Chapter 2 of 13

Catastrophe

About 22 minutes to read

Monday, 23 March 2020

Before the markets opened in New York on Monday 23 March 2020, the Federal Reserve issued a statement. The Covid-19 pandemic was spreading across the world. Cities were locking down; factories, shops, schools and offices were closing; millions of people were losing their jobs. In the previous four weeks, the main index of American shares, the S&P 500, had fallen by about a third, one of the fastest collapses in its history. Credit markets were seizing up. The Fed had already cut its interest rate to nearly zero. Now it announced that it would buy government bonds and mortgage-backed securities in whatever amounts were needed to keep markets working — with no upper limit — and that, for the first time in its history, it would buy the bonds of private corporations.

The stock market hit its low point that day. Then it began to rise, and it did not stop for a long time. By August, the S&P 500 had regained all its losses. By the end of the year, it stood well above its level before the pandemic. Over the following two years the Fed's balance sheet — the total of the assets it had bought — more than doubled, to nearly nine trillion dollars.

On the other side of the ledger, in April 2020, the American unemployment rate reached nearly fifteen per cent, the highest since the Great Depression. Across the world, according to the World Bank, the pandemic pushed around seventy million people into extreme poverty in 2020 alone — the largest increase in a single year since the Bank began tracking global poverty in 1990. Meanwhile, as the first book recorded, the richest one per cent of humanity captured nearly two-thirds of all the new wealth created in the world in the two years to the end of 2021.

The first book of this pair found that catastrophe was the most reliable leveller in history. The Black Death broke serfdom in western Europe. The two world wars produced the greatest compression of inequality ever recorded in industrial societies. And yet the two great shocks of the early twenty-first century — the financial crisis of 2007–2009 and the pandemic of 2020–2022 — did not level. In most rich countries, they did the opposite.

This chapter asks why, and what that means for the catastrophes still to come.

How catastrophe used to level

To understand why modern shocks behave differently, we have to be precise about why older ones levelled.

Walter Scheidel, whose The Great Leveler framed the final chapter of the first book, identified four kinds of catastrophe — mass-mobilisation warfare, transformative revolution, state collapse and lethal pandemic — and showed that each tended to reduce inequality through specific mechanisms. They are worth listing, because each one corresponds to something that modern societies have learned to prevent.

Destruction of concentrated wealth. Wars destroyed factories, ships, buildings and foreign investments, which belonged overwhelmingly to the rich. Revolutions expropriated them. State collapse wiped out the claims — on land, on taxes, on debts — that the elite depended on.

Inflation and default. Wars were financed by borrowing and printing money. The resulting inflation, and sometimes outright default, destroyed the value of bonds and savings, which were held mostly by the rich, while reducing the real burden of debts, which were owed mostly by everyone else.

Scarcity of labour. Pandemics such as the Black Death killed so many people that the survivors could demand higher wages and better terms. Total wars took millions of men out of the labour market and into the army, and drew women into the factories, tightening the labour market at home.

Mobilisation and its bargain. Total war required the participation of the whole population, which gave ordinary people a powerful claim on the society for which they were being asked to fight. The political scientists Kenneth Scheve and David Stasavage, in Taxing the Rich (2016), studied the history of progressive taxation across twenty countries over two centuries and found that steep taxes on top incomes and inheritances were introduced above all in countries that mobilised mass armies for war. The argument that won them was what Scheve and Stasavage called a "compensatory" one: if the poor were conscripting their bodies, the rich should conscript their wealth.

Notice that in every case, the catastrophe levelled because it worked through one of the other four forces from the first book. Plague levelled through scarcity. Total war levelled through scarcity and through the bargain of mobilisation, which unions and labour parties were organised to exploit. The post-war settlement lasted because it was locked into law and institutions. Catastrophe was never a force on its own. It was a shock that the other forces could use — or not.

The lesson of the Depression

There is one modern catastrophe that did level, and it explains a great deal about why the later ones did not.

