The COVID-19 relief package and ‘wartime’ spending: America’s admirable record of economic durability (and more!)

According to Senator Mitch McConnell, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) reflects “a wartime level of investment into our nation.”  Obviously, the $2 trillion cost of the stimulus legislation is eye-popping as it represents about 10% of GDP.  However, it may be helpful – and even heartening – to recall how the U.S. faced previous crises in terms of allocating budgetary resources during wartime.

‘Wartime’ budgets as a percent of GDP

How much of GDP did defense constitute during actual ‘wartime’ crises?  You may be surprised to know that it spiked to 22 percent at the end of World War I,and hit 41% during World War II.  During the Korean War spending peaked at 15% in 1952, and during Vietnam it “hit 10 percent of GDP.”  Plainly, we’ve seen national emergencies consume as much or more of GDP as the CARE Act.

The great chart and info below from usgovernmentspending.com illustrates the spending:

Can anything mitigate the grim economic picture?

Most experts are painting an extraordinarily grim economic picture as a result of the pandemic, raising the specter of a recession or even a depression.  Economics is a complex field, and there is much more to analyzing the impact of the pandemic than simply looking at ‘wartime’ expenditures as represented by a percentage of GDP.

Still, it is remarkable that following most of these ‘wartime’ defense budgets that were equal to or, frequently, larger than the portion of the GDP the CARE Act consumes, the U.S. nevertheless generally enjoyed economic booms.

There are, of course, many serious questions about the impact of the CARE Act.  The U.S. deficit?  Unquestionably, a huge problem, but experts say that the CARE Act numbers “don’t necessarily equate to the ultimate deficit impact; some costs may be recovered later, such as loans that are eventually repaid.”  We also don’t know what might be the unintended but possibly mitigating results on the economy of COVID-19 induced actions.

For example, the Centers for Disease Control says a “2014 NHTSA [National Highway Traffic Safety Administration] study shows motor vehicle crashes have $871 billion economic and societal impact on U.S. citizens.”

If auto traffic is plummeting as seems to be the case (see e.g., here, here, and here), shouldn’t we expect some decrease in the nearly three-fourths of trillion dollar of auto accident costs that the NHTSA figures show? (Consumer advocacy groups evidently think so as they are demanding lower car insurance rates).

There may be other mitigating factors.  For example, Streetsblog USA says that “with private vehicles largely purged from American highways by COVID-19-curbing travel restrictions, truck delivery of essential goods is reaching cities quicker than ever.”  Rebecca Brewster, president of the American Transportation Research Institute, adds:

“Is it realistic that we’ll continue to see this kind of operational efficiency once COVID-19 is over and people get back on the road?” she says. “No, probably not. But are we thrilled that trucks are moving this fast now? Yes.”

We can hope that there may be other unexpected results and unknown factors that could alleviate the strain on the economy, at least temporarily (and, one has to say as a note of caution, might increase the burden).

More importantly, despite the huge percentage of GDP these crises cost, they were, as I say, more often than not followed by periods of economic growth.  University of Pennsylvania Professor Mary Frances Berry told Politico that:

“After the disastrous 1918-19 Spanish flu and the end of World War I, many Americans sought carefree entertainment, which the introduction of cars and the radio facilitated. Young women newly able to vote under the 19th Amendment bobbed their hair, frequented speakeasies and danced the Charleston.”

“The economy quickly rebounded and flourished for about 10 years, until irrational investment tilted the United States and the world into the Great Depression. Probably, given past behavior, when this pandemic is over, human beings will respond with the same sense of relief and a search for community, relief from stress and pleasure.” (Emphasis added).

Regarding ‘high GDP percentage’ defense expenditures during World War II and the Cold War, historians also tell us:

“As the Cold War unfolded in the decade and a half after World War II, the United States experienced phenomenal economic growth. The war brought the return of prosperity, and in the postwar period the United States consolidated its position as the world’s richest country.”

Other experts contend that an examination of the “U.S. gross domestic product by year reveals that the [Vietnam] war boosted the economy out of a recession caused by the end of the Korean War in 1953.”

Overall, I’m cautiously optimistic that the economy will start to rebound by the early fall…but it won’t truly reach pre-COVID-19 levels for considerable some time after that.

When can COVID-19 restrictions be eased?

While many argue that China’s experience won’t (or can’t) translate to non-authoritarian nations in the West like the U.S., it is noteworthy that Foreign Policy reports that “after about two months of often near-total shutdowns, especially in the outbreak’s epicenter of Hubei province, China is resuming something close to a normal level of activity…”

For the U.S., this will have to be a ‘conditions-based’ decision, and that seems to have been the case with the President’s announcement today that social-distancing guidelines will remain in place until the end of April.  The Washington Post reports:

“Nothing would be worse than declaring victory before the victory is won,” Trump said. “That would be the greatest loss of all. … Therefore, we will be extending our guidelines to April 30 to slow the spread.”

According to the Washington Post, the President said “he expects that the peak in the nation’s death rate probably will be reached in two weeks, and that by June 1 the country will be well on our way to recovery’.”

Whether that proves to be true, only time will tell.  A new article by Joe Pinsker in The Atlantic (““The Four Possible Timelines for Life Returning to Normal”) describes a number of scenarios, but Pinsker admits that “no one knows exactly.”

