In the 13 months since the COVID-19 pandemic began, the United States has had more deaths than the country lost in four years of World War II. This state of affairs seemed particularly embarrassing when countries much poorer and weaker than the U.S., such as Taiwan and Vietnam, let alone China, the rising power, were able to take decisive action in order to stop the spread of the pandemic.
Some believed that the pandemic was the nail in the coffin of American hegemony. But a year later, the U.S. is pursuing an aggressive vaccination campaign against COVID-19, leading the industrialized world. Its economy is set to exit the pandemic stronger than it entered — so strong in fact that the U.S. will likely be the engine of economic growth for the entire world in the first post-COVID years.
A partisan might point to the new and more competent presidential administration as the key factor that has turned a disastrous containment strategy into what seems like a dramatic vaccination success. But this would be to miss the forest for the trees.
The successes and failures of governments around the world reveal that state capacity is largely path-dependent: the result of previous political and economic leaders’ actions and decisions. This path dependence is itself a function of where major powers are positioned in a global division of labor, wherein certain capabilities, such as financial depth or export competitiveness, are exaggerated. The differing trajectories of the U.S., China and the European Union in addressing the pandemic have made these differences clear and can tell us something about what the post-pandemic world might look like.
“The U.S. will likely be the engine of economic growth for the entire world in the first post-COVID years.”
The early American response to COVID-19 was a disaster: Hospitals lacked protective equipment, the ability to detect and contain the virus was hampered by stressed supply chains and, most importantly, Americans and their leaders resisted true lockdowns as the virus spread unabated. At the time, as planes delivered Chinese-made masks to suffering and confused Americans, some observers suggested the pandemic heralded the last act of the American century.
But in the middle of the chaos, the American fiscal state was rumbling to life. American fiscal policy has largely been dormant since the Reagan revolution, largely restricted to tax policy and military spending. Even the Obama-era stimulus paled in comparison to the challenge of the Great Recession.
The first CARES Act and ensuing stimuli were a radical departure from the previous policy regime. Just as importantly, the Federal Reserve changed its stance to prioritize employment over a strict inflation target of 2%. These policies worked. Instead of a feared repeat of the Great Depression, the American economy has remained largely stable and prosperous, considering the circumstances. And the post-CARES Act political environment has taken the brakes off the American state’s largest comparative advantage — its ability to use fiscal policy to invest in growth.
The success of fiscal policy alongside the failure of social policy reveals that the American state is a broadsword, not a scalpel. However, it is a powerful sword indeed. As Nils Gilman and Steve Weber argued at the outset of the pandemic, the initial response to COVID-19 was a test of “operational expertise” — an area of knowledge that tests coordination and social services. What we can see clearly now is that the U.S. welfare state remains weak, but its fiscal and innovative state are a remarkable success.
“The American state is a broadsword, not a scalpel. However, it is a powerful sword indeed.”
In the postwar period, the American military-industrial complex seeded a system of funding innovations and then transferring them to the market. Though the U.S. has retreated from industrial policy in many sectors, it retains a strong infrastructure for funding late-stage scientific research and advanced pharmaceutical manufacturing.
As Alex Williams and Hassan Khan have argued, the relative weakness of American domestic manufacturing was the result of a series of deliberate policy choices in the 1970s and after that incentivized firms that are light on assets and rely on global supply chains for low-value-added, high-cost activity. Since the 1980s, the U.S. has emphasized the competitiveness and short-term economic efficiency of business rather than resilience. These features left the U.S. extremely vulnerable to the kinds of discoordination that plagued it in the early pandemic.
However, the pandemic triggered an effort to invest in the development of vaccines with no attention to cost or efficiency. Unconstrained government spending for the achievement of public goals used to be a driver of economic growth and innovation in the U.S., and the success of vaccinations shows that America can still use these tools if they are not politically restricted. The U.S. has more state capacity than we imagined at the start of the pandemic — it is simply that some of the muscles of the state have not been exercised, while others have not been put to use.
In China, the pandemic response offers a stark contrast to the U.S. Despite COVID-19’s Chinese origins, China has largely returned to normal due to aggressive lockdowns and test and trace policies. After initial missteps, China leaned into a draconian set of lockdown measures to control the spread of the virus.
However, vaccine hesitancy runs high, probably because of the success of the containment campaign: The Chinese public seems to not see vaccination as a priority given the low prevalence of domestic COVID-19 cases. Moreover, even the head of China’s CDC now admits that domestic vaccines may be ineffective, with efficiency as low 50%. Given the low rates of COVID-19 infection, why not wait for the more developed product to appear?
A second difference between the world’s two largest economies is that China’s vaccine campaign is aimed at exporting vaccines to developing market economies. The strategy is implicitly designed to capture market share. Not only are Chinese vaccines being actively marketed to the developing world, but China also initially attempted to issue vaccine passports to foreigners who accepted Chinese-made shots before switching to a policy that accepted others.
However, despite early success, China is having issues meeting both domestic and foreign demand. Moreover, there is conflicting evidence for the effectiveness of the Sinovac vaccine, even when it was deployed on a large scale in Chile. As the U.S. begins to reach vaccine saturation, its more effective vaccines will likely start becoming a powerful tool in vaccine diplomacy.
China’s successes and failures are the result of another long path dependency: its export-oriented, developmental state. China’s domestic political economy is dominated by low levels of consumption and high savings that, in turn, drive exports. This is the result of decades of policy choices to restrict the growth of consumption by wage-earners. China’s export-driven economy is built on an operational capacity designed to discipline labor.
