If, as I’m claiming, all of the modern methods are unworkable, we might ask what have people done traditionally, and the answer for most of human history would involve families, and to a lesser extent tribes, along with religious groups. And I suspect that there are quite a few people who are gaining a greater appreciation for family at this very moment. In my own case, I have deep stocks of many things, but toilet paper was not one of them (an obvious oversight on my part). As it turns out my mother-in-law has a ton (not from hoarding) and so rather than show up at Costco at 7 am, or buy it on the black market I can just get it from her. And if she hadn’t been able to help me I’m sure that my religious community would have. (Just to be clear I still haven’t burned through the TP I had on stock at the beginning of things, I’m just laying the groundwork to make sure I don’t get caught flat footed.) This whole story is an account of surge capacity. Though it may not look like it at first glance. But think of it this way, when you need help, having a single child that lives on the other side of the country doesn’t do you much good, but when you have five kids, three of whom live close by, you have four times as many resources to draw on in a crisis, and potentially six times as many depending on what you need.
Going even deeper, friend of the blog Mark wrote a post over on his blog which I keep thinking about, particularly in relation to the current topic. He talks about redundancy, fragility and efficiency as it relates to biological processes. In other words, how does life solve this problem? He gives the example of building a bridge and compares how an engineer would do it versus how a biological process would. While the engineer definitely wants to make sure that his bridge can bear a significantly greater load than whatever they judge to be the maximum, beyond that his primary goal is the same as everyone else in the modern world: efficiency. The biological process, on the other hand, would probably build a bridge made up of dozens of overlapping bridges, and it might cover the entire river rather than just one stretch of it. In other words from an engineering perspective it would be massively overbuilt. Why is that? Because life has been around for an awfully long time, and over the long run efficiency is the opposite of what you’re striving for. Efficiency equals fragility which, as we’re finding to our great sorrow, equals death.
I suspect that some of you are either already suffering financial difficulties as a result of the pandemic or that you will be soon, so rather than ask for donations, let me rather make an offer of communication. If anyone needs someone to chat with feel free to email me. It’s “we are not saved at gmail”. I promise I’ll respond.