Reluctant War President and the Pandemic

In 2020-2021 we are living in peacetime with no major global conflict, but the United States is at war against a global pandemic and an economic crisis unseen since the post-war period. One year into the COVID-19 public health crisis, America reached a grim milestone: 400,000 dead and 24 million infected, while healthcare capacity is stretched. Yet, history reminds us that 100 years ago America and the world faced a deadly pandemic during a world war that decimated a continent and cities. Woodrow Wilson, the schoolmaster, was the commander in chief durinf this pivotal period.

World War I broke out in Europe in 1914, but it was not until three years after when the United States officially joined. During his reelection campaign for a second presidential term, Woodrow Wilson was reluctant about openly supporting the war. Though the war was intensifying in Europe, Wilson’s position to maintain United States neutrality reflected the state of nation at the time. But when Germany escalated tensions by attacking American military assets in neutral areas, President Wilson was left with little choice. To officially commit troops to the other side of the pond, the commander chief must ask Congress for a war declaration.

On April 2, 1917, President Woodrow Wilson, using his presidential power, convened a special joint session of the United States Congress, to issue a declaration of war against the German Empire. At the special address, Wilson addressed the State of War with Germany to Congress: “The world must be made safe for democracy. Its peace must be planted upon the tested foundations of political liberty. We have no selfish ends to serve. We desire no conquest, no dominion. We seek no indemnities for ourselves, no material compensation for the sacrifices we shall freely make.”

Congress gave the president what he needed: the declaration of war came on April 6. With the official backing of Congress, President Wilson was full steam ahead to allocate resources to support the war. The production frontier between guns and butter are now clearly focused on guns.

Wilson began his second term as a wartime president; therefore, it made strategic sense to establish a War Cabinet, assigning Secretary McAdoo the responsibility to finance the war. Wilson relied on McAdoo to finance World War I, much like Lincoln who relied on Salmon Chase, to finance the Civil war. McAdoo believed in the war effort, and believed that it should be driven by the people. McAdoo remarked: “Any great war must necessarily be a popular movement. It is a kind of crusade; and like all crusades, it sweeps along on a powerful stream of romanticism.” The question became what were the viable financing options? Would it solely rely on the government’s budget or perhaps leverage the power of the newly created central bank? How would the government mobilize support behind this effort? All these questions were on the mind of McAdoo as he amped up financing capacity before the U.S. entered the War.  

There were several options: printing money, borrowing, or taxation. The economy was operating at near full capacity at the time. The tradeoff had to be shifting industrial resources towards the war effort. Printing money was not a feasible option since the Federal Reserve Act of 1913 established the Federal Reserve Notes as official obligations of the United State. McAdoo learned from the lessons of Lincoln’s experience with printing the greenback which led to inflation and declining confidence in the country’s money management. It ended up being a combination of taxation measures and borrowing. The borrowing program was done through Liberty Bonds. The regional federal reserve banks were the fiscal agents to offer the bonds.

Source: World War I poster depicting Lady Liberty, Courtesy of Library of Congress

On April 9, 1918, celebrities Charlie Chaplin and Douglas Fairbanks drew thousands to Wall Street and the foot of the United States Sub-Treasury building located at Federal Hall. Nearly five decades earlier, the sub-treasury building took market orders from the White House that would spark a market crash and a resulting depression. 

The iconic photo shows Charlie Chaplin is being held up by actor Douglas Fairbanks to rally support for the War. The rally took place at the foot of the United States Sub-Treasury Building, which is now known as Federal Hall. 

Following that act was a musical performance by Fairbanks and vocalist Harvey Hindemeyer who got the crowd in a rendition of “Over There,” the war anthem written by Broadway impresario George M. Cohan.

Unlike the COVID-19 pandemic of 2020-2021, which took place during peacetime, Wilson had to make tough decisions during the Spanish Flu almost a century ago when there was a major world war I. He needed to rally the public, albeit reluctantly, but as commander in chief, he needed to finance the war. The flu was merely an afterthought. Wilson did not discuss it publicly nor took any public health measures. The parade must go on was the rallying cry. But that came at a huge public cost.

