Political Risk Brief
Spring 2020

COVID-19 and the History of U.S. Crisis Response

Introduction

The U.S. political system responds to national calamities with remarkable consistency: marshalling seemingly inexhaustible resources to deploy nearly permanent solutions to impermanent problems.  The American reaction to Imperial Japan’s attack on Pearl Harbor provides a powerful reference case.  The combined cost of developing the B-29 Superfortress and the Manhattan Project surpassed 25 percent of Japan’s pre-war annual GDP.1  Seventy-five years after the Enola Gay dropped “Little Boy” on Hiroshima, the United States maintains a military presence in Japan that includes 49,000 personnel.2

Policy action on COVID-19 has followed the well-established American pattern of leveraging material abundance at shocking scale.  The consequences promise to shape markets, large and small, for decades.

U.S. Crisis Management

History provides numerous examples of the almost boundless and unending nature of U.S. responses to crises.  The bureaucratic superstructure created to address the Great Depression had a price tag of approximately 50 percent of GDP in any given year of the program.3  New Deal policies continue to shape the country’s politics and economy more than eight decades later.  In a more recent instance, spending on the Department of Homeland Security has increased 35 percent since the first full year of the organization’s existence and today roughly equals Germany’s entire defense budget.4

Efforts to constrain America’s spendthrift ways largely have been unsuccessful.  A cost-saving initiative adopted by the U.S. Air Force following the end of the Cold War quickly fell out of favor.  The doctrine – “Effects- Based Operations” – focused “on consider[ing] different and perhaps more effective ways to accomplish the same goal with fewer resources.”5  The theory shaped the 1991 Desert Storm air campaign, but then lost support and was wiped from the military’s lexicon.6  The United States returned to “annihilation and attrition” as the core philosophy of warfighting.

The Implications of COVID-19 for American Life

Two days after the toll inflicted by COVID-19 reached 1,000 domestic fatalities, Congress passed, and President Donald J. Trump signed, a third emergency response bill with approximately $2 trillion in disaster spending.8  This amount supplemented the combined $200 billion included in the “Phase 1” and “Phase 2” legislation and the actions of the Federal Reserve to “provide up to $4 trillion in liquidity through broad-based lending programs.”9  In committing to fight the pandemic, President Trump declared, “We are marshalling the full power of government and society to achieve victory over the virus” and touted “the single biggest economic relief package in American History – twice as large as any relief bill ever enacted.”10  Total U.S. emergency relief spending to date exceeds the combined current GDPs of 120 countries.11

Although the duration of the crisis remains unknown, Disney World on March 29 suspended accepting reservations dated before June 1.12  This decision suggests an economic shutdown that will last at least the equivalent of a fiscal quarter.  No event since the beginning of the 20th Century – not the 1918 Spanish Flu, Pearl Harbor, or 9/11 – has shuttered the American economy for so long a period.  If the magnitude of the pandemic follows the mid-range of estimates – five months (through the end of May) and 100,000-to-240,000 deaths – then COVID-19 will rank as the most economically consequential disruption in decades.13  In considering the medium-to-long-term effects, the following areas deserve special attention:

Social democracy: Since the 1960s, the United States has suffered a steady and pronounced deterioration in social capital, which has been defined as “the non-financial, often intangible assets that one gains from interactions with one’s community.”14  These declines accelerated during and following the Great Recession; for example, the age-adjusted “deaths of despair” rate – principally attributable to a surge in overdoses – increased nearly 50 percent in the decade following 2008.15  Diminished social capital leaves the nation especially vulnerable to shocks, as individuals lack the familial and communal resources to endure adversity.  In 1930, the average household size was 4.11, compared to 2.52 in 2019.16  Today, for approximately every three marriages there is one divorce, and fertility rates have fallen below replacement level.  The impact of COVID-19 has the potential to render a tenuous social capital condition unsustainable.  The replacement of American free-market capitalism with European-style social democracy could become inevitable if the pandemic causes pronounced and sustained reductions in family formation, life expectancy, and similar indicators.  Such a development would have particularly destabilizing effects on private healthcare companies, financial services firms, and labor markets.

Fiscal instability: The status of the U.S. dollar as the world’s reserve currency enables the country to borrow vast sums at exceedingly low interest rates.  For this reason, leading economists dismiss the possibility of a fiscal crisis. In the Harvard Law & Policy Review, the former Director of Fiscal Policy at the Center for American Progress wrote, “The conventional wisdom about the national debt is wrong.  While reckless fiscal policy changes have the potential to destabilize the economy, the American fiscal system is fundamentally strong.”18  COVID-19 highlights the danger of ignoring allegedly low-probability, but inarguably high-impact risks.  Pre-pandemic, the Congressional Budget Office had projected that by 2047 federal spending on interest payments would be double the expenditures on R&D, nondefense infrastructure, and education, combined.19

Nevertheless, the Republican Party under Donald Trump has abandoned even the rhetoric of fiscal discipline.  Similarly, Democrats have become enthralled with Modern Monetary Theory, which holds that “depression occurs only if the amount of money spent is insufficient,” allowing the government “to keep the rate of spending in the economy at the level required.”20  No one knows the limits of America’s borrowing capacity, but we should heed the insight of former Council of Economic Advisers Chairman Herbert Stein: “If something cannot go on forever, it will stop.”21

Conflict with China: As part of achieving the status of a dominant global power, Beijing has aimed to deepen America’s dependence on China as a manufacturing center and establish greater capabilities in advanced applications, including through the “Made in China 2025” initiative.  To the great consternation of the regime, COVID-19 has reinforced and accelerated the U.S. policy consensus in support of decoupling the bilateral economic relationship.  The Chinese Communist Party appears to fear such a development, and this anxiety likely will produce unpredictable and aggressive behaviors that compound current tensions.

Washington, D.C. supersized: The nation’s capital ranks as a major beneficiary of crises.  World War II, the Cold War, the War on Terror, and the Great Recession all left the denizens of the modern world’s Rome more prosperous and more powerful.  During the past decade, Washington, D.C.’s median household income rose 40 percent, compared to an overall national increase of less than 25 percent.22  The sprawling government healthcare apparatus almost certainly will emerge from COVID-19 bigger and wealthier than ever.  Reorganization, increased oversight, and consolidation might appear to impose some form of accountability for underpreparedness, but one of the most reliable rules of American politics should pertain: in the end, Washington wins.

The demise of radical individualism: COVID-19 has the potential to discredit, perhaps utterly, the two factions that have dominated contemporary American politics.  As described by Notre Dame professor Patrick Deneen in Why Liberalism Failed:

Both ‘classical’ and ‘progressive’ liberalism ground the advance of liberalism in individual liberation from the limitations of place, tradition, culture, and any unchosen relationship.  Both traditions – for all their differences over means – can be counted as liberal because of this fundamental commitment to liberation of the individual. … Thus statism and individualism grow together while local institutions and respect for natural limits diminish.23

The radical individualism of the Right and the Left leaves the global market and centralized government unencumbered by intermediating institutions that might inhibit either.  American politics increasingly reflects growing dissatisfaction with this arrangement, and COVID-19 could catalyze a historic reordering of domestic politics involving the decisive rejection of the Right’s “market fundamentalism” and the Left’s “identity politics.”

Conclusion

The response of the United States to emergencies typically shapes the nation’s politics and economy long after the crisis has abated.  While near-term legislation and regulation impact the private sector most visibly, more subtle and delayed unintended consequences arguably produce even greater effects.  The scale and speed of the government’s response to COVID-19 signals an epoch-defining event, and political and corporate leaders should not expect a return to the pre-crisis status quo.

1  Mark Harrison, The Economics of World War II: Six Great Powers in International Competition, Cambridge, United Kingdom: Cambridge University Press, 2000; Phillips Payson O’Brien, How the War was Won, Cambridge, United Kingdom: Cambridge University Press, 2015; and “Implied PPP Conversion Rate: 1990,” International Monetary Fund, https://www.imf.org/external/datamapper/[email protected]/OEMDC/ADVEC/WEOWORLD/DA.

2  “Guidance from the Commander, U.S. Forces, Japan,” U.S. Forces, Japan, https://www.usfj.mil/About-USFJ.

3  “Gross Domestic Product,” U.S. Bureau of Economic Analysis, retrieved from the Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/GDPA; and “Which Was Bigger: The 2009 Recovery Act or FDR’s New Deal,” Federal Reserve Bank of St. Louis, https://www.stlouisfed.org/on-the-economy/2017/may/which-bigger-2009-recovery-act-fdr-new-deal.

4  “Trends in the Timing and Size of DHS Appropriations: In Brief,” Congressional Research Service, December 6, 2019, https://fas.org/sgp/crs/homesec/R44604.pdf; and Press release, “Table 2: Defense Expenditure,” North Atlantic Treaty Organization, June 2019, https://www.nato.int/nato_static_fl2014/assets/pdf/pdf_2019_06/20190625_PR2019-069-EN.pdf.

5  David A. Deptula, Effects-Based Operations, Arlington, Virginia: Aerospace Education Foundation, 2001, http://www.ausairpower.net/PDF-A/AEF-AFA-Effect-Based-Operations-D.A.Deptu-la-2001.pdf.

6  James N. Mattis, “USJFCOM Commander’s Guidance for Effects-Based Operations,” U.S. Army War College, 2008, https://apps.dtic.mil/dtic/tr/fulltext/u2/a490619.pdf.

