The 5 Stages of a Covid-19 Command and Control Economy
A reorganization of economic life will be needed to combat the pandemic
“It is not easy for a free community to organize for war. We are not accustomed to listen to experts or prophets. Our strength lies in an ability to improvise. Yet an open mind to untried ideas is also necessary. No one can say when the end will come.”— John Maynard Keynes
Locking down the economy was intended to be a short-term measure to slow the spread of Covid-19 and prevent health resources from being overwhelmed. Yet the longer it carries on, the more it seems like a permanent measure. Depending on how long this virus lasts, we could be in a state of effective lockdown for a long time.
Fighting a deadly virus is much like fighting a war: politicians employ war-like language (‘metaphorical militarism’), communities pull together out of a sense of duty, and governments invoke emergency powers in the interest of public safety. Commercial enterprise is put on hold as everyone’s efforts are focused on supporting our men and women on the front lines, and the economy is reorganized to ensure civilian life can continue to function while the virus is kept at bay.
Make no mistake, we are at war, and our economy will need to adapt. Keynes, who offered Britain a blueprint for an effective wartime economy in his 1940 book How to Pay for the War, knew this would be an unnatural thing for people inclined towards freedom. However, the British adopted wartime economic management when the time called for it, living off rations and forgoing spending to contribute to the nation’s savings. There is every chance we will be called on to do the same.
Could something like this really happen to our generation? When we think about the disasters that could befall us, we can feel like we have betrayed our more hopeful selves. Dwelling on the future can be more painful than dwelling on the past if what lies before us is nothing but a dark and murky fog of possibilities. But facing up to the worst of what the future can throw at us can also help us rationalize our fears and give us confidence that we can see things through.
Make no mistake, we are at war, and our economy will need to adapt.
Humans are not properly wired to deal with uncertainty. We prefer constrained decision making with clear, analytical solutions, rather than huge, open-ended problems with no single measure of success. We like it when experts can at least make us feel like we are in control. Logical decision making under these conditions is incredibly difficult, and the best we can hope for is to muddle through.
Part of the problem is the vast amount of information that must be parsed by policy makers and the public. Information about how the virus spreads, our immunological response, and stories about what has and has not worked in different countries, are a moving feast. This makes it difficult to make a holistic assessment of the risks to public health and the economy, with the result being a politically driven equilibrium that focuses on managing public perception rather than making calculated decisions.
Paradoxically, the more information we have about the virus, the less we seem to know about what an optimal public health response should look like. Add to this the economic dimension, which demands politicians make a diabolical choice between adding millions to the jobless pile or risking a spike in illnesses and deaths, and you have a ticking timebomb of blame, resentment and social unrest.
From here, it is not obvious where things will go. There are very few precedents to guide us, and certainly no recent ones. Viral outbreaks are common, but a global pandemic that forces developed and emerging nations alike into lockdown is something rare in history. The speed and devastation of the economic collapse is also something extraordinary, and while there has been a bounce back, it may prove short-lived if a second wave hits.
There is also a host of attendant global risks, some of which were present even before the virus hit. According to a survey of risk experts conducted by the World Economic Forum, the most probable risks are economic: a prolonged global recession, bankruptcies, high unemployment, and lengthy supply chain disruption. However, there were also other risks that ranked highly in terms of likelihood, including governments holding on to emergency powers, worsening mental health, and widening inequality.
If we take the likelihoods of these events at face value, then we could expect a number of these outcomes to coincide, with second-order and even third-order effects combining to create a highly complex situation for governments to manage. Once in the grip of bankruptcies, supply disruptions, and civil unrest, governments are forced to take more direct action beyond handing out cash to ensure the economy can continue to function.
If you don’t make stuff, there is no stuff
Printing money has become the conventional response to an economic crisis. Flooding markets with money helps keep yields low while governments rack up debt to fund transfers and other forms of stimulus. When the economy comes to a grinding halt, payments are needed to help workers stay in jobs and businesses stay afloat. However, when a crisis gets really bad, payments alone do not get you very far. What people need is not the cash per se, but the things that cash can be used to buy.
When economies become severely dislocated, governments can make money as abundant as they like. It is a lot harder to conjure up food, medical supplies, equipment, and other essential goods. When economic activity falls through the floor, goods and services become scarce. As Elon Musk said, in true Keynesian fashion, “If you don’t make stuff, there is no stuff.”
Securing supply chains and managing shortages become the primary concern of governments during an acute crisis. It may sound absurd to those of us accustomed to living in relative peace and prosperity, where heavy-handed government intervention is rarely if ever needed, but crises like the one we currently face have a way of changing the rules of the game.
When society is confronted with a threat, it is prepared to forgo a degree of freedom to increase its chances of survival. At the same time, governments rarely let a crisis go to waste. Even if not done entirely with Machiavellian forethought, governments use emergencies to expand their power and normalize ideas about what should legitimately fall within the realm of state control.
The 5 stages of wartime economic management during the Covid crisis
As the Covid-19 crisis worsens, we should expect governments to take whatever action they are able to get away with to effectively contain the virus. Whether intended or not, we are on the path to a command and control economy with significant consequences for how we work and live. This process will not happen overnight, but by a ratcheting-up of the government’s wartime response. Let us examine in five steps how this process could take place.
Stage 1: Social distancing, stay at home orders, and short-term government support
This is the initial stage that we are all familiar with. Social distancing is awkward at first, but we soon develop some rules that allow us to interact smoothly and safely. Staying home does not seem like such an onerous duty considering the lives that will be saved. Those who put others at risk by needlessly venturing outside are excoriated on social media and issued hefty fines by the police.
