Mar 24th 2020

Insuring the Survival of Post-Pandemic Economies

NEW YORK – Lockdowns of entire cities. Panic in financial markets. Bare store shelves. Hospitals short of beds. The world has entered a reality unknown outside wartime.

By mandating that people isolate themselves at home, policymakers hope to slow, and then reverse, the rate at which COVID-19 is spreading. But a lockdown alone, or a burst of money creation, will not stop the pandemic or save our economies. We need government intervention, but many current proposals appear misguided, some woefully so. Others move in the right direction but are too piecemeal.

The very possibility of millions dying as the economy is crippled justifies substantially scaling up the extent and scope of government action. This action should be viewed as an unprecedented form of short-term systemic insurance for our lives and livelihoods. Given the absolute value we place on both, citizens and governments should be prepared to pay what might appear an extravagantly high premium for such insurance.

The systemic insurance that is needed demands a government-led effort in four main areas:  

·       Redirecting the economy’s existing productive capacity to overcome the rapidly growing shortages of equipment and services required to respond effectively to the pandemic.

·       Supporting firms that are not directly involved in efforts to combat the crisis, so that they can continue to supply essential goods and services.

·       Ensuring that the population has sufficient means to purchase these goods and services.

·       Creating a financial facility to help those unable to pay their mortgage and meet other obligations, thereby mitigating cataclysmic risks to the financial sector.

Such systemic insurance goes well beyond current proposals to spend trillions of dollars, much of which is earmarked for policy initiatives that misdiagnose the crisis as one of deficient aggregate demand or as the result of an ordinary supply shock. Moreover, substantial sums are being dedicated to bailouts without explicitly conditioning the money on a firm’s participation in the effort to combat the health crisis and its economic consequences.

So, as officials around the world consider large outlays to combat the COVID-19 crisis, the most immediate questions that we face are whether the policies currently under consideration provide sufficient insurance against the systemic risks that are now mushrooming. The criteria are straightforward:

·       Is government spending sufficiently laser-focused on overcoming the public-health crisis?

·       Is the economic rescue package adequate to sustain the population’s wellbeing? 

Considering the second criterion first, government injections of so-called helicopter money (direct cash handouts) to help keep the population afloat should be recurrent, rather than the one or two disbursements now being discussed. Expanded unemployment benefits, together with expanded eligibility for food stamps and other such payments, would also help provide the means to pay for essential goods and services.

Policies aiming to stimulate employment, such as the cuts in corporate or payroll taxes advocated by US Senate Republicans, certainly won’t help combat the pandemic and its consequences for the supply of goods and services. Employees who are sick or apt to be sick, and thus a hazard to others, cannot be relied upon to maintain the production of goods and services. 

What is now painfully clear is that there is a supply shortage of an unprecedented type: medical equipment and facilities. And it is equally clear that the policies under consideration in the US, which mostly rely on voluntary repurposing of existing manufacturing capacity, are woefully inadequate to close the growing gap.

Re-equipping factories to produce ventilators for patients and personal protective equipment (PPE) for medical personnel, for example, takes time. So these measures must be scaled up without delay. Moreover, such retooling requires substantial financial outlays, which are hard to make in a collapsing economy.

In order to repurpose existing capacity, the government should condition support for any private firm on the firm’s commitment to producing vital equipment (specified by a body of medical experts) and meet its payroll at reasonable wages. To avoid price-gouging, medical supplies must be priced at pre-crisis levels.

This conditionality should not only apply to firms producing equipment. The systemic insurance approach to allocating taxpayer funds would require that large service-sector companies such as airlines or hotel chains receive bailouts only if they repurpose their capacity to support the fight against the pandemic. Rather than standing idle waiting for passenger travel to resume, airlines should be provided funds to re-equip their airplanes to transport medical supplies and equipment, or to move sick patients to locations with the capacity to care for them. Similarly, hotel chains should be supported by the government only if they agree to repurpose their hotels to serve as temporary hospitals. 

