The disturbing part of the ongoing developments related to the COVID-19 pandemic is that it has not fully sunk in for many commentators just how bad all this is likely to get.
There has been much discussion in recent years about the fate of the U.S.-led world order, and about the possible acceleration of its decline in the face of both Russian and Chinese challenges, the waste of blood and treasure in Middle Eastern wars, and America’s political malaise at home. Much like Britain at the dawn of the 20th century, the United States has gone from a virtually unchallenged preeminent position in the world to a defensive crouch. But the debates about the causes of decline today feel like they are from a different era. Today, the United States is facing a pandemic, the response to which is triggering a massive recession. If COVID-19, with disturbing dark humor, is called the “#BoomerRemover” on Twitter for its toll on the elderly, it is also likely to exact a punishing toll on the United States in its role as the world’s sole remaining superpower.
The numbers tell a sobering tale. Before the pandemic began, the United States was already on an unsustainable fiscal trajectory. Before the Great Recession, U.S. gross federal debt (including that which the government itself holds) stood at about two-thirds of GDP—67.7 percent. It jumped in 2009 to 82.3 percent and never came down; over the next ten years, it continued to creep upward to over 100 percent. As of the end of 2019, it stood at 106.9 percent. Before the crisis hit, Congressional Budget Office projections were dismal. The U.S. budget deficit exceeded $1 trillion, against about a $21 trillion gross domestic product.
The situation is partly voluntary and partly structural. The problem begins with the recognition that the United States has been beset by economic stagnation since the 1970s, with each decade showing slower economic growth. Why this is so is hotly debated. Economists such as Robert Gordon and Tyler Cowen see this as the result of the maturing of the economy, with each breakthrough (improvements in electricity, running water, education, internet access, etc.) only achievable once. Others, such as Larry Summers, have revived a Depression-era theory of “secular stagnation”—the idea that the absence of investment opportunities would lead to unproductive saving.
Whatever the exact causes, amidst this stagnation, and arguably in an uneven effort to mitigate its worst effects, the United States has been intermittently availing itself of a series of voluntary unfunded tax cuts. It cut taxes under Reagan before raising them partway, cut them again under George W. Bush and then allowed the upper income tranche to expire, and finally cut taxes again under Trump. Each of these tax cuts led to, or exacerbated, deficits at the time, which could not be addressed without unpopular or unsustainable spending cuts.
The structural problem, which was arguably the more serious and intractable, was the inability to recover from recessions and the looming spike in old age entitlements from the aging of the Baby Boom generation. Despite the apparent surplus at the end of the Clinton Administration, the United States was already set up for a massive fiscal shortfall as the Baby Boom generation retired and began collecting Social Security, Medicare, and Medicaid (which pays for nursing homes). The surplus, in other words, was a mirage, though what followed did not help. The Bush tax cuts of 2001 and the subsequent wars in Iraq and Afghanistan led to deficits, though these were lower than GDP growth at the time.
It went well, until it did not. The 2008 recession led to massive revenue shortfalls at the exact same time that old age entitlement spending began to increase as the first of the Baby Boom generation began to retire. Even though the bank bailouts were mostly paid back and the ill-fated 2009 stimulus had been mostly unspent by the time the recession had formally ended in the second quarter of 2009 (and was therefore spread out over time), the United States was in serious financial trouble, running deficits of over a trillion dollars annually from 2009 through 2012. These equaled anything from 6 to 10 percent of GDP annually at the time, far beyond average economic growth of about 2 percent. It also exceeded, on an annual basis, the total nominal end-to-end cost of the Iraq or Afghanistan war.
The problem was solved in large part by the famous “sequester” of 2013, entailing across-the-board budget cuts. The Trump tax cuts of 2017, which reinstituted some parts of the Bush tax cuts that had expired in 2013, led to a “peacetime” trillion dollar deficit that the United States was still running on the eve of the COVID-19 pandemic and subsequent recession. It should go without saying that as these debts piled up, they never were paid down. At present, the outlook for entitlements remains gloomy, with funding shortfalls in the trillions projected for the coming decade, even before COVID-19 arrived.