Between 1929 and 1933, the American economy collapsed. Share prices fell by close to ninety per cent from their peak. Thousands of banks failed, and their depositors lost their savings. The money supply shrank by around a third. Output fell by about a quarter and unemployment reached a quarter of the workforce. The suffering was immense. But the destruction of financial wealth fell heavily on those who owned it, and the share of national income going to the richest one per cent, which had peaked in the late 1920s, fell sharply. The New Deal that followed — with its new taxes on the rich, its protections for unions, its social security system and its regulation of finance — then locked much of the levelling in, and the Second World War completed it.

In 1963, Milton Friedman and Anna Schwartz published A Monetary History of the United States, which argued that the Depression had been made far worse by the Federal Reserve's failure to stop the collapse of the banks and the money supply. Their interpretation became one of the most influential in economics. Among the economists it shaped was Ben Bernanke, who had made his academic reputation studying the Depression. In November 2002, at a conference held in honour of Friedman's ninetieth birthday, Bernanke, then a governor of the Federal Reserve, concluded his remarks with an apology on behalf of the institution: regarding the Great Depression, he told Friedman and Schwartz, "You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

Six years later, as chairman of the Fed, Bernanke kept his promise. In 2008 the Fed did everything that it had failed to do in 1930: it lent without limit to banks, bought assets on a vast scale, and prevented the collapse of the money supply. It was, by most economists' judgement, the right decision; it almost certainly prevented a second Great Depression, with all the suffering that would have brought. But it also prevented the levelling that the first Depression had produced. The lesson that central bankers drew from the 1930s was how to stop a financial collapse. The by-product was that the destruction of financial wealth — one of history's great levellers — was taken off the table.

Why 2008 did not level

The financial crisis of 2007–2009, described in the first book's chapter on the ledger, destroyed wealth on a vast scale. Between 2007 and 2010, according to the Federal Reserve's Survey of Consumer Finances, the median American household lost close to forty per cent of its net worth. But the losses were distributed in a way that magnified inequality rather than reducing it.

The reason lies in what different households own. For most families in the middle and at the bottom, the main asset is a home, usually bought with a mortgage. When house prices fall, a family's equity — the part of the home it actually owns — falls much faster, because the debt stays the same. The economists Atif Mian and Amir Sufi, in House of Debt (2014), showed how the crisis concentrated losses on indebted homeowners, many of whom lost their homes entirely, while creditors — the owners of the debt — were largely protected. For the richest households, the main assets are shares, bonds and business stakes. When governments and central banks stepped in to rescue the financial system, they rescued precisely those assets.

They had good reasons. A collapse of the banking system would almost certainly have caused a depression far worse than the one that occurred, and its victims would have been ordinary workers above all. But the way the rescue worked — guaranteeing the banks, buying assets, cutting interest rates to zero and holding them there for years — had a predictable effect. The prices of shares, bonds and property recovered and then rose far above their previous levels. Those who owned them, who were overwhelmingly the rich, saw their wealth restored and multiplied. Those who had lost their homes, or whose wages stagnated through the long recovery, did not.

In the terms of the first book, the crisis destroyed some of the farm's wealth, but the farm's owners had built, over the twentieth century, an institution capable of replacing it: the modern central bank, whose mandate to stabilise the financial system meant, in practice, that it would not allow the value of financial assets to collapse. The old levelling mechanism of destruction had been disabled.

Why the pandemic did not level — and where it briefly did

The pandemic tells a more complicated story, and a more hopeful one.

As in 2008, central banks acted at once to protect the value of financial assets, and those assets soared. But this time, governments also acted directly to protect the incomes of ordinary people, on a scale never attempted before outside wartime. In the United States, the CARES Act of March 2020 and later legislation sent cash payments directly to most households, greatly expanded unemployment insurance — for a time paying many unemployed workers more than they had earned in their jobs — and, in 2021, expanded the child tax credit into a monthly payment to most families with children. In Europe, governments paid a large share of the wages of furloughed workers to keep them attached to their jobs.