Beyond repurposing existing capacity, systemic insurance would require that employees of bailed-out companies continue to be paid an adequate wage. The bailouts should not be allowed to be diverted to management pay raises, stock buybacks, or dividends.

What makes the systemic insurance unprecedented is that it requires not just government spending – which can be thought of as the cash part of the premium – but also large-scale government-led interventions in how our economies produce and distribute goods and services. This move toward state action is much more encompassing than the mobilization for World War II – a frequently invoked parallel – ever was.

But such a reorganization of our economies poses more than operational difficulties, especially in the US, where government has historically strictly limited its direct intervention in productive activities. Although governments’ intervention in modern economies takes many forms, ingrained ideas about the balance between the state and the market are even now impeding an adequate response to this crisis. 

President Donald Trump and US policymakers have thus far favored piecemeal measures, especially when it comes to the state directing – indeed, reorganizing – the private sector. Their instinctive belief in the superiority of the market and private initiatives, regardless of the circumstances, leads them to recoil from the scale of government intervention needed to save our lives and livelihoods. 

Lingering shibboleths about the state’s proper role must not become roadblocks to mitigating the grave systemic risks that we face. Governments’ poor track record on addressing another existential threat – that of climate change – does not inspire optimism.


Roman Frydman, Professor of Economics at New York University, is the co-author of Imperfect Knowledge Economics and Beyond Mechanical Markets(Princeton University Press). Edmund S. Phelps, the 2006 Nobel laureate in economics, is Director of the Center on Capitalism and Society at Columbia University and the author of Rewarding Work. 

