In today’s newsletter, we will talk about the similarities between the global economy in 2020 and a wartime economy.
The Story
As Coronavirus ravages the world economy, a lot of people are comparing its effects to the 2008 financial crisis. However, as more days pass by, it’s beginning to seem as if the economic impact of the Global Pandemic is likely to look very different than anything we’ve seen over the past few decades.
But if you turn back the clock a little bit (circa 1940 perhaps), maybe that will change.
The point is — our economy right now resembles a wartime economy. As is with war, a small percentage of the population is fighting on the front lines (In this case Doctors and medical staff). There’s widespread panic and misinformation. Businesses, small and large are facing the heat as the country’s resources are being directed towards the destruction of the common enemy. The only difference this time around is that the enemy happens to be an invisible virus.
And the similarities don’t stop there. For instance, during World War 2, there was a desperate need to accelerate the output of items such as ships and tanks, and so, several companies were tasked with mobilizing their existing resources and equipment to produce these alternate goods.
Today we are no longer producing guns and tanks. But we are facing an uphill task to manufacture and stock medical equipment/supplies to battle the contagion. As face masks, test-kits and ventilators begin running out, we are seeing governments ask (sometimes force) private companies to step in and fill the gap. Automobile companies such as Fiat and General Motors are using their car plants to make ventilators. Luxury fashion brands like Louis Vuitton are using their perfume distilleries to manufacture hand sanitizers. And on Friday, President Donald Trump invoked the Defense (defence) Production Act to boost the production of ventilators as part of efforts to deal with the coronavirus outbreak. And it doesn’t stop at that.
We are also seeing hoarding en masse. During World War 2, goods such as gas, rubber, coffee, and sugar were rationed, as they were deemed essential to the war effort. People were encouraged to make do with less so that soldiers would have enough. But of course, the fair price system collapses when consumers resort to hoarding. And now, pictures of empty supermarket shelves prove that once again, fear has won out over rational thinking.
So if the impact of the virus is so similar to that of war, would recovery follow the same trajectory?
Not exactly. For one, there’s no mass destruction of property and equipment happening here- so the rebuilding effort will not be physical. And instead of young people dying in the ‘war’, elders are more vulnerable here. Also, there’s no hard stop when it comes to the virus- especially considering we don’t know if and when the vaccines will show up. So in truth, nobody knows what course the economy will take because no one’s sure how the pandemic will play out.
But that doesn’t stop people from making predictions. Oh no, not one bit. In fact, most people expect that once the uncertainty surrounding COVID-19 dissolves, we will see an economic boom akin to the one following World War 2.
Think of it this way- we’re going to go months postponing large purchases. So once we’re in the clear, this pent-up demand will need to be satisfied, and companies who are currently witnessing sales slumps will be more than happy to comply.
However, this doesn’t apply to all things. You’re not going to go get an extra massage or eat out 4 times as often just because you weren’t able to do so for a few months. And to expect businesses to emerge out of this crisis unscathed would probably be a bit naive.
The end of the Pandemic may also bring about a shift in the nature of work. After the World War, labour unions won long-term employment contracts and other peripheral benefits for most blue-collar employees. And the pandemic will perhaps force labour unions to band together once again, as hourly workers and wage labourers are forced to make some hard financial choices in the face of a lockdown.
Either way, I think it’s fair to say that it’s anybody’s guess how the economy will be holding up, once the dust settles.
Until then…