The results were striking. According to the US Census Bureau's Supplemental Poverty Measure, which takes account of taxes and government benefits, the share of American children living in poverty fell to 5.2 per cent in 2021 — the lowest ever recorded. The expanded child tax credit alone was estimated to have lifted nearly three million children out of poverty. For a brief moment, the richest country in the world showed that it could almost abolish child poverty with a policy decision.

Then the policy expired. Congress did not renew the expanded child tax credit at the end of 2021. In 2022, the child poverty rate more than doubled, to 12.4 per cent.

There was a second, unexpected levelling effect. As the economy reopened in 2021 and 2022, the labour market became extremely tight: millions of workers quit their jobs in what the press called the "Great Resignation", and employers in low-wage sectors such as restaurants, warehouses and retail struggled to find staff. Wages at the bottom rose faster than wages at the top for the first time in decades. The economists David Autor, Arindrajit Dube and Annie McGrew documented what they called an "unexpected compression" of American wages between 2020 and 2023, which by their estimate reversed a substantial part — roughly a third — of the growth in the gap between high and low wages since 1980. Inflation ate into those gains, and the compression slowed as the labour market cooled. But for a while, the scarcity of labour did what it had done after the Black Death.

The pandemic, in other words, contained all the elements of a levelling catastrophe. It produced a moment of mass mobilisation of a kind — the "essential workers" who kept hospitals, supermarkets and warehouses running were applauded from balconies across the world. It produced a tight labour market. It produced a willingness to spend public money on the incomes of ordinary people. What it did not produce was organisation strong enough to hold the gains, or institutions to lock them in. The applause stopped. The emergency measures expired. The asset prices stayed up.

The view from the poorer world

So far this chapter has looked at the rich countries, whose central banks could print money and whose governments could borrow almost without limit. Most of the world's people live in countries that could do neither.

When the pandemic struck, poorer countries faced collapsing exports, falling remittances from workers abroad, and a flight of capital to the safety of the dollar. They could not borrow cheaply to protect their citizens' incomes, and many were already spending large shares of their revenue on debt service — the "ledger of nations" described in the first book. In 2020 the G20 agreed a Debt Service Suspension Initiative, under which official creditors postponed repayments from the poorest countries; according to the World Bank, it suspended around thirteen billion dollars of payments between 2020 and 2021. It was a modern, limited echo of the Mesopotamian clean slate. But it was a suspension, not a cancellation, and private creditors — bondholders and banks — largely declined to take part.

The same pattern appeared with vaccines. The rich countries, which had funded much of the research and could pay the highest prices, secured supplies first. By the end of 2021, according to data compiled by Our World in Data, most adults in high-income countries had been vaccinated, while fewer than one in ten people in low-income countries had received even a single dose. A proposal by India and South Africa to waive patent protections on Covid-19 vaccines at the World Trade Organization was resisted for more than a year by several rich countries and the pharmaceutical industry, and the eventual agreement, in June 2022, was far narrower than its sponsors had sought.

Seen from the poorer world, the pandemic was a catastrophe in which the fences of the farm held firm. The borders closed. The money stayed where it was. The patents held. In the language of the first book, the global 99 bore the shock, and the global 0.01 were protected from it.

Disaster communities

There is one more piece of evidence from catastrophe that matters for this book, because it bears on the second of its standing assumptions — the conviction, held in good faith, that a society without the farm is possible.

It is widely believed that in disasters, people panic, loot and turn on each other, and that order must be imposed from above. The research on disasters says otherwise. In A Paradise Built in Hell (2009), the writer Rebecca Solnit gathered the evidence from the San Francisco earthquake of 1906, the Halifax explosion of 1917, the Mexico City earthquake of 1985, the attacks of 11 September 2001 and Hurricane Katrina in 2005, drawing on decades of sociological research on how people behave in disasters. Again and again, she found, ordinary people responded with improvised cooperation, generosity and mutual aid: strangers rescuing strangers, neighbours sharing food, communities organising their own relief. The sociologists Caron Chess and Lee Clarke coined a phrase for what often went wrong: "elite panic" — the fear among authorities that the public would behave badly, which led them to treat survivors as a threat to be controlled rather than as people to be helped.

