It is remarkable how the economic debate that has dominated political life over the past decade in Britain and much of Europe—how austere should we be?—is completely irrelevant to our current crisis, as if that argument sits in a parallel economic universe that we no longer inhabit.
Instead of arguing about how swiftly governments should balance the books and lower their debt levels, leading economists, who are typically better known for their rhetorical sobriety, are suddenly making the case for much more aggressive public spending. People such as Mario Draghi, a former president of the European Central Bank, Olivier Blanchard, previously a chief economist at the International Monetary Fund, and the economist Kenneth Rogoff, who has often argued that too much debt leads to far lower growth, have all pushed for what they have described as warlike spending. The U.K.’s Office for Budget Responsibility, traditionally a guardian of fiscal prudence, now advises the British government to spend “what you need to spend to deal with this. In some ways it’s like a wartime situation.”
If this is right, what lessons might we learn from “wartime economics”—beyond a cautionary reminder that the standard economic tools available to us (cutting interest rates, carefully increasing government spending) are no match for the magnitude of the moment?
First, we should acknowledge the peculiar paradox at the core of this crisis, that although we are confronting an economic calamity, no actual economic weaknesses are to blame. The economy has not been leveled by bombs—we have simply turned it off. This creates a unique challenge: How do you support people during this moment of suspended animation, and ensure that, when we switch the economy “back on,” it is able to propel itself into action, unscarred by this pause? Some of the traditional lessons of war, thus, don’t apply. Today, for example, a crucial economic challenge is that consumer demand has been decimated by the virus—people are stuck at home across Britain, Europe, the United States, and elsewhere, unable to buy coffees or croissants, eat at their local restaurant, or purchase many new products. In contrast, what troubled John Maynard Keynes, the British economist, at the start of the Second World War was the possibility of too much demand. That combined with a shortage of supplies due to the war effort, he feared, would lead to explosive inflation. His solution, a compulsory saving scheme, is precisely the opposite of what we need.