Steven Weber is the director of the Center for Long-Term Cybersecurity at the University of California, Berkeley and a 2019-2020 Berggruen Institute Fellow.
Recency bias guarantees that, over the next week, we will see a large number of analyses comparing the stock market crash of March 2020 to the crash of late 2008. The analogy is particularly frightening because the 2008 crash contributed to a global financial crisis. And the stories will be a source of longer-term anxiety because of some of the political economy sequelae that are generally attributed to the crisis, including the rise of mass populist movements in Western democracies.
But 2008 is the wrong analogy. In many important respects — financial and otherwise — what we are experiencing right now is more like what happened in September of 2001. And that analogy has some good news embedded in it that is worth paying attention to even in the middle of the acute shock.
The 9/11 attacks were, like the coronavirus, an exogenous bolt from the blue that hit an otherwise moderately growing economy with decent fundamentals. That kind of exogeneity matters more than simply being a theoretical consideration in economics. Covid-19 isn’t really a consequence of modern financial markets or the ways in which the global economy works. It’s a consequence of biology and the fragility of human immune systems when faced with novel pathogens. The September 11 attacks had the same exogenous character — they weren’t caused by finance in any meaningful sense.
Of course, it’s right to point out that in some narratives about longer causal chains, both shocks are related to the way we’ve constructed global systems. Covid-19 would be less of a challenge if supply chains and transport links were less globalized, and 9/11 might never had happened if U.S. foreign policies in the Middle East had been categorically different for the previous 50 years than they were. But that’s a very different argument, both in theory and in practice, from the first-order causal links between financial instrument over-engineering, mortgage-backed securities, the role of rating agencies, the underlying Asian savings glut and the bubble in U.S. treasuries that were the proximate causes of the 2008 crisis.
The immediate economic consequences of Covid-19 are hitting hardest many of the same industries and sectors that suffered most from 9/11. Consider transport, travel and hospitality as the most obvious examples. Air travel in the U.S. was shut down entirely for several days after 9/11, and it took months before passenger volume returned to pre-9/11 levels. The immediate shock to supply chains was dramatic, as the costs and delays associated with securing containers moving across national borders rose sharply. There was also an element of demand shortfall that followed at least in some cities (most notably New York), where fear kept people at home and out of stores and restaurants and the like, at least for a few weeks. But confidence and associated demand returned to trend surprisingly quickly. The anthrax events later that fall were a bit of a setback but not a massive one.
Exogenous events tend to work their way through the system much more quickly than endogenous debt-deflation crises, which historically take around a decade to normalize. That’s of course no guarantee of anything this time, since lots of negative multiplier effects could emerge on top of the Covid-19 shock. It’s too soon to rule out a cascade of defaults on low-grade bonds, a lasting and self-reinforcing demand shortfall from a collapse in confidence, massive bankruptcies of businesses that can’t service their debt or, as happened in 2008, the emergence of unseen financial interdependencies that collapse under stress. But for right now, there’s no significant evidence of that kind of downward spiral, as measures of systemic stress like spreads in foreign exchange swaps and bond market liquidity shortfalls are holding steady.
Barring any secondary market conflagrations, the best bet for Covid-19 is a supply shock that is less concentrated in the very short term but is spread out over a somewhat longer time period than what happened after 9/11. That’s simply because 9/11 was a one-day tragedy rather than a contagious disease that spreads before it eventually burns out. The “area under the curve,” a measure of the aggregate size of the shock, could very well be similar in magnitude, but the curve will be somewhat flatter and stretched out over a longer time period.
This is bad news simply because it lengthens the time in which markets and businesses face shortfalls. But it has a positive element: the low likelihood of a rapid recovery enhances the incentives for political authorities in control of fiscal policy to put political differences aside in order to mount significant fiscal stimulus that would directly compensate for demand shortfalls and create indirect demand effects by boosting overall confidence. With interest rates so low, fiscal policies would be a more effective stimulus and a more compelling signal of government commitments. It may not happen — particularly given the current electoral political environment — but the chances are better with a drawn out shock like the one we’re now facing.
But more interesting and hopeful is a hidden positive dimension around public health that I believe we’ll start to see over the next year.
After the sharp shock of 9/11, the U.S. embarked on a set of massive security-related investments intended to reduce the risk of terrorism. Some of these investments were in advanced technologies that have had long-term positive effects outside of the defense-intelligence complex in areas like high performance computing, network analysis, machine learning and image and facial recognition. Much went to military and security activities that had few positive externalities and more likely were deadweight loss or net negatives for the overall state of the economy. Together, the wars in Iraq and Afghanistan cost trillions of dollars. Without making a judgment on the geopolitical necessity or moral status of either war, it’s possible to imagine massively greater positive effects if some of those resources had been invested in basic infrastructure like bridges and airports, alternative energy research and deployment or human capital needs like technologies for distance education.
Or, of course, in capabilities and facilities relevant to public health. Even $1 trillion could modernize public health infrastructure in the U.S., and parallel expenditures in other countries could do the same globally. In the wake of the Covid-19 shock, we will likely see at least some upward surge of investment in public health capabilities. The optimistic case is that we see a huge surge indeed as governments realize that the massive human and economic consequences of viral pandemics — which have become far more frequent in the last two decades — are controllable, even if the underlying viruses cannot be.
Disease surveillance technologies, hospital surge capacity and rapid diagnostic and vaccine development would all reduce the short-term shock risk associated with what are now inevitable pandemic events. Investments in supply-chain resilience and information systems to support crisis communications would reduce the first-order negative externalities of pandemics. The key is that most of those investments would pay positive externality dividends in “normal” times as well. And this is on top of the positive human welfare impacts they would bring.
It won’t be easy or straightforward. Public health investments aren’t always politically sexy. Some public health capabilities, such as advanced disease surveillance systems, run up against sensitivities around privacy and sovereignty. But spending many trillions of dollars to fight the global war on terror wasn’t politically sexy either, even though the “system was blinking red” in the summer of 2001. The shock of 9/11 changed the game.
Covid-19 just might be the shock that does the same for global public health. We should start talking about it that way right now.