Using Lessons From War Mobilisation To Fight COVID

As the fight against COVID-19 continues, we ask: what lessons from war mobilisation can be employed to fight pandemics? Looking at this working paper from the Global Institute for Sustainable Prosperity, we consider the justification of large-scale fiscal stimulus to maintain the productive capacity of the economy. What the paper also demonstrates is that the longer the economy stays in lockdown, the higher the likelihood of stagflation returning.

What is Mobilisation Economics?

Normally, a market economy is geared towards maximising individual liberty. A mobilised economy works towards maximising society’s welfare by devoting all of its human capital, institutional capacity and its resources to a shared goal. For example, winning a war; or, in the current situation, flattening the curve.

Keys Lessons on Mobilisation Programming and Mobilisation

• A program must be balanced, in both a macro and micro sense; it must avoid simultaneously a relative undersupply of some things and oversupply of others. For example, if we decide to prepare planes for a massive airlift in the event of war, we better be sure to provide for a corresponding gasoline supply. Using the example of the pandemic: we should perform testing of a vaccine while concurrently ramping up our ability to mass produce and distribute vaccines in order to avoid delay between approval and widespread availability.
• Mobilisation tends to be associated with intense inflationary pressures because conflict can arise over who gets priority claim to those resources between various divisions in society, causing prices to spiral. In our Deep Dive, The WWI Economics Of COVID-19, we showed how the war led to hyperinflation in Germany.
• Beginning mobilisation when you have a substantial underutilisation of resources is a significant advantage. Starting from full employment requires living standards to fall if you are allocated a job according to mobilisation needs.
• Mobilisation is also associated with a temporarily bigger government. In our Deep Dive, The WWI Economics Of COVID-19, we discussed how, in both wartime and during pandemics, fiscal deficit soars.

Mobilisation Frameworks

• Tight mobilisation uses direct controls (government rationing and price controls) to curb inflationary pressures and allocate resources. For example, Galbraith’s disequilibrium system.
• Loose mobilisation ensures the free market remains intact during the allocation of resources. It uses fiscal and monetary policy to close the inflationary gap by eliminating excess demand. Once implemented, the price system could then be relied upon to distribute goods adequately. Pay-as-you-go and expenditure rationing are some of the public finance frameworks that incorporate this.

Figure 1

• Tight mobilisation is an attempt to achieve full capacity (Figure 1). In contrast, loose mobilisation tolerates some underutilization or slack in favour of preserving the market system. For households, the trade-off is that under tight mobilisation they can consume more (have lower taxes and less additional money-saving) but must bear more rationing and other direct controls compared with loose mobilisation.

Can These Frameworks be Applied to COVID-19?

Prolonged quarantines could force us into a tight mobilisation scenario. But we could exit it by closing the inflationary gap, either through demand management or by releasing workers from their homes to increase output. However, broad-scale mobilisation of idle resources towards fighting the virus does not appear forthcoming (as there is also a risk of speeding the spread of the virus). So, we might not approach an inflationary gap in the first place.

A Scenario Under Which COVID-19 Can be Inflationary?

The quarantine of workers will reduce real GDP significantly. These represent goods that nobody can consume because they were never produced — that’s a real loss. However, somebody must bear the real loss. This can happen through a reduction in aggregate demand, as people who reduce their expenditures are in effect self-selecting to take the real loss. But if too few people self-select — that is, if the drop in demand ends up being smaller than the decline in production — then this will set up an inflationary dynamic as buyers compete for a limited amount of resources, potentially driving up prices.

It’s worth noting that economists seem optimistic that the demand gap will be higher than the supply shortages. So a general shortage-induced inflation is not a worry in the short run. Similarly, that Washington is spending trillions on a scale last seen in WWII is another signal that the demand gap is more significant than the supply shortage.

Tackling Inflation

While inflation may not appear on an aggregate scale, specific products and sectors may require regulating, such as critical medical goods, which could experience shortages and consequently price increases. The authors of the working paper advocate some form of price control or controls on inventory (i.e. limiting the quantity of a particular product or material a firm may stockpile) and distribution orders (i.e. requiring a supplier to maintain distributions to specific customers or geography).  The federal government’s current action where individual US states could procure their own supplies, effectively pitting them against each other in the market for critical goods, could become inflationary and create shortages for some states.

Demobilisation –Successfully Restoring the Economy starts in Quarantine

Following war, demand spikes before supply resumes (it takes time before war-torn capacity is rebuilt) leading to both price rises and unemployment — a situation known as stagflation. Demobilisation following COVID-19 should ensure this does not occur. The main goal is to preserve productive capacity in stasis until it’s functional again, which requires steps to ensure supply side does not experience structural damage when labour quarantined. The private economy needs to absorb workers re-entering once the quarantines end. That will depend critically on whether during quarantine business is paused or whether, during shut down, they have fired the workforce, sold capital and filed for bankruptcy. If it is the former, then the return to a healthy economy will be smoother. If not, then we may face wartime-like stagflation.

Bottom Line

The paper highlights how war can be inflationary, but that such an eventuality may not always be so for pandemics. It also sheds light on how the main goals of a coronavirus stabilisation policy will not be to redirect productive capacity (unlike war). Instead, it will be to preserve productive capacity. The paper implicitly justifies large-scale fiscal stimulus to ensure that the productive capacity of the economy is not damaged. And it also demonstrates that the longer the lockdown continues, the higher the likelihood of stagflation returning.

Mehdi is a research analyst at Macro Hive. He’s currently pursuing an MSc in Finance & Investment at Nottingham University Business School and he is a CFA level 3 candidate. Mehdi has previously pursued roles as an Equity Research Analyst, Junior Economist & in Proprietary Trading.