Skip to main content
SearchLoginLogin or Signup


Published onApr 09, 2020

Like the present crisis, economists did not have a front-line role in World War II and their expertise was primarily applied to management and planning. That allowed some of them room to think about the future. At the time, it was easy to draw a line from the Great Depression to the rise of fascism and hence, the war. And for John Maynard Keynes, he had seen the problem even earlier in the retribution imposed on Germany following World War I.1 So it was no surprise that he and his US counterpart, Henry Dexter White, were planning how to do better when the war was over. On April 21, 1944, the Allies came to an agreement to establish new post-national economic institutions to assist in managing the world economy and preventing crises such as the Depression. A preliminary meeting was held in Bretton Woods, New Hampshire later that year with 730 delegates from 44 countries. It led to establishment of the International Monetary Fund (IMF), an institution that exists to this very day, to allow free conversion of currencies and management of what was then a complex series of fixed exchange rates tied to a fixed price for gold. The goal of the IMF was to provide a means of ensuring that member countries complied and did not adjust their exchange rates wildly for their own short-term motivations. Suffice it to say, the motives were not retribution but continued cooperation. It was a superior approach.

What will happen once the COVID-19 pandemic has been tamed? It is too early to state definitively what lessons we will have learned and also the specifics of how we should respond and react going forward. But there are some general principles likely to be of relevance. For instance, if we look around the world today, the countries that were the closest to previous outbreaks (SARS in 2003 or H1N1 in 2009) enacted clearer plans at an earlier point than others (e.g., Taiwan, Singapore, South Korea, Japan and China). But while that may have contained COVID-19 outbreaks within their borders, it is plainly apparent that the costs imposed on them because other countries did not have those plans were significant. The global economy is interconnected. If just a few countries manage pandemics appropriately that does not prevent a large fallout and difficult recovery. In other words, management of the outbreak needs to be global even if its immediate impacts on health are most clearly local.

The issues of international cooperation become more serious when you realize that outbreaks emerge from specific places. In the case of COVID-19, it was around a neighborhood in Wuhan China. There is insufficient information right now to know whether that outbreak could have been prevented from spreading. But the relevant information was closely held within governments in that area and, thus, the response and expertise to deal with it had to be similarly confined. The alternative is that there is a global pandemic response unit with the expertise and monitoring of health across countries that can come in and dictate appropriate actions to prevent the spread earlier. This creates issues of national sovereignty, cooperation, the bearing of costs, compensation and myriad of other complications. But the social value, globally, from being able to contain an outbreak quickly and close to its source is very high, indeed. If Bretton Woods could cause countries to cede some control of their international finances to a supra-national body, that should at least give us hope that a future global pandemic response institution might be possible.

The question we will want to answer is: knowing what we know now, what would we have liked to see in place with regard to this and future pandemics? My presumption here is that this will likely be a pan-national institution like the IMF with a set of resources to contain future pandemics and ensure an international, harmonized response. The hope is that it would have both public health and economic expertise to do the job properly. Indeed, it may even assume the role of promoting and managing a new Manhattan Project type innovation offensive against future viruses and disease.

The goal of this final chapter is to highlight the very high-level economic challenges that a move in this direction will have to confront. There are political and moral challenges as well, but I will leave those for others to contemplate. My focus here is on how we will determine how much we should spend on managing pandemics pro-actively going forward.

How much should be paid?

In 2015, Microsoft founder turned philanthropist, Bill Gates, gave a TED talk warning of the costs of a future pandemic and our lack of preparation.2 The costs of a global flu pandemic were estimated to be in the millions of deaths and a reduction in global wealth of $3 trillion. This was the prediction of a catastrophe. But it was also an indication of what we might be willing to pay to prevent it. Suffice it to say, the budgets for pandemic preparedness were in the low billions and we know that wasn’t enough.

When the benefits are monetary, it is easy to calculate a rate of return on expenditures for preparedness. A reduction in global wealth in the trillions alone suggests that to prevent COVID-19 or another specific pandemic, budgets in the hundreds of billions would still be worthwhile. But my guess is that it will be tough getting governments to allocate those funds on that basis. Why? Because there are already a number of potential catastrophes that fall into that category of magnitude. Each of those have different likelihoods of happening but each of which could happen; impacting on our willingness to pay to prevent any single one. Indeed, when you add up potential global catastrophic risks, one thought you might have is whether it really worth spending even hundreds of billions to avoid one of these things when the others could get us anyway.

That was my thought up until 2015 when a paper appeared that changed my mind. It was written by Ian Martin and Bob Pindyck and was entitled “Averting Catastrophes: The Strange Economics of Scylla and Charybdis.”3 Scylla and Charybdis are a reference to Homer’s The Odyssey. In that tale, the sailor Odysseus sought to avoid both the monster Scylla and the whirlpool Charybdis but could not avoid both. The choice was made using a cost-benefit analysis — the monster might attack a few of the crew but the whirlpool would take the entire ship. The choice for Odysseus was to choose the monster.

