Odd Lots - How To Fund The Search For A COVID-19 Vaccine And Boost The Recovery

Episode Date: April 30, 2020

The hunt is on for a clinical therapy to prevent or treat COVID-19. But what’s the best way to go about this? How can governments accelerate this process? And what can governments do now to help a robust economic recovery? On this week’s Odd Lots, we speak with Bill Janeway, an economist and venture capitalist, who has written extensively on how the government can accelerate innovation by the private sector. He explains how his thoughts translate into the medical space and the post-crisis economy overall.See omnystudio.com/listener for privacy information.

Hello and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthal and unfortunately my co-host Tracy Allaway is out today. But nonetheless, we have a great topic to go over today. So obviously we've been talking about nonstop, the crisis that is going on all around the world with both the virus and the economic fallout. We've been discussing just sort of the incredible speed with which everything has changed and shut down and what that means for the economic system and the financial system. Today we're going to try to have a conversation that looks ahead a little bit further about sort of what's next, maybe even potentially hopeful. I don't know. Maybe it'll be a little bit hopeful and about things related to a potential vaccine and reopening

and how we might get there and what lessons we might apply from the past to improve the situation that the world is facing today. And the guest that I'm going to be speaking with is one that we've had on the podcast in the past. He's Bill Janeway. He's a partner and senior advisor at Warburg-Pinkus. He's an economist, a visiting scholar at Cambridge University. And he's a unique perspective as having been both on the venture capital side, so understanding innovation, as well as the sort of academic economic side. So he can really speak to the types of policies and the types of conditions that can enable innovation to flourish. And of course, that's something that we desperately need right now with the lack of a vaccine, the lack of testing at scale, and so forth. And of course,

part of this crisis has been in part the coordination problem that we've seen between the government, which is obviously trying to move faster on things like testing and developing therapies and that coordination with the private sector that needs some more organizations. So without further ado, I want to bring in Bill Janeway. Bill, great to have you back on the podcast. Great to be back with you, Joe. Always enjoy it very much. So there's obviously numerous aspects of this crisis that the world overall is facing to which you can speak. But I want to start off with this question of how governments or how the U.S. government in particular could conceptualize funding and accelerating the process of innovation

towards a potential vaccine or therapy. And of course, in the past, you've written a lot about the role that government spending and sort of pure government spending and research and so on has played in the development of our big tech tech industries, particularly Silicon Valley and how much of that came out of defense department spending and so forth. Set out the big picture of the role that the government has to play here in terms of getting more work done faster in this area. Well, in a way, this is a simple one. There's a clear target, clear set of targets. One set of targets involve reliable and emphasize reliable tests, both for the incidence of the disease and in particular tests for the aftermath, the potential immunity. Both of these require, as usual,

multiple efforts by multiple sources funded across the board with no preference to a particular potential source. And given the global nature of this, that would argue as well for the maximum of international collaboration possible, the sort of collaboration that was available in World War II between the U.S. and the U.K., which radically advanced, for example, the development of radar, and which should be readily available today if we had leadership that was concerned with international collaboration as a necessary effective tool for accelerating the development of the needed tests and then beyond that, the vaccine. And it's not just lab work.

This involves clinical trials. It involves the accumulation of lots of data from all the sources possible. This is an ideal moment for open collaboration. Unfortunately, we seem to be somewhat stalled. And in the meantime, in a way, there are two concerning resonance. Two concerning echoes about what's going on and what's not going on specifically in the U.S. during this extremely challenging time. We've had the experience before of closing down the civilian economy. That's exactly what happened in 1942 in the United States after Pearl Harbor, when civilian production in an economy that was much more heavily manufacturing and product-oriented versus service-oriented,

when manufacturing of civilian goods was radically reduced, no automobiles, for example. At the same time, there was an alternative source of demand, namely military demand, which maintained, actually reduced unemployment down. I think the low point was reached when unemployment to the extent, that it could be measured at all was at 0.2%. So you had a high, high-driven, high-demand-driven economy after closing the civilian economy. And the problem then was, and this is where we have this kind of ironic, curious moment, God knows there's not much demand on the economy.