“China’s successes and failures are the result of another long path dependency: its export-oriented, developmental state.”
As successful as this model has been, it may now be running out of steam — the low-hanging fruit has been picked and real growth is slowing down. Thus, China must either move toward a model driven by domestic consumption or move up the production possibility frontier to compete with more technologically advanced countries in exports.
The Chinese attempt to dominate exports of vaccines to emerging markets, even at the possible expense of domestic supply, is a testament to China’s dedication to maintaining an export-oriented economy. The skills needed to control a workforce that is necessary to support high trade surpluses clearly translate to an ability to contain the spread of a virus.
American vaccine hoarding, on the other hand, is another testament to the power of the American fiscal state, which is a driver of America’s dominance of global infrastructure. In short, the centrality of American financial and consumer markets to the global economy means that its elites have not been bound to build alliances based on development aid since the demise of a competing social model in the Soviet Union. Given the resiliency that the dollar-denominated fiscal system has shown through the pandemic, it is likely that the American fiscal state will continue to dominate the global economic infrastructure.
The diametrically opposite responses of China and the U.S. have revealed that the two countries appear weak only because their strengths are asymmetric. America’s powerful fiscal state makes it capable of playing the role of an economic hegemon, stabilizing the global economy in a crisis by acting as a creditor and importer of last resort. If political constraints on spending are removed, its ability to create new productive capacity and innovation is almost unlimited. China, on the other hand, is a developmental state able to mobilize its population to compensate for more limited fiscal space and distance from the innovation frontier.
China and the U.S. are both strong states whose capacity is particularly pronounced when we compare them to states with much weaker governments. Case in point is the world’s third major economy: the European Union.
After Italy’s COVID disaster last February, most European countries were able to implement quarantine and lockdown restrictions that at least temporarily restricted the spread of the virus. Germany in particular was held up as a global model. These early successes testify to the strength of Europe’s welfare states and public medical systems.
However, the E.U. vaccination campaign highlights a failure to properly leverage its economic power and become a true fiscal state. Instead of pursuing vaccine development at any cost like the U.S. and Israel, for example, the E.U. stuck to a strategy of attempting to negotiate with firms to secure a lower price, costing it precious time and weakening Brussels’ hoped-for all-European effort.
Instead, individual E.U. members are now scrambling to secure vaccinations outside E.U. channels. Vaccination failures have complicated even Germany’s once-vaunted public health efforts. Publics that once saw a competent government are losing patience with restrictions, with almost no end in sight and no urgency to act.
“The E.U. stuck to a strategy of attempting to negotiate with firms to secure a lower price, costing it precious time and weakening Brussels’ hoped-for all-European effort.”
The European economic response has been hampered by the same problems as its vaccine strategy. The pandemic spurred hopes that Europe might begin the process of creating a common budget through a European rescue fund. These early hopes for swift action have been dashed by delays caused by opposition from the so-called “frugal four” — Austria, the Netherlands, Denmark and Sweden — that lasted for the first five months of the pandemic and were only approved by the German constitutional court a week ago. The slow deployment of the rescue plan has hurt growth in Europe’s weak southern periphery, which has been disproportionally impacted by the pandemic. And with the rescue package still awaiting ratification, already there are calls for fiscal discipline in the European south.
The pandemic underlined the primary weakness of the European project: its lack of a central fiscal state. The modern E.U. was organized as a free trade zone and a smaller “optimal currency area,” or a set of countries that share a currency and monetary policy without sharing a fiscal policy. The founders of the E.U. assumed that free trade and movement between countries would create a balanced common market that did not need fiscal transfers between states. This belief in the power of free trade was complemented by a deep faith in monetary policy to respond to shocks to the economy.
The 2008 financial crisis shattered these assumptions, and Europe has been stuck in a low-growth equilibrium since. The north has continuously under-consumed compared to its productivity and forced its exports on the south, which can neither spend to invest in productive capacity and stimulate the economy nor adjust exchange rates downward to make their own exports more competitive. This stagnation hurts wage-earners in both regions, spurring an increasingly nationalist political environment.
At the outset of the pandemic, many had hoped that a central fiscal policy, a critical piece of state capacity, might be built, and the dream of European economic solidarity might emerge. Unlike 2008, it was difficult to blame the poorer members of the E.U. for being profligate. However, like China and the U.S., the pandemic has exposed that Europe is a hostage to path dependency.
The COVID-19 pandemic has not provided us with any easy answers on what political system is best. But it has revealed that every model of socioeconomic organization in the world’s leading economies is remarkably uneven. State capacity turned out to not be just one thing. Instead, it is a highly unevenly distributed set of capacities that are not only shaped by a country’s or group of countries’ history of development, but its place in the global political economy.
However, there is one conclusion that we can take away. Reports of the death of American power are greatly exaggerated. The U.S. still has an outsized capacity to use its fiscal state to solve big problems. Unlike China or the E.U., the willingness to use this capacity has demonstrated a real change in policy that was triggered by the pandemic.
Spending on physical and human capital doesn’t solve all things, but it solves many things. The U.S. can build the capacity needed to overcome the weaknesses in its government if it can align its politics behind it. This might be a herculean task, but we should heed Winston Churchill’s observation that Americans will do the right thing after exhausting all other alternatives.