It is hard to know what the total cost of the pandemic will be, but some preliminary estimates can be hazarded. The average ICU visit in the United States costs about $31,000, and some tens of millions of Americans (how many is unknown, but the projections from the Centers for Disease Control run to the hundreds of millions in worst-case scenarios) will be infected. Some of those—perhaps about ten percent, perhaps twice that—will end up in the hospital. A ballpark figure for the medical bills alone, therefore, is in the hundreds of billions. Whether these are paid by patients, the government, or healthcare providers and insurers agreeing to swallow the costs, they represent something like the absorption of 2 percent of GDP’s worth of brand new costs. There will also be a surge in spending—probably paid for in part with taxpayer funds—on basic medical supplies, including ventilators, which U.S. manufacturers are now promising to produce on a World War II scale.
Meanwhile, the productive capacities of the American economy will be hammered. Americans are going to ground for weeks or months. This is a giant hit to aggregate demand—the economy will shrink as nobody buys things—and there will be myriad knock-on effects, many of which are still hard to imagine. Some industries—anything to do with air travel, tourism, hospitality, food service, or live entertainment, not to mention education—are going to be devastated as people stay at home in compliance with social distancing directives. As many as 32 percent of the American workforce of 160 million are expected to lose their jobs. How long until they get them back is unknowable, but a year is a reasonable estimate; those projecting an “L-shaped” or “U-shaped” recession implicitly suggest it could take longer. The hit to the U.S. economy may be measured in trillions.
The classic response—economic stimulus, whether monetary or fiscal, intended to prop up demand—is unrealistic, doubly so since in some sense, depressed demand is the goal of lockdowns and social distancing. As one commentator noted, what is needed is not stimulus, but “life support.” The most that may be hoped for is some sort of mitigation to prevent masses of unemployed people from starving or losing their homes, an all-too-real prospect in a country where 69 percent of citizens have less than $1,000 in savings. Assuming that a fifth of America’s 160 million-person workforce are unemployed and need (conservatively) $10-20,000 a year to avoid this (assuming a poverty level of $12,750 per individual or $24,500 per family), the cost will be about a third of a trillion dollars. In practical terms, it will probably be several times that.
Various measures have been proposed. The U.S. Congress has just passed a $2 trillion stimulus bill, including broad-based unemployment benefits and a $1,200 stimulus check to each adult citizen, along with a variety of industry subsidies. More will be needed. (A more ambitious program that honestly accounts for the true cost of the entire economy losing a year’s income was proposed by the financial journalist Andrew Ross Sorkin. The plan would involve a “bridge loan” by the government to all American workers and businesses that could be repaid over time. Setting up the “life support” this way would mitigate the cost to the government and effectively pass it on to the public as a delayed tax increase. So far, there has been little interest in such an approach.)
But ultimately, how the COVID-19 recession is paid for—through government borrowing or through measures like the suspension of mortgage and rent payments—is beside the point. What Americans don’t take in in revenue will not go to the government in tax revenue either. The Great Recession, after all, led to deficits of over a trillion dollars a year. Regardless of precisely what form stimulus, relief, or simple revenue shortfalls take, the United States is in for running shortfalls at least that great now.
Overall, then, the least that can be expected is that the United States will spend several trillion dollars in total—about ten percent of GDP—handling the coronavirus and its fallout. But it is as likely, given where the United States is starting and what happened in the last recession, that federal debt will rise by trillions more. A debt-to-GDP ratio of 150 percent a few years from now is not hard to imagine.
Facing this much economic damage, the United States also faces a threat to its power and security, and the world order on which its security depends. Even as it looks to its citizens’ welfare at home, the United States must be cognizant of the national security challenge that the pandemic and recession pose.
