Anyone speculating on what the world will look like when we emerge from Covid-19 lockdown, would do well to heed the famous quip about prediction being difficult, especially about the future.
With the S&P 500 index up more than third since bottoming on March 23, financial markets seem to be betting on a V-shaped recovery, despite mounting evidence that it will be a long haul back to pre-pandemic normality, assuming we remember what it was like when we get there.
Economists, inevitably, overweight measurable financial and fiscal changes and underestimate the potentially more powerful social, cultural and institutional dynamics. Much current commentary ignores the genuine fluidity and uncertainty of the current situation. Many observers also fail to acknowledge the importance of the choices that individuals and societies will make as a result of the pandemic and how those decisions may impact long-term outcomes.
It is far easier to present such outcomes as inevitable, mechanistic consequences of powerful, impersonal forces, rather than take responsibility for the changes we want to see, and the trade-offs these inevitably entail.
So far, governments have sought to perpetuate the idea that a return to normalcy is easily within reach. Stick the economy into deep freeze now and it will be microwave-ready in a few weeks once the crisis is over. Stimulus packages to date have been designed to work with the grain, preserving existing jobs and businesses, rather than squaring up to the possibility that the economy on which they are predicated may never come back.
This crisis is going to be costly and it has hit at a time when economies were already fragile and politics fractious. When it is over there are going to be bills to pay and scores to settle, and how they are managed will set the tone for the decade ahead, if not longer.
As philosopher Michael Sandel pointed out in his book, What Money Can’t Buy, for too long we have dodged difficult political and moral choices by relying on the lazy assumption that markets, because they represent the agglomeration of all our collective desires and choices, never get it wrong.
Despite the Global Financial Crisis and COVID-19, faith in the market mechanism hasn’t completely collapsed. But the lockdown has reminded people that there are other things that are as important to them as money, and that market values don’t always reflect what people deep down really feel.
The pandemic has painfully exposed the inadequacies of a system that leaves overworked doctors in underfunded hospitals struggling with insufficient equipment, while the superrich self-isolate on their island retreats and superyachts. But before we cheer too loudly the rediscovery of the virtues of a strong and activist state, we will need to face up to the myriad failures in planning, procurement and logistics of public health systems that even now, when showered with money and attention, are struggling to respond.
Governments have a choice. They can try to return to business as usual and hope it all comes right. That recipe is clear. Massive fiscal transfers and new spending aim to see society through the coronavirus restrictions, with the hope that thereafter economies return, more or less, to their previous growth paths.
Can it really be that easy? An unreformed economy, burdened with excessive debt, overly reliant on the financial sector and incapable of providing decent living standards for too many will be poorly equipped for the post Covid-19 world. Trillions in additional debt will not spur productivity. Nor will it more equitably distribute the benefits of growth. Crushing debt loads are likely to hamper spending. Moreover, if stimulus merely boosts the value of financial assets while ‘Main Street’ stumbles, as happened after the financial crisis, trouble will almost certainly ensue.
Growth rates will probably jump initially when social isolation ends, but only from much lower income and expenditure levels. Some parts of the world economy may never regain their former legs. For instance, global production and trade may be permanently hamstrung by a desire to shorten vulnerable supply chains.
The fact is we have never in modern human history experienced anything quite like this. If ever was there a time for thinking the unthinkable, it is now. Even the Great Depression, a bad as it was, was mostly a consequence of human folly. In its wake, the economics profession may not have learned how to eliminate the business cycle, but it figured out how to dampen it.
Covid-19 and its social, political and economic consequences potentially pose much bigger challenges. For one, globalisation—already reeling from worker discontent and the rise of populism and nationalism—may never fully recover if businesses, governments, workers and other stakeholders demand that firms adopt business models less vulnerable to future pandemics. Above all, that would require either shortening supply chains or building in back-up systems, with either option reducing the profitability of global firms.
Second, the massive increase in government indebtedness owing to ‘stimulus’ and lost tax revenues as economies have plunged into recession only adds to already unsustainable debt trajectories in the US, Japan, and Italy, among other countries. Looking ahead, taxes will have to be raised, expenditures cut, resulting in long-term demand weakness. Tough political decisions come at a time when concepts of fairness and equality of opportunity are already severely challenged. It is not impossible to imagine a further coarsening of public discourse and, potentially, much worse.
Battles over a pie that does not grow as it once did will leave precious few resources for what governments truly must accomplish, namely productivity-enhancing investments in education, training and infrastructure in order to pave the way for the higher future incomes to assume the legacies of debt from this crisis and prior inaction.
Society must also gird itself for previously unthinkable polices—debt monetization and debt repudiation, for instance. Both are possible, yet both also carry enormous risks, including high inflation and breaching important social contracts. But, embraced the right way, they could potentially open the path, not just to recovery, but to a new era of sustainable progress and growth. Despite the enormity of the challenges ahead, the body politic must address them squarely. It serves no one to avoid the recognition of tectonic shifts coinciding with unsustainable trajectories. Better to face up to the realities, engage and inform the debate, as the means to find our way through what lies ahead.
