The U.S. Economy Is Uniquely Vulnerable to the Coronavirus
Why America’s Growth Model Suggests It Has Few Good Options
Mark Blyth
MARK BLYTH is William R. Rhodes ’57 Professor of International Economics at Brown University. He is a co-author, with Eric Lonergan, of Angrynomics [1] (Columbia University Press), forthcoming in June 2020.
Two competing epidemiological models currently guide and divide expert opinion on how best to respond to the novel coronavirus. The first, from Imperial College London [2], scared the U.S. and British governments [3] into instituting strict social-distancing measures. It predicted that if left unchecked, COVID-19, the disease caused by the virus, could kill over half a million people in the United Kingdom and 2.2 million in the United States [4]—not counting the many additional deaths caused by the collapse of each country’s health-care system. The second model, developed by researchers at Oxford University [5], suggested that the virus had already infected as much as 40 percent of the British population but that most had shown mild or no symptoms. According to this model, COVID-19 would still cause many deaths, and it would still severely stress health-care systems. But because it predicted fewer critical cases to come, the Oxford model suggested that an indefinite lockdown might not be necessary.
The attractions of the Oxford model are obvious. But if political leaders plan based on the Oxford model and turn out to be living in a world described by the Imperial College London model, they will have made a bad situation much, much worse [6].
Similarly, high-stakes decisions must be made about how to protect national economies from the effects of COVID-19—decisions that can be predicted with another kind of model. Political economists use “growth models” [7] to describe what countries do to promote growth under normal circumstances, but these models also indicate how countries are likely to respond in the event of a crisis, such as a deadly pandemic. The United Kingdom’s basic growth model [8], for example, is driven by finance, housing, and, above all, domestic consumption. When the British economy got walloped by the coronavirus crisis and everyone was told to stay home, taking measures to boost consumption—such as guaranteeing 80 percent of wages [9]—was the necessary response. By contrast, in Germany, which is essentially a giant export platform sucking in demand from elsewhere, the necessary response included instituting a shorter workweek and guaranteeing company balance sheets [10], but not supporting wages.
For the United States, the question of how best to shield the economy from the effects of the pandemic is more complicated. In growth model terms, the United States is a massive exporter of primary products, aircraft, weapons, oil, services, software, e-commerce, and finance—simply because its economy represents a quarter of global GDP. But most of what drives the U.S. economy is still domestic consumption, and while that isn’t as credit-driven or debt dependent as some analysts [11] have claimed—the United States lies in the middle of the pack of Organization for Economic Cooperation and Development countries in terms of the ratio of household debt to household income [12]—the role that private-sector debt plays in the U.S. economy makes it difficult to respond to a crisis like this one. This reality is thrown into sharp relief when contrasting the U.S. growth model with those of other countries.
BLUNTING THE SHOCK
Trade-dependent growth models, such as those found in northern and western Europe, tend to have large welfare states [13] that act as “shock absorbers,” helping to mitigate the effects of economic shocks. In general, the more open a European country’s economy is to international trade, the bigger the welfare state it constructs to act as a buffer in case trade shuts off. Large welfare states also allow their citizens to carry large amounts of debt [14], since they effectively insure them against periods of unemployment; the most indebted people in the world are not Americans but the Danes and the Dutch.
In contrast, countries with growth models of the Anglo-American variety, especially the United States, tend to have weaker states, lower taxes, and large financial sectors. They have highly flexible labor markets rather than large welfare states, which means they ultimately depend on wages to drive growth. Since those wages have been buying less and less over time [15], credit cards [16], student loans [17], and medical debts [18] have become a standard part of U.S. household budgeting. When those household budgets shrink sharply, their debts are not compensated by the shock absorbers that countries such as the United Kingdom and Germany have in place.
This lack of shock absorbers is integral to the U.S. growth model, and under normal circumstances, it is a feature, not a bug. When systems such as the American one are hit by shocks, they tend to bail out their financial systems to keep credit flowing and let the real economy absorb the blow through unemployment [19] and austerity policies [20]. The assumption is that with no shock absorbers in place, prices and wages will adjust quickly, capital will be redeployed, and growth will return without the need for state intervention. But these are not normal circumstances. And as U.S. policymakers are quickly realizing, the usual playbook is of limited use in the face of the coronavirus pandemic.