On this point, it is important to recall that American global hegemony rests on its unparalleled ability to project force abroad. That ability is sure to be tested going forward. The U.S. defense budget will have to end up on the chopping block—if not now, then in the coming years when deficits really start to soar. At the moment, the United States is spending about $686 billion on defense annually, and $375 billion to service the national debt. The second is already projected to overtake the first. COVID-19 will no doubt accelerate this trend.
The entire U.S. alliance network, by which the United States has historically led the world, depends on the perceived ability of the United States to respond militarily if an ally gets in trouble. A blow to U.S. credibility in this area can bring the entire system down. If a NATO ally is attacked and the United States does not respond, NATO ceases to be credible and probably falls apart (and takes the EU with it). Similarly, if any of the countries along the First Island Chain—Japan, South Korea, Taiwan, or the Philippines—are attacked, and the United States does not respond, those states will quickly make their peace with China. If credible doubts about the United States’ ability to do any of the above emerge, serious strategic realignments could well break out across the world.
It is unclear where the breaking point is, but the numbers have not been moving in the United States’s favor. The U.S. Navy has been planning to deploy 355 ships as a (probably inadequate) measure to counter China’s growing fleet; as a popular naval blogger recently noted, a fraction of that number now looks optimistic. Similar statements could be made about efforts to modernize the Air Force or to retool the Army. In any case, the incentives are there for China, and perhaps even Russia, to test the boundaries of America’s already-wavering resolve and to undermine the credibility of U.S. security guarantees. We should expect more provocations if the United States visibly weakens.
Americans can and should start thinking hard about what we can do to mitigate this looming catastrophe. It is important to state outright, however, that any plans that demand the country sacrifice civilian lives in the service of American “power” and “greatness,” however those are construed, are non-starters. The pandemic is real, and it must be faced head on, costs notwithstanding. The first priority must be to save the lives of as many of our fellow citizens as possible, and to preserve Americans’ concern for one another. Our civil society was already badly fraying before COVID-19 hit us; becoming the country that threw millions of its citizens under the bus in a futile effort to preserve productivity will be a death blow.
On the fiscal front, therefore, there is only so much that can be done, but that is all the more reason to be careful. But the United States should, at the very least, avoid wasting money where it can help it. It needs to route bailout money toward those most in need, avoiding spending on those who can survive on their own. Industry bailouts, if needed, should be structured as loans; if exceptions need to be made for airlines and other industries that constitute critical economic and national security infrastructure, these can be evaluated on a case-by-case basis.
The United States also needs to be mindful that its greatest geopolitical adversary, China, is also one of its greatest creditors, and, despite historically needing (until very recently, at least) to purchase U.S. debt for structural economic purposes, has also shown a willingness to use international credit markets for purely political purposes. Debt, while inevitable, must also be treated as a vulnerability best minimized. This is particularly true amidst efforts by U.S. rivals to partially replace the dollar as the global reserve currency, which could have severe implications for U.S. borrowing rates and the general economy.
In the foreign policy area, the United States can cut back where it can. For example, the withdrawal of forces from Afghanistan, if it can be effected, will open up political and military options. A long-overdue look into wasteful defense procurement could mitigate some of the effects of likely future defense cuts and spur innovation. And a little leadership—even just in the form of token aid in these horrific times—would also reassure allies that the United States, for all its internal turmoil, is still present. At the moment, China is providing aid to U.S. allies and waging a propaganda battle even as it covers up its role in the pandemic’s start. The soft power aspects of U.S. leadership must equally be attended to with what little the United States can spare.
Conspiracy theories about COVID-19 being a bioweapon have been debunked. But if you wanted to design a weapon to accelerate America’s decline as a global superpower, it would look like COVID-19. If we want to be the leader of the free world—if we want there to be a free world—we are going to have to be careful about how we manage the plague of our era.