On September 28, 1918, the Philadelphia Liberty Bond Parade drew 200,000 people. The crowd lined up for two miles along the parade route to cheer on uniformed troopers, Boy Scouts, and marching bands. Pressured to meet city bond quotas, salesmen readily handed out bonds to war sympathizers. The flu spread immediately, becoming one of the largest known outbreaks in the world. Within a matter of weeks an estimated 45,000 Philadelphians were stricken with the flu and with 12,000 dead. By contrast, St. Louis city imposed social distancing measures and locked down its public squares, including churches, parks and non-essential venues. The severity of the flu between Philadelphia and St. Louis remains a lesson of history.

This was a predictor for the grueling death toll that would come. The largest contributor to the spread of the Spanish Flu was the massive mobilization for the war. By June 1918 millions of young American men were packed in tight quarters and deployed to Europe. The influenza spread like wildfire across the continent; all told, the pandemic killed between 50 and 100 million people around the world, more than the battlefield. By financial metrics, the war bond campaigns were a success. In total the four national drives raised more than $17 billion with twenty million people subscribing.

Public health interventions and epidemic intensity during the 1918 influenza  pandemic | PNAS

Bibliography

Sutch, R. (2015). Financing the Great War: A Class Tax for the Wealthy, Liberty Bonds for All,. Federal Reserve. https://www.federalreservehistory.org/essays/liberty-bonds

Pandemic in Peace Time vs. Public Health Crisis of World War I

COVID-19 is once in a century public health storm. The only comparable event is the Spanish Flu from a century ago that coincided with World War I. As the world enters a winter with a resurgence in cases, there are waves of record COVID cases popping up in major urban centers as society deals with the challenges of reopening the economy and fatigue from social distancing. If current trends persist, the coronavirus could take the worst toll on society for a public health crisis during peace time.

As of Q4 2020, there are 242 thousand deaths and 10.5 million COVID cases in the United States alone. A Stanford study at the end of Q3 2020 found that fewer than 1 in 10 Americans have antibodies to coronavirus. Based on this study of nationally representative analysis of virus antibodies, it means that at least 9 percent of the U.S. population been infected with COVID-19.

Cumulative deaths from COVID-19
Total Reported COVID-19 Cases

Major drivers of virus transmission are public events and spaces where people interact, such as restaurants, shops, places of worship and other social gatherings. Those infected persons can then transmit it to people in their family and close circles. Important to note is we’re living in peace time in 2020.

There is no major war like what we faced a century ago when there were massive movements of troops. What we do have today is constant movement of people, not so much for the battlefield, but traveling for business and leisure, in an interconnected world with opened borders marked by globalization. Our modern economic life is much busier, have diverse needs and encompasses human collaboration and interaction in connected spaces. It’s what the economist Alfred Marshall referred to as the “ordinary business of life.” But these are extraordinary times.

The Center for Disease and Control Prevention estimates that 675,000 people in the United States contracted the Spanish Flu during the 1918 pandemic (HN1N virus). It infected about 28 percent of all Americans.

The biggest driving factor for transmission were urban density and troops mobilizing for World War I. President Wilson faced the challenge of the deadly Spanish flu while committing U.S. forces to fight the war. Like any commander in chief, President Wilson did not make decision lightly (Wilson would later suffered from the flu during post-WWI peace. negotiations in Paris).

In April 1917 had officially entered World War I with 378,000 in the armed forces. It wasn’t long until the draft established 32 large recruiting camps, each housing 25,000-55,000. The first cases of the Spanish Flu were detected in the spring of 1918. There were a few reported severe cases and a handful of deaths in rural Haskell, Kansas. The nearest military training ground, Camp Funston in Fort Riley, Kansas, about 100 soldiers had contracted the flu. Within a week, that figure shot up to a few hundred. With the “war to end all wars” at stake, there was no turning back. In May 1918, hundreds of thousands of U.S. troops would be deployed to the war front in Europe.

