When societies face catastrophe—war, pandemic, or natural disaster—governments act to protect lives. But rarely do they confront an equally urgent question: how to fairly distribute the economic burden of shutting things down.
Consider the ongoing war in Ukraine. The conflict has heavily disrupted private business, particularly through reduced entrepreneurship and small firm closures. A survey by the Bank of Ukraine in early 2022 found that 75 percent of small businesses halted their work during the invasion. According to a study by David Audretsch, Hossein Momtaz, Pavlo Motuzenko and Silvio Vismara, Ukraine’s number of self-employed workers fell by about 675,000 after the 2014 Crimea invasion—a decline of roughly 20 percent compared with what might otherwise have been expected. Small and medium-sized enterprises also shrank by about 71,000, or 14 percent, though most of that loss was recouped within five years. Russia’s experience was even more dire: five years into the conflict, it had shed more than 1.4 million small and medium-sized firms, a collapse of about 42 percent.
Historical evidence shows that wars frequently reallocate economic activity. Governments redirect resources to defense, constrain private enterprise, or shift entire regions into wartime production. Public employment becomes the anchor, especially military employment.
The same occupational distortion was visible during COVID-19. Across the developed world, governments restricted mobility, closed businesses, and froze entire sectors. Salaried employees, particularly in the public sector, kept receiving paychecks. A professor, a civil servant or a corporate employee with a laptop worked from home. But the shopkeeper, the restaurateur, the hairdresser—those whose livelihoods depended on open doors and face-to-face contact—saw their incomes collapse overnight.
This was not the ordinary risk of entrepreneurship. Opening a bakery entails the risk of bad planning or lack of customers. What happened in 2020 was a systemic shock: a government decree shutting down entire activities. Yet the costs of that systemic risk were borne disproportionately by those least able to absorb them.
It’s true, governments tried to compensate. In Europe, wage subsidy programs such as Germany’s Kurzarbeit or Britain’s furlough scheme kept millions of employees formally attached to their jobs (Giupponi, Landais and Lapeyre, 2022). In the United States, the Paycheck Protection Program directed nearly $800 billion in forgivable loans to small businesses.
A study by David Autor, David Cho, Leland D. Crane, Mita Goldar, Byron Lutz, Joshua Montes, William B. Peterman, David Ratner, Daniel Villar, and Ahu Yildirmaz, “The $800 Billion Paycheck Protection Program: Where Did the Money Go and Why Did It Go There?” published in the Journal of Economic Perspectives (2022) found that the PPP did preserve jobs—about 3.6 million at its peak in May 2020, though only 1.4 million by the end of the year.
Yet the program’s cost was staggering: between $169,000 and $258,000 per job saved, three to five times the median worker’s annual earnings. Worse, the aid was skewed. Firms with strong banking relationships received funds quickly, while many smaller or minority-owned businesses struggled to access relief. And not all the loans were forgiven: a fraction must still be paid back.
The OECD’s 2021 report “One Year of SME and Entrepreneurship Policy Responses to COVID-19” reached a similar conclusion: while governments rolled out tools ranging from grants to loan deferrals across dozens of countries, these supports often missed the most vulnerable groups—the self-employed, startups, young firms, and minority- or women-led businesses.
That imbalance matters. The implicit message of COVID-era policies was: become a bureaucrat, not an entrepreneur; take a safe job, not a risky one. Over time, this discourages risk-taking and dynamism, pushing societies toward safety at the expense of innovation.
If societies hope to preserve entrepreneurial spirit through rare disasters, the policy response must go beyond mere public spending. It must protect private risk-takers through targeted support and shared resilience, perhaps in the form of social insurance. Systemic risks should be insured in the same way systemic financial risks are covered—think of FDIC insurance that guarantees up to $250,000 per depositor in U.S. banks.
Natural disasters linked to climate change may well be the next test. Floods, fires, and extreme storms can paralyze entire regions, forcing businesses to shut down while public employees continue to draw wages. It is likely that small enterprises will be the least prepared for natural catastrophes arising from climate change, with limited access to credit or insurance. Unless governments design policies that spread these risks more evenly, the pattern seen in COVID and wartime economies will repeat in the face of climate shocks.
Absent a universal measure to insure private risk-takers, the long-term consequences are dangerous. If the best and brightest decide it is too risky to start a restaurant, a tech company, or a manufacturing firm—because society will leave them exposed in the next crisis—we all lose. And the best and the brightest will want to become bureaucrats, not entrepreneurs.
Ugo Troiano is an associate professor of economics at the University of California, Riverside. You can follow his Substack: utroiano.substack.com