7  John T. Correll, “The Assault on EBO,” Air Force Magazine, December 21, 2012, https://www.airforcemag.com/article/0113ebo.

8  “United States Coronavirus,” Worldometer, https://www.worldometers.info/coronavirus/country/us; and “Remarks by President Trump at Signing of H.R. 748, The Cares Act,” The White House, March 27, 2020, https://www.whitehouse.gov/briefings-statements/remarks-president-trump-signing-h-r-748-cares-act.

9  Isabel Soto and Tara O’Neill Hayes, “Estimating the Cost of the Families First Coronavirus Response Act,” American Action Forum, March 17, 2020, https://www.americanactionforum.org/research/estimating-the-cost-of-the-families-first-coronavirus-response-act; Jennifer Scholtes and Caitlin Emma, “Senate Approves $8.3 Billion Emergency Coronavirus Package,” Politico, March 5, 2020, https://www.politico.com/news/2020/03/05/senate-approves-83-billion-emergency-coronavirus-package-122266; and Craig Torres, “Fed’s Anti-Virus Lending Firepower Could Reach $4.5 Trillion,” Bloomberg, March 25, 2020, https://www.bloomberg.com/news/articles/2020-03-25/fed-s-anti-virus-lending-firepower-could-reach-4-5-trillion.

10  Twitter, President Donald Trump, March 27, 2020, https://twitter.com/realDonaldTrump/status/1243647273462005760; and Twitter, President Donald Trump, March 27, 2020, https://twitter.com/realDonaldTrump/status/1243637430483390470.

11  “World Economic Outlook Database,” International Monetary Fund, January 2020, https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx.

12  “Update on Walt Disney World Resort Operations – Including Theme Parks and Winter Parks,” Walt Disney World, March 29, 2020, http://web.archive.org/web/20200329023325/https://disneyworld.disney.go.com/travel-information.

13  Zachary Basu, “White House Projects 100,000 to 240,000 U.S. Coronavirus Deaths,” Axios, March 31, 2020, https://www.axios.com/trump-coronavirus-models-two-weeks-0dad0224-ef4e-457b-9e83-143d38d0799c.html.

14  Mary Clare Amselem, “Rebuilding Social Capital Through Community Institutions,” The Heritage Foundation, December 6, 2013, https://www.heritage.org/poverty-and-inequality/report/rebuilding-social-capital-through-community-institutions.

15  “Long-Term Trends in Deaths of Despair,” United States Congress Joint Economic Committee, September 5, 2019, https://www.jec.senate.gov/public/index.cfm/republicans/analy-sis?ID=B29A7E54-0E13-4C4D-83AA-6A49105F0F43.

16  Historical Households Table, “Table HH-4: Households by Size: 1960 to Present,” United States Census Bureau, November 2019, https://www.census.gov/data/tables/time-series/demo/families/households.html; and Robert Pear, “Average Size of Household in U.S. Declines to Lowest Ever Recorded,” The New York Times, April 15, 1987, https://www.nytimes.com/1987/04/15/us/average-size-of-household-in-us-declines-to-lowest-ever-recorded.html.

17  National Center for Health Statistics, “Marriage and Divorce,” Centers for Disease Control and Prevention, January 20, 2017, https://www.cdc.gov/nchs/fastats/marriage-divorce.htm; and Gretchen Livingston, “Is U.S. fertility at an all-time low? Two of three measures point to yes,” Pew Research Center, March 22, 2019, https://www.pewresearch.org/fact-tank/2019/05/22/u-s-fertility-rate-explained.

18  Harry Stein, “America Can Still Do Big Things: Dispelling the Fiscal Hysteria that Thwarts Good Public Policy,” Harvard Law & Policy Review, February 2017, https://harvardlpr.com/wp-con-tent/uploads/sites/20/2017/02/HLP107.pdf.

19  “Four Take aways from the CBO Long Term Budget Outlook,” Peter G. Peterson Foundation, March 31, 2017, https://www.pgpf.org/blog/2017/03/four-key-takeaways-from-the-cbo-long-term.

20  Abba P. Lerner, “Money as a Creature of the State,” The American Economic Review, Vol. 37, No. 2, (May 1947), 312-317, https://www.jstor.org/stable/1821139.

21  “Hearings before the Joint Economic Committee,” Congress of the United States, January 16 – 17, 1986, https://tinyurl.com/yx2ery6b.

22  American Community Survey, “2010: ACS 1-Year Estimates Subject Table,” United States Census Bureau, 2010, https://data.census.gov/cedsci; and American Community Survey, “2018: ACS 1-Year Estimates Subject Table,” United States Census Bureau, 2018, https://data.census.gov/cedsci.

23  Patrick J. Deneen, Why Liberalism Failed, New Haven, Connecticut: Yale University Press, 2018.