The sick economy and the medication needed for recovery - two perspectives from across the political aisle

Profile picture for user mbanks By Martin Banks May 27, 2020
Summary:
Tackling the COVID-19 heath crisis is the main priority, but beyond that lies uncertainty about the extent and duration of the damage caused by the pandemic on the world's economies. Appian's virtual conference heard from 2 leading US economists who've served very different political masters.

covid
(Pixabay )

As a health crisis, COVID-19 has already had a massive effect on the global economy. The cost of facing up to the virus itself has been, and will continue to be, huge. The direct medical costs are high, but there's another bill to be paid as economies have stalled. As lockdowns are lifted at varying speeds around the world, the need to turn attention to re-starting both national and global economies are coming into sharper focus.

They were issues that got an airing at Appian’s recent virtual conference as CEO Matt Calkins invited two distinguished US economists from across the political aisle to join him in a panel session on `The Viral Economy’. Dr. Austin Goolsbee, of the University of Chicago, served as the former Chairman of the Council of Economic Advisers under President Obama, while Dr. Arthur Laffer, was a member of the Economic Policy Advisory Board under President Reagan and has been an advisor to many other political figures, including the current occupant of the White House. He is also a Professor of Economics at the University of Chicago.

The session kicked off with thoughts around the pandemic itself and how it has been handled to date. Goolsbee, for example, suggested that the best thing for economic prospects is anything that slows the rate of spread of the virus, given that the pandemic isn’t about to be ‘over’ any time soon. It has to be expected that economic numbers will be horrible, he argued, probably the worst that have been seen by some measure, but that it is difficult to judge that result by normal standards because this, very obviously, is not a normal business cycle.

Laffer, unsurprisingly perhaps, took an opposite view, suggesting that the lockdown had not been a good idea and that people know very well what is good for them and should have been left to make individual choices. In his view, “No-one wants to jump off a cliff”. (There is an argument, of course, that some may not know this is what they are doing when they take that all important first/last step!).

Once the lockdown has been lifted and business activity is possible, he sees an urgent need to jumpstart the economy:

I would suggest that we have a waiver of the payroll tax through December 31 once people are out of lockdown.  It would reduce the employer contribution to Social Security by 7.65%, which would incentivise employers to retain workers, to hire new workers.

Get moving

Asked to expand  what they thought would get the economy moving and how it might play out, Goolsbee responded by saying he saw the virus hit the weak spot of most rich countries, where economies are now dominated by services and are a prime target in situations like this. So, he reasoned, hospitality and transport services will take some to come back to their previous levels of activity. But he does see the possibility of even a fast response in some areas of consumer services:

Once people really need a haircut, and they've been doing it themselves, they may want to get their hair dyed. They've been putting off getting a car, getting a washing machine.

As well as refreshing consumer goods, he see those with the money also looking to redress the life balance that has been tipped over by the virus. So those that had, for example, elective surgery planned and then cancelled on them, will soon be pushing to have the treatment completed. He also sees the issue of expanding Public Healthcare to everybody in the USA coming back to be a front-line discussion. (With a US Presidential Election looming, that’s a pretty safe bet.)

But he does not see any of that bringing about a recovery, more just checkmarks along that road. In addition, the rate of recovery will be different for different business sectors and different US states, as well as countries around the world.

And the poor will always be with us

On the possible economic impact to the less advantaged in society - those without internet access or who can’t work at home or educate their children remotely - the consensus was that the imbalance between rich and poor was likely to get worse as a result of the pandemic.

Laffer said he expects inner cities to be hammered very badly by this and set out some thoughts on how the situation might be made better, thoughts he said he first wrote about back in 1974:

I would like to see something like enterprise zones put into place to really get tax free zones there to bring these people back into the mainstream as fast as possible, and to make sure that we don't keep this poverty trap on top of them.

He suggested that more effort goes into addressing the incentivising angle of the poverty crisis, to provide more opportunity for the poor and disenfranchised minorities. This, he suggested, would be better than payouts, which put a ceiling on the earnings of such people, stopping them going forward.

In one point of unanimity, the panelists agreed that it is unlikely that economies would return to pre-crisis status, leaving aside the number of dips into recession there might be along the way. This then begs the question: if this is going to be a transformative moment, what kind of different economy do they expect to see?

Will the economy get a gig?

Both economists agree the debt burden is likely to be a major problem, with Laffer suggesting it could be of 107% of US GDP rather than 82%. He also suggested that the availability of a vaccine would not be  a magic bullet for the economy, arguing that many iof the actions taken by the US Federal Government during the crisis have done huge damage to the long run prosperity of America.

One change they both see coming is growth in the gig economy. Goolsbee sees this having two driving forces, one being the obvious: a rise in the number of people who have grown to like the self-reliance that comes with working from home and see possible advantages in spreading their talents a little more widely. The other is likely to be the businesses currently trapped by having staff furloughed and part-paid by the State. This, he posited, will push some businesses towards the greater flexibility and agility that comes with a shift to a ‘per-contract’ gig economy approach.

He also sees businesses looking to diversify their sources of supply so they're not dependent on one country, although this would be an outcome that might well cross swords with President Trump’s desire to contain the supply chains within US borders.  Goolsbee suggested:

Perhaps they're not in any country. If they need to get their parts and supplies It won't just be from one point.

As to how the inevitable debt crisis is handled, Laffer produced a long list of steps that he would like to see taken, starting with very close controls on government spending to make sure this does not create a dependent society. He would implement a universal tax amnesty programme at federal, state and local levels, which he claimed would raise trillions of dollars:

I'd like to see us sell the gold in Fort Knox, sell Camp Pendleton, (which) would pay off some of that debt. Do as much as we can bring pro-growth economics back into play and get government's hands out of the economy from picking winners and losers.

His bottom line would be to create as much growth as possible, for he sees the debt problem only being solved by growing as fast as possible.

My take

This session was, inevitably, a mere scratch of the surface of what is set to be some of the toughest, most complex questions the world has ever faced. As the tech we all take for granted now stands at the front line of the developments which will be tasked with pulling us and our economies through, we all have not only a string vested interest in what happens next, but a growing responsibility to make it happen. One thing that can be suggested, however, is that the more people in IT talk about these broader issues, the more chance there is that ideas for the new tools, applications and services that will be needed will emerge. So have this as a primer discussion list.