Regardless, there needs to be balance, and a degree of prudent risk-taking, and we need to bear in mind that keeping the draconian restrictions carries perils as well. 

For example, the Los Angeles Times reports that Prof. Michael Levitt, a Nobel laureate and Stanford biophysicist:

“[F]ears the public health measures that have shut down large swaths of the economy could cause their own health catastrophe, as lost jobs lead to poverty and hopelessness. Time and again, researchers have seen that suicide rates go up when the economy spirals down.

Similarly, writing in the New York Times, Dr. David L. Katz, the  president of True Health Initiative and the founding director of the Yale-Griffin Prevention Research Center, asked “Is Our Fight Against Coronavirus Worse Than the Disease?”  He makes a compelling argument:

“I am deeply concerned that the social, economic and public health consequences of this near total meltdown of normal life — schools and businesses closed, gatherings banned — will be long lasting and calamitous, possibly graver than the direct toll of the virus itself. The stock market will bounce back in time, but many businesses never will. The unemployment, impoverishment and despair likely to result will be public health scourges of the first order.”

My view of the timing of the relaxing of restrictions is much the same as that of Pinsker’s: “Come summer, Americans might get restaurants but no music festivals, offices but no crowded beaches, [and] bars with spaced-out seating.”  While imperfect, I believe even that measure of flexibility will be important to helping the economy to begin to get its footing back.

Crises can change the economy – and society – and sometimes for the better

Let’s be clear: this pandemic is a horrible thing, but that shouldn’t stop us for looking at how we might try to alleviate its effects.  History can be something of a teacher here.  Today farmers comprise just 1.3%  of the labor force, population yet agriculture “supplied $1.053 trillion to the US gross domestic product in 2017, which would make it the 16th largest economy in the world if treated as its own country, sandwiched between Mexico and Indonesia.”   Much of that productivity is the result of sophisticated technology, the introduction of which might be traced to a terrible event: the Vietnam War.  Consider:

“The Vietnam War accelerated the mechanization of the agricultural industry. In 1970, 25% of the U.S. population lived on farms or rural communities. Of those, 2.25 million men left to fight in Vietnam. Farms compensated by buying larger machines and concentrating on one main crop.”

With respect to today’s situation, one of the key flaws that’s been revealed is the vulnerability of U.S. manufacturers’ supply chain. An expert in that area, Prof Sunil Chopra of Northwestern University, says businesses can now learn to “[b]uild regional supply chains, lean on technology, and focus on efficiency and resilience.”  He sees “one of the more promising areas for small companies to adapt to supply uncertainties is 3D printing.”  He contends this is something that could not only address current challenges, but also help companies be better in the future:

“Right now, companies are going to 3D printing as a backup as their operations are disrupted, but it is actually a good go-to strategy for small players looking to source a few parts,” Chopra said. “So if 3D printing takes off, what these small players will do is design the parts around 3D printing.”

An intriguing article in the Economist “Covid-19 is foisting changes on business that could be beneficial” acknowledges the near-term pain most companies will suffer, but suggests that some will seize the opportunity to make changes having a “lasting effect, accelerating trends in business organization that were already under way.”  The Economist says “[t]wo are particularly important”:

The next few months are set to be a giant experiment in whether new technologies can allow successful mass remote working for employees, speeding up the reinvention of the office. And for firms already worried about rickety supply chains amid a trade war, the virus gives another reason to reconfigure them.

The essay closes with the apt observation that “the crisis offers a chance to experiment with new ways of doing things—and to question the wisdom of old habits.”

Similarly, Eric Schmidt, the former CEO of Google, is urging in a new essay that “American innovation can bring us tools and solutions that will outlast today’s crisis.”

Schmidt discusses “big data and novel manufacturing” and argues that the “predictive maintenance and additive manufacturing that are gaining traction in the military should become more prominent in health care.”  He also says we “should also accelerate the trend toward remote learning, which is being tested today as never before.”

Schmidt speaks of the advantages of “AI-enabled computing” and calls for what he says is a “real” digital infrastructure for the U.S.. He says that “[g]overnment at every level should move to cloud, mobile and web-based software and start treating data as a strategic asset.”

He concludes on a high note:

“The American people are problem-solvers and innovators, and we have the opportunity today for farsighted action. If we invest strategically and mobilize our society, we can build the digital infrastructure necessary to enjoy a higher and healthier standard of living and to solve complex modern problems like today’s pandemic.”

Concluding thoughts:

Schmidt’s essay is essentially a very timely call to action to use the pandemic to motivate us to make changes that will build a better future.  To be sure, there are very dark days ahead – we have terrible losses yet to suffer – but let’s make the sacrifice meaningful.  We can’t lose faith. 

One of Britain’s greatest generals of World War II, Sir Archibald Wavell, was fond of recalling Caius Terentius Varro, one of the few Roman generals to survive the catastrophic defeat at Cannae at the hands of the Carthaginian general Hannibal.  Rome was paralyzed with fear, but Varro “rallied all the remaining forces and returned to Rome to defend the city.”  Wavell said:

This is the first and true function of a leader: never to think the battle or cause is lost. The ancient Romans put up a statue to the general who saved them in one of Rome’s darkest hours, with this inscription: “Because he did not despair of the Republic.”

Let’s not despair of our Republic!

Remember what we like to say on Lawfire^®: gather the facts, examine the law, evaluate the arguments – and then decide for yourself!