The Covid virus has created circumstances where many economic rules, teachings and assumptions don’t apply in the same way.
GDP is no longer everything. In economics, GDP is usually the most visible goal, with economic policy often focused around maximising economic growth. The virus forces us to shift priorities – rather than worrying about GDP, we need to worry about saving lives. Also, in response to the economic downturn, the concern is not so much seeking to boost GDP, but more concerned with minimising the economic pain to the worst affected. In the present moment, social security payments to the unemployed are more important than GDP statistics.
Demand-side tools ineffective. In the economic textbook, there are many policies for dealing with a recession, such as cutting interest rates and cutting tax. But, the virus and lockdown have broken the transmission mechanism. Cutting income tax will not encourage spending when people can’t go out to shop. Cutting interest rates will not boost investment when business are concerned about the future and are unable to start projects.
Social distancing rules are key to economic activity. When social distancing rules are relaxed in the future, it would lead to jump in economic activity. Even policies such as setting up more local deliveries could be a key factor in affecting economic activity. The fortunes of business may depend on whether they can adapt to the changed circumstances and find a way to be online.
Shutting down the economy can make sense. Some models suggest the best way to overcome the virus is an aggressive shutdown of normal economic activity. Only through halting the spread ruthlessly can enable the economy to reopen and in the long-run minimise the long-term economic costs.
It is a bad time to be a libertarian free-market economist. The libertarian model of limited government intervention is hopelessly inadequate for this situation. In this situation, we need government intervention to
- To prevent an exponential rise in virus cases
- Prevent widespread economic collapse
- To provide a safety net for those caught out
- Direct use of resources, such as telling manufacturers to switch to production of respirators, face masks and goggles.
Bailing out firms. Some economists like J.Schumpeter talk about ‘creative destruction’ and the idea recessions force ‘inefficient’ firms out of business enabling more efficient firms to take their place. Therefore, free-market economists refuse to countenance bailout. This is debatable in normal circumstances, but the nature of this particular shutdown is that even the most profitable, efficient and successful firms are at risk of going bankrupt. Government aid in the form of loans, grants and direct payments can enable them to survive and avoid a permanent loss of output.
Public health is a public good. The good health of other people in society matter as much as our own. Public health It forces us to remember that we are all in this together. For economies with piecemeal health care, this crisis will provide a boost to those wanting universal health care and a reminder that we are affected by the health of others.
Debt rules out of the window. The Eurozone place restrictions on government debt and government borrowing. budget deficit must not exceed 3% of gross domestic product (GDP) and gross government debt of 60%. These are irrelevant, with governments promising to ‘do whatever it takes’. For 2020/21, we could see budget deficits in the region of 20% of GDP. (how much can government borrow?)
Ability to print money. A maxim that usually applies in economics is that if you print money it causes inflation. This economic shutdown is one of the few cases, where you can print money and finance part of government debt with a very limited impact on inflation.
What has economic value? The crisis forces us to ask what has economic value? At the moment the goods in highest demand are toilet paper, rice and pasta. Designer luxury watches have a certain meaninglessness when you can’t show off your luxury goods to others.
What is the real value of workers? In this crisis, “low-skilled” workers such as supermarket staff (on national minimum wage) are seen in a new light because we realise how essential it is. Doctors and nurses are relatively low paid compared to many highly executives and celebrities whose work has stopped.
Many fundamentals of economics still apply and are relevant, however, the crisis is definitely causing an unusual situation which changes the assumption and effectiveness of many usual economic policies are theories. It is changing not just economic policies, but also the attitude of consumers and firms. Whether it will lead to permanent changes in attitudes is another matter. But, it may accelerate trends towards considering economic welfare as much as just GDP.