🦠 The three cleavages

Shaping the post-pandemic order

We’ll win this war. We’ll defeat the enemy, a mindless foe, one oblivious to the threat it poses, the damage it wreaks. It will have no sense of its defeat.

Those of its number which survive will answer the staccato call of its protein machinery, enveloped in droplets of coughs and sweat, until it finds its way into our bodies, ultimately binding to the membranes of our lungs once again. And the battle will restart.

This war will be won. As will the next. But Sars-CoV-2 is not capable of caring about the details of its defeat. There will be no signing on the deck of the USS Missouri, nor misplaced hubris or the Hall of Mirrors of the Place of Versailles (or the deck of USS Abraham Lincoln).

Yet, there are sides, contrasted from the choices we make over the coming months. These sides mark three of the major cleavages that the war against the virus will illuminate.

👁🗽 Leviathan and liberty

Thomas Hobbes argued that in a time of persistent threat, citizens would turn to a sovereign power, a Leviathan, to protect us from one another. We would surrender our rights and freedoms to an absolute power.

Which aspects of our emergency response will become cemented into our day-to-day life?

Will it be stronger surveillance powers by the state?

In South Korea, government agencies are harnessing surveillance-camera footage, smartphone location data and credit card purchase records to help trace the recent movements of coronavirus patients and establish virus transmission chains.

In Israel, the country’s internal security agency is poised to start using a cache of mobile phone location data — originally intended for counterterrorism operations — to try to pinpoint citizens who may have been exposed to the virus.

The countries who have best responded, at least from a public health perspective, to Covid-19 can be presented as those where liberty sits at the ankles of the Leviathan. Singapore and China have all marshalled excellent responses. According to Freedom House’s Freedom Index, they score 50 and 10 respectively. (The United States scores well above at 86, but below Greece and Chile.)

But we must not ignore how well Taiwan and Korea have done against the virus. Yet they maintain much greater freedoms than Singapore and China. According to Freedom House’s Freedom Index (a necessarily limited assessment of political freedom), they score 93 and 83 respectively.

How far have Taiwan and Korea shackled liberty? Taiwan’s electronic fence is a fine-grained approach to quarantining. It shows that there are nuances in execution, the subtle bargains between liberty and security, between the economy and the safety.

And equally, we know that states can turn their expansion into meaningful ideological changes. Public investment programmes don’t merely become drivers of aggregate demand and long-term transformation, they shift what we value too. America’s New Deal heralded reforms that brought that nation the Social Security, homeownership and unemployment insurance.

States are not very good at giving back what they take. In Crisis and Leviathan, Robert Higgs, a libertarian-leaning academic argues that the size of the American government is connected to how the machinery reacts to national emergencies. Expansions in the reach of the federal state being punctuated by the responses to those emergencies and, bringing with them, ideological shifts.

The question is: which of the adaptations from this crisis will we keep? Will we allow governments to maintain lockdown powers beyond our victory against Sars-CoV-2? Will we allow them better access to tracking systems in order to prepare for the next pandemic? And if we do, will we get stronger rights in return? (See this letter from Rachel Coldicutt calling to ensure our rapid response to the crises follows ethical best practice.)

How we encourage our states to respond after this crisis will determine harmony and prosperity in the years after.

🇨🇳🇺🇸 China and the US

As I pointed out on Sunday, China is moving swiftly to position itself as a leader amidst the chaos, especially with the US likely to be mired in the crisis at home for weeks or months to come.

When no European state answered Italy’s urgent appeal for medical equipment and protective gear, China publicly committed to sending 1,000 ventilators, two million masks, 100,000 respirators, 20,000 protective suits, and 50,000 test kits. China has also dispatched medical teams and 250,000 masks to Iran and sent supplies to Serbia, whose president dismissed European solidarity as “a fairy tale” and proclaimed that “the only country that can help us is China.” Alibaba co-founder Jack Ma has promised to send large quantities of testing kits and masks to the United States, as well as 20,000 test kits and 100,000 masks to each of Africa’s 54 countries.

Beijing’s edge in material assistance is enhanced by the simple fact that much of what the world depends on to fight the coronavirus is made in China. It was already the major producer of surgical masks; now, through wartime-like industrial mobilization, it has boosted production of masks more than tenfold, giving it the capacity to provide them to the world. China also produces roughly half of the N95 respirators critical for protecting health workers (it has forced foreign factories in China to make them and then sell them directly to the government), giving it another foreign policy tool in the form of medical equipment. Meanwhile, antibiotics are critical for addressing emerging secondary infections from COVID-19, and China produces the vast majority of active pharmaceutical ingredients necessary to make them.

Beijing’s tactics involve a meaningful campaign of disinformation. This may have been unintentional at first, but certainly looks more deliberate now.

It is even possible that China becomes the global economic and financial safe haven, argues Andy Rothman. The government has plenty of dry powder, consumer demand is healthy (buffered by deep household savings, see chart on Chinese consumer optimism) and odds are they have domestic Covid-19 infections under control. 

As Europe and the US begin their economic shutdown, interested primarily in medical supplies and staples, the Chinese economy, which can still rely more on domestic demand than many other nations, is slowly whirring back to life. (Graphs below from the FT.)

Chart showing Covid-19's impact on the Chinese economy. Subindices that make up the FT China Economic Activity index.

The US will respond. It is slow to act and clearly disunited but when it does act, it has creativity, resources, commitment and drive. As my friend Joe Cohen suggested to me, the federated response from the US, states leading on public health, the federal government on markets and the stimulus, national centres of excellence on the medical and scientific responses, and its strong private sector of innovation, could turn into a winning strategy. (For example, see Curative Inc, a US-startup scaling up to 10,000 Covid-19 tests per week.)

