President Trump is now a wartime president. He has said as much to the American people, whether or not they accept the pandemic’s gravity. With states and cities imposing lockdowns and shelter-in-place requirements, the country is on an unconventional wartime footing.
Unconventional because the enemy is invisible. The requisite weapons are not tanks and artillery but surgical masks, medical devices and drugs, emergency liquidity, loans and grants. The coronavirus pandemic brings chaos everywhere it rages. Trump’s presidency will be judged this November by how well he handles the immediate medical and economic fallout from this once-a-century disaster.
There are also important issues emerging about the shape of our post-virus future. Will “Big Government” stage a comeback? Will artificial intelligence dominate daily life in new ways? What’s the future of monetary and fiscal policy in a time of zero (or negative) interest rates and a national debt rapidly approaching $30 trillion?
The wartime analogy is fitting, and we should think carefully about the consequences associated with the necessary, emergency economic stimulus programs now being implemented. There are also important distinctions to recognize with respect to our last major military engagement that touched every aspect of American life, World War II.
That war rescued the American economy from the Great Depression. We had more room to grow back then given the economic slack. Our 1931 public debt was $17 billion, a trivial 22 percent of GDP. By contrast, COVID-19 struck when we had full employment, a record high stock market, the reemergence of trillion dollar annual deficits, a $24 trillion national debt and a current debt-to-GDP ratio of 106 percent.
Today, we’re more like Italy than Germany. For much of the last decade, German economic policy pursued low annual budget deficits and relative fiscal austerity (meaning budget surpluses), which is what governments should produce in good economies. Today, Germany’s debt-to-GDP ratio is 61 percent; the country now has ample room to sustain emergency deficits to combat the coronavirus.
Italy, by contrast, has a debt-to-GDP ratio of 134 percent. Tied to the Euro, Italy cannot devalue its way to prosperity and may soon face a Greece-style economic crisis. Spain’s leader has urged a European Marshall Plan to address the current health and economic crisis. Is the rest of the Eurozone prepared again to do “whatever it takes” (per Mario Draghi) to address these issues?
A colleague in her early sixties recently told me that she never thought she’d again see a repeat of the 2008-2009 Great Recession. Readers of former OMB Director David Stockman’s daily Contra Corner blog will not be surprised. While Stockman did not predict the coronavirus shock, he foresaw a massive economic meltdown (surpassing 2008-2009) and warned at least three years ago that our profligate monetary and fiscal policies were creating serious marketplace distortions, impeding true asset-price discovery, and thereby fueling global asset bubbles as investors sought higher yields in an artificially low interest-rate environment.
The gigantic economic stimulus unleashed by the Congress and the Federal Reserve is designed to halt the immediate economic pain for companies, individuals, and markets. But when the slide stops, will the U.S. economy return to the February 12, 2020 stock-market peak?
What about companies that recklessly amassed debt, or investors who raced headfirst into risky junk bonds? Will the American taxpayer cover their losses?
The British government bet the farm to defeat fascism in World War II. It had no choice, of course, but severe structural consequences resulted. The massive British wartime debt meant the end of the pound sterling as a major international reserve currency, plus the gradual dissolution of the British empire.
Today, the U.S. dollar has replaced the British pound as the principal global reserve currency. Economist Barry Eichengreen deems this situation an “exorbitant privilege,” echoing former French president Valery Giscard d’Estaing. We can borrow exorbitantly (for a while) in our own currency, precisely because it remains a global safe haven. But what happens if we abuse that privilege?
As we devise our economic, social and political responses to this unparalleled national and global crisis, our policymakers should also consider the long-term, structural implications of today’s actions.
If they, and we, stumble, you can rest assured that Chinese competitors are waiting in the wings, questioning the efficacy of open, transparent, democratic societies while touting Beijing’s supposed authoritarian administrative expertise.
Now is the time to think through carefully not just the scope of the rescue but the structure of the overall recovery.
Charles Kolb served as Deputy Assistant to the President for Domestic Policy from 1990-1992 in the George H.W. Bush White House