There should be an opportunity to allocate resources to the highest priorities, which, well, we are developing the tests and waiting for the vaccine, which all serious accounts suggests as at least 18 to 24 months away, we should not have any shortage at all of the kind of protective gear and the medical equipment necessary through this interim to make it possible to start reopening the civilian economy sooner. And that's where the utter incoherence as Governor Cuomo has been putting it day after day of having 50 states competing with each other for the needed supplies with the federal government playing no role in acquiring and allocating and distributing is bizarre.

I saw a couple weeks ago you tweeted out, and I hadn't realized this, that your father had actually written a book about the challenges of sort of grand, scale national procurement during a time of crisis. And I think he was talking about the war, but sort of lay out why this is a difficult problem to solve. Because we do have this sort of bizarre thing where you say, oh, states, people see states are competing against the federal government. States are competing against each other. And it's clear that sort of like the traditional market mechanism for the supply of basic medical goods, whether it's N95 masks, ventilators, other protective gear is breaking down. So talk to me about the sort of inherent

challenge of crisis time supply procurement. The reason for revisiting the incoherent mess of procurement and allocation in the early days of World War II is precisely because there shouldn't be anything like that problem today. The problem in 1941, 42, even into 43, was that you had the Army and the Navy at a time, as I say, of maximum full employment of all resources, desperately competing for steel and aluminum and copper with the Army wanting to build tanks and aircraft, and the Air Force was part of the Army in those days, and the Navy wanting to build battleships and aircraft carriers and landing craft. And the extreme allocation pressure produced enormous political and administrative and bureaucratic challenges in Washington, which were only resolved in early 1943, by which time the supply of those resources had been cranked up to an enormous extent. Here, today, we have a much simple problem.

First of all, God knows resources are not fully employed. We have a very simple short list of needed products. It's not a question of deciding whether we want landing craft or aircraft. We know we want masks. We want ventilators. We want beyond that, reliable tests. And it should be possible. This is the role where the federal government would clearly in national emergency have the authority to be the purchaser.

of first resort and then allocate those resources by very simple, available, obvious metrics of need based on number of people in the hospital, based on number of people on ventilators, that kind of very simple message. This should not be a hard problem. And the fact that it is a hard problem, that's obviously a hard problem. I think Cuomo said that the price of a ventilator had been built up from $10,000 to $50,000 in the course of a month. This is interesting. So just in theory, what we're seeing right now is not, in your view, something inherent to crisis. That even though it's chaotic, even with our federal system, even with unclear or ambiguous models about how many ventilators, states will need, and so forth, this should be, in theory,

doable with a sort of normal, with a federal coordinated response? When things get really incoherent, when you have a four problem with respect to allocation, it's when you have equally legitimate claims for scarce resources. Right. Well, here we have a very short list of unequivocally legitimate claims against a vast reservoir of resources, not, I don't mean the resources of personnel in hospitals. I mean the research and development resources that can be devoted. And those resources are, and I would come back to this,

unlike World War II with the exception of our unique relationship with the UK, those resources are global. Everybody has the same incentive to produce reliable tests for the virus and for the antibodies that are generated in response to the virus. and for a vaccine. And it should not be, I mean, this is, if I may say so, what the World Health Organization was created to help coordinate. It should be possible subject to focusing on the proven ways of demonstrating efficacy and safety, efficacy for testing and safety for medical, not just vaccine, but also any kind of antiviral,

medicine, pharmaceutical. We know how to do that, and we've done that. It does take time. And that's why having this capacity for managing a gradual, graded reopening. And the fact that the U.S. is somewhat certainly behind East Asia is enormously useful. I have just looking at this concern in Singapore that there's been a bounce back of the virus. And as it's been said, the world in its different national ways is going to be playing whackamo. Do we need to think of this as an annual injection like the conventional influenza virus? Or is it like polio where you do get lifetime immunity? Nobody knows the answer to that.

