Post-pandemic economics: The new normal will not be very different from the old one

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April 27, 2020 1:50 AM

Idealist notions of the State overtaking the Market as the one in charge are unfounded.

Before the shock, the global economy was facing excess savings, and bond yields were negative for good borrowers. (Representative image)Before the shock, the global economy was facing excess savings, and bond yields were negative for good borrowers. (Representative image)

There is yet a while, perhaps six to nine months, before the world is free of the Covid-19 pandemic. The 1918 Spanish flu had three waves, and killed more people than the First World War did. But, claims are already being made as to how there will be profound changes when the the world returns to a new normal. Idealists are hoping that we will all become more socially-minded, more altruistic, and less selfish and materialistic. Others hope that socialism will come back as the major choice ahead for the world; the State, rather than the Market, will be in charge.

These are just visions which those who foresee them were already advocating. The pandemic has given them hope that their dreams would be realised in their lifetime. Others want globalisation back, or climate change tackled, or inequality reduced.

The facts are that almost all countries will suffer from a large output shock—25% at least, but also a demand shock. Keynesian remedies are for where supply is available but demand is not. But, this time, the massive effusions of money by all governments are to sustain incomes lost due to output collapse, and to hold up asset values that have fallen due to the demand shock. Before the shock, the global economy was facing excess savings, and bond yields were negative for good borrowers. All this money will be mopped up. At least there is no financial resource constraint as there is money sloshing around, but there will be losses and gains as people shuffle their portfolios.

But, the new normal, whenever it comes, will not be very different from the old one. This is because people would like to get back to what they had before, whatever it may have been.It is good to admire low air pollution, but not if it requires a total shutdown of the economy. Nor will it be possible to redesign economic life quickly—more working from home, more social distancing—because that would haemorrhage the old normal before lives have been restored. Readjustment after a war has destroyed plants, equipments, and buildings is different; this time, the infrastructure is all ready to be reused.

Yet, across countries, while the virus has had the outcome of moving the State centrestage, to take charge of economy and society, the discussion, remarkably, has been about how badly it has done so. In various ways, governments have failed. They have proved too slow, too unprepared, and incapable of devising income maintenance schemes without excessive red tape. In the rich countries of Europe—Italy, Spain, France, the UK—deaths are already in five figures, hundreds per million inhabitants, and those hospitalised in six figures. (So far, the US has more deaths than any other country, but lower per million than Europe .) The State has proved unequal to the enormous task. A lot of private, voluntary efforts by citizens and charities, often spontaneously offered, has been needed to patch up the inadequacies of the State.

Take the problem of medical supplies and healthcare facilities. Despite all talk of global supply chains, unprepared governments have not been able to harness available chains quickly enough to relieve shortages. While the UK runs short of protective equipment for its health workers, it orders supplies from Turkey, which is making exports difficult, while British suppliers are shipping stuff abroad. Why was the Indian government caught by surprise when immigrant workers were prone to go back home as they could not work during the lockdown? It is not unknown to politicians when elections are being fought as to where there are vote-banks of Biharis or North-Eastern voters in Delhi or Punjab. But, this knowledge is not transmitted to administrators.

The worst problem has been that every country/society has had to value life in economic terms, but refused to see the choice clearly. Take, for instance, complaints in India that emergency spending plans will breach the deficit targets by a few percentage points. So what? Do you want to save lives or money? The money can be paid back in the future, but the lost lives cannot be brought back. A similar problem was created by the choice between mitigation and suppression as two strategies for tackling the infection. Mitigation relied on ‘herd immunity’ which was a sort of laissez faire solution—liable to lead more deaths, but no economic shutdown—while suppression involves lockdown, which has enormous economic costs, but a lower human cost. Different countries have adopted different strategies. We shall see afterward which was the most efficient in terms of economic loss per life saved. It is not heartless to ask such questions. It is essential to save lives because economic shutdown also costs lives, though not by infection.

As an economist, my surprise has been the uncertainties on the hard science side. People mock economists for disagreeing, or for getting forecasts wrong. But, uncertainties about the nature of the virus, its evolution, ways of testing, devising a vaccine, estimates of lives lost under each scenario have all shown (to me, at least) that faced with an unanticipated shock, natural science does no better than social science. At least the mistakes of economists are not lethal.

The author is Prominent economist & Labour peer. Views are personal

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