Copyright: Project Syndicate, 2020.
www.project-syndicate.org 

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Jun 25th 2020
EXTRACT: "The facts are clear: the wealthiest 0.54%, about 40 million people, are responsible for 14% of lifestyle-related greenhouse gas emissions, while the bottom 50% of income earners, almost 4 billion people, only emit around 10%. The world’s top 10% income earners are responsible for at least 25% and up to 43% of our environmental impact. Most people living in developed countries would fit into this category, meaning you don’t have to consider yourself rich in order to be globally affluent. Even many poorer people in wealthy countries have a disproportionately large and unsustainable resource footprint compared to the global average."
Jun 24th 2020
EXTRACT: "To be sure, the American Dream was always more aspiration than reality. Economic, social, and intergenerational mobility have always fallen short of what the myth of the self-made man or woman would lead one to expect. But with social mobility now declining as inequality rises, today’s young people are right to be angry."
Jun 19th 2020
EXTRACT: "There is only one way to repair America’s reputation, regain the trust of allies, and ensure that the US can act as an effective counterweight to China: address the root causes of the cracks that Trump’s disastrous presidency has exposed and widened. This is in line with the vision advanced in 2011 by two military strategists, Captain Wayne Porter and Colonel Mark Mykleby, using the pseudonym “Mr. Y.” Porter and Mykleby argued that national security depends not only on the capacity to respond to threats from foreign powers, but also – and perhaps more important – on the “application of credible influence and strength.” That influence, in turn, depends on America’s success in providing a “pathway of promise” for US citizens – and a model for the world."
Jun 14th 2020
EXTRACT: "The most critical question then is not how far Trump will go to promote his treasonous agenda, but for how long Republican leaders will silently accept and subserviently enable Trump to destroy the basic moral tenets and values on which this Union was founded, and which they swore to uphold and protect...............Of course, shame on us if we continue to be surprised by Republicans’ continuing silence, because as we all know, even when presented with overwhelming evidence that Trump committed crimes against the American people, Trump’s Republican stooges in the Senate exonerated him following impeachment almost unanimously...................The Republican leadership, to be sure, has made its bed. It has committed moral suicide. History will judge them harshly for their treason and betrayal of the nation, including all of those who have lived and died throughout our history to foster and protect our safety, integrity, and freedom."
Jun 9th 2020
EXTRACT: " Governments can do nothing about the quotidian offenses of living as a black person in America – the empty taxis that refuse to stop, being mistaken for employees in supermarkets, the myriad intentional and unintentional insults. Many now in the streets won’t be satisfied unless the result of this national spasm is improved schools, health care, and job opportunities for minorities – a fair shake for black people. What will happen when America once again falls short of honoring its professed values?."
Jun 8th 2020
EXTRACT: "It should be apparent to most observers of international relations that the Chinese government wants the world to play by its own set of rules. Beijing appears to believe that China’s rise and its assumption of global leadership positions are an inevitable extension of earlier periods in its history, when it was the world’s most powerful country. This is often at odds with the global norms that have been established – with China’s participation, it is worth adding – since the 1940s. While this is clearly the Chinese century, few outside of China would agree that Beijing’s global leadership is either inevitable or necessarily desired – certainly not on the Chinese government’s terms."
Jun 4th 2020
EXTRACT: "Many Americans are clearly horrified by their president’s crass and incendiary words. But will their disapproval be offset by anxiety about violent social unrest? Will age-old racial prejudices, often unspoken, or even acknowledged, still make them vote for the false security of a coarse white bully?  Much will depend on how hot this summer gets. If people think rationally in November, it is hard to imagine that enough of them would vote to keep this appalling administration in power for another four years. But fear is reason’s worst enemy."
Jun 2nd 2020
EXTRACT: "For starters, many Americans have accepted that they live in a winner-takes-all society of deepening inequality. While the wealth and incomes of those at the very top continue to grow, tens of millions of Americans struggle to afford health care, childcare, and other basic goods. This story has been told many times over. But what often goes unremarked is that the responsibility for managing the social costs of this system has been offloaded onto the police."
May 27th 2020
EXTRACT: "Obamagate is the latest conspiracy theory to be pushed by US president, Donald Trump. It started on the morning of May 10, when Trump retweeted the word “OBAMAGATE!” By the next day, the Obamagate hashtag had accrued over two million tweets and another four million by the end of the week. Trump has repeatedly reused the slogan on his Twitter feed since and it has been promoted by right-wing influencers including Glenn Beck, Sean Hannity and many others....You are not alone if you’re confused by what Obamagate actually is or why Trump is tweeting about it."
May 23rd 2020