The pandemic produced its own version. In Britain, thousands of local mutual aid groups sprang up within weeks of the first lockdown in 2020, organising shopping, prescriptions and phone calls for people who were shielding. Similar networks appeared across the world. Most faded as the emergency passed. But they showed, once again, that the capacity for cooperation without a farm is not a fantasy. It is a normal human response to crisis — one that the farm's own institutions have often suppressed rather than relied on.

This does not prove that a society can be organised on such lines in ordinary times, at the scale of billions. Disaster communities are temporary; they draw on a shared emergency that ordinary life does not provide. But it is evidence that the second assumption of this book is not naive. When the fences of the farm are knocked down by a shock, people do not usually turn into a herd. They turn into neighbours.

Two lessons

Two lessons follow, and they matter for everything else in this book.

The first is that modern states have learned to protect the farm from catastrophe. The central bank, the deposit guarantee, the bailout, the bond-buying programme: these are, among other things, institutions for preventing the destruction of concentrated wealth that once made catastrophes level. They were built for good reasons — to prevent depressions that would hurt everyone — and they work. But they mean that the old leveller of destruction is largely disabled for financial wealth in the rich world. The rich have a fire brigade, and it is publicly funded.

The second is that modern states can also protect the 99 from catastrophe, when they choose to — and that the choice is political. The pandemic showed that governments could raise the incomes of the poorest, nearly abolish child poverty and keep workers attached to their jobs through a shock. What they did not do was make those protections permanent. The emergency floor was real. It was also temporary. In the language of the first book, the catastrophe opened a door; the lock-in force was missing, and the door closed.

Climate

The catastrophe that most people expect in the coming decades is climate change. What would it do to the ratio?

The history of the first book offers some uncomfortable precedents. Climate shocks have contributed to the collapse of states before: drought has been implicated in the fall of the Akkadian empire and in the Late Bronze Age collapse described in the first book, though the evidence is debated. The historian Geoffrey Parker, in Global Crisis (2013), argued that the cooling of the seventeenth century — part of the period known as the Little Ice Age — combined with war and misgovernment to produce famines, revolts and wars across the world, with enormous loss of life. Where states collapsed, inequality sometimes fell, because the elite fell with the state. Where states survived, the burden usually fell on the poor.

The early evidence on the present climate crisis points the same way. The costs fall most heavily on those with least. The poorest countries, which have contributed least to the problem, are among the most exposed to heat, drought, flooding and crop failure. Within countries, the poor live in the most exposed housing, work outdoors in the heat, and have the least insurance and the fewest options to move. The first book cited an Oxfam analysis finding that the richest one per cent of humanity was responsible for about as large a share of global emissions in 2019 as the poorest two-thirds. The World Bank's Groundswell report of 2021 estimated that, without strong action, climate change could force up to 216 million people to move within their own countries by 2050.

A single disaster shows the pattern. In the summer of 2022, unusually intense monsoon rains, on top of extreme heat that had accelerated the melting of glaciers, flooded large parts of Pakistan. Around a third of the country was under water at the peak. More than thirty million people were affected, and a joint assessment by the Pakistani government, the World Bank, the United Nations and the European Union put the damage and economic losses at around thirty billion dollars. Pakistan is responsible for less than one per cent of the world's historical greenhouse gas emissions. The people who lost their homes, their crops and their livestock were, overwhelmingly, poor farmers and labourers in the Indus valley — the valley that, more than four thousand years ago, was home to one of the world's first urban civilisations, the cities of Harappa and Mohenjo-daro.