Massive movement of troops would be a key contributor to the deadly spread of the Spanish Flu. There was no social distancing. But unlike today’s peace time, soldiers were not dining at restaurants or at their local pubs. They were largely ground troops fighting conventional warfare, situated in crowded quarters and foxholes. On the aggregate, the Spanish Flu is thought to claim more lives than troops dying from the battlefield.

The Journal of the American Medical Association posted the following eerie observation on December 28, 1918:

“The 1918 has gone: a year momentous as the termination of the most cruel war in the annals of the human race; a year which marked, the end at least for a time, of man’s destruction of man; unfortunately a year in which developed a most fatal infectious disease causing the death of hundreds of thousands of human beings. Medical science for four and one-half years devoted itself to putting men on the firing line and keeping them there. Now it must turn with its whole might to combating the greatest enemy of all–infectious disease” 

 Cots set up in gymnasium for flu patients
Military hospital for Spanish Flu patients

Why People Hoard and How Game Theory Can Help Stop a Crisis?

This is part of my pamphlet series Pandemic Chronicles that looks at the Coronavirus public health and economic crisis with the lens of game theory.

Hoarding behavior is not new. It happens when people feel the need to accumulate things regardless of its perceived value whether they’re sports cards or antique pens. During a normal environment, collecting goods for private consumption does not harm anyone; it reflects that person’s individual preference. But during a public health crisis, like the COVID-19 pandemic or the Spanish Influenza 100 years ago, hoarding behavior negatively affects other people and society. There are several reasons why:

  • Amassing goods takes away the supply of goods for people who need it more like the elderly, women and children.
  • Piling on large quantities causes supply disruptions and artificially increases prices and thus opening opportunities for black markets. Black markets draw in actors with perverse incentives to manipulate and take advantage of other consumers.

To understand what drives hoarding and potential ways to address it, we can draw lessons from game theory and the economics of stockpiling.

Shoppers vying for last unit of paper towels.

The Psychology of Hoarding

Individual hoarding can impact society when it becomes a larger panic buying scenario that causes rationing and irrationally high prices. In a crisis, where people, markets, and government may not have all the answers, it fuels a desire to hoard. When the COVID pandemic struck with the first wave in 2020, it wasn’t uncommon to see empty shelves at American stores, especially for consumer goods such as hand sanitizer and a range of toiletries. At the store, customers are behaving in strategic interactions of whether to stock up on certain goods or engage in normal buying based on their needs for the day or week. However, in a pandemic, thew news and social media can fuel anxiety and the perception of scarcity. If panic sets in, customers have reasons to stockpile.

Consider a scenario where two customers walk into a store:

In this situation the customers make independent decisions whether they should engage in normal buying behavior or hoarding. They both have all information available to make a decision, including the price and quantity on the shelf. It’s been a tense few weeks since COVID cases have spiked and the area is still in locked down except for essential businesses. Social media communities have shared posts of stores running low on supplies. On the way in there was a line of customers who had already filled up their shopping cart with supplies.

With that backdrop, Customers 1 and 2 arrived at their relevant aisle. For Customer 2, if she thinks that Customer 1 will try to hoard, then Customer 2 best hoard because if she acts business as usual, she would not able to get the item she needs. Vice versa, when Customer 1 thinks that Customer 2 will hoard, he has an incentive to panic buy. When both customers choose to hoard, the whole store is worse off. Ideally, both customers adopts normal buying behavior but in a non-cooperative situation where newspaper and social media propagate fear and anxiety, grocery stores had to take drastic actions by imposing quota per customer which is an enforcement mechanism against individual irrational actions that harm the public good.

