Trump Is Using the Defense Production Act All Wrong
If we could rapidly increase production of medical masks, public health officials wouldn’t be forced to make this tradeoff between effectiveness and availability. There have been growing calls, from both the left and the right, to use Title I of the Defense Production Act to effectively nationalize the supply chain of critical medical supplies. This piece of Korean War-era legislation grants the president broad authority to command the production of private industry. President Trump has started using the law, commanding GM, for instance, to begin production of ventilators and preventing mask manufacturer 3M from certain types of medical exports.
But nationalization is hugely inefficient. The government doesn’t know which specific factories have the lowest costs to adapt production processes to start producing masks or ventilators. The government can’t figure out what quantity of medical goods is optimal for each specific factory to produce, given local labor supply and existing infrastructure constraints. Government officials can’t know which simple modifications to the designs of these medical goods would enable manufacturers to ramp up production more quickly.
A better idea is to harness market signals and amplify them using the purchasing power of the federal government. And it turns out that there’s another section of the DPA — Title III — that can make that happen using purchase guarantees. If paired with targeted deregulation, massive purchase guarantees can act as a multiplier on American manufacturing capacity.
In other words, instead of deciding which companies or factories should take on this production, the government can provide market incentives that allow the best, most efficient companies to step up to the challenge – faster than the alternative.
The key is purchase commitments.
Using Title III, the government can commit to buying enormous quantities of masks and ventilators for a set time period (including excess supplies, if the crisis proves shorter than anticipated). Even if the U.S. government ends up with a surplus of medical equipment, it will provide an excellent opportunity to build out our strategic medical stockpiles whose limited supplies helped accentuate this crisis in the first place.
Here’s why Title III is a better option.
The decision to retool production facilities for the manufacture of medical supplies entails large fixed costs, and uncertainty about the length and breadth of surging demand can be a significant deterrent to investment. For example, after a wave of concern about swine flu boosted medical mask sales in 2009, manufacturers like Prestige Ameritech responded by doubling their staff and investing millions in new factory equipment, only to find that by the time they ramped up supply, the crisis was over and demand plunged as hospitals had a glut of medical equipment. Prestige Ameritech suffered major losses and came to the brink of bankruptcy.
Purchase guarantees from the government can assuage these fears and give firms the certainty necessary to make these large investments. Additionally, federal purchases of masks and distribution across states could even make these masks free for citizens, which would help maximize uptake.
And here’s how to make it happen fast. The government can speed up the entire production process by sending a large and credible signal that medical equipment will be purchased at higher-than-normal market rates for a sustained period of time. The higher the price, the faster manufacturers will start retooling production lines and the faster the producers and shippers of raw materials will begin reforming their supply chains. The “speed premium” in a pandemic is incredibly high.
Liability and deregulation can help, too.
There’s one more part of the DPA – Title VII — that the president can use to spur the production of masks and other equipment. Title VII offers the president the ability to enter into voluntary agreements with private firms producing essential goods by shielding them from possible antitrust suits that could occur while coordinating mass production.
To complement the antitrust liability protections, Congress should consider issuing product liability waivers to any party that receives a government contract to produce masks or ventilators. In such cases, the government would assume liability for harms to health care workers or patients. By reducing liability on both these margins, businesses should be able to rapidly scale production processes with more confidence.
Finally, for maximum effect, purchase guarantees and liability waivers should be paired with targeted deregulation. This is what finally accelerated the slow rollout of diagnostic testing for Covid-19. Much like with diagnostic testing, there are regulatory barriers to ramping up mask and ventilator production. For example, the average approval time for a production facility that is certified to make N95 respirators is more than three months.
To accelerate production, the FDA should issue temporary Emergency Use Authorization exemptions for all domestic manufacturers of masks and ventilators, just as it did for diagnostic testing. Regulators can accelerate the permanent EUA process by delegating the testing currently done at the National Personal Protective Technology Laboratory to university and private labs. And the FDA should also remove the quantity limits on entities granted an EUA. The Battelle Memorial Institute was recently granted an EUA for a decontaminating system to make N95 respirators reusable. It was initially limited to 10,000 units per day per machine, even though Battelle claimed each machine could decontaminate up to 80,000 masks per day. The FDA should grant EUAs based on the process or product being proposed, not on the agency’s estimation of a company’s maximum production capacity.
Since there can be a tradeoff between speed and safety associated with deregulation, regulators should conduct random quality inspections on manufacturers. Hospital administrators could also do spot checks before handing out masks to health care workers or using ventilators on patients. Suppliers that deliver low-quality or unsafe products could be banned from the market.
Health care workers are rightly outraged that they are being asked to take care of infected patients without the proper protective gear. Patients are rightly worried that they might not be able to go on a ventilator if their symptoms become more severe. These concerns have led the FDA to issue some partial regulatory exemptions and President Trump to invoke the DPA in a few cases.
But if the United States is truly going to address its mask and ventilator shortage, much more aggressive measures are needed. The executive branch should use Titles III and VII of the DPA to unleash American industrial capacity through purchase guarantees, allowing firms to cover their fixed costs and rapidly scale up production. Congress should issue liability waivers for manufacturers producing masks and ventilators, which would encourage more market entry. Lastly, the FDA should temporarily waive all EUA requirements for domestic manufacturers and expand the exemptions list for imported masks.
These measures are necessary to deliver on the latest and most urgent American entitlement: Masks for All.
Image credit: Mykola Tys