Coronavirus: Ireland needs careful action to prevent a severe fall in living standards

We have become increasingly aware in recent weeks of how both the virus and our economy thrive on face-to-face interactions. Stopping one imposes the necessary price of substantially stopping the other.

As a matter of life and death, the public health imperative of slowing the spread of the virus must now take precedence. Historical evidence from previous pandemics suggests that virus suppression and economic damage limitation may not be in conflict over the longer term. However, careful economic management – with little by way of a map to guide us – will also be required to prevent a severe fall in living standards in a prolonged emergency.

This economic management challenge is made more difficult because it involves both the need to maintain essential production and also the wherewithal for households to access what is produced. At its core, the economic emergency has resulted from a massive shock to the ability to produce – production is impeded when workers cannot go to their normal work places and businesses cannot access essential inputs or physically interact with customers.

It is useful to consider three dimensions of the production challenge: distancing, re-engineering and essentiality. As already noted, the need to slow the spread of the virus makes physical distancing imperative wherever possible, but it also throws sand in the gears of production.

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Both the private and public sectors are showing great ingenuity in re-engineering their production processes to make and deliver their outputs with greatly reduced face-to-face interaction. This is most apparent where services can be delivered online. In sectors where at least some level of physical presence is required in production or distribution, processes are being re-engineered to increase safety by minimising close interactions and the use of personal protective equipment.

Even allowing for optimal re-engineering, continued production in many areas will depend on how essential the good or service is judged to be. This list has become increasingly restrictive as the need for physical distancing has increased. Given the long and integrated supply chains involved in the production of many goods, the challenge in identifying what is essential and what is not is likely to become more difficult.

Production of ventilators

One recently cited example is Medtronic’s production of ventilators – undoubtedly an essential good. But the production of a ventilator involves 1,500 parts sourced across 14 countries. There is a danger of bottlenecks emerging in the production of essential items if the definition of essentiality is set too narrowly for an extended period.

Maintaining supply chains and access to essential imports will also require that the international trading system remains open. There are already understandable pressures across the globe to limit the export of essential items needed at home. Our own history makes us alert to the tragedy of food being exported when there are dire needs at home. But exports are the means of accessing essential imports – a reality that is as much political as financial in the present circumstances. Every effort must be made in our global collective interest to keep the international trading system open.

In the near term, policy makers will also need the wisdom of Solomon

Fiscal policy will play a central role in the economic management of the emergency. In addition to its familiar role of maintaining overall spending power in economy, an even more important role in the near term will be in ensuring basic access to essential goods and services through such mechanisms as unemployment supports and wage subsidies, fronts on which the Government has been impressively proactive.

It is important to remember, however, that a household’s real income relates to its purchasing power over goods and services. There are no real incomes if there are no goods and services. This again underlines the importance of paying attention to production as well as incomes, especially if available stocks become depleted during a prolonged shutdown.

Shrunken economy

There will inevitably and appropriately be a large increase in the deficit. The direct impact of the income-support measures will likely be much less important than the indirect effects on taxes and spending from a significantly shrunken economy. Early in the financial crisis, the deficit as a share of GDP peaked at close to 12 per cent, even excluding the direct deficit-increasing costs of the banking system bailout. It would not be surprising to see the deficit in double figures again.

In that earlier crisis, a major escalation in the country’s challenge came when the State lost its ability to borrow. Recognising the global nature of the shock and substantially evolved thinking on the part of the ECB and other European institutions, there are reasons to be optimistic that things will be different in this emergency. It is critical that the ECB is willing to act as lender of last resort to governments. Encouraging signals have come with its massively scaled up bond-buying programme, though it may have to go further.

The priority for the coming weeks will rightly be to suppress the spread of this deadly virus. Success could allow for a V-shaped recovery, especially if businesses are supported in navigating their way through the shutdown and spending is supported as production-impeding restrictions are relaxed.

But in the near term, policy makers will also need the wisdom of Solomon as they grapple to balance the need to minimise physical interactions with the need to sustain the production and distribution of essential goods and services.

Prof John McHale is Executive Dean of the College of Business, Public Policy and Law, NUI Galway. He was Chair of the Irish Fiscal Advisory Council between 2011 and 2016.