The coronavirus pandemic poses a challenge to the global economy – but there are reasons for optimism, writes Lord Jim O’Neill
I doubt anyone should have a very confident view about the medium to long-term consequences of this remarkable crisis; it’s tricky enough for the next few weeks. With this caveat in mind, let me offer some ideas.
What is clear is that Covid-19 has caused havoc for the world economy. I spent a large part of my career in financial markets looking at reliable high-frequency indicators for many countries, and they have all fallen off a cliff , whether it be China, Europe or the US.
In addition to this crisis being the most severe that I have probably experienced (although every major crisis always feels like that), it originated externally to the economic and financial system, and of course, the scale of the economic decline has been a direct result of policies to restrict movements of people.
In this regard, it does allow for some hope, that as soon our governments allow us to open up our societies again, our economies can recover sharply. Since the middle of March, when I started to grasp the scale of this virus, I became a believer in so-called People’s QE, at least temporarily, to compensate everyone for the enforced shutdown.
Not only is this economic shutdown not a consequence of individual poor decisions, but also we are all going to be needed to be productive once it is appropriate. So it is entirely just that our governments spend huge amounts of money to reward us for the enforced shutdown, with the consequence of expanding fiscal deficits and dramatic expansion of central bank balance sheets.
Different countries have applied different versions, but in many countries some temporary version of MMT (modern monetary theory) and UBI (universal basic income) have been applied, with the US introducing the most stark form of so-called helicopter money, where individuals are just given money.
As well as the cost to the shutdown, there will be a probable cost to the dramatic increase in monetary financing of fiscal deficits. A traditional analysis would suggest such policies will create a less efficient economy and higher inflation.
Insofar as this crisis is also a severe supply disruption as well as a demand shock, it could have some of these consequences. However, it is worth bearing in mind that as a result of 2008, and polices to combat that crisis, monetary and fiscal expansion didn’t have the traditional expected economic results, so it is far from definite that this government policy response will lead to a big rise in inflation.
It will depend on the ongoing scale of demand shock, the permanent damage to the supply shock, and monetary and fiscal policies, if and when we emerge from the crisis. It is also the case, in my view, that what governments do about our health systems, our number of beds and, crucially, the number of critical treatment factors such as ventilators and masks may have a major consequence for the medium-term economic outlook.
One would hope that, behind the scenes, governments are estimating in detail how many weeks it will take to have a dramatic boost in supplies of all the relevant things, as presumably once the health systems have them, then our governments can move towards some less blunt form of social distancing.
Ultimately, a sustained period of mass social distancing may end up being self-defeating, so let’s hope our governments are thinking wisely. What does give some hope, if the wage-support policies help keep companies from firing most of their workers, is that once social distancing can be eased, and some sectors are allowed to return to something more towards normality, then they will have the workforces in place to pick up. We might want to think about it as an extended, paid, enforced holiday in our homes.
Economically, this is a version of what Germany effectively did during the 2008 crisis, where it didn’t shed massive numbers of employees, which appeared to make it easier for them to pick back up when the crisis eased.
As for how our economic system functions once it is back up, and we have moved on to 2025, there are two things that appear likely.
Firstly, we will probably emerge with more evenly shared economies, where earnings are not growing in vastly different degrees between the most highly paid and those lower down the scale. Secondly, the infant growth of Profit with Purpose will accelerate and become a central part of 2025 business life, where companies no longer focus on maximisation of profit – often at the expense of all other goals – but instead focus on the optimisation of their goals, including profit.
If so, it will allow many societal challenges to be regarded as a challenge for all of us, not just left to governments – including climate change, the search for new antibiotics, and other vital medical needs. If so, this dramatic mess we have all gone through may end justifying the cliché, ‘never let a crisis go to waste’.
Lord O’Neill is currently the vice-chair of the Northern Powerhouse Partnership and a member of Shelter Social Housing Commission
This piece first appeared in issue 74 of Spear’s, available now. Click here to buy a copy and subscribe