The COVID-19 pandemic is already taking a dramatic toll on the U.S. economy as businesses are shuttered, interstate commerce is restricted, and both domestic and global supply chains are disrupted. We anticipate that this could have significant medium-term implications for the defense budget and that there will be a need for the U.S. Department of Defense (DoD) to find efficiencies that are of at least the same magnitude as the recent sequestration.
Estimates vary widely regarding what COVID-19 could cost the U.S. economy, which totaled $21.4 trillion in 2019.
At the higher end, a recent McKinsey analysis (PDF) suggests (in one of their more negative scenarios) that a return to even pre-crisis GDP levels might not occur until 2023. Under these conditions, and assuming that the U.S. economy would have grown at its pre-crisis rate without COVID-19, the economic losses could total as high as $19 trillion over 10 years.
At the lower end, more optimistic estimates from JPMorgan assume a steep decline in the first and second quarters of calendar-year 2020, but then a strong rebound to the economy beginning in July 2020, which can be described as a “V-shaped” trajectory. The cumulative economic losses in even this relatively rosy scenario could total roughly $11 trillion over 10 years. Both estimates assume that the growth rate is robust once the initial downturn is over, returning to its pre-crisis growth rate, as it did after the 2008-2009 Great Recession.
Yet, there is reason to believe that both these estimates may be too optimistic. Historical analysis (PDF) suggests that pandemics can have adverse macroeconomic effects that last decades and some economists are worried that recovery might be slower than current estimates suggest. Indeed, there is great uncertainty over the medium-term costs of the increasingly draconian restrictions on domestic and international movement that have disrupted global commerce, a core driver of economic growth for decades. In addition, the $2 trillion relief bill will expand total U.S. debt by nearly 10%, which was already $23.4 trillion at the onset of the crisis, putting defense and other government expenditures under increased pressure.
Beyond macroeconomic effects, the COVID-19 crisis has required expenditures beyond any recent experience for testing and treatment, and there will undoubtedly be severe pressure to overhaul the healthcare system to prepare for future pandemics. Since the economic crisis is a fallout of a health crisis, this call is likely to be persuasive. And this economic impact has been felt by such a broad swath of individuals and businesses that a “Phase Four” stimulus is already being mooted, which could further ratchet up the debt and claims to resources.
This is a daunting prospect, but what does it imply for defense spending, which totaled $676 billion in the federal fiscal year 2019? (end of excerpt)
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