DISASTER, AMPLIFIED
During a global economic crisis, the United States has one major advantage over other countries: it prints the global reserve currency. Other countries need U.S. dollars because their banking systems lend in dollars even though they can’t print them. During previous crises such as the 2008 financial crisis, sharp falls in global financial markets have been put right by Federal Reserve actions such as rate cuts and bond-buying programs. But this time, Federal Reserve action has not had its usual calming effect: financial markets have continued to fall, and the dollar’s dominance has failed to prevent a flight into cash [21].
Although Congress finally passed a $2 trillion economic stabilization package, its continuing inability [22] to agree on whom to bail out—companies or consumers—reflects tensions in the underlying growth model. The United States typically opts to protect capital and to simply let labor adjust through unemployment. But this instinct—to protect the big players and let workers take the hit—is also a key reason why the coronavirus pandemic is a disaster amplifier for the U.S. growth model in a way that is not true for Germany or even the United Kingdom.
The U.S. growth model works well as long as there is little unemployment, wages are being earned and spent, and credit is being recycled to cover the difference between wages and costs by consumers and companies. But when markets freeze and cannot price assets correctly (no one knows how much United Airlines stock is worth because they don’t know when Americans will be flying again), the growth model collapses. Once that happens, it is hard to find a bottom. The Federal Reserve and Congress can try to put a floor on asset prices by bailing out companies, but there is no bottom for the broader crisis of consumption that occurs when a third of the labor market is laid off and the other two-thirds are locked at home for an extended period of time. In this world, bailing out capital and expecting labor to adjust through wage cuts and unemployment is simply impossible given the scale of the shutdown.
The U.S. growth model is built in such a way that it simply cannot shut down without inflicting catastrophic damage on itself. Because the model is designed to adjust through reduced wages and employment rather than increased welfare outlays, political leaders can contemplate temporary unemployment benefits for a banking-induced shock, but not semipermanent cash transfers [23]—which is what the British are doing—and a near-total collapse in asset values. The British solution is too politically toxic to be anything other than a short-term expedient in the American context. So, once it became clear that—at least according to the Imperial College London model—the epidemiologically correct response was to put the economy in hibernation for several months, U.S. leaders started looking for other solutions.
One alternative solution, put forth by U.S. President Donald Trump but with proponents in many states, is to simply “restart the economy.” The direct cost of doing so, according to the Imperial College London model, could be the deaths of as many as 2.2 million Americans—or, as Texas Lieutenant Governor Dan Patrick bluntly suggested in a recent interview, old people need to die to save the economy [24].
Unfortunately, even if Americans turn out to be living in the world described by the less dire Oxford model, simply restarting the economy may not be feasible if that means up to 70 percent of Americans will catch a disease that requires intensive care in over ten percent of cases [25]. If Americans return to work, these infection rates would effectively shut down labor markets whether the president likes it or not. Consumers are unlikely to flock to malls when they could literally “shop till they drop,” and businesses whose employees are crowding emergency rooms are unlikely to invest in products they would be unable to ship.
The United States, with its 330 million people [26], 270 million handguns [27], 80 million hourly workers [28] with no statutory sick pay, and 28 million medically uninsured [29], faces challenges quite unlike those in other countries. Putting the economy in a freezer for six months or longer would destroy what’s left of its social fabric along with its growth model. But restarting it could turn the pandemic into a plague that could cause as much damage as the freezer.
ABANDONING THE LOCKDOWN
Which of these unappealing paths is the United States most likely to take? Again, examining its underlying growth model is revealing. It suggests that the United States will temporarily bail out companies, partially support consumption, and abandon the lockdown as soon as it can. Trump and those around him seem perfectly willing to gamble a few million lives to save their assets, betting that the health-care system will always be able to care for the elite [30].
If the coronavirus pandemic plays out according to the Imperial College London model, reopening the United States will simply compound the damage inflicted by the U.S. response. If the pandemic takes the course described by the Oxford model, other countries’ economies will sustain less damage than the U.S. economy and will rebound faster because lockdowns cause less economic damage [31] than allowing uncontrolled infections. The U.S. stock market may soar if the Oxford model turns out to be correct, but that will do nothing for the millions of hourly workers who have been laid off, the thousands of small businesses that have gone bankrupt, and the millions of extra infections that will result if the United States opens for business too early.
If the United States goes down this path, it may finally have reached the moment former President Bill Clinton said would never come: when people make money betting against America [32]. After all, if U.S. leaders’ best strategy in a pandemic is to “let it rip,” the rest of the world will soon stop regarding the United States as a model, for growth or anything else
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