The result will be an uneven impact based on geography and regulatory response. Some states like California and New York see a full-scale emergency, some elements of the leadership in Texas are more calculating with their response. In recent days, the FDA has banned in-home Covid-19 testing.

In its 240-year history, the US has been tremendously successful, apart from its post-war failures in Cuba, Vietnam, Iraq, Afghanistan and Syria. But unlike those wars, Covid-19 represents an attack on the homeland of more intensity than 9/11 or Pearl Harbour.

Yet this fragmented response may take away one of the US’s longest-standing economic advantages, the equity risk premium US equities have enjoyed.

America’s sluggish response, first in rhetoric and now in action, demonstrates to investors that they ignore the competency of the ruling-government at their peril. Particularly when every day that passes without a government response only deepens the costs—both to humans and capital—over the longer term.

The death of the American century might have been exaggerated, but perhaps this crisis will signal the end of the American valuation premium.

How will this end? This excellent review in the Financial Times, does not portend well:

a toxic mix of economic downturns in the US and China, nationalistic citizens and political leaders trying to deflect blame on to an external rival has the potential to deepen the crisis. [Bill Bishop] wrote last week: “The carnage from the coronavirus has barely begun in the US.”

👵🏽 👧🏽 Old and young

This disease disproportionately attacks the old.

Unlike the Spanish flu, which in absolute terms killed those in their 20s, 30s and 40s more than most other age ranges. In relative terms, death rates for those aged between 25-30 were similar to those between the ages of 60-70. (There were just many more 20-40 years olds than septuagenarians a century ago.)

Early indicators for Covid-19 suggest that the fatality rate for the those seventy and over is anything like 30-60 times higher than those in the 30-39 age group. In fact, modern medicine appears to be able to heal most of those without other serious complications. See, for example, early American data here which supports more extensive research from Italy and China. Germany’s comparatively low fatality rate is partly attributed to the disease passing through younger populations first.

This was noticed by governments. Britain’s initial strategy of ‘herd immunity’ seemed to depend on the relative puissance of younger cohorts towards the disease.

In order to stop the spread of the disease, governments have increasingly closed their economies. China first, now right across Europe, Italy, Spain, France, Switzerland, the UK, and increasingly larger parts of the US.

Today we face a stagnation trap, where:

[f]irms react by cutting investment, which negatively affects productivity growth. Initial pessimistic expectations of weak growth thus become self-fulfilling. Importantly, this self-fulfilling feedback loop can take place only if the fundamentals of the economy are sufficiently weak. The coronavirus epidemic, therefore, can open the door to expectation-driven stagnation traps precisely by weakening the growth fundamentals of the economy… this means that a sufficiently aggressive policy intervention to sustain investment can rule out stagnation traps. A timid intervention, however, will not do the job. (Emphasis mine).

Getting out of this stagnation trap will take a Herculean effort. And to stop the fabric of society unravelling, governments have started to make unprecedented interventions.

In Germany, €750bn ($808 bn) stimulus package, equivalent to about 21% of GDP. More may be in the works.

In the UK, a £330bn ($387bn) in loan guarantees, on top of £20bn in direct aid and offers to pay 80% of employees wages.

In the United States, a package of up to $2 trillion in aid, representing some 10%, is currently under discussion.

As our economies restart, these sums will need to be repaid. Governments have typically done this through lower investment in public goods, like education or housing, or through higher taxes. After the banks were bailed out during the global financial crisis, most governments in the West passed the costs of reparations onto the least well-off through programmes of austerity.

Younger cohorts, when the dust settles, might ask the question about how all this will be paid for and whether the burden of paying it will fall on them. Older cohorts, who largely control the wealth in richer economies, and have done so increasingly since the global financial crisis, may take a different view. Ultimately, this will be decided by politicians, at a time when the governing class is older than their average citizen than ever before. Not all will behave like this Italian priest.

How do we constructively explore divergence that may emerge between the young and the old?

The dialogue

There may be other cleavages to explore. For example, the gender balance: in previous wars, men represented the combatants, suffered most of the casualties in war and did virtually all of the killing (of civilian and soldier alike). In this war, the front line is the doctors and nurses—75% of our warriors are women.

Broader than China vs the US is the collective East vs. the individualist West, of Confucius vs. Aristotle. The crass “othering” leads to a simple conclusion that these Asian nations are bizarre because they aren’t WEIRD. That only they will accept mass lockdowns because the collective population behaves like a herd (and so it doesn’t need herd immunity). But as doctors from Bergamo, the epicentre of the disease in Lombardy, recently argued collective institutions do make a difference during pandemics:

Western health care systems have been built around the concept of patient-centered care, but an epidemic requires a change of perspective toward a concept of community-centered care

And even if most commentators argued Western populations could never accept lockdowns, it turns out that those in Italy, France, Germany, the UK and the US can. Ninety-three out of a hundred Brits, from the land of Locke, Mill, Bentham and Smith, support it. What might we learn about learning from other nations earlier?

How we tackle these cleavages will determine the shape of the world after the war. After we have rid our households, streets and cities of this vile 29,902-letter word, and banished it to nothing more than furtive sallies, what future will we shape?

I’m curious to learn how you think these cleavages will play out. Discuss in the comments below.

Stay at home, keep your distance and WASH YOUR HANDS.

Azeem

Dig deeper

Listen to my discussion with David Runciman where we explore some of the ideas of super-agency and Thomas Hobbes.

Listen to my discussions with Ian Bremmer where we explore some of the issues around US and Chinese competition.

Listen to my discussion with Marianna Mazzucato on the role an active state can play.

In my discussion with Carlota Perez, we explore some of the institutions that emerged after the New Deal.

Thanks to inspiration from Paola Bonomo, Joe Cohen, Marija Gavrilov, Yann Ranchere and others.