Countries breaking the rules of economic prudence to deal with coronavirus shatters the monetarist view that economic policy must be independent of politics.
There has been a lot of dissatisfaction with Economics, and economists since the Great Recession of 2008. Macroeconomic geniuses not only failed to predict it, but claimed that it was the essence of their theory of rational expectations/efficient markets that any such shocks were unpredictable, theoretically. Thank you very much could be the only response to these preeminent (many Nobel Prize winners among them) professors . The built-in errors of over optimism, excessive risk-taking, following the trend in a gadarene fashion, overpaying the insiders, and ditching the shareholders were all ignored.
Indeed, crowd behaviour, or interdependent perceptions among individuals, was ruled out theoretically. Whether it was Economics 101 or 901, the message was the same: The individual, all alone, like Robinson Crusoe without Man Friday, makes his decisions subject to his constraints. No social interaction, no family, no neighbourhood, and no caring for anyone else.
The policy lessons that came out of this economics concentrated on budget balance, low debt-GDP ratio, and control of deficits within second decimal point brackets. The monetarist distrusted governments, and wanted to sanitise central banks from political influences—hence, central bank independence. Indeed, all economic policy, if not economic life, had to be independent of politics.
The coronavirus crisis has completely shattered this vision. It is social interaction within and outside family, in offices, factories, on trains, and in parks that determines all economic activity. Stop the social interaction, and all economic activity comes to a juddering halt. Around the world, a genuinely global phenomenon—infection and its rapid spread—has challenged the globalisation of economic life. The world is no longer borderless. Borders have been rebuilt everywhere.
Rich and poor countries have been hit equally by this. The virus may have originated in Wuhan, but it has spread very rapidly. (I visited Wuhan way back in 1973, when it was an oppressive steel town with polluted air, and grim surroundings.) Within three months, China has been through the crisis and, hopefully, come out. The effect may be 15-20% loss of output in these three months. But, developed countries—Italy, and Spain—have suffered a much higher mortality, and the US is catching up with them. The social isolation required as a preventive measure has further economic effect since it reduces social interaction. The influence of social interaction—individual interdependency—on economic activity is coming up as the essential ingredient.
Every country is breaking the rules of economic prudence, which are relevant, if at all, only for ‘normal times’. Normal times are when the companies, banks, and high net worth individuals are not worried. Now, everyone is in trouble. New rules are needed. Money is not a constraint when it comes to saving lives, which may be lost in large numbers. The difficulty is not in bailing out the corporations or banks, as was done in 2008. The difficulty faced by all governments is in identifying the many different ways in which people make their living, make their journey to work, and buy their daily necessities. This is so that governments can help them continue their daily lives without social interaction.
Within days of the voluntary curfew on Sunday, March 22, that Narendra Modi announced, and its extension for three more weeks, economic packages have had to be announced. But, how many people in the government knew about the seasonal migratory labourers who work in the metros? In Mumbai, they used to be called ‘Ghati’ because they came from the Western Ghats, and went back at harvest times. The same is the case in Delhi—the workers come from UP, and Bihar. No one had foreseen that these people will be jobless and unpaid in times of social distancing, and that their only escape was to head back home, breaking all rules of social distancing. Crowded trains, and buses will worsen the situation.
How do you help shopkeepers, watchmen, and the many self-employed casual workers? Do we have any idea of the morphology of the economy? The UK is finding out the various types of work, and workers there are for whom simple categories of employed/unemployed do not help. How do you help single people, the disabled who cannot go out in any case, but need attendants, who cannot come due to lockdown? How do people who live in slums, if not on the pavements, stay indoors?
There will be a severe economic shock. As it was, the economy was slowing down. The GDP growth rate was slowing down. The Rs 1.7 trillion package is just a first step. But, RBI should follow other central banks and cut the interest rate to 1%. This will not repair the broken credit market, but it will give much-needed relief to hard-up sectors.
I cannot help reminding people that there was a brave and stubborn Governor of RBI who wanted the bank’s reserves to be able to cover a seven sigma crisis. He was harassed, and left. The crisis is here. Give Governor Urjit Patel three cheers !
(The author is a prominent economist and Labour peer. Views are personal)