Post-Pandemic, Governments May Rethink Everything

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One expected consequence of the Covid-19 crisis from a human and economic cost perspective, is that people will almost certainly expect and insist on greater resilience in the event of another crisis

Source: GARP | Global Association of Risk Professionals

The human and economic costs of the Covid-19 crisis are already enormous, and the final tally will be colossal. What’s happening will undoubtedly focus minds, so next time will be different. One consequence is that in the near future, people will almost certainly expect and insist on greater “resilience” in the event of another crisis.

But what does that term really mean in the current context? And how could governments even begin to meet such expectations? The implications could be profound and may extend far beyond the realm of public health.

A renewed appetite for safety could summon new thinking on how the West’s economies are organized. Covid-19 will induce discussion of climate change, global trade and supply chains, the efficiency of markets, macroeconomic policy, safety nets, international cooperation — and what living in a decent society even means.

The bigger the setback, the more likely it is that the quest for resilience won’t stop at stockpiles of essential medical equipment.

Granted, it would be hard to overstate the costs of that particular failure. Resilience starts with preventing avoidable catastrophes. In the U.S. and most of Europe, the urgency wasn’t understood. A lack of planning and materials made it impossible to suppress the infection with testing, contact tracing and isolation. In many countries it wasn’t even clear which agency or level of government should take the lead, or what kinds of information should be gathered, by whom, or to what end. In the U.S., it still isn’t. Weeks of institutional mind-freeze let the pandemic get established, which in turn demanded economic shutdowns.

The modest sums not spent on planning and preparation might be the biggest false economy in history. To be sure, the next virus (or the next wave of this one) could be worse — more infectious, lethal, or resistant to testing and analysis. So in addition to an instant response, a resilient public-health system will also need the wherewithal to expand hospital capacity at short notice and develop treatments and vaccines faster, as well as plans for curbing transmission without shutting everything down. To get all this done, governments will have to set goals and commit additional resources.

That’s a big agenda, but achieving this kind of resilience won’t raise deep questions about modern capitalism. Other aspects of the crisis might.

According to one view, for instance, the lodestar of modern manufacturing — efficiency based on complex supply chains, lean production, just-in-time delivery and zero inventories — has made economies too fragile. Where a narrow-minded, profit-maximizing company sees waste and inefficiency, the thinking goes, a well-run society would recognize prudent buffers and wise investment.  

Plausible as this might seem at the moment, it’s wrong. Modern logistics are lean but also flexible and adaptive. Overseeing a complicated supply chain to squeeze out costs alerts managers to options — and alternatives provide resilience. Also, investing in redundancy can easily go too far. Tolerating waste reduces output, and if you’re poorer, everything, including resilience, gets harder to afford. Connectedness by definition means more links that might be broken, but this doesn’t make the system as a whole less robust. Life in modern advanced economies is hardly more fragile than in primitive (albeit self-sufficient) societies.

Though you might see Covid-19 as proof of capitalism’s hidden fragility, it would be more accurate to see it as a threat so potent and mismanaged that governments had to flatten a fundamentally robust system. In that case, the right response is to avoid the mismanagement while harnessing the underlying strength. Disaggregated information and decision-making — market forces — shouldn’t be supplanted at lower levels even in a crisis.

Supply chains that cross borders pose additional problems. Will that cause a rethink on trade and globalization? It might, but it shouldn’t. Global supply chains are vulnerable more because of uncoordinated governments than irresponsible profit-seekers. Leaders who rightly deplored President Donald Trump’s earlier attacks on the global trading system were quick to impose export restrictions on medical equipment. The instinct is understandable, but surrendering to it was still a failure of leadership.

Thanks mainly to Trump, protectionism was rising and growth in trade slowing even before Covid-19. If the crisis accelerates that trend, the whole world will be poorer, hence less resilient. The U.S. president is unfit to lead because he opposes cooperation on principle. Yet it’s telling that his abdication of global leadership did not summon any other leader to shape or even call for an effective international response. Initially, members of the European Union (as in “ever closer union”) couldn’t even bring themselves to help their partners.

International economic cooperation matters, but something else matters even more. Over the coming months, the resilience of individual households will do most to shape future thinking on the role of government.

Once the initial mistakes were made and economic shutdowns became necessary, fiscal and monetary policy moved, in most cases, quickly and forcefully. The Federal Reserve and the European Central Bank expanded the measures they used during the financial crisis in 2009 to keep credit flowing and financial systems working. Large-scale bond-buying programs are again up and running, enabling dramatic fiscal expansions aimed mostly at supporting workers who’ve been laid off or furloughed. More public spending is likely to be needed soon, and governments seem ready to offer it.

Where this all leads will depend on how long the dislocations last, how soon the shutdowns can be lifted and, once they are, how quickly output and employment come back. But it’s already apparent that the crisis will test the advanced economies’ different approaches to social insurance as they’ve never been tested before.

The U.S. is an outlier among rich countries. Its model leaves the victims of the shutdown much more exposed. Among the changes in thinking Covid-19 might cause, this could be the most consequential.

The American model denies workers resilience in two main ways. First, the social safety net is much less generous than in Europe. Typically, if you lose your job, you lose your health insurance; unemployment benefits replace less of your income and for less time; income supports for poorer households are smaller; and so forth.

Second, labor protections are weaker. At-will employment is the norm, so it’s easier for firms to fire workers they no longer need. This approach puts flexibility above security. It has advantages. U.S. incomes are typically higher than in Europe, taxes are lighter and unemployment is persistently lower. But if you’re unlucky, you fall a lot further.

Even before Covid-19, more Americans were coming to see this balance as wrong. Growing support for universal health insurance and increasing alarm over inequality suggest a shift was already under way. This crisis could make a decisive difference. It’s partly the shock of what’s happening — the depth and abruptness of the setback. But it’s also that the collapse has been deliberately engineered. Jobs destroyed and livelihoods ruined, not because of disembodied economic processes or hostile foreign powers, but as an act of policy undertaken in the public interest.

The new claim this ordeal makes on social solidarity is acknowledged in the fiscal plans that the U.S. and Europe have been rolling out. Characteristically, European governments have taken this furthest — in some cases, paying most of the wages of millions of workers on furlough, so that they’re kept on payrolls and don’t lose their jobs.

The U.S. is offering a more limited loan-based Paycheck Protection Program, one-time payments to workers making less than $75,000 and enhanced unemployment benefits. That’s remarkable by U.S. standards, but still reflects what you might call national characteristics. It’s as though the country acknowledges the argument, but isn’t ready to capitulate. 

For society as a whole, is resilience a matter of individual self-reliance — when you get knocked down, you get back up again? Or is it “we’re all in this together”? If what’s happening now doesn’t spur demands for a greater sharing of economic risk, it’s hard to imagine what will.