What should we do with regard to the myriad of modern catastrophes, especially when we are often faced with decisions that could, in the terms of the Scylla and Charybdis example, both take the entire ship? Not only pandemics but climate change, asteroid strikes or nuclear war. Martin and Pindyck write:

Naturally, we would like to avoid all such catastrophes. But even if it were feasible, is that goal advisable? Should we instead avoid some catastrophes and accept the inevitability of others? If so, which ones should we avoid? Unlike Odysseus, we cannot turn to the gods for advice. We must turn instead to economics, the truly dismal science.4

Their answer is not to rely on a separate cost-benefit analysis for each one. Nor is their answer to just give up as if there were two whirlpools and no hope. Instead, there is value to picking and choosing which to confront.

To understand this, let’s put it in terms that will likely arise. Should we spend money dealing with a future pandemic? Should we spend money dealing with mitigating the climate change disasters that likely will come? Both? Or neither? Let’s suppose that someone was to argue, what’s the point of dealing with pandemics if you believe that we are going to face climate change disasters? The Martin-Pindyck answer is that the case for dealing with pandemics is actually higher (not lower) if you are worried about climate change. You should want to deal with it even more intensively than you might have thought.

The intuition is this: if you spend ongoing resources to mitigate pandemics, the fact that you may have to deal with the consequences of a climate emergency (e.g., hurricanes, sea level rises, extreme heat) means that, in the future, you expect some suffering. That means that you will actually value what you do have more and want to spend more to protect it. In other words, if there is harm in your future, you want to spend resources to mitigate another threat because you value what you have more than what you might have had in a disaster-risk free world. Consider this, if you live in a big house and a fire threatens to potentially raze half of it, you will be willing to spend more to protect the remaining half than you would have spent to protect one of the halves alone.

Once you are expending resources to insure against one catastrophe, the losses you might face if the other one happens are relatively lower. But this raises another question: which catastrophes should you prioritize? Could it be that concentrating your resources to mitigate a few of them might be better than spreading your resources to deal with them all? It turns out to be hard to state some general rules. Some, though, are obvious. If the costs of dealing with many catastrophes are sufficiently low, then it is worthwhile dealing with all of them. You should definitely do something so long as there is at least one catastrophe that passes a cost-benefit test in isolation. If you have decided to avert one catastrophe and a second one has higher benefits and lower costs evaluated in isolation, the it is worthwhile to also avert the second one as well. Finally, and this is comforting, if you assess one catastrophe to have both the highest benefit and lowest cost you should definitely try and avert that one. Interestingly, Martin and Pindyck’s simple calculations suggested dealing with a global pandemic may fit precisely that bill.

This analysis gives us strong comfort that, just because we face multiple catastrophes, we should not give up on dealing with some of them. Of course, in evaluating any catastrophe, assessing things in purely monetary terms is somewhat limited. Pandemics, like some other catastrophes, also have implications with respect to the loss of life. Preventing death is well and truly on the benefits side of any set of measures to prevent pandemics.

One way economists have sought to be persuasive on these questions is by trying to come up with a way of expressing the costs associated with a loss of life in monetary terms. Macabre though this is, the intent was to force policymakers to at least take into account loss of life in their calculations which could otherwise too easily be ignored. But what value? One possibility was to just add up someone’s potential lost earnings as was sometimes done when calculating damages in litigation. But was this really the value someone placed on their own life? Economists Thomas Schelling and Kip Viscusi were among those who suggested that if we look at people’s risky behavior (activities that people know might lead to death) we could estimate the value they were placing on their own lives (for instance, by looking at wage differentials for working in certain construction jobs or in security). This is the value of a statistical life. Numerous government agencies have put that value at $10 million.5 If that is the case then for pandemics of even modest size the loss of life component dwarfs the economic cost.6

What this all suggests is that spending hundreds of billions of dollars a year to mitigate substantially the risk of global pandemics are as close to a no-brainer as we are likely to get. That said, prior to COVID-19, we did not engage in that spending. Our experience confirms this error.

Future Resolve

Returning to the present, there will come a point in the COVID-19 panic that we will declare victory. At the time of writing, we do not know when that point will be. We do not know the number of deaths the outbreak will cause. We do not know how and whether the economy will bounce back soon after. We do not know whether life will be again regarded as normal. But, right now, for reasons I cannot fully explain, I am confident that there will be a point where we will collectively believe COVID-19 has been conquered.

Then, sadly, the trouble begins. Victory is a dangerous thing. It comes with relief. It comes with exhaustion. It comes with hope that we are done. Therein lies the danger.

When Germany was defeated in World War I, it was called “the war to end all wars.” The victors went back home, wrapped their hands together and were done. For France, this was especially so. They were finished but had also decided to make huge investments to give them a sense of security. They envisaged and then built an incredible series of fortifications along the entire border with Germany. Basically, it was a low-level mountain range with tracks to move troops, 100 miles of tunnels, barracks, and even air conditioning. The Maginot Line would protect France from a direct assault. Half a million troops could be embedded there. No army would try and breach it.

