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article imageOp-Ed: The economics of a pandemic — Curing the chaos

By Paul Wallis     Mar 20, 2020 in World
Sydney - It’s arguable that this pandemic has done more damage to people by trashing the economy than by its death toll. If the panic is bad, the real hits are showing the way to something more practical.
Predictions are dire enough. From social collapse to total economic shutdowns, there’s no shortage of gloom. People have lost a lot of real money, and the “Masters of the Universe” don’t seem to have a clue. Major equity assets have virtually dissolved. The rich are a lot less rich. The poor, of course, are merely poorer.
Odd how a society can just disappear like that, isn’t it? A lot of the chaos is self-inflicted. Humanity’s idiotic habit of never being organized has bitten it on the butt in no uncertain terms. Feeling smug? No? How odd.
The politics of ignorance haven’t helped much, either. Party politics delayed the full-blast US response to the virus which could have happened weeks ago. The pandemic has gone from being a “hoax” to a “national crisis”.
Learning the new economics
The economic collateral damage is at almost nuke levels. Job losses, hits to industries and exponential knock-on job losses in services, airlines, etc. are the current hits
Long term hits are:
Capital losses in the hundreds of billions or perhaps trillions. At the moment, estimates can only be guesses. A prolonged visit to business Death Valley is likely to be much more expensive than it’s been so far.
A locked-in global recession. That’s unavoidable, and it can either be a very long, ultra-costly recession, or short and sour.
Hits to credit markets which can undermine banks and make money more expensive for borrowers. (That’s real grassroots capitalism-Debt is a major driver of growth.)
Massive uncertainty about future economic conditions, notably when and where things get back to normal, or anything like it.
To be fair, economists and policymakers don’t have many precedents for this hideous mess. Solutions have to be found and made to work. The mix of the Spanish Flu epidemic and the Great Depression are about as close to this as history has got.
The New Yorker has a fascinating but grim article on how the economics of that time worked and didn’t work. The lesson seems to be that government spending works to reboot an economy. Fast reactions to health and prevention saved lives, and doing nothing is not an option. (The article deserves to be read to get the full range of contexts in which economics responds to crises.)
Now, however, it’s a global effect. If the local response principles still hold good, the world is a very different place. This is where global economics needs some failsafes, some off switches, and some luck. The trouble is that the impact on countries will vary, a lot, depending on their economic breadwinners, state of health care systems, and their ability to spend their way into a reboot of themselves.
So – Who’s trying what?
The spending is definitely happening. The United States will spend about $1 trillion. When that starts happening, how it’s delivered, and to whom, will define the effectiveness of the spending.
Cutting interest rates seems to be a universal option, although at such a low baseline, the cuts can’t do much. It might just take some of the sting out of repayments of debt but it’s a low-level effort.
Australian banks are deferring business loan repayments for 6 months. That might work well, and as a model for not destroying businesses in general, it’s a good idea. There’s no way of knowing when cashflow starts again, so this is a worthwhile option. (Italy has suspended mortgages and other loans, too.)
“Dodging economic meltdowns”
This is an expression you can expect to hear a lot more about. The virus has basically shut down the rails on which economies run. People run out of money, businesses run out of customers, governments run out of revenue. That has to be prevented, but finding a way of doing it isn’t likely to be easy.
At the macro level - Policy needs to generate money for the wider economy. Given the usual nepotistic policies of some governments, that idea may take a while to sink in. If it does, however, you’ll get Keynes On Wheels. A New Deal, or many of them, is the default way of doing this. Probability of success is high, provided the money is pointed at a wide spread of sectors.
(That’s how capitalism “shares the wealth”, remember? It’s also how many self-righteous politically naïve pretentious bastards got rich. Don’t forget that. To make money, that money has to come from other people who actually have money. Sending everyone broke has never had anything to do with capitalism.)
Capital - Investment, the source of the real big capital, is likely to shut down for a while. Ironically, acquisitions may take its place. The lower stock prices are attractive targets for those prepared to take the risk, and that could inject meaningful amounts of money into economies.
Trading in markets - Margin-dwelling is a tough game, but at this level of volatility, people often do make big money. Underpriced stocks, futures, commodities, etc. could be a gold mine for investors, kickstarting some markets.
Main Street - For wage earners, making money is almost as hard work as having a job. They don’t have much personal capital, and any source of income needs to be dependable. Some people may create second-stream income simply because they have no choice, but is that a solution?
The bottom line here is that Sink Or Swim will take down the whole circus tent in global economics. The baseline economies have to be shored up and made to work again. That means spend, spend, spend. Non-cooperation is not an option because it can’t work. Lose the damn tariffs, stop the bickering about every tiny thing, and get on with rebuilding, fast. The longer you wait, the more costly and unnecessarily difficult it will be.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
More about pandemic economics, global recession 2020, John maynard keynes, Debt deferral, economic stilmulus
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