David Greenberg, a professor of history at Rutgers, has a piece in Politico today lauding the Progressive Era wartime economic planning of Woodrow Wilson.
Greenberg specifically credits the War Industries Board and a cluster of other federal agencies with marshaling the resources needed by the U.S. and its allies to win World War I.
More generally, he says the War Industries Board “helped vault the U.S. into its preeminent role in the world.”
If the War Industries Board failed to mobilize business as effectively as it might have, it did demonstrate clearly that only the government, and not the private sector, has both the authority and the size to direct and coordinate any industrial mobilization on a national scale.
Greenberg’s implication is clear:
President Trump needs to stop dragging his feet and use whatever federal powers might be necessary—including, but not limited to. invoking the Defense Production Act of 1950—to force General Motors and other big businesses to provide critically needed medical supplies to our hospitals and healthcare workers on the frontlines in the war against the coronavirus.
Greenberg is wrong. He is wrong about the history of the War Industries Board and central planning; he is wrong about the economics of the private sector versus central planning; and he is wrong about the public policy implications for today.
First the history and economics. America won World War I and became a preeminent world power in spite of President Woodrow Wilson’s “war socialism,” not because of it.
America, in fact, had been rapidly industrializing, and its economy growing, well before Wilson’s central planners began to gum up the works with their fascistic ideas of government control and coercion.
The Economic Historian Association’s Hugh Rockoff notes, for instance, that production of steel ingots and “total industrial production’—an index of steel, copper, rubber, petroleum, and so on”—was growing years before establishment (on July 28, 1917) of the War Industries Board.
“It is evident,” Rockoff observes,
that the United States built up its capacity to turn out these basic raw materials during the years of U.S. neutrality when Britain and France were buying its supplies and the United States was beginning its own tentative build-up.
Moreover, despite their dangerously fascistic aspirations—and despite causing considerable economic mischief, damage, and dislocation by effectively discriminating against small-scale entrepreneurs who lacked political clout—the central planners at the War Industries Board were seriously hemmed in, and, as Greenberg himself admits, unable to implement their plans in full.
Their fascistic rhetoric far outpaced the reality of Wilson administration actions.
In Greenberg’s view, this was precisely the problem. The War Industries Board “could cajole companies to act but had little ability to command them,” he writes.
In truth, though, the board’s limited power of command was our saving grace, and the very reason American industry was able to produce a vast amount of raw materials and munitions (aircraft especially) that proved decisive for the Allied war effort.
As historian Francis J. Munch succinctly put it in a 1973 review of Robert D. Cuff’s book, The War Industries Board: Business-Government Relations:
The WIB simply maintained the symbol and myth of an integrated system which in reality lay beyond its grasp. The agency was severely circumscribed by private interest groups, the military, and ideological assumptions of the mobilizers themselves…
The obstacles to wartime coordination and control (institutional factors and political conditions) were omnipresent…
In sum, the effectiveness of the WIB as a public symbol helped protect businessmen from traditional political pressure, while the ineffectiveness of the WIB as a bureaucratic power save them from undue intrusion by the state.
Greenberg also fails to mention that Wilson’s disastrous economic policies, rooted as they were in central planning and government control, led to “very high inflation… and a severe depression in his last year in office.
“[Indeed], industrial production,” writes economist Scott Sumner, “had fallen by 32.5% by March 1921,” when conservative Republican Warren G. Harding became president. Harding “cut income tax rates sharply” and the economy quickly recovered, surpassing its previous cyclical peak, Sumner notes.
As to the public policy implications for today, Greenberg insists that if Trump had used the Cold War-era Defense Production Act six weeks ago “to force General Motors to build the life-saving ventilators that are in short supply around the nation… those ventilators would probably be en route to hospitals today.”
No, that’s not true.
To be sure, Greenberg is right to fault Trump for being slow to recognize the magnitude of the danger presented by the coronavirus. Trump continually downplayed the problem when, in fact, he should have been rallying the nation to confront the problem.
