Back in 2009 the economists
Carmen Reinhart and Ken Rogoff published a very good book with a brilliant title:
“This Time is Different: Eight Centuries of Financial Folly.” They were, of
course, being sarcastic: During every financial bubble, as debt rises to levels
that historically have portended trouble, investors eagerly assure themselves
and each other that old rules no longer apply, only to suffer ruin when the
usual things happen.
This time, however, really is
different. Economic data are only now beginning to show what the financial
markets have already priced in, a dramatic slump over the next few months. But
while the slump — the coronacession? — is definitely coming, it’s going to be
different from previous recessions. Among other things, while we usually
measure the success of economic policy by what happens to real G.D.P. — the
total value of goods and services the economy produces, adjusted for inflation
— this time G.D.P. will be both a poor measure of success and a bad target for
economic policy.
To be sure, there will be many
parallels with the financial crisis of 2008 and the Great Recession that
followed. Now as then, financial markets are being disrupted, with crazy asset
pricing driven by financial stress. Now as then, there will probably be a lot
of gratuitous unemployment, as consumers curtail their purchases and workers
lose their jobs — gratuitous unemployment in the sense that it could have been
avoided if Congress and the Trump administration had moved quickly to provide
adequate economic stimulus. (Spoiler: they won’t).
What’s different this time,
however, is that some of the things we want to be doing, indeed must do if we
don’t want hundreds of thousands of unnecessary deaths, will temporarily reduce
G.D.P. And that’s OK.
Most obviously, we want and need
sick or potentially sick workers to stay home, limiting the spread of the
virus. Some of these homebound workers will be able to do their jobs remotely,
but even in 2020 most jobs require physical presence. As a result, we’re going
to lose the G.D.P. those workers could have produced. So be it. Production
isn’t everything.
A slightly more problematic issue
involves jobs lost because of the social distancing we need to slow Covid-19’s
spread. People won’t and shouldn’t be going to restaurants, doing nonessential
shopping, and so on; that leaves people who would normally be working at these
establishments idle.
The reason this is slightly more
problematic is that given time, service workers in the affected sectors could
be re-employed in substitute activities: fewer servers, more people making
deliveries. In fact, Amazon says it needs to hire 100,000 more workers to keep
up with surging online demand. If extreme social distancing were to become the
new normal, there’s no fundamental reason we couldn’t still have full
employment; it would just require a different mix of jobs.
But that can’t happen overnight,
and if we think the worst will pass in a few months, it actually makes sense
for most workers in the afflicted sectors to stay where they are and not work
for a little while. That also means less G.D.P., but again, so be it.
So what’s the role of economic
policy here? Two things. First, reduce the pain. Universal sick leave at close
to full pay should just be the start; we should also be doing what Denmark is
doing, and subsidize firms that keep paying wages. We should also dramatically
increase aid to the unemployed.
Second, we should be funneling
money into the economy to sustain spending on things that shouldn’t be affected
by the virus. Job losses brought on by inadequate overall demand serve no
purpose.
None of this would or should
prevent at least a few months of economic contraction. But we could do a lot to
make this plague less painful economically. I wish I had any confidence that
we’ll do more than a small fraction of what we should.
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