So on the one hand, yes, there's no question that the proper public sector government response to this kind of challenge. spread the money as broadly as possible to have many candidates, as many flowers take root and start to bloom as possible, and recognize that hoping for shortcuts can be extremely dangerous. Right. Well, let's talk about this with a little bit more specificity. So you obviously have lots of different pharmaceutical players who have begun the race, so to speak, to search for a vaccine. whoever in theory finds an effective vaccine and proves it can expect perhaps to reap a pretty big financial windfall. Most companies will probably lose the rate. Maybe one, I don't know, maybe two, but most companies aren't going to make money. And so they'll have invested all of this

money up front for a long shot ticket that will probably end up costing them financially in the future. So, strictly speaking, how do you go about allocating funds in a way such that there is a prize, so to speak, to the entity that gets there first, but that also doesn't create, you know, that creates enough incentive for lots of different players to sort of enter the race that most of them will do? Well, compared to the amount of funding that's going out to try to keep the civilian economy, as I call it, the private. sector alive through this process, given the fact that there isn't the military, the broad military demand to maintain full employment. Given the scale of that funding, government underwriting of research efforts, you would expect to see the most productive research efforts coming out of collaborations between academic research labs and pharmaceutical companies with capacity for toxicology and testing and dealing with the FDA.

Every major research university with a strong biomedical base is collaborating with as many partners as it can find. Government underwriting of that research as a public good, regardless of who winds up producing the vaccine, seems to me it is a political-flash-economic no-brainer. The flip side is no rent-seeking. no profiteering. When the output of that public good reaches what in America, we have to call the health care market, rather than more generally, the clinic broadly defined across the world. This gets to an interesting question, rent-seeking, profiteering. Should there be some sort of

windfall for the winning team, so to speak? Well, they almost certainly will be. I noticed that somebody was commenting that everybody was on the list of this American Revitalization Council, except Martin Shrekly, who I think is still in jail. He is, yeah. I've read that he petitioned for a release so that he could get to work on the virus. Yeah, that's just what we need. So, you know, the U.S. is, I think it's fair to say, unique in not having effective limits on prices for pharmaceuticals. This is a case where clearly, I can't remember, it would be very interesting to go back and look at

how were the Sauk and Sabin vaccines brought to market? In other words, under what regime? They were developed in academic labs, but they were produced at scale, distributed globally, still being distributed globally. But when I was a kid and got the vaccine, which was, you know, I'm old enough to have remembered the horrors of the summers of the 1950s and had friends who had polio. You know, I don't think anybody wrote a check to pay for getting the sugar cube. It was distributed free. But on the other hand, costs were clearly covered by those who were producing the vaccine. There's an awful lot of relevance of history available for any one of these crises.

You just have to have interest and attention. Similarly, the people who produce the antivirals that have managed to allow people to live with AIDS, even if not be cured of it, and this is something Tony Fauci probably knows more about than anybody else alive, made decent return on their capital, but I've seen no suggestion that they have profiteered off it. It does mean that there's a role not just for government funding of this kind of R&D, both tests and vaccine, for the public good, but there's a role in ensuring that the surplus generated is properly shared between consumers and producers. In the meantime, while we're waiting this, your view would be anyone, in the ideal scenario, anyone who is sort of on some sort of reasonable path or some sort of like, you know, a plausible

player to find a vaccine should more or less get a blank check. Yeah, I think it's well known who has the capacity for real research in this area. But as I say, it is international and it is global. It's entirely possible the Chinese will come up with a vaccine before anybody else because they were the first ones to decode the genetics of the virus. I think that it is hard for me to imagine the pressure over the next 12 months for international collaboration. at least and minimum favoritism for a particular potential providers of what's desperately needed. Let's talk about the macroeconomics for a minute. So we are seeing this extraordinary shutdown of