That’s a fair and legit criticism, and one that we’ve made here at ResCon1.
And, truth be told, had Trump done so, it’s certainly the case that all Americans—private industry included—would have been more quick to recognize that we need many more masks, ventilators, respirators, and other crucial medical gear sooner rather than later.
But the question becomes means—or how, exactly, do we meet this unprecedented demand?
All of our historical experience, and everything that we know about economics, and the incontrovertible laws of supply and demand, tells us that far from the government needing to “command” or direct private-sector business decisions, we instead need to allow open and competitive markets to function and work.
Trump has been wildly inconsistent about whether he is or is not invoking the Defense Production Act to force General Motors to produce more ventilators.
One day he is throwing stones at GM and saying he will invoke the act; the next day he is saying that GM is being responsive and that invoking the act is unnecessary.
Regardless, one thing is crystal clear: private sector companies, including GM, are making heroic and herculean efforts to meet this unprecedented demand, and they are doing so irrespective of what Trump and the feds are or are not doing.
Why? Because they recognize that there is a severe need for this under-supplied medical gear, and they are rushing to meet that need, both to do good and to make money.
Price Signals. Greenberg echoes New York Governor Andrew Cuomo’s complaint that states are in a bidding war for ventilators; and that, therefore, the federal government needs to intervene to hold down prices.
But again, this betrays a serious lack of understanding of how markets work—and specifically, a lack of understanding of the importance of price signals as the means by which private sector producers identity and meet market demand.
As Alex Tabarrok, a professor of economics at George Mason University, explains at Marginal Revolution:
A price is a signal wrapped up in an incentive, as Tyler [Cowen] and I write in Modern Principles.
Compare the price system with command and control. We need ventilators. The federal government could order ventilator firms to make more but they are already doing so.
The government could order other firms to get into the ventilator business but does the federal government have a good idea which firms have the right technology, or which firms have the right technology that could be repurposed to ventilator production at low cost, that is without causing shortages and disruption in other fields?
Can they do better than a decentralized process in which millions of entrepreneurs respond to price signals. No.
Government’s Role. To be sure, this doesn’t mean that there isn’t a role for government in ensuring the prioritization and distribution of ventilators among the 50 states and regions.
Which is precisely, it seems, what former Clinton administration official Joshua Gotbaum is getting at when he argues, in the Washington Post, that Trump should involve the Defense Production Act.
“The act,” he writes, “allows federal agencies to collaborate with business to get critical supplies during emergencies—by encouraging investment and speeding production—and direct them to where they’re most needed [emphasis added].”
Okay, but prioritization and distribution of goods manufactured and produced by private sector companies responding to market signals is very different from the sort of state-run war planning scheme pushed by Greenberg as he harkens back to Woodrow Wilson’s War Industries Board.
Again, as Tabarrok explains:
If all the trucks are fleeing from the front, we want the army to be able to requisition vehicles to move in the opposite direction.
Private and social incentives do not always align and when time and certainty are of the essence command and control may be superior (as Tyler and I discuss in Modern Principles in the chapter on externalities).
For the most part, however, that is not the situation we are in now. Private incentives are all pushing in the right direction of greater production.
Let the market respond. The federal government is not good at command and control, but it does have a role to play in redistribution for need.
Bad History. In short, when it comes to history, “it ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
Greenberg purports to know something that just ain’t so—to wit: that Progressive Era wartime economic planning by Woodrow Wilson and the War Industries Board was a great success—or at least a template or model that future American presidents should learn from and adapt to present circumstances.
In truth, the government’s attempt to commandeer and command private industry was misguided to begin with; it caused considerable economic mischief, damage, and dislocation; and America succeeded in spite of it, not because of it.
And it is a mistake we should not repeat any time soon, at least not if we wish to defeat the coronavirus and save American lives.
Feature photo credit: Woodrow Wilson, arguably the worst president in American history, courtesy of History.com.