Meanwhile, the wealthy can buy protection. Insurance retreats from the most exposed areas, leaving only those who can afford to rebuild or move. Private security and private emergency services, already used by the very rich, are likely to grow. Climate change may well become, in the terms of the first book, a new fence and a new feed: borders hardened against climate migrants, adaptation sold to those who can pay, and land and water in safer regions bid up by those with capital.

But climate change also has the features that made earlier catastrophes level. It could destroy concentrated wealth on a large scale: fossil fuel reserves that cannot be burned, coastal property that cannot be defended, insurance companies that cannot pay. It requires a transformation of energy, transport, housing and agriculture on a scale comparable to wartime mobilisation, which will require the participation and consent of whole populations — and which, if it is financed as the world wars were, could bring back the compensatory argument of Scheve and Stasavage: if everyone must sacrifice, the rich must sacrifice most. Whether climate change levels or entrenches will depend, once again, on the other four forces.

Great-power war

The second catastrophe that the coming decades may hold is war between great powers. Since Russia's full-scale invasion of Ukraine in 2022, and with rising tension between the United States and China, the possibility can no longer be dismissed. At their summit in The Hague in June 2025, the members of NATO agreed to raise their defence spending towards five per cent of national income by 2035, a level not seen in most of Europe since the Cold War.

Would such a war level? The first book found that the world wars levelled because they were wars of mass mobilisation, fought by conscript armies and industrial economies that needed the cooperation of everyone. Modern warfare is changing in ways that may weaken that effect. Professional armies, precision weapons, drones and AI-assisted targeting reduce the number of soldiers a state needs, and therefore the bargaining power of those it calls on. The war in Ukraine has involved mass mobilisation and has shown that numbers still matter; but the trend in military technology is towards capital rather than labour — towards machines rather than masses. A war fought by machines may not produce the bargain that the world wars produced.

It is worth remembering how that bargain was actually struck, because it was not automatic. In the First World War, the fortunes made by arms manufacturers and suppliers provoked public fury in several countries; in the United States, a Senate committee chaired by Gerald Nye investigated the munitions industry between 1934 and 1936 and fed a popular conviction that "merchants of death" had profited from the slaughter. In the Second World War, governments were determined not to allow a repeat. In 1942 President Roosevelt proposed that no American should have an income, after taxes, of more than twenty-five thousand dollars a year — a cap of roughly half a million dollars in today's money — while the war lasted. Congress refused. But the top marginal rate of income tax rose to 94 per cent, excess-profits taxes were imposed on corporations, and wages and prices were controlled. In Britain, the top rate of tax on the highest incomes reached 97.5 per cent. The bargain of mobilisation was a political achievement, won by argument and pressure: if a young man could be conscripted to die, his employer's profits could be conscripted to pay. A future war would raise the same argument. Whether anyone would be organised to make it, and whether governments that need fewer soldiers would feel obliged to listen, is another matter.

And there is a limit beyond which war does not level at all. A nuclear war between great powers would not compress the ratio between the 0.01, the 1 and the 99. It would destroy the society in which the ratio exists. Scheidel's darkest observation was that the most thorough levellers in history were the ones that made almost everyone poorer. No one who has read the first book should wish for the levelling that would follow such a war.

Pandemics to come

It is worth being clear about the scale of the difference between Covid-19 and the plague that broke serfdom. The World Health Organization estimated that the pandemic caused around fifteen million excess deaths worldwide in 2020 and 2021 — a terrible toll, but roughly one person in five hundred. The Black Death killed perhaps a third or more of Europe's population in four years. And Covid-19 killed mainly the old, who had already left the workforce, rather than people of working age. The labour shortages of 2021 and 2022 came less from deaths than from withdrawals: early retirements, long illness, the closing of borders to migrant workers and people's reluctance to return to dangerous or badly paid jobs. Scarcity, in other words, did not have to be created by mass death. It could be created by people refusing — which is a force the next two chapters will examine closely.