the civilian economy, as you put it, part of that was mandated. So, of course, in most cities, basically most cities and most states around the country and around the world, there's been some level of government requirement that say, okay, we're going to shut restaurants and bars and schools, any place where lots of people congregate. But there was no like sort of mandate to shut the economy overall. Nonetheless, between the shutdown of a major sector of the economy and the spillover effects in the fear and so forth, we've seen now a sort of de facto shutdown the entire civilian economy, which is leading to, the worst, you know, acute economic crisis since the Great Depression. And there's hopes that maybe when the virus, when the health crisis has slowed down, that a lot of people will come back

to work. But so far, that's just hopes at this point. Furthermore, and, you know, there is a consensus at least. And I don't know if the policy is actually caught up to the scale of necessary. I don't think anyone has. They were going to need fiscal spending. And that has to be a major part of the equation to get the economy running again. How should governments be thinking about the challenge of what it will take to actually return people to sort of pre-crisis levels of activity? First of all, Joe, you've got two very, very different models available. Unfortunately, the U.S. has taken the least efficient approach to trying to maintain the living standards, the life chances of people through this crisis.

The Germans who had already proven their model in 2008 and 9, and interestingly enough, the British who kind of see themselves as sitting between the Germans they've rejected as partners and the U.S., whom they aspire to have a special relationship with, have actually followed the Germans. Right. But the Germans did and what they had prepared for doing

because of their deep commitment to, quote, the social market economy was basically to pay companies to keep people on the payroll, not to lay or furlough off their workforces, meaning that as and when, whether it was a global financial crisis or whether it's the coronavirus pandemic, when the threat retreats, They don't have to go through an enormously inefficient process of rehiring a workforce, which undoubtedly will not be the same workforce that they have let go. The British have done the same thing. We have done the least efficient, possible pseudo-fix of indeed effectively mandating any employer in the private sector or, for that matter, the public sector, to lay off as many people as they want, giving those people access to a very inefficient

as different state-by-state unemployment insurance system, which is overwhelmed right now. And on the other hand, providing these loans to small business through the banking system. I mean, it's as if we've learned nothing about how, when you have an IRS there, who has everybody's social security number, which is their tax ID, and provides refunds to tens of millions of people every year. why that was not invoked. I think there's probably a certain sense, this is speculation. The IRS, it's been so radically underfunded for 30 or 40 years, that the notion that it actually could play a really useful and efficient role

in keeping this economy ticking over while it's in suspended animation was just, I guess, anathema to a sufficient number of people in Washington. But it's a great shame. It's a great waste. And the U.S. coming back up will be less efficient as a result. I don't think there's any concern about whether there will be demand. The problem of reopening the economy, the problem of reopening the economy is actually to go back to a different experience from World War II. The problem of reopening the economy is somewhat like the challenge.

of in 1945, 46, shifting from an economy driven by military demand back to an economy driven by the very, the radically different pattern of civilian demand. Right. There, the crucial need that was provided by very effective modes of financing the war through a set of techniques that endowed both consumers and business. with the liquidity, the cash they needed to go through the transition to shift jobs, but above all to shift production, we shifted gears into, of course, the great post-war boom. Right.

Do we have the tools for measuring the inescapable imbalances that are going to emerge as demand sector by sector for goods and services picks up when supply will be lagging because of the need, the unfortunate need, which we've imposed on ourselves, of business hiring new workforces to provide the services and products that they exist, that they have existed to deliver. And being able to be nimble about identifying. pockets, hot spots, if you like, to use the pandemic language, hot spots of inflationary pressure and respond to them during a very delicate process of bringing back online the supply that has been closed off. That's going to be a real challenge. Right. I mean, we did this. So part of

