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Wednesday, April 1, 2020

Economics After The Pandemic (Part I): Fighting The Last War

The world faces a great deal of challenges in the coming months, but it appears that challenges will be quite different for each country. The medical challenges will depend upon the number of initial infections, as well as the readiness of the medical authorities and cultural norms (e.g., mask wearing). The medical challenges in turn will help determine the magnitude of the economic disruption. In this two-part article, I want to discuss some of the issues that will come to the fore after the virus is vanquished.

My plan was to write a MMT primer in between the publication of Volume I and Volume II of my text on recessions. The manuscript for Recessions: Volume I is still being edited, and I hope to do its final formatting (which will take away from writing time). I am considering pivoting the MMT primer to be a discussion of how MMT fits in with the challenges of the post-pandemic world.

Fighting the Last War

It is safe to say that very few people will want this episode to repeat any time soon. How many changes that will be made is unknown, but it seems likely that there will be emphasis on a change in direction. These changes may be thought of as fighting the last war (the war on the virus that is currently raging).

I would split changes into two parts: the medical response, and adding to the robustness of the economy.

Medical Response

The authorities were forced to lock down activity as a result of the projected overwhelming of medical care facilities. Although we are used to contagious diseases popping up, we have not seen any of them resulting in overflowing intensive care units and ventilator capacity, as well as the consumption of personal protective equipment.

Given the retooling of factories, it should be relatively straightforward to rebuild strategic stockpiles of these materials. To what extent economics is involved, it is who pays for the stockpiling. For a federal system like Canada, it should be at the national level. A secondary issue is that stockpiled goods do not last forever; there  presumably needs to be some mechanism to turn it over and put it into use.

The other issue is see is globalisation. Thus far, proponents of globalisation have been able to ignore the destruction of domestic jobs, and push their agenda with only limited resistance. However, everyone is now focused on the externalities of outsourcing supply chains, as well as the risks of porous borders. It is very easy to imagine that sand will be thrown into the gears of international travel when it is opened up again.

Countries with government-dominated health care (e.g., all developed countries outside the United States) should probably push for supply chain localisation (and/or greater inventories) for critical pharmaceuticals.

Government might push for households to stockpile more food and essentials, but the issue is that some of them already did that. (The Canadian government has been informing citizens for a long time to keep two weeks of supplies in their house as part of disaster readiness.) Households may do that on their own for some time, but memories will fade. The question is whether governments need to do more to rebuild food stockpiles (which I believe fell out of favour after the 1970s). My fear is that food security will be an issue in the coming year, and the amount of reforms here will depend on whether those fears are realised.

Economic Robustness

From an abstract perspective, the optimal response to the pandemic was to freeze economic time. Send everybody home for two to four weeks, and suspend all contractual payments for that period. Unfortunately, essential services needed to be provided, and most households lacked the stored provisions to freeze all activity. Meanwhile, legal institutions did not exist to do payment flow freezes of this nature.

As such, governments were forced to approximate this ideal: offer salary replacement schemes, small business loans, cash transfers, to keep the payments flowing. (At the time of writing, it is unclear how well these approximations worked.)

The question arises as to what can be done to make the response better the next time. However, the emphasis should be on reforms that are always relevant. Crafting a scheme that only handles pandemics will drift away from economic fundamentals if no pandemics of any size hit within a couple of decades. It would be better to make a change that is "always on," and improves the economic response to pandemics and other natural disasters.

Households 

The easiest way to help freeze the household sector in place is flat cash transfers. This dovetails exactly with various calls for "helicopter money" for recession fighting, or an always-on Universal Basic Income (UBI).

I am not normally a fan of a UBI. One way of phrasing my critique is that it is a bad idea to pay people to stay at home, and not be engaged with society. However, in a pandemic, that is exactly what you want people to do. However, this is only for a limited period of time, so time-limited helicopter drops fit the bill, without the concerns created by an always-on UBI.

The problem with one-time helicopter drops is that we only appear to need them once per decade. Under normal circumstances, the administrative overhead of running the programme seems excessive for such infrequent use. However, if one billed it as part of disaster readiness, such objections might be ignored.

In my view, if a Job Guarantee programme had been put into place ahead of the crisis, it could have achieved exactly the same objective in the crisis -- as well as being useful every other business day. Very simply, the Job Guarantee programme organisers would have paid people to stay home, and start bringing people out when it is safe to do so.

The pandemic just offers insights into technical issues associated with the programme.
  • It should be possible to enter the programme while on furlough from the private sector. Maybe not always, but the mechanism should exist so that it could be used in an emergency.
  • It should be possible to sign up by phone or internet.
  • There should be a way to guarantee that payments can easily be made to all citizens. A postal banking system, or a mandate to private banks that all citizens can have a fee-free savings account should be introduced.
Otherwise, governments could force consumer-facing contracts to have emergency standstill provisions for payments. Lenders would in turn probably need to put matching stand-stills into their financing arrangements.

Small Businesses

It is easy to come up with an emergency amount of cash flow that can keep most households afloat, but the amounts required are more ambiguous for small businesses. At the time of writing, the only proposal that comes to mind is the central government offering business continuity insurance at a subsidised rate (or re-insuring insurers offering such insurance).

Next Installment

The next article is going to cover the larger topic of getting the economy back to normal. That article will be closer tied to Modern Monetary Theory, as it is a standard business cycle discussion.


(c) Brian Romanchuk 2020

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