The Covid pandemic was often compared by news media to a
war. The war analogy has been used to justify the huge expenditures and budget
deficits associated with the response to Covid.
However, Covid was not like a war.
Wars kill young people in the prime of life; Covid killed unproductive old
people a few years before they would have died anyway. Covid took much less of a toll on the economy
than a war involving the same number of people would have. You could even argue that Covid was a net
plus because it reduced the amount that would have been expended to care for
old people in nursing homes and other care situations. There was a corresponding increase in medical
payments for end-of-life treatment in hospitals by doctors and nurses. But overall, the effect of Covid was much
less than a war would have caused.
The only corresponding increase in deficits and debt has
been those incurred during World War II. In World War II, people made many
sacrifices to support the country. Food and gasoline were rationed. People bought
war bonds to finance the war. Neither
the Trump nor the Biden administration has asked Americans to sacrifice
anything for the war on Covid. Instead,
the government has handed out more and more benefits, such as the $9,000 FEMA
payment for funerals of people who died from Covid. Medicare and Medicaid paid many of the Covid medical
expenses. In short, it was almost the
reverse of World War II; instead of the people helping the government fight
Germany and Japan, the government helped people fight Covid.
The Treasury and Federal Reserve expended trillions of
dollars to make sure than no one suffered economic hardship as a result of
Covid. In retrospect, they may have done
too much because Covid was not as damaging as people thought it would be. Information technology kept many businesses
going. The main losers were restaurants
and in-person retail stores, but many retail stores successfully converted to
on-line sales. There were dislocations,
but certainly not a depression, or even a recession. It was pretty much business as usual but
carried out in different ways. At first,
people thought the housing market would collapse because people would be afraid
to show homes for sale or to visit them.
Instead, the housing market turned white hot, with sales and prices
going through the roof, in part spurred by interest-free money made available
by the Fed. The stock market has also
gone through the roof after the initial losses around March 2020 when the
pandemic first began to hit the population.
Many investors make huge profits in the markets. Again, people expected the devastation to be
much worse than it was. Many people died,
but not so many productive people. Service
and travel industries were hit hard, but others not so much. Gains in information technology largely made
up for losses in the service industries, like restaurants and airlines. Even many restaurants adapted by converting
to take-out.
After the initial losses in early and mid-2020, the US
economy came though fairly well, with relatively few sacrifices required of the
American people, except a request to wear masks. It’s ironic that the supposedly patriotic
Republicans were the most vocal resisters to the few sacrifices that the government
requested, wear a mask and get vaccinated.
While there are still questions about how Covid started in
China, it looks like as soon as the government became aware of it, it cracked
down strongly. The epidemic stated just
as the 2019 Chinese New Year would normally have created the biggest travel
days of the year, but the government stopped or postponed it. As a result, China came though the epidemic
much better than the US did and in a much shorter time. This has benefitted the Chinese economy
significantly vis-à-vis the US economy.
Although the US came through the pandemic much better than I
initially expected, I remain worried about what comes next. The Fed and the
Treasury have made sure that no one suffered terribly from it, but there may be
a cost in out years. There are now huge government
debts that must be repaid somehow someday, and it looks like there will be further
budget deficits into the foreseeable future.
One way to escape debts is inflation; if money is worth less, the debt
is easer to pay off, because you are paying cheaper dollars. This inflationary pressure is in addition to
more normal wage and price inflation caused too much money in circulation, thanks
to the largess of the Fed and the Treasury.
If US inflation increases significantly, it will undercut the world’s
use of the dollar as the international currency, perhaps replaced by China’s currency
if it becomes the world’s leading economy.
Cryptocurrencies will further complicate the situation, if not bitcoin,
perhaps cyber currencies backed by national governments.
The US dollar because the world’s currency partly because of
World War II. The US was much less
affected than the other belligerent countries.
The Marshall Plan revived western Europe, and benign occupation of Japan
and Germany allowed them to recover.
Meanwhile the US had suffered fewer casualties than many of the other
warring countries, hundreds of thousands, rather than millions (Soviet Union,
China, Japan, Germany). The US became
the factory and the banker for the world.
There is a possibility that the pandemic will do the same for
China. China may not be as generous following
the pandemic as the US was following World War II.
