Coronavirus: Beware It Being Used as a Cover for Promoting Socialism and Protectionism

This article appeared on Conservative Home on March 4, 2020.
  • Related Content

“You never want a serious crisis to go to waste.” “Only a crisis‐​actual or perceived‐​produces real change.” Rahm Emmanuel, Barack Obama’s Chief of Staff, and Milton Friedman, the libertarian economist, had different political ambitions. But they both understood how crises can facilitate radical economic and political change. The coronavirus, or Covid‐​19, now risks becoming one such crisis. Ascendant political ideas do not bode well for its consequences.

Much has been written on the near‐​term economics. Disruption to global supply chains, including lost production in China and consequent knock‐​on effects on shipping, could restrict the availability of certain goods, acting as an adverse supply‐​side shock. That will put upward on prices, which central banks would be wise to ignore.

Purer “panic” risks sapping the demand‐​side of economies too, thus constraining output further. Restrictions on, or fears about, socialising, could induce short‐​term consumption contractions, most of which will bounce back later, but which will put near‐​term pressure on many businesses and liquidity‐​constrained households. Tanking markets reflect both such effects but, as Tyler Cowen notes, the market reaction is bigger than these imply, suggesting investors are passing judgment on political reactions too.

The overall GDP impact depends on infection and death rates, the length and severity of containment, and consumers’ spending responses. Even with a death rate of one per cent, widespread infection could significantly affect output. School closures for a month, as seen in Japan, might multiply any economic drag by a factor of three. In the worst case, flights might be grounded, sporting events cancelled, and more.

As Paul Goodman outlined last week, the Health Secretary must tread carefully between accusations of complacency or needless panic. Ministers are reportedly “considering the trade‐​off between allowing an acute outbreak, from which the economy would rebound more quickly, or trying to save more lives by imposing restrictions…”

Recognising trade‐​offs is welcome, but given the international nature of the problem and awful worst‐​case scenarios (widespread infection of health professionals, causing knock‐​on consequences for those sick without the virus), health concerns must dominate here, particularly to protect the elderly.

Nevertheless, one understands why the economics spooks politicians. A 2009 paper by Simon Wren‐​Lewis, and Oxford University economist, modelled an influenza pandemic. Assuming a three month flu similar to that seen in 1957 and 1968/69, with 35 per cent to 50 per cent of people affected, and those infected taking five to seven days off work, it assessed various lengths of school closures, the possibility of people proactively taking time off, and adjusting types of consumption.

In the best‐​case UK GDP was projected to fall by 1.2 per cent in the quarter, with the year fall in GDP just 0.2 per cent as most consumption then rebounded. A more extreme scenario, with one per cent of the working population dying, school closures for 13 weeks, and four weeks pre‐​emptive absenteeism, would have seen GDP contract by 4.5 per cent over the year. If consumers really change their spending habits, that rises to circa six per cent – a similar near‐​term recession to the financial crisis.

Now, that’s a severe scenario. But it’s worth bearing in mind given how much the financial crisis changed politics. Even a more muted impact could have profound consequences, once political opportunism kicks in.

The most obvious could be how a U.S. downturn affects their Presidential race, particularly with Bernie Sanders still in the hunt for the Democratic nomination to face Donald Trump. Goldman Sachs estimates the coronavirus could shave a percentage point off GDP growth this year. No post‐​war incumbent has won a Presidential election with growth that weak.

Though yesterday’s Democratic primary results were positive for Joe Biden, an escalating epidemic could rapidly change that race again. And with stories of U.S. citizens avoiding seeking medical treatment through fear of out‐​of‐​pocket costs, a crisis will allow Sanders to denounce a healthcare system that Biden helped create, pushing Sanders’ proposed socialisation of healthcare (so‐​called “Medicare‐​for‐​all”) to the forefront of the campaign, ahead of a Trump showdown.

Sanders’ supporters certainly still smell blood. “If America ends up with major supply chain disruptions like China has had, a related stock market decline (already underway), and other adverse economic impacts, how voters, as taxpayers, weigh the costs versus benefits of ‘Medicare for all’ proposals could easily change,” said Steve Early, a co‐​founder of “Labor for Bernie.”

Remember that Sanders’ economic platform is more radical than Corbyn’s Labour – combining protectionism, a massive expansion of the welfare state, and a guaranteed well‐​paid public sector job for all who want one. If he wins, the Land of the Free turns in a radically different economic direction, institutional constraints notwithstanding.

This would not be unusual. History shows crises invariably grow government, with emergency measures, new spending, and trade and social restrictions never quite normalising. Even if the U.S. avoids a socialist president, the coronavirus is already emboldening protectionists, particularly with regard interdependence with China. Donald Trump’s son (Don Jr) retweeted approvingly, for example: “For people worried about the economic impact of #coronavirus and #StockMarketCrash2020 – just imagine if we *didn’t* have a president in the White House who spent the past three years encouraging American companies to reduce their dependence on China.”

Trump will use a potential pandemic to push reshoring, tighter borders, and immigration restrictions. Environmentalists concerned about carbon emissions will use it too to advocate for less international travel. Historians have pointed out that pandemics tend to occur after long periods of trade growth and integration, because of this sort of reaction.

It’s not escaped my notice that three well‐​plugged‐​in UK journalists – Jeremy Warner, Iain Martin, and Andrew Neil – have all downplayed supply chains’ longevity, as part of the government’s hubristic desire to “reshape the economy.” We will see further anti‐​market sentiment when prices of certain goods rise through trade disruption too. There’s nothing like a shortage of hand sanitiser or certain foods to cause people to give up on supply and demand and denounce “greedy profiteering.”

An anti‐​market, anti‐​free trade turn would be a disaster, though, and economically short‐​sighted. Yes, global interconnectivity and travel raises risks associated with pandemics, requiring contingencies. But free trade and interconnectedness also raises prosperity, providing more resources to deal with crises when they arise.

A home‐​focused industrial policy hardly saved China from this epidemic. And it’s precisely trade openness and markets that ensure diversity of supply – particularly in medicine and food. If you think the UK or the US are vulnerable to lost production from Covid‐​19 now, imagine if everything was produced domestically and a pandemic hit here hardest.

When crises hit though, as Emanuel and Friedman knew, the chaos provides opportunities for ascendant ideas currently waiting in the wings. Neo‐​socialism and protectionism are today’s fashionable “novel” opinions. Covid‐​19 could have a legacy much greater than any initial economic drag.

Ryan Bourne

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute.