Domestic Affairs

“How to Pay for the War” and its Applications to the COVID-19 Pandemic

The world is currently waging a seemingly endless war on SARS-CoV-2, even if it may not seem so for those reading from bustling West Campus. As we continue to wage a proverbial war on the virus with various levels of success and failure, we need to be able to quickly and efficiently mobilize national resources. During times of war, which are times of scarcity, normal economic rules of play that work for the most part during times of surplus must necessarily be suspended. Thus, John Maynard Keynes’ arguments are very relevant to the current COVID-19 pandemic. It has forced the United States and indeed much of the world into an unforeseen, hard-hitting, and intense recession that will continue to impact our economy long after the pandemic ends. 

In 1940, Keynes published How to Pay for the War, a long-form essay in which he developed and shared a macroeconomic-level series of recommendations regarding how Great Britain could fund a war against Germany. The main question he aimed to answer was how to effectively organize and deploy all of Great Britain’s human capital and productive resources during a time of intense scarcity that would last for an indeterminate amount of time. Keynes’ arguments for achieving full employment, implementing price controls, and decreasing consumption as a way to pay for the Second World War can also be applied to the United States’ approach toward the pandemic and its long-term economic implications. He argues that the true challenge is to “devise a means of adapting the distributive system of a free community to the limitations of war.”

One of the first arguments Keynes makes is about the critical necessity of achieving full employment. Keynes says, “In peace time, that is to say, the size of the cake depends on the amount of work done. But in war time, the size of the cake is fixed. If we work harder, we can fight better. But we must not consume more.” One method of understanding the size of the fixed cake, or our possible consumption, is by understanding the country’s output capacity. This output can be increased through encouraging and enabling full employment, as well as lengthening and intensifying the workday. To him, the nature of unemployment during the war is drastically different than the nature of unemployment during business as usual. 

While the latter may be viewed as a natural byproduct of a peacetime job market and a deficiency of demand, the former is much more insidious and reflective of inefficiency, which must be suspended as much as possible during wartime. Unemployment during wartime no longer reflects a deficiency of demand. The challenges of shifting the labor force to the areas where it is needed and of existing demand becoming effective (i.e., able to be met with supply outside of just labor supply, such as raw material supply) hinder full employment. 

This theory was applied during the Great Depression when President Roosevelt created programs such as the Public Works Administration, Tennessee Valley Authority, Civil Works Administration, and Civilian Conservation Corps, which all hired unemployed individuals and helped “prime the pump” for economic recovery on a larger scale. 

The Civilian Conservation Corps is perhaps the most famous; it was an unemployment relief program that provided manual labor jobs to young men that promoted the development and conservation of America’s natural resources and public lands. During its operations from 1933 to 1942, three million individuals were active in the program. In turn, the CCC introduced millions of dollars to regional economies across the country, helping to alleviate the acute pain of the Great Depression. The economic impact of programs like the CCC during times of crisis is quite clear.

And, we need something similar now — desperately. The impact of the current COVID-19 crisis on the American economy alone cannot be overstated. While unemployment has gone down in recent weeks, twenty percent of the American workforce had claimed unemployment — 33.3 million Americans — in May. The original public health crisis has engendered an economic disaster of literally unprecedented proportions. While this is certainly true, I would agree with Keynes that there is not a deficiency of labor demand. There are nationwide shortages of many essential items, both for the average American and our healthcare workers on the front lines of this battle, such as with respirators, ventilators, medical-grade masks, gowns, and other personal protective equipment, beef, hand sanitizer, etc. A public employment program à la the Civilian Conservation Corps could attempt to meet these needs while enforcing social distancing protocol, such as through paying people to sew masks at home.

Another one of the primary Keynesian arguments in his essay regards price controls and rationing. Keynes argues that, for a very limited range of essentials, price controls and rationing would be beneficial. Keynes opposes price and wage controls normally, arguing in The Economic Consequences of the Peace, “The preservation of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself … the seeds of final economic decay, and soon dries up the sources of ultimate supply.” 

However, in How to Pay for the War, he argues that these practices may be beneficial for wartime. Shop shortages and queues which lead to “great injustices of distribution” due to differences in purchasing power and old-fashioned inflation are both unsatisfactory. However, there must be a way to preserve the common good and the freedom of choice of individual consumers. For necessary goods, exorbitant rises in price are undesirable; thus, the natural method of restriction is ruled out and there is a reasonable case for rationing. The purpose of rationing is not to control consumption, but to divide it as fairly as possible for goods that have restricted supply.

