Covid’s Economic Mutations

The coronavirus has made fools of us all. Show me a commentator who denies any seriously bad calls over the past two years—predictions that look embarrassingly off in retrospect—and I’ll show you someone who is delusional, dishonest, or both.

This has obviously been true for the epidemiology; remember when Covid-19 was going to be a serious problem only in densely populated metropolitan areas? It has also been true for the economics, where there have been huge surprises both good and bad. In April 2020, when the US unemployment rate shot up to almost 15 percent, few would have expected to see it back below 4 percent by the end of 2021. On the other hand, I don’t know of anyone who predicted the supply-chain crisis that has, among other things, caused inflation to soar, especially but not only in the United States.

It’s difficult, and arguably foolhardy, to write at length about events that are both fast-moving and twisty. You can see this very clearly in Adam Tooze’s Shutdown: How Covid Shook the World’s Economy, a book completed in early 2021 and published in September. It displays all of Tooze’s virtues as a writer and analyst; it’s full of valuable insights and telling details, and may well be the best thing to read if you want to know what happened in 2020. Yet that was then, and this is later, and Tooze’s book already seems hugely dated, overtaken by events.

Tooze has established a stellar reputation by combining a solid grasp of economics and quantitative methods with the skills of a serious, primary-source historian. His 2006 book, The Wages of Destruction, about the Nazi war economy and how it fell apart, shed a completely new light on World War II; I, at least, will never think about that war the same way. His 2018 book, Crashed, about the 2008 financial crisis and its aftermath, was less revelatory to those of us who had been immersed in those events, but it added many new insights into both the nuts and bolts of economic crisis and the sausage-making of economic policy.

Those books were written long after the storms they described had passed. Shutdown, by contrast, was written in what now looks like the eye of the storm. It more or less ends with Joe Biden’s inauguration; yet more Americans have died of Covid-19 since Inauguration Day than before, and it’s still very much up in the air whether economic management during the pandemic will ultimately be viewed as a success story or a huge failure.

I understand, I think, why Tooze chose to rush this book out, and it wasn’t wasted effort. As I said, it may be the best source for understanding what happened to the world economy in Year One of the pandemic. But so much has happened since that we will surely need another Tooze or Tooze-like book a few years from now, revisiting the story once we know how it actually turned out. Maybe title it Snarled?

It’s true that some stages in the history of Covid-19 economics are clearly behind us, and Tooze does his usual excellent job of conveying what happened, including important stories that I suspect even generally well-informed people missed. For example, in March 2020, amid vast uncertainty over the economic impact of the coronavirus, world markets briefly experienced a meltdown worse than the one that followed the implosion of Lehman Brothers in 2008. In that year investors fled anything remotely risky and plunged into the perceived safety of US government debt. In 2020, even the market for US Treasuries virtually shut down, with buyers unwilling to accept anything but cash.

Since the world financial system essentially runs on Treasuries, this could have led to a collapse of global commerce. But as Tooze documents, the Federal Reserve responded by setting up a sort of wall of money, buying everything from government bonds to corporate debt. And the financial crisis suddenly faded away.

Tooze also documents the huge surge in public spending that took place in early 2020 in both the United States and Europe, although I was a bit disappointed that he didn’t offer much new insight into the political aspects of this. Why, for example, did US Republicans go along with a plan that in major respects looked as if it had been devised by Democrats? (A Democratic senator, Ron Wyden, came up with the $600-per-week unemployment supplement, for instance.) My guess is that Republicans simply lacked alternative ideas, that it was something like the old joke from Yes Minister—“We must do something. This is something. Therefore we must do it.” In any case, the radicalism of the US response remains something of a mystery. And while Tooze presents striking data on European responses, he doesn’t tell us why, exactly, the famously austerity-minded Germans ended up offering more money in grants and loan guarantees as a share of GDP than anyone else.

Tooze’s early draft of history suffers from its earliness in at least two important ways. First, while the shocks of 2020 were amazing and unprecedented, the economic story of the pandemic’s first year didn’t actually present much of a puzzle or, as it turned out, much of a challenge to economic thinking. The need to slow the virus’s rate of transmission, to “flatten the curve” to avoid overwhelming health systems, forced governments to put their economies into the equivalent of medically induced comas; they for the most part prevented extreme financial hardship, in effect keeping those economies on life support by providing generous aid. All of this wasn’t like anything we’d seen before, but it worked out pretty much the way conventional economic models would have predicted.

By contrast, economic events since early 2021—that is, since the end of Tooze’s story—have posed a huge challenge to our understanding. True, some economists warned that large government spending would lead to inflation, and inflation duly arrived. But the way this happened didn’t match anyone’s predictions.

Normally, we expect inflation to materialize when the economy “overheats”—when high spending pushes output and employment above sustainable levels. As I write this, however, real GDP in the United States is only roughly back to its prepandemic trend, while employment is still below trend. Other advanced economies like the UK haven’t done even that well. Yet inflation has shot up to levels not seen in decades, and wages are rising rapidly. What happened?

We’re not completely in the dark; at this point everyone knows about the problems of overstretched supply chains and the Great Resignation of workers unwilling or unable to return to the workforce. But few saw those problems coming. For example, surely the great majority of economists, to the extent that they thought about the issue at all, believed that global logistics were far more resilient than they have turned out to be.

And on the really crucial question of policy response, everything hinges on whether this inflation is becoming “entrenched,” so that it will continue even once pandemic disruptions fade away. Unfortunately, it will be months or even years before we know the answer.