the CARES Act, which everyone agrees was completely insufficient and already, some of the funding is completely tapped out, even though it's still desperately needed. Part of the bill that was passed at the end of March was kind of premised on what Germany and the UK are doing in terms of grants or loans to small business that could be turned into grants if they kept people on payroll. But in terms of maintaining the productive capacity of the economy, in terms of being able to go back to something that we had, it seems like we should have just done that on a much bigger scale and not just limited it to small businesses, but done everything we can, and not through the banks,

but through the IRS, so that essentially every entity that had any employers could have massive wage subsidies throughout the duration of the crisis. Exactly. Exactly. And as I say, we had the model and we had the existence proof of the model working in Germany back in 10 years. years ago. Okay, we've had this wave of layoffs as of right now when we're recording this. And these days, I'm always making a point to remind listeners when the episode is being recorded because the world changes so fast between recording and the time they listen to it. So it's April 16th. It's 10 a.m. East Coast time that we're recording this. As of yet, we haven't embraced the sort of European, and UK-German model of keeping all of really trying to subsidize employment.

Regardless, every country is going to have a seriously difficult road getting back to something resembling normal, especially because of the behavioral changes, both in terms of people having realized that employment is so precarious, and also the health concerns that will linger for quite some time, even after reopening whatever that means or whatever that entails. Almost everyone expects there will be changes in people going out to eat and other traveling. We don't know exactly what the future is going to look like. What is the role that the government can play beyond obviously sort of spending money, or maybe it is just spending money in rebuilding private sector confidence to go out and invest and spend and to not save every

dollar possible? Well, that's a great question. And, you know, I think there are two quite different aspects to it. And it does reflect the fact that we have this remarkable federal system because we've been seeing across the country over the last month, six weeks, this pattern playing out of certain governors. I'm in New York City. You're in New York City. So we happen to have more exposure to Governor Cuomo than to other governors. But it's clear that there's a pattern of governors who have been able to contribute a kind of sense of responsibility at the top that in and of itself is a contributor to maintaining and then potentially reviving confidence.

and a sense of reasonable security. This, of course, was the classic example in American history is Franklin Roosevelt and the fireside catch through the bottom of the Depression. And then during the really dark days of the 1942 and into 43 in World War II, when, as the British say, the U.S. was completely on the back foot. Whether and how the messages out of Washington

evolve, and maybe it's not something that can happen in this year, in this presidential election year, that provide a degree of consistency, reliability, that are indeed in the traditional phrase confidence-inspiring. I think we can perhaps hope for that in 2021, but I don't think it's on the table for 2020. I think it's going to be more at the state level that we will see confidence reestablish state by state. And you know, there's a deep history. You know, I'm devoted, Joe, as I think you're aware, to reading lists. And there's a remarkable book by a great American historian, Gary Gersel, the book's called Liberty and Coercion. And what it's about are the two very different structures of government that the Constitution gave us, at the federal

We have a government where the president is not endowed with total authority. It's a government with enumerated powers. In times of crisis, those powers have been extended, as in World War II, as in the Civil War, when the challenges overwhelm the capacity of the state. But the extension of federal power under those crisis conditions has always been subject to challenge because the police power, the authority that tells us when we can vote, when we can get married, when we can drive, all of that resides in the state government, and that clearly includes whether or not we can keep a restaurant open or not.

This is a very interesting experiment, real-time experiment in the functioning of American federalism. And I think the question you raise is a very, very, very important. important one. And I expect that we will see very different patterns of demand returning for the services and products that we need, really on a state-by-state basis. This is a bigger issue, bigger issue for economists and the issue for political leaders. We've spent the last 40 years, again, this gets back to the question of international collaboration. We've spent the last 40 years mobilizing information technology in order to optimize supply chain around the world, not just for products, also for services. Think of coal centers located remotely as well as software

development in India. We've optimized for the most efficient supply chains for goods and services. And the increase in efficiency comes at a cost. The cost is robustness, resilient. that we've been learning the hard way can be a truly devastating cost. So I do expect without government intervention, but in some cases with government leadership, to see a, if you like, retreat from global emphasis on efficiency towards greater respect for resilience and robustness. You know, to go back to the Defense Department's years of supporting and sponsoring all the technologies that combine to make the digital revolution, the Defense Department for critical materials always required at least two sources of supply. It required the inventor, you might think this could be the case with a vaccine, to share the intellectual property with a competitor.