Arguments for price controls and rationing are incredibly relevant during the COVID-19 crisis. Reports about price gouging have been rampant. During normal times, supply and demand set an equilibrium price for a good or service. However, the value placed on things like hand sanitizer and protective masks is currently so high that price gouging is a natural result if prices are set only by supply and demand. However, this not only induces mass hysteria but limits access to necessities based on socioeconomic status. When necessities are by definition essential regardless of income level, this is frankly unjust. Thus, rationing and price controls during times of crisis like these can be justified. Grocers like H-E-B and Walmart have internally set rations for products, thus indicating that the involvement of government may not be necessary. Furthermore, South Korea and Taiwan have successfully rationed masks. South Korea limited the price of masks to USD $1.20 (below the market price of USD $2.00), with a weekly ration of two masks per person. Policies such as these could not only reduce mass hysteria and panic buying but could also limit the spread of the coronavirus. It would be easy for the United States to do something similar. 

To Keynes, enforcing price controls and rationing is contingent on developing and implementing a scheme of deferment of wage payments. This would serve to control aggregate consumption and thereby support the war effort. He argues that a necessary proportion of consumers’ purchasing power is withdrawn from the market; at the time, there were millions of dollars in private hands that, to him, should be redirected to the war effort. These earnings would be made available as a right to consume after the end of the war. Keynes drafted up a table of ideal amounts of deferred payments for individuals at different income levels, with allowances for taxation and remaining income. 

The bulk of those new taxes would fall on individuals from higher socioeconomic levels. By fixing this system proportionally, there is a consideration for relative sacrifice. A key point here is that Keynes wants to protect from regulated reductions in consumption those whose “standard of life offers no sufficient margin.” Thus, in his table, he implements a very sharp progressive scale and encourages various family allowances. The goal is to change the consumption levels of those in higher-income groups while leaving lower-income groups alone. Furthermore, Keynes is sympathetic to arguments for basic minimum income as a universal equalizer during the wartime. 

Recent research shows that COVID-19 has had a dramatic negative effect on household spending and consumption overall. I believe Keynes’ argument about the necessity of decreasing consumption and deferring wage payments on a massive scale to divert financial resources to the war effort is less relevant in the economic fight against COVID-19, especially considering the high level of American unemployment, than his arguments on full employment and price controls and rationing. If we were to implement something like this, I feel it would only be feasible and advisable for the top 1%-5% of income levels. 

However, his discussion on this topic is relevant due to the recently passed federal stimulus package aimed to provide relief from the financial burdens of the pandemic for American citizens in the form of stimulus checks, and the ongoing conversation about whether or not we should have another one. For example, a single taxpayer who earns less than $75,000 each year can expect about $1,200. This is essentially equivalent to a short-term form of universal basic income (UBI). 

Other countries have enacted similar measures. In Canada, for instance, Prime Minister Justin Trudeau has pledged CAN$2,000 each month to those out of work due to the coronavirus. This is really fascinating because of the potential long-term impacts of these initiatives, such as the possibility of adopting a permanent UBI. Viewed as a fringe economic policy not six months ago when hailed by former presidential candidate Andrew Yang, the COVID-19 pandemic may change public perception of UBI, even in a country with as much of a free-market-oriented mindset as the United States. This would follow the precedent set by many European countries, where public support of a basic income system, as far back as 2016, is often above 50 percent. This, to me, raises the question of not just how this pandemic will affect the United States and global economies for the next decade, but, more interestingly, how it will affect the very nature of our economic system.
I’ve just scratched the surface of Keynes’ arguments in his timely and impactful essay, How to Pay for the War. His work and the principles within it regarding how to run a wartime economy can readily be applied to our current pandemic. I believe that these three focuses — full employment, price controls & rationing, and controlling consumption through deferment of payments and a basic minimum income — are the most relevant of his various proposals regarding how the United States and other countries around the world should approach the economics of the coronavirus pandemic. Considering the free market culture in the United States, it’s likely that many of these proposals would be unpopular, to say the least. However, Keynes said it best: “A general plan like this, to which all are required to conform, is like a rule of the road — everyone gains and no one can lose. To regard such a rule as an infringement of liberty is somewhat silly…”

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