Stores impose rationing policy with 1 unit/household cap

Hoarding more than you need is not necessarily irrational behavior. Like other strategic situations, game theory helps us understand the social psychology of a person’s thinking in response to how other’s act. If you see others panic buy, your instinct is to buy the goods before the other person buys it. Each person’s optimal strategy is to beat the other guy to the paper towels or pasta package. That is represented by a Nash Equilibrium where each player has not incentive to deviate from their strategy. It is a no regret strategy given what they know about the situation. But the dreaded Nash Equilibrium in this case is sub-optimal for society. If enough people stockpile, the result are supply shortages and hefty prices. In 2020, we saw a demand surge for essential goods, masks, hand sanitizers, certain medicines, and various groceries. This demand run up of consumer goods, coupled with the economic lockdown of non-essential businesses, disrupted supply chains, which further put pressure on store supplies.

How do we stop panic buying?

There needs to be ways to counter people’s greed and fear. There’s social psychology, a belief that others are greedy. If that’s true, that incites panic buying, in order to not be the sucker (i.e. sucker’s payoff). That social psychology becomes a negative self-fulfilling prophecy that begets further hoarding.If everyone buys just what they need, there would not be shortages. These solutions could involve encouraging kinship, socially responsible behavior, explaining to people that this is a long-term game, signaling to shoppers that supplies are coming.

EConomics of Hospital Stockpiling

Large quantity purchases also caused supply shortages for healthcare front line workers. Masks, gloves, and respirators, which are personal protective equipment (PPE) for medical staff and hospitals, became scarce during Q1 2020. In the medical mask market, hospitals and states resorted to alternative channels to only find themselves competing against hucksters, profiteers, governments, and individual hoarders. Facing a global demand surge and scarce market, buyers faced the choice of acting as a good neighbor or panic buy. Just like customers in the stores, medical supply purchases do not want to be the sucker and miss out on supplies. There are reports of people stockpiling medical masks and selling it on the secondary market. That drove up prices which attracted copycats who sold poor quality medical masks. When official government guidance came out recommending mask wearing in public spaces, the general population went to alternative markets online and other shady networks, which exacerbated the problem but presented more opportunities for profiteers.

Solutions to Medical Supply Shortages

The motivation for stockpiling medical equipment is the same as collecting large quantities of household goods. However, countermeasures to the medical supply problem must be broader and forceful given the impact on the hospitals, doctors and people who are the nation’s first line of defense.

In a broken market with competing demands, one option is to rely on the federal government to serve as an efficient coordinator to purchase and manage distribution of supplies. The executive branch can invoke the National Defense Production Act to ramp up the manufacturing of masks, face shields, and other PPE. Historically, presidential administrations have used this authority to purchase critical military equipment to support infrastructure repairs and impacted citizens following natural disasters. In the same way, the government can leverage that authority to centralize supply management on strategic goods and services to deal with a global health pandemic. The government can deploy this policy strategy to fight a raging crisis by compelling private entities to produce medical supplies. When society is on a path to recovery, the same authority allows the government to guarantee purchases of the vaccine supply and manage its distribution.

For a broader crisis fighting strategy, strong leadership and communication to inform society and individuals. Hoarding behavior is rooted in panic and uncertainty about the future. That can be part of public health campaign to inform and address people’s doubt, fear and uncertainty. Private organizations also found creative ways to institute quotas on goods and services. For example, purchases of high demand products such as masks are subject to a cap per household. Stores used its soft power by posting signs that encourage customers to respect one another by not panic buying while maintaining a social distance from other shoppers.

TAKEAWAYS FOR FUTURE CRISES

With any crisis, decision-makers need to understand social psychology with empathy and putting themselves in people’s shoes. Game theory could be useful to understand how people make decisions in reaction to other people’s actions and what they see on the news. Once we understand how social psychology can break markets and worsen the crisis, governments and practitioners can use a combination of hard power like presidential authority and public health information campaigns to address the pain points so that our critical infrastructure and front line staff can continue to perform their duties to get society back to normal.