Bob Traa BOB TRAA

A new shock to the economy – Covid-19

COMMENT

An elderly man wearing a protective mask stands outside a closed fast-food outlet in the northern port city of Thessaloniki.

TAGS: Coronavirus, Economy

There’s no beating around the bush, we are all stunned by what has happened in a very short time: An invisible pathogen has entered every country of the world and affected normal life as we know it, caused governments to shift to a war footing, and brought economic activity to a halt (for example cruise tourism) or at least caused it to slow down abruptly (the rest of the economy).

Since this shock is unfolding at unprecedented speed, there is much uncertainty and there are many questions. This is welfare-destructive, because uncertainty produces stress for individuals and entire countries alike – indeed the world. It is also an unparalleled challenge for political systems, and medical staff and systems that will risk getting sick themselves to help patients. The first thing we need to do, it seems to me, is respect the difficult job that medical workers and politicians have to do. This is not the time for criticism or division – we all need to see, in our own way, what is the best and safest way forward. Let’s cooperate to find a solution.

Here are some thoughts that came to my mind as I observed the unfolding of the pandemic:

Nature. Don’t mess with nature – you will lose. Human beings have unusually large brains, a blip in evolution that we cannot explain; it has led to ideas in some quarters that this gives us the abilities to ignore nature. Big mistake. Nature is an equilibrating machine, and if an imbalance emerges somewhere, Mother Nature will take care of it without ever saying a word or showing empathy. It is better to study nature rather than deny it.

Demographics. Scientists are again asking if population pressure contributes to pathogens being flushed out of animal kingdoms in forms that we are not even aware of. We destroy our planet at will, and this has consequences as more and more populations come into contact with, and ingest, the fewer remaining creatures on this planet, including those that carry disease. Just as the weather is changing due to our activity, and storms, floods, hurricanes etc are getting worse, so, too, it is possible that infections and pandemics may occur more frequently and at higher virulence. Homo sapiens is a monoculture, and I was told in high school during biology class that monocultures are risky. We need to think more about fundamental balance. 

Healthcare. That governments are shifting to a war stance is understandable. The shock is so strong that the health system suddenly is confronted with a myriad of shortages, including doctors, nurses, tech personnel, masks, protective gear, ventilators and other necessities. In a pure efficient economic system this would lead to sharp price increases for everything in short supply. Society cannot afford this, given that it would make victims of millions of people who cannot afford such a price shock. Thus, governments step in and allocate resources directly to benefit as broad a swath of the population as possible. In an armed war, the government directs resources, by force, to producing as many war machines as possible. In this conflict with the virus, the government needs to help increase the supply of medical goods and services as quickly as possible. But watch the risks… including in politics. Do you trust your leaders with war powers? Parliaments and congresses will have a difficult job maintaining checks and balances.

Economic crisis. The threat to health is first, the risks to the economy follow immediately. From a supply side view, as activity plummets, many businesses may not survive without help. Many of these would be viable if conditions were normal. If their capacity is destroyed in a crisis, resurrecting this capacity afterward will take much time. Allowing many businesses to go under would thus shrink the productive capacity of the economy, remove places of employment, and lower income. Government intervention as a kind of ultimate insurance policy to tide these businesses over is thus understood to be reasonable and advisable. Supportive monetary and fiscal policy in a time of crisis is therefore also understood to be reasonable and advisable. That said, is this crisis short-term, medium-term, long-term or permanent (a new normal)? The answer to this question changes the solution.

But this is where the problems begin. Some governments have high debt from the start, such as Greece. Policy confidence needs to be earned every day, including in crises. I agree with a quick and large ramping up of spending, but what I find missing in much of these early political debates is a cool and argued notion of a return ticket – how do we get back to sound policies and debt levels after the crisis has abated? It is as if the public is given a one-way ticket to make everyone feel better without any notion of how to get back when things settle down. What government is explaining its extraordinary and understandable interventions in a longer-run framework of sustainability? Not one, from what I can see, because politics looks at the next election, not at the next generation.

What aspects of the economy deserve assistance, and in what form? Businesses and households need help. How do we distinguish and avoid abuse? It would seem that healthcare, food, electricity, water and shelter are essentials that government should support for society as needed. Protecting productive capacity and jobs is also in the priority list, but this is not at all a simple task. Governments need to explain what they are doing and why. 

If society, through civic and public efforts, supports a safety net for families and households, then the demand side of the economy also receives support. Businesses will not supply goods and services if there is no demand, so there is the notion that in a crisis like this the government also has a legitimate task to be a “demander of last resort.” This occurs alongside the supply support mentioned above.

Globalization. Globalization has acquired a bad name in some circles, mostly fanned by politicians of various stripes. These politicians favor nativism, combined with populism, and they are quite prone to discriminate against others, or denigrate those who are not of their own country, much like the crisis years in Europe before the Second World War. This crisis needs to press home the realization that we live in a global village, that we need to cooperate and we need dialogue across borders. We can overcome this challenge if we work together on a global scale instead of practicing divide and conquer. Thus, the crisis can even bring something as a side effect that is good and important. Are we really going to let the Iranian people die because someone in high office does not like the ayatollah? Where is our humanity?

And Greece? Many Greek people and Greek businesses need help from government, as in other countries. This costs money, so the short-term primary surplus objectives should go to meet immediate needs. The debt will go up. Can the government provide a sense of what the orders of magnitude are and what the longer-term plan is (the return ticket), given this new shock? 

Only a few weeks ago, when things seemed to be OK, the political system was convinced that the primary balance objective could easily be reduced to support growth. What is left of this argument in the face of this new and true crisis – was this argument premature?

Work with other countries and the World Health Organization (WHO) to forge a joint path forward and do what you can to protect and assist Greece itself with its own Greek initiative. Europe needs to assist Greece in paying to help the refugees. People need to stay home to flatten the infection curve so that the health system can cope. Many mistakes will be made, but resilience will return. 

Let us accept that spending is needed now, and probably a lot of it, but in the future, we need to be prepared to amortize this new debt. Primary surpluses in the future need to go back up. By how much? That can be assessed with a long-run analysis such as Odysseus’ Plan, which I calculated in a recent book on the Greek economy to return to lower debt. This Plan can be monitored, updated and adjusted to get further insight into the task ahead. Just throwing money at the problem is not a plan.


Bob Traa is an independent economist who worked with the International Monetary Fund for three decades, including as the IMF’s senior representative in Greece.

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