This is not your father's, or grandfather's, recession. Paul Krugman, a Nobel prize winner, this week correctly pointed out the unusual nature of the crisis. Previous recessions can mostly be analysed in terms of supply or demand shocks.
This one, uniquely, has large elements of both: supply and demand have both been turned off by government edict. That means there isn’t an awful lot to be learned by looking at previous recessions.
Most importantly, anyone seeking policy clues from past experience – good and bad government handling of recessions – risks looking in exactly the wrong place.
Optimistic
Krugman is optimistic that, once the pandemic is over, economies can bounce back very quickly. The correct economic policy response right now is to replace those incomes lost because of lockdown.
‘Stimulus’ is exactly the wrong way to think about policy. And it might not be necessary. That depends on whether or not our behaviour has been permanently changed.
That raises the critical question: once the lockdown is lifted, will things more or less return to the way they were?
The honest answer is we simply don’t know. Everything about the post-pandemic future is shrouded in uncertainty. Actually, that’s true of forecasting 100 per cent of the time, not just in these ‘particularly uncertain times’. It’s completely innumerate, but most economic forecasters believe that they live in ‘particularly uncertain times’, all the time.
I can think of quite a few reasonable explanations of the warning by the Government about the limits to what they can do, fiscally speaking, about the pandemic. Most obviously, it is quite right to argue that there are limits to borrowing. The Government cannot borrow without limit.
However, this is an incomplete statement that might be a shibboleth, trivially true and meaningless, all at the same time.
It would be more accurate, a better description of the truth, if we were to say: there is a limit to borrowing, it is a variable, not a constant; we never know what it is in advance; those limits can be reached when lenders refuse to lend, either at all or a reasonable price (interest rate) – that’s a hard limit; limits can also be fuzzy things, better described as “consequences” of borrowing, particularly ones we don’t like.
Worried
Perhaps the Government is worried about the past. There have been dark hints about how too much public sector borrowing has, historically, resulted in problems for the Irish economy. Again, this is true. But it is also incomplete and, probably, trivially true.
The current situation is unique; the past, therefore, is a very poor guide to what we should do next.
Governments don’t trust their future selves. They worry that lots of debt now will entrench bad habits. Future finance ministers will come to see borrowing as business as usual. Restoring ‘sound’ public finances will be made more difficult the more we borrow today.
All of this is could be true; it is certainly consistent with past experience. But it might not be true; it risks infantilises future finance ministers and assumes we are not capable of learning, not least from past mistakes.
It might be a pragmatic response but it doesn’t negate Krugman’s point of economic principle. The right, unique, policy response to Covid-19 is to replace lost incomes for the duration of the pandemic.
The extent to which you don’t do this, the higher the probability that the economic consequences of coronavirus will be permanent.
There might be other reasons why there might be long-lasting economic consequences but getting policy wrong now and over the next few quarters will be up there at the top of the list.
Decision making under uncertainty, the core of economic policy making, is always hard. Medics and epidemiologists, with respect, have it relatively easy. Their job is to apply the precautionary principle and minimise risk. That’s quite different from deciding how much risk to take.
The scientists are doing what they are paid to do: in most countries they are saying the same thing, it’s too early to release the lockdown, even in baby steps; don’t change two metres to one and so on.
Evidence
There is evidence that a high proportion of coronavirus infections are caused by super spreader events, ones that take place in crowded, noisy, enclosed spaces.
There have been enough care home and hospital infections to wonder about the nosocomial aspects of the disease. We know a lot about the demographics. While there is still a lot we don’t know, we know a lot more than we did.
Just continuing with a broad, blunt lockdown is the narrow risk minimising approach, correct in its own way, but inferior to a holistic risk management strategy.
It’s about risk taking, risk management and risk mitigation. Lockdown is risk minimising – and also defines risk in a narrow way. There are other risks than medical ones. While it’s correct to prioritise health, it’s wrong to ignore the consequences, the economic, social and health effects of the lockdown.
We should take risks with fiscal policy and debt. That’s not always true, but it is now. Continue to be generous with income replacement strategies and signal, in the strongest possible terms, that you stand ready to stimulate the economy if Krugman’s optimism is misplaced.
Take the deficit and debt risks. Likewise, it’s time to take lockdown risks. Lockdown can be eased intelligently and faster, with a broad definition of risk and explicit willingness to take it.
