State Capacity as the Next Revolution

I want to recommend this article in Jacobin by Leigh Phillips that offers an explanation for different successes at coping with the pandemic in different parts of the world. It comes down to what LP calls state capacity, or lack thereof, what is also called industrial policy.

A popular treatment of this issue can be found in Michael Lewis’s “The Fifth Risk.” It’s a page-turner for policy wonks. I tore through it in two days. The accounts pertaining to nuclear weapons and waste are scary as hell.

Phillips’s point of departure is Canada, home of glistening, universal, single-payer health care and utter laggard in its pace of vaccination. Canada lacks any domestic means of production for vaccines, the result of its few firms being gobbled up by global corporations over the years, much as rapacious private equity operates today. Its conservative and liberal parties embraced the global turn towards feeling that markets, rather than governments, would fix problems. (From the U.S. standpoint, the Canadian Liberal Party is not unlike the Rockefeller Republicans of days gone by.)

One of the problems is that vaccine production is not very profitable, especially in smaller countries like Canada that lack mass markets. I would venture to add that the public health urgency of vaccination against epidemics drives down the prices governments permit companies to charge, and there are no repeat customers. By contrast, drugs for chronic conditions are the gifts that keep on giving.

Canadian Prime Minister Trudeau’s fumbling efforts to start up a vaccine industry have been hampered by self-imposed nostrums about privatization. LP doesn’t mention it, but this tale reminded me of the debacle of England’s transit privatization, chronicled in a report for the Economic Policy Institute by Elliott Sclar of Columbia University that I edited twenty years ago.

The other sick man of the West is the European Union, also the home of vaunted public health insurance systems. Here too the vaccination rates, as well as public willingness to be vaccinated, are dismal.

It turns out that a public health system has to be propelled towards providing for public health, in terms of being prepared for and dealing with epidemics. It doesn’t happen automatically. Otherwise it devolves to focusing on the routine but no less pressing need to treat people who are sick today.

For me, the most interesting idea here is that the formation of the EU ‘superstate’ entailed an actual reduction in the power of the public sector, not to mention democratic accountability. Although a friend advises me that the EU began as a social-democratic project, not the EU is more about suppressing public initiative in its members, for the sake of privatization, than about concentrating affirmative power – the ability to do things that alter market outcomes – in itself. This has been painfully clear as far as fiscal policy goes: the E.U. has none, as well as in its sado-monetarist central bank.

In the literature on “fiscal federalism” in the U.S., the traditional view was that state centralization entailed state expansion. An analysis along these lines was promulgated by my old adviser, the late Professor Wallace Oates. Cases where a central government held back its member jurisdictions were thought of as aberrations with the term of art “pre-emption.” It was fun to cite cases where Republicans violated their own “government is best that governs least” code for the sake of ideological preferences. An old example was conditioning transportation grant funds on state governments drug-testing truck drivers.

The U.S. and the U.K. have done a lot wrong, but one thing they did right was gin up the development and production of vaccines. For this reason, as LP notes, Matt Bruenig tweeted that the new U.S. R&D vaccine capacity could make Donald Trump the greatest president in history, which is both wicked and hilarious. The progress on vaccines is a case of the selective application of industrial policy, ordinarily reserved for times of war. (Arguably, climate change requires an equally intense effort, on a much larger scale.)

In the U.S., the Defense Production Act is the legal framework that permits the Federal government to redirect the means of production. The government can order factories to be opened, supply to be redirected, corporations to collaborate.

The success in one particular field – vaccine development and production – has sadly not been replicated in pandemic-related functions, such as being able to detect the onset of contagious disease, trace those who carry the disease, produce and distribute protective gear to the health care sector for the safety of workers engaged in caring for the infected, and until this year, distributing vaccines. In this sense, the abandonment of initiative to the market, or to nobody at all, is manifest and egregious.

The great contrast is East Asia, where the virus is mostly a memory, even though little vaccination has been implemented. It could be tempting to suppose that in totalitarian China, behavior to reduce incidence of the virus is easy to regulate, but the fact is that in democratic Asian nations, such as South Korea or Taiwan (sorry, CCP), the pandemic has been similarly eliminated. Though celebrated by the less-informed as a triumph for capitalist markets, the truth is that these nations, democratic or otherwise, conduct vigorous industrial policy.

LP notes a challenge for the Left, I would say in the U.S. in particular, is to get beyond welfarist limits to public policy, Medicare For All, free college, and the like, as well as labor market regulation focused on wages and union rights. All those things are essential, but the virus demonstrates, with a vengeance, that the nation needs a public sector with a more interventionist role in the economy. The specter of climate change ought to convince everybody of this. I tried to get into it in my paper on public investment, in terms of the neglected place of public enterprise.

Oddly enough, the sort of slogans in favor of workers’ control on the U.S. left are usually bereft of content. What we need are politically tenable counterparts to the sort of policies that got citizens of the U.S. and U.K. a fistful of working Covid-19 vaccines in record time, under the leadership of no less than Donald J. Trump and of Boris Johnson.

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