The Covid-19 pandemic will not be the last. The conditions that make new pandemics more likely — dense cities, global travel, intensive livestock farming, the destruction of wild habitats — have not changed. The next one could be more lethal. A pandemic with a death rate approaching that of the Black Death would, by the logic of the first book, make labour scarce and could shift the ratio; but it would do so at a cost that no one could accept, and modern medicine is likely, as with Covid-19, to blunt the death toll. Its distributional effects will be decided, as in 2020, by what governments choose to protect: the value of assets, or the incomes of people.

The tests

This chapter does not test a part of the Federation design directly, but it does test the first of the five forces as a path towards it, and one part of the design — the floor — as a response to shocks. The four tests of the book apply.

Precedent. Catastrophe has levelled before — after the Black Death and the world wars — but only by working through the other forces, and at a terrible cost. Modern catastrophes have not levelled, because modern institutions protect concentrated financial wealth from destruction. The one modern case that came close — the pandemic's emergency income support and tight labour market — showed that levelling through a shock is possible, and that it does not last without lock-in.

Evidence. The research is consistent: 2008 concentrated losses on indebted households and gains on asset owners; the pandemic did the same for wealth, while temporarily compressing incomes and wages at the bottom. On climate, the burden is already falling disproportionately on the poor.

Capture. Crises are moments of opportunity — for everyone who is prepared. Milton Friedman wrote in the preface to a 1982 edition of Capitalism and Freedom that only a crisis, actual or perceived, produces real change, and that when it occurs, the actions taken depend on the ideas that are lying around. The journalist Naomi Klein, in The Shock Doctrine (2007), argued from the opposite political direction that elites had repeatedly used disasters to push through policies, such as privatisation, that would have been resisted in normal times. Her account has been criticised by scholars for overstating the coordination involved. But on the central point, Friedman and Klein agree: in a crisis, the advantage goes to whoever has a plan ready. Over the past two crises, the farm's owners had their plans ready. The 99 mostly did not.

Exit. In a catastrophe, those who can leave, do. During the pandemic, the wealthy left crowded cities for second homes; the most cautious had already bought fortified retreats, a subject for Chapter 8. Climate change will multiply the opportunities for the rich to withdraw to safer places, and the pressure on everyone else to stay where they are.

The ledger

What survives. Catastrophe will come: climate change is certain to bring shocks, and pandemics and wars are possible. Each will open a door, as every catastrophe in the first book did. The floor — the sixth element of the Federation hypothesis — survives its first test: the pandemic showed that a guaranteed income floor can be built quickly and can sharply reduce poverty.

What has to change. Catastrophe cannot be part of the plan. No design worth defending can depend on disaster to bring it about, and modern institutions have largely disabled the destruction of wealth that once made disasters level. The Federation's floor must be automatic and permanent, not an emergency measure that expires when the applause stops. And the design must be ready before the crisis, because the crisis will reward whoever has their ideas lying around.

What remains unknown. Whether the transformation required by climate change will produce a new bargain of mobilisation, as the world wars did, or a world of fortified enclaves. Whether war between great powers can be avoided, and whether the next pandemic will be worse than the last.

Bridge: the scarce worker

Of all the things that happened during the pandemic, the one that most resembled the levelling of the past was not the destruction of wealth or the rescue of incomes. It was the moment when employers could not find enough workers. For a year or two, waiters, warehouse workers and care workers had something they had not had for decades: the power to quit and find something better. It did not last. But it was a glimpse of the force that the first book found to be the strongest in the 99's favour — the force of scarcity.

The next chapter asks whether that force will return. The populations of most rich countries, and of China, are ageing; the number of people of working age is beginning to fall. Artificial intelligence will take over many tasks. Under this book's assumptions, it will hit a wall. If it does, the next fifty years could make human labour scarcer than it has been for centuries — with consequences for the ratio between the 0.01, the 1 and the 99 that could be the most important since the Black Death.