That, of course, was understood by all. If they attacked, the Germans would have to go through The Netherlands and Belgium (or maybe Switzerland). The French plan was to meet the invading force in those countries, which seemed secure. But as with all such things there were weak links. Belgium decided to stay neutral in the war. More critically, when the Germans were still preoccupied in the east against Poland, the French army chose not to cross the Maginot Line and pre-emptively attack. Their strategy had been one of defense. But even Napoleon had said that those who decided to stay within the fortress have already lost. And when the Germans did attack, they managed to slide into France through the Ardennes Forest. It had been believed that was a natural barrier against attack as it would be slow to traverse. That plan did not account for tanks, which covered the distance in days rather than more than a week.7 France was cut in two and fell in just over a month. As soon as the invasion had moved to their soil, resolve seemed to evaporate.

The idea that success can breed the seeds of its own destruction is not a new one. In management, the term “disruption” describes the situation where successful businesses cannot adopt new technologies because they continue to do the things that made them successful in the first place.8 Precisely why it happens and whether it is stupid, complacent, or can be “rationalized” is not material at this point. If and when we are victorious against COVID-19, whatever is driving that phenomenon will likely be present again.

It is also worth noting that, in many respects, COVID-19 was a somewhat ‘lucky’ pandemic. The virus, unlike measles, did not stay alive in the air. It did not lead to contaminated food. It appeared to be relatively genetically stable. And, it left children (and many others) mostly unaffected. There was no reason for all of those things to have happen. And so, there is no reason to predict that they will be absent in a future pandemic. But there is reason to be worried that we may forget that once we are done with the current crisis.

To build the global institutions we need to mitigate the costs of future pandemics, we will need that resolve. There are signs of hope. As this book was going to press, Bill Gates moved to build manufacturing facilities for seven vaccine candidates knowing only one or two would be viable. Why? Because doing that would save months of time. That is what resolve looks like.

Any victory we have over the next two years, needs to come with a warning. The eye cannot be taken off the ball. And if you need any guide from history remember that we did not get the IMF or the United Nations until we had not one but two World Wars.

Eric Zhou:

to have happened

Krishna Ravi Srinivas:

But the vulnerability and impacts are not the same for all countries in such catastrophes whether it is climate change or Corona. A tricky issue is that of Justice and how should those who suffer without contributing much to the factors that caused that catastrophe.

Kevin Bianco:

Krishna Ravi Srinivas:

IMF or World Bank are not suitable for this. WHO and few other institutions and foundations can create an organization to do this.

Michael Jones:

Why not suggest the WHO? It seems that we have an organization already created for this purpose.

This may not be the book for it, but further discussion of the WHO’s activities, or lack of activities, is warranted.

It also seems that one of the long-term consequences of organizations like the WHO producing misleading statements is that it will undermine the future success of such organizations.

Dermot Crean:

I was hoping to see in this chapter and the previous one some discussion of how our economy will need to change.

Economists have an important role to play in ensuring that our politicians grab hold of this as an opportunity to make lasting changes for the good of society - eg what about unlimited free water for farmers, fix energy supply, transportation, support for entrepreneurs (ie move away from Basel 3 regulatory capital, incentivise investors, innovators), create stronger links between business and universities, many of which may not survive otherwise.

Countries that do this well will prosper and attract talent and capital. The actions of the Bank of England and the Fed this week finally prove that we do not need to issue government bonds to finance spending. This is quite a radical ‘discovery’, albeit it was hiding in plain sight. However, now more than ever government spending needs to prioritise improvements in productive capacity.

Philip Stephens, Financial Times, this week wrote a good article highlighting the political issue.

The danger in the global coronavirus recovery will be inertia

A make-do-and-mend approach will not be enough — we need a societal transformation

“Low-paid workers in precarious employment took the hit after the 2008 crash. They will not be willing to do so again. Coronavirus should have taught us that our economies cannot function without all those minimum-wage workers caring for the sick and elderly, stocking the supermarkets and delivering Amazon’s parcels. The notion of fairness has acquired political potency.

Some shortening of global supply chains is inevitable. Yet the pandemic has exposed just how far even the richest nations are from strategic self-sufficiency. The international scramble for tests, drugs and equipment to fight Covid-19 will push politicians towards more state planning. We may end up with what the French public servant Pascal Lamy calls “globalisation with Chinese characteristics”. Short of permanently sealing borders and returning to subsistence economics, the pandemic has shown that governments cannot escape international interdependence. Most obviously, the world needs to invest more rather than less in integrating efforts to combat global disease — in methods of tracking, therapeutic drugs and vaccines.

The big danger is inertia — that politicians exhausted by fighting the disease take a make-do-and-mend approach... Instead, halfhearted reform will simply renew the invitation to populists to take up arms against liberal democracy.”