EXTRACT: "Not all aspects of our near and medium-term future can be foreseen at this juncture of the Covid-19 pandemic, but we now know enough to make some hypotheses about what is likely to change, based on what has already changed. The future is sure to look very different than it did before this decade began, regardless of whether a vaccine is found. If a vaccine is found, it is unlikely to be tested, approved, manufactured, and efficiently distributed to the world’s population of nearly 8 billion people for years. Bearing in mind that there is no vaccine for any coronavirus, what is likelier is that the world will be living with Covid-19 as a part of our ecosystem for many years to come – possibly permanently. That means that our new normal is probably already here."
May 21st 2020
EXTRACT: "LONDON – The new Franco-German proposal for a €500 billion ($547 billion) European recovery fund could turn out to be the most important historic consequence of the coronavirus. It is even conceivable that the deal struck between German Chancellor Angela Merkel and French President Emmanuel Macron might one day be remembered as the European Union’s “Hamiltonian moment,” comparable to the 1790 agreement between Alexander Hamilton and Thomas Jefferson on public borrowing, which helped to turn the United States, a confederation with little central government, into a genuine political federation."
May 19th 2020
EXTRACT: "In April 2011, Donald Trump, then considering a run for the presidency the following year, said that he had sent investigators to Hawaii to check out rumors that President Barack Obama wasn’t born there, but in Kenya, which would disqualify him for the presidency. His investigators, Trump declared, “cannot believe what they’re finding.” I can find no record of Trump being challenged on this outlandish claim at the time. In the fall of 2016, Trump, now the Republican presidential nominee, was convinced by his staff that he had to abandon this “birther” nonsense. He did so reluctantly, charging – also with no evidence – that such rumors had actually been initiated by his opponent, Hillary Clinton. There, in a nutshell, is Trump’s modus operandi: he’s not just a liar but a fabulist, seemingly unconcerned with whether his fictions will be exposed. If they are, the world simply moves on as he invents fresh distractions."
May 19th 2020
EXTRACT: "Li, a doctor, was purportedly silenced and chastised by Chinese officials for warning on December 30, 2019, about a new virus in the Wuhan hospital where he worked. When it became evident that he was on to something serious – so serious, in fact, that it ultimately killed him – the Chinese government changed its tune and celebrated Li’s bravery. If only that had happened sooner, the argument goes, the world would have avoided this horrific pandemic.................... But that’s not what happened."
May 9th 2020
EXTRACT: "Jana Winter and Hunter Walker at Yahoo News broke the story that 11 Secret Service agents have tested positive for the coronavirus. Likely some of them served in the West Wing. This week it was revealed at that a US military valet who brought Trump food came down with the virus, sending Trump into a “lava level” rage. Two aides to Vice President Mike Pence have tested positive. Some observers are afraid that the virus is circulating in the West Wing itself."
May 6th 2020
EXTRACT: "There has been much debate around the world about the source of the COVID-19 pandemic, ranging from a laboratory to Wuhan’s seafood market to some other form of animal-to-human transmission. While there is no proof (yet) that the virus may have been inadvertently released from one of the two biological research laboratories located at Wuhan, there is evidence that viral release has occurred in the past, and a host of additional data that point to a laboratory connection. "
May 4th 2020
EXTRACT: "A better bet is that nothing will be the same. Wealth will be destroyed on a catastrophic scale, and policymakers will need to find a way to ensure that, at least in some cases, creditors take part of the hit, a process that will play out over years of negotiation and litigation. For bankruptcy lawyers and lobbyists, it will be a bonanza, part of which will come from pressing taxpayers to honor bailout guarantees. Such a scenario would be an unholy mess."
Apr 29th 2020
EXTRACT: "We need the twenty-first century’s two superpowers, America and China, to set the example, by burying their rivalry and uniting all of humankind around a collective response to the current crisis, and to those that await us. As COVID-19 has taught us, the old international system can no longer guarantee humankind’s safety and security. We cannot afford to be taught that lesson twice."
Apr 29th 2020
EXTRACT: "It should come as no surprise that Trump has abused his power in orchestrating the federal response to the pandemic. For example, he made sure that Colorado received 100 much-needed ventilators, and made sure that Colorado voters knew it, in order to help re-elect troubled incumbent Republican senator Cory Gardner.  More alarming, Trump effectively threatened to wage germ warfare against US Postal Service workers by denying them congressionally approved virus-mitigation aid unless the USPS quadrupled rates on packages. Trump’s actual target was Jeff Bezos, the CEO of Amazon and owner of The Washington Post."
Apr 28th 2020
EXTRACT: "These ten risks, already looming large before COVID-19 struck, now threaten to fuel a perfect storm that sweeps the entire global economy into a decade of despair. By the 2030s, technology and more competent political leadership may be able to reduce, resolve, or minimize many of these problems, giving rise to a more inclusive, cooperative, and stable international order. But any happy ending assumes that we find a way to survive the coming Greater Depression."
Apr 26th 2020
EXTRACT: "In response to the COVID-19 pandemic, the US Federal Reserve will buy unlimited quantities of Treasury bonds, the Bank of England will purchase £200 billion ($250 billion) of gilts, and the European Central Bank up to €750 billion ($815 billion) of eurozone bonds. Almost certainly, central banks will end up providing monetary finance to fund fiscal deficits. The only question is whether they should make that explicit."