so that if the first supplier failed, the second source, as it was called, would be available to maintain critical supplies. I think we're going to see a lot of that happening more broadly and more generally, as well as discussion, how much will actually come of it of bringing critical production capacities back to the United States. that's going to be a very challenging issue. The process of re-learning, for example, how to make the kind of microprocessor semiconductor devices that are made in Taiwan, TSM, Taiwan Semiconductor Manufacturing Company is the world leader. Bringing that back to the U.S., Intel can do it for itself, but Intel lags TSM. So there are all sorts of questions, which in a broad sense are national. security questions as well as questions of political economy, that this experience is forcing

us to consider after almost two generations of thinking that they were off the table and the only thing that mattered was efficiency in the allocation of resources. Real quickly, and then I'll let you go. I want to sort of remind listeners, you know, obviously you have a venture capital past. You're also an economist. You're a student of John Maynard Keynes' work, and you've written a lot about his work in sort of this idea of, and again, it almost speak to exactly what you're talking about, the ability of the government to provide stability at a time of, like, truly radical uncertainty. And radical uncertainty is a cliche that people talk about during normal times, but it sort of never felt more real

than now when there are just so many balls in the air in questions about what the future looks like what should people look at looking to Keynes' work and sort of helping illuminate, illuminate sort of from a philosophical perspective, perhaps what the role of government is in ameliorating some of that uncertainty. Keynes, indeed, at the core of Keynes' economics, was his recognition that much as it would be lovely to believe that we can know what the return on investment will be when we decide to build a plant or invest in research and development, we can't. And consequently, efficiency in the allocation of resources is on the one hand, the enemy of innovation, but it also

can be, on the other hand, the enemy of a thriving private sector. But as I've said several times in this conversation. Here, we have great uncertainty about when, but we don't have much uncertainty at all about what, about what we need to invest in. And that is, you know, this array of personal protection equipment and above all the vaccine. And there, not much government intervention except for writing checks is required. I think there'll be a more complicated and difficult role in as as things reopen, the central banks of the world and the treasuries of the world have poured money into the private sector in more or less efficient ways. They've created enormous reservoirs of liquidity. And we know that when the economy begin to reopen, there are going to be these

imbalances and these opportunities for inflationary hotspice. How and the process of withdrawing X less liquidity as cash flow starts to percolate again through the private sector. And right now, the private sectors of the world's economies are on the ventilators, of converting them over to be able to breathe under their own scheme without artificial support. That's going to be a big challenge. Bill Janeway, it's always great to get your perspective. Really appreciate you joining us. So we need blank checks from the government and fireside chats from the governors.

It's my big takeaway, and we'll see what we get. But I really appreciate you taking the time. Thanks so much, Joe. Always enjoy it. Thanks, Bill. Well, that was summary needed for me. That was my conversation with Bill Janeway. I strongly recommend, though, if you haven't read it, listeners, check out his book, doing capitalism in the innovation economy, because there are not many people that I've ever read

who sort of balance both the private sector experience, what actually motivates business and how they make calculations in terms of what's a good money-making investment with academic theory. And there's often a disconnect between the two, and I feel like understanding that nexus is going to be extremely important in the months and weeks ahead as governments around the world try to get their recovery policies correct.

So that was Bill Janeway, And this has been another episode of the Odd Lots podcast. I'm Joe Wisenthall. You can follow me at The Stallworth. You should follow my co-host on Twitter. She's on Twitter at Tracy Allaway. Bill is on Twitter. His handle is at Bill Janeway.

You should follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of the Bloomberg podcasts under the handle at podcasts. Thanks for listening.