Nobel Perspectives: on a post COVID-19 world

A weak and difficult recovery, contingent on what kind of health and economic policies are deployed in various countries and if there is a second wave of infections. There are anxieties on both fronts.

The US Federal Reserve (Fed) expects unemployment levels to be down to ~6% by the end of 2021, which in my view is optimistic but achievable if the right policies are implemented.

I'm skeptical about a "V" shaped recovery. Many economic relief programs were designed to be over by the end of July at the latest—as of now, I don't think anyone believes the economy will be recovered by the end of July.

A combination of weakened balance sheets, increased bankruptcies, and extremes in precautionary behavior is a recipe for a deficiency in aggregate demand.

We really do need more stimulus. The Bureau of Labor Statistics noted that the unemployment rate understates how many people are out of work because of a misclassification error. Broader measures put underutilized labor at about 25%. That is a much weaker labor market and is going to take a while to repair.

The US added USD 3trn in stimulus and the Fed has scheduled liquidity operations of the same magnitude. These are big changes. At the same time, it was a fire-hose approach and not well-targeted. New Zealand, France, Denmark did a better job keeping workers linked to their jobs.

Additionally, the program wasn't comprehensive enough as it didn't include state and local government. The last jobs report showed a marked increase in unemployment among state and local employees. That’s an area where you obviously have to do more. Also, if unemployed workers don't have good enough unemployment insurance because the states run out of money, that’s going to add to the precautionary behavior that makes a robust recovery more difficult.

This is an opportunity to say what kind of economy do we want emerging from this, as countries like France are doing. COVID-19 exposed pre-existing issues and we should address economic, racial, and health inequalities.

In terms of our PPP (paycheck protection program), there were problems in design and implementation, like relying on banks as an intermediary. The consequence was small businesses that were well-connected got the money, and others didn’t. The second part is that many small businesses didn't trust the government, and thought the government would find a reason to prevent the loan from becoming a grant.

The divergence has never been greater than now. The stock market reflects views on future profitability, that is revenues minus salaries and wages. When wages are low and workers are suffering, stock markets can still go up.

Right now, interest rates are low on bonds and that means the discount rate used to value future profits is lower and valuations increase. Bonds can look relatively unattractive in comparison. But if the recovery is as weak as I expect, some of this equity advance is based on a false promise of a robust rebound, and may cause people to think it’s an equity bubble when the recovery proves to be slower.

Economics is about the science of scarcity and limited resources, so how you spend money matters. But we don’t need to worry about deficits right now in the US. Economists worry about a deficit if it leads to inflation, which can have very adverse effects. Right now there are no inflationary pressures because there is no demand, in part because individuals are putting money aside as precautionary balances.

In the medium term, we may have to be concerned about people converting those precautionary balances into spending but not at the moment. It’s more likely to show up in asset prices in the near-term.

You can expect to see a lot of debt crises in emerging markets in the coming months, which will weigh on the global recovery.

We want to use this opportunity to think about the current issues and how to restructure to a new and improved economy and society. A top priority should be racial equality and social justice.

We were warned about the pandemic, when we had signals from previous pandemics such as SARS and Ebola. The first pillar is we want an economy with greater efficiency with an emphasis on competition. The lack of competition has undermined both productivity and innovation. Climate change is an existential threat, and we have to respond.

The second pillar is that we need more support and investment in the knowledge based industry. Science and education are necessary to boost our standard of living.

Finally, we will need to have explicit programs to address these problems, as we’ll still have a weak economy in November 2020. Investments in green infrastructure will create jobs and help us move out of the pandemic-induced recession.

Inequality does undermine the overall performance of the economy in the US. When you transfer money from the bottom to the top, those at the top spend less.

COVID-19 has exposed inequality in America, access to healthcare is lower and disparities in health outcomes are wider. A very large fraction of the country living paycheck to paycheck without paid sick leave is a risk to public health. Meat-packing plants, for instance, became hot spots for the disease. People providing essential and front-line services are poorly paid, most exposed to the disease and disproportionately suffering.

The international community needs to come together to provide more assistance. The IMF has the power to distribute more funds to developing countries to fight COVID-19, but two countries stopped this initiative.

Unfortunately emerging markets were financially stretched even before the global pandemic. These countries have suffered decreasing exports and remittances as well as money flowing out of these countries. As we emerge from the crisis, these countries cannot print their own money unlike the US. We should expect a lot of debt crises across the emerging markets. Creditors need to accept sustainable debt restructuring.

The recent anti-racism protests during a global pandemic show it is time for racial and social justice and a stark move to end racial inequality. Individuals supporting the movement at this time when people are worried about their own health and economic well-being, people all over the world came together to say we’re more than just that, and show solidarity and common values. That reinforces my hope that when we emerge from this pandemic, we will have a moment of reflection that ushers in a new era of social solidarity. What’s happened in the past couple of weeks has given me hope that we can work together with common purpose to make a more equal society with more racial and social justice, addressing problems like climate change and economic and health inequality.