We must focus attention on our next steps

A journey of a thousand kilometers begins with one step. The journey through this pandemic will be long and difficult. We cannot know where it will end, although it is difficult not to speculate. What we need to do instead is to focus on the next steps if we are to avoid falling from our narrow path into the mass dead on the one hand, or economic devastation on the other. If we do not avoid these calamities in the near future, we risk chaos in front of. Even if we do, we will only return to the normality we took for granted only recently. For this, you must at least wait for a cure or a vaccine. The economic and social damage will last even longer.

Analysis by OECD illuminates the economic disruption to come. It is not an ordinary recession, or even a depression, caused by a collapse in demand. Economic activity has stopped, partly because people fear contact and partly because governments have told them to stay home. The immediate impact of these measures could be a reduction in gross domestic product in the Group of Seven, the main high-income countries, by 20 to 30%. Each month that large parts of our economies remain closed, annual growth could drop by 2 percentage points.

In addition, the costs are unevenly shared. Unskilled workers suffer most from the loss of jobs. People and businesses capable of working online continue to work. Those who cannot do it do not.

Costs are also not shared equally globally. Many emerging and developing countries are hit by the collapse of external demand, falling commodity prices and unprecedented capital flight, all of which have to deal with the pandemic with very inadequate health systems. Closures are particularly brutal in countries where welfare states are limited or nonexistent and where large numbers of people live off their daily income from a fragile informal economy.

Graph of the potential initial impact on the activity of closings by sector which shows that the closure of services leads to the collapse of production

It is fair to wonder whether such economic carnage can be justified. Among the high-income countries, Sweden has adopted the least restrictive approach. A comparison with Norway clearly shows the compromise: unemployment has also increased in Sweden, but by far less than that of its neighbor; however, the number of deaths is also higher in Sweden. We must be thankful for the Swedish experience. We can learn from it in one way or another.

My opinion, however, is consistent with that of health experts and prominent economists, is that closures are necessary to save health systems from collapse and control the disease. But they must be brief. It is impossible to keep people locked up indefinitely, without enormous personal suffering and without social and economic damage. This is obviously true when governments are unable to offer the costly social protection measures possible in high-income countries.

Graph of cumulative unemployment benefit claims for Norway and Sweden which shows that Sweden's more relaxed approach means fewer unemployed compared to Norway, where unemployment rose rapidly after the national blockade on 12 March

Locks should be a short breathing space before moving on to a group of German experts calls for a “risk-adapted strategy”. During closings, governments must do whatever is necessary to avoid having to resort to such brutal intervention. They don’t have much time to do it: a few months, no more. Otherwise, they may have no choice but to imitate Sweden.

Charging the locks, to allow us to live without them, is the first essential step. The second step is to minimize economic damage. Here the focus should be on today, not on the high public debt and other charges of the future. Sufficiently up to date is the downside of it. As in wartime, you have to survive the present for a future to be worth it.

Chart of daily coronavirus deaths (7-day moving average) showing that the coronavirus balance in Sweden is increasing much faster than that in Norway

In considering what needs to be done to manage the devastating economic impact, beyond reopening economies as quickly as it is reasonably safe to do, there are three essential considerations.

First, protect the weak, both within and between countries. Everyone is sick. How we respond is a measure of our ethical standards. It is essential to ensure basic economic security for all those who are unable to work. A temporary universal basic income is an obvious option. Likewise and above all, means must be found to support vulnerable economies. There are many radical possibilities. One is one huge new show IMF special drawing rights, with donation by high-income countries to a trust for the benefit of the most vulnerable developing countries. It will also be crucial to stop debt service payments for the duration of the crisis.

Graph of cumulative job growth since January 2007 in the United States, by skill level, showing that coronavirus closings are hitting medium and low-skilled jobs more severely in the United States. Employment of intermediate workers has not yet recovered from the 2008 financial crisis

Second, do no harm. The deepest wound would come from the complete destruction of the trading system. This would make it much more difficult to restore global prosperity after the crisis has ended.

Third, abandon expired shibboleths. Governments have already abandoned the old budgetary rules, and rightly so. Central banks must also do whatever is necessary. This means monetary funding from governments. The central banks claim that what they are doing is reversible and that it is not money financing either. If it helps them to act, that’s good, even if it’s probably wrong. In the eurozone, they talk a lot about Eurobonds. But the support that counts will have to come from the European Central Bank. There is no alternative. No one should care. There are ways to manage the consequences. same “Helicopter money” may well be fully justified in such a deep crisis.

Graph of real money flows to emerging markets (6-week moving average centered in billions of dollars) showing that Covid-19 generated unprecedented emerging outflows

More painful choices than these arise. An emergency like this will be used by future tyrants to strengthen their grip. At the same time, certain freedoms will have to be temporarily abandoned. Managing these painful compromises depends on high levels of trust and reliability, barely salient features of today’s democracies. But the test is now. Governments that fail to meet these challenges risk collapsing. The political systems that produce such governments risk losing their legitimacy. We must succeed in these next steps. It all depends on what we do.

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