Of course, you can’t exactly blame a book written midway through a crisis for failing to address issues that didn’t become salient until the second half. But Tooze does draw one overarching lesson from the pandemic—a lesson laid out even more starkly and crudely in Bruno Maçães’s Geopolitics for the End Time: From the Pandemic to the Climate Crisis. This is that societies with top-down, centralized social control—societies like China—are better able to cope when confronted with a crisis like Covid-19 than Western-style liberal social orders. That’s a conclusion that would be disturbing if true. But it hasn’t aged well.

Tooze lays out this theme early, in a chapter titled “Wuhan, Not Chernobyl.” Chernobyl, he suggests, was deeply discrediting for the Soviet Union, where lack of accountability and the unwillingness of an authoritarian government to accept awkward facts contributed to disaster. But faced with a pandemic, China “turned the tables on its foreign critics,” because it was able and willing to do whatever it took to contain the coronavirus’s spread, enforcing harsh lockdowns in a way few Western countries could or would. Maçães goes further, arguing that China’s all-in pandemic response demonstrated that it is “now ahead of the West on many dimensions of what constitutes a modern society.”

By early 2022, two factors have made these conclusions look dubious. On one side, the miraculously fast development of effective vaccines has made harsh social control seem less essential to pandemic response. China, however, has a problem on the vaccine front: its domestically developed and produced vaccines appear to be less effective than their Western counterparts.

Yet China—unlike, say, France, which abandoned its Sanofi vaccine after shots from Pfizer and Moderna proved more successful—is still pushing its own vaccines. At one level this isn’t surprising: refusing to admit that your homegrown technology appears to be less effective than foreign alternatives is exactly the kind of thing you’d expect from an authoritarian, nationalist regime that tries to suppress politically damaging information. But it suggests that China’s Covid response is turning out to involve more Chernobyl syndrome than the first year might have revealed.

Second, the evolution of the virus itself seems to be making China’s social-control approach less sustainable. The Omicron variant appears at the time of writing to be less dangerous than earlier strains, especially for the fully vaccinated, but far more transmissible. The problem for China is that the government is still pursuing a zero-Covid policy—locking down whole cities at the first sign of new cases—at a time when new cases keep popping up even though people have been taking many precautions. As a result, China’s economy and society are now suffering a steady drumbeat of disruption, while highly vaccinated Western nations are limping back toward something like normal life.

Which is not to say that the West is doing well. Indeed, there seems to be a recurrent rhythm in which nations that seem to have been doing a good job at limiting the damage from Covid-19 suddenly turn into problem cases. For example, in September Denmark, with its high vaccination rate, lifted social restrictions; it appeared to be one country that, thanks to good management and public trust, had dealt effectively with the pandemic. But social restrictions came back as the nation experienced a huge surge in new cases.

And then there’s the United States, in which the coronavirus has brought out a whole new range of pathologies going far beyond the purely medical. You might have expected mRNA vaccines to solve the problem of dealing with a pandemic in a liberal society. Unlike lockdowns and social distancing, vaccines don’t require that individuals make sacrifices for the common good. Being vaccinated does reduce your chance of infecting others, but the big reason to take your shots is that they reduce your personal chance of getting severely ill. That is, vaccination is even less problematic than mask-wearing, which is something you do primarily to protect others and only secondarily to protect yourself. Vaccination is something you do mainly out of self- interest.

But anti-vax sentiment, fed by medical disinformation, caused a drastic slowdown in the pace of US vaccinations by June 2021, just in time for the deadly onslaught of the Delta wave. Many Republican politicians and, even more crucially, right-wing media figures fiercely opposed vaccine mandates, then turned to attacks on the science behind the vaccines and the medical experts urging Americans to get their shots. And opposition to vaccines became a badge of conservative political loyalty.

The effect has been dramatic. As of November 2021, 91 percent of Democrats had received at least one shot, versus only 59 percent of Republicans. In vaccine terms, the US is practically two countries: blue states have vaccination rates comparable to Western Europe, while red states lag far behind. So if we’re comparing the ability of political systems to cope with a pandemic, it makes an immense difference whether you consider New York or Texas to represent America.

What next? At this point, anyone making confident predictions about the course of this crisis should slow down and think about how well past predictions have panned out. Still, 2021 seemed to teach us one new lesson and remind us of two important older truths.

The new lesson is that the twenty-first-century economy, which until recently seemed like a marvel of organized complexity, is a lot less robust than anyone realized. Much of the recent surge in inflation seems to reflect a shift in demand away from consumption of face-to-face services that seemed risky toward goods like household appliances. My guess is that if you had asked economists three years ago how the world would respond to such a shift, they would have predicted an efficient, fairly smooth reallocation of resources. What we actually got was clogged ports, factories idled for lack of crucial parts, and plunging confidence.

The first of the two older truths we’ve had to relearn is what Thomas Hobbes tried to tell us: To succeed, society must be a “commonwealth.” Letting people put others at risk by refusing to wear masks, practice social distancing, or get vaccinated is qualitatively the same as letting individuals use the threat of violence to get what they want; in both cases, government has a crucial role—it constrains destructive individual behavior.

But the other truth we’ve relearned is that while autocratic governments may initially seem highly effective at providing security, they eventually suffer from their lack of openness: nobody dares tell their leaders when they’re wrong, or can force them to change policies that aren’t working, whether it’s the use of inferior vaccines or an unsustainable policy of repeated lockdowns.

So if, like Tooze and Maçães, you want to view the pandemic through the lens of great-power rivalry, you need to accept that the simple criteria that seemed to make sense a year ago no longer do. “Disciplined China does better than the disorganized West” has stopped working as a story line. At this point some of the best performers in both fighting the coronavirus and recovering from its economic effects are Western democracies with relatively high levels of public trust in science—not just small nations like New Zealand, but bigger nations like France.

And if America is in deep trouble—which it is—it’s not because we allow too much freedom, but because our society is being threatened by deep currents of hostility and irrationality that won’t go away even if Covid-19 recedes.