Employers are encouraged to be as flexible as they can and to take care of their staff, especially those on the front lines. Retail workers are praised for the essential work they do to stock our shelves and deliver our packages. Generous government support is extended to businesses and workers who have been laid off due to the virus. Banks, landlords, and insurance companies come to the table to renegotiate payment terms. Monetary authorities crank up the printers and flood the markets with liquidity to ensure the financial system stays afloat.
Stage 2: Business failure, civil unrest, and extension of government programs
Despite the liquidity pumping through the system, and the additional cash to keep employees on the books, many businesses struggle to keep their doors open. A string of failures adds to unemployment and creates additional stress for landlords who need to manage rising vacancy rates. Social tensions are exacerbated by an arbitrary approach to enforcing the lockdown measures, while the threat of unemployment and loss of income results in widespread anxiety and depression.
The world appears to bounce back from recession, but pockets of outbreaks become more and more severe, prompting a return to stricter lockdown measures. A collapse in confidence leads to a deterioration in longer-term expectations. Retail businesses begin to die out, while global supply chain disruption leads to shortages of some essential goods. Previously high-value sectors like technology suddenly become worthless, while consumer staples and health care products become highly coveted. Despite a reduction in income and higher savings rates, some products become more and more expensive due to a lack of supply and higher manufacturing costs.
When economies become severely dislocated, governments can make money as abundant as they like. It is a lot harder to conjure up food, medical supplies, equipment, and other essential goods.
Stage 3: Supply chain stress, rationing of goods, and geopolitical conflict
Eventually, supply chains become stretched and businesses reach the limits of their ability to adapt. While some large physical retailers successfully transition to online selling, customer experience deteriorates due to increasingly long dispatch times, a lack of availability of many items, and high shipping costs. Industrial inputs and finished goods sourced from overseas become increasingly expensive. Energy prices skyrocket as governments favour importing energy rather than drawing down on national stockpiles.
Customers attempt to go direct to warehouses to purchase goods but face long queues and traffic bottlenecks. After waiting for hours on end, many go home empty handed. Police are required to prevent stockpiling, with strict limits imposed on the number of items that can be purchased at a time. In some regions, emergency services take direct responsibility for rationing essential goods, setting up distribution points to ensure everyone has access to a minimum amount of food, sanitary products, and other essential items.
Social tensions intensify, while mass protests and claims of corruption among local authorities are rampant. After a few months, much of the unemployment thought to be temporary becomes more or less permanent. Acute unemployment in some areas results in widespread discontent and demands for governments to take more drastic action. Some countries use the opportunity to settle long-standing grudges while their opponents are preoccupied. Skirmishes break out in contested territories and resource rich areas, while cyberattacks become relentless.
Stage 4: Mandated re-openings, suspension of labor laws, and government financing of payrolls
To alleviate shortages, governments are forced to reopen factories and other essential services, many of which were already bankrupt or on the verge of insolvency. Labor forces are rehired and put back to work, with necessary Covid-safe procedures in place. Labor laws are relaxed or suspended to ensure workers can get back to work immediately. Governments step in to help businesses finance wages and other operating costs with subsidized loans and direct payments.
Businesses with essential assets or labor that refuse to reopen face penalties. Workers who refuse to work are fined or have their government payments suspended. To plug gaps in the supply chain, the government quickly moves to bring new manufacturing online, although skill shortages mean new workers need to be trained. National training programs are established to bring more workers into factories. Manufacturing becomes a lucrative form of work for many who may previously have held professional jobs.
While incomes begin to rise and unemployment falls, the cost of goods remains high and inflation leads to a rise in inequality and an insider/outsider effect, where people direct their efforts at obtaining a government-sponsored job in manufacturing. Businesses further down the supply chain compete for labor while facing higher input costs. Governments must offer support to protect margins and ensure adequate supply and distribution.
Stage 5: Wartime economic organization, debt monetization, and nationalization
As federal and state debt reaches fantastical levels, central banks are forced to step in and directly finance government spending, much like during wartime. To combat chronic inflation, governments implement price controls while paying additional subsidies to businesses whose profits are affected. In some sectors, supply chains are integrated under a single government enterprise to avoid unnecessary fiscal churn.
Most workers are now de facto government employees, with output targets set and supply requisitions issued by government managers. This transformation of the structure of the economy was originally justified as a necessary evil to combat the virus, but people are starting to get used to the new system. The safety afforded to many by a secure income and rationed goods makes for comfortable living, although extreme inequality persists among the population.
As the virus disappears from news headlines and the ‘new normal’ simply becomes ‘normal’, people continue to go about their day, heading into work, catching up with friends, and watching their favorite shows on TV. Life seems to have stabilized, and most are grateful simply to have an income, a source of food, and a roof over their heads.
Demobilizing the Covid economy
How much of this is plausible and how much is pure science fiction is for individuals to judge. In the developed world we have gone decades without a hot war or similar crisis that has had a direct effect on our lives. It is difficult to imagine, without the benefit of recent memory and experience, what the process of full-scale mobilization and state-directed production would look like.
How would we respond? Would we protest any of the measures, no matter how justifiable they may seem on utilitarian grounds? Would a newly awakened sense of duty mean we support each other and our political leaders for the sake of survival?
It is an interesting thought experiment and, happily, no more than that for the time being. This crisis may end up passing us by reasonably fast. Perhaps a vaccine will be discovered, or maybe exposure to the virus will lead to herd immunity and a fall in death rates.
Or maybe, after months of on-again, off-again lockdowns and failed vaccine trials, things will start to get worse, and something similar to the scenarios outlined above will become our reality. Then, once the virus is finally defeated, we will need to roll back the wartime provisions, denationalize our industries, and reclaim our rights as private citizens.
Did you find this story compelling? Is there anything missing? Or is it simply too outrageous to take seriously? Maybe you have your own version of what could happen. If so, I and many others would love to hear it.