How the Coronavirus Has Broken the Global Economy

were even a few weeks ago. Inevitably, Stephanomics is going to feel a bit different too, But our basic mission to bring you what's happening in the global economy and why it matters hasn't changed. In fact, it seems more important than ever. So later on I'm going to talk to the American economist Adam Posen about how governments and economists have measured up to the challenge of this pandemic.

But first, I am very grateful to James Mega, Julian and Jeff Black from Bloomberg's economy team in China for managing to produce this piece from the front lines of the bat to keep the global supply chain intact. I think for a minute about how you get your household goods, or at least how you got them two months ago. You might have gone to a local store or you

ordered them online and waited for delivery. That's all become a lot more difficult since COVID nineteen spread around the world, with billions of people now in various forms of lockdown. But what about the people who make these items and how do these things travel across the world. Here in China, there's a thirty million strong army of truckers who linked the factories, markets, container terminals and warehouses of this country together. Now they're on the front line of that struggled against

the coronavirus and its associated economic impacts. This is the Shinfai agricultural wholesale market in Beijing, the size of sixteen soccer fields, and there were trucks everywhere early in the morning on March nineteen. Every truck acts as a standalone sales booth. Tai Lily is a thirty six year old driver from nearby Herbe Province with a faux hawk haircut. He was playing with his phone in the driver's seat and we talked to him. Behind him was half a

truck of oranges and boxes waiting to be sold. He told us about what he would be doing normally. No, because of the epidemic, lots of factories haven't returned to work. We have no other choices but to transport fruit. Fruit is all fresh and once picked, it needs to be shipped out right away, while factory goods can wait. Besides, there aren't many factory goods that need to be transported now. Anyway, the market was a lot quieter than it would normally be,

according to Chai. That's partly because movement in public in Beijing is still difficult due to the fear of infection, and market demand remains suppressed. But there's an emerging problem now that will further crush demand for China's goods abroad, just as restrictions begin to be lifted and drivers returned to the roads at home. The spread of the disease around the world and the lockdowns and economies ranging from

the US to Europe. In a choice, senior vice president at Moody's said, the shock from outside of China is a bigger concern now. We are in a very unprecedented situation when global supply chain is being disrupted UM and I think UM. So far we have been the supply chain and various in industry in China recovering to a different extent or resuming productivity to a various extent. But

going out, it's a little bit difficult to predict. Um as the virus breaks out you know around the world, um, what kind of ramifications and um pulling impact that would have to bring back to China. I think now you know, without with very little visibility on how long and how how how fast evolving situation is. I think it's a bit difficult, but I think it's um it's it's It's probably fair to say that some supply chain disruptions it

should should be expected. The situation in China's transport industry has come full circle in just a few weeks in February. During the immediate aftermath and the coronavirus shutdowns in Wolhan and other cities, even if you had goods to ship, it was next to impossible to find someone to drive them. Shoot Japan is head of logistics that Longy solar panel factory in Shanxi in northwestern China. Shoes says the industry is experiencing its biggest crisis in history. There were all

kinds of unexpected and very serious abnormality. The normal order of transportation was completely the trupted. Mr Shu who we interviewed on March nine, is talking about the difficulties he encountered exactly one month before that, when trucks and drivers were in extreme shortage. At the time, he was urgently needing to ship raw materials to the company's factory in Vietnam. It relies solely on supplies from China, and it was

about to run out of materials from production. If that would happened, more than two thousand workers will be sent home and the company would suffer great losses. Shoe managed to arrange a dozen trucks to deliver raw materials to Apport in chin Jaw, a city in southern China near the Vietnamese border, where a ship bound for Vietnam was waiting. There was one hitch. The trucks weren't able to leave the highway and chin Jaw because all exits were closed

due to virus containment roadblocks. Shoe spent about ten hours pulling strings with the local commerce department and customs authorities before his fleet of trucks were allowed to exit the toll gate and clear customs. China's struggles to get back to work after its own virus shutdowns are likely to be repeated in other countries in coming months. The truck as we talked to said, it's been a hard road

filled with risk and personal sacrifice. Fung, who's forty three years old, is a native of Unaway Problems in the East, but he works far from his family in the south in Guandong. We spoke with him on February. He talked about the fear he felt while driving through the peak of the epidemic ceremony worried. I wear my mask very tightly every day and replace it daily. For my family's living, I have to work. I don't have any other options. I have two sons at home. I'm the only breadwinner

of my family. I have no other choice but to work. Frequent temperature checks on highways during the peak of the outbreak in China slowed him down and shuttered roadside restaurants made it hard to eat while on the move. All I hope is for the epidemic to be over soon.

This way, I feel worried about infections when driving. Whose anxiety is the price for keeping even a fraction of a global economy operating, and it's in stark contrast to other professions which can work from the relative comfort of their own homes. Without people like Woo, supply chains would have come to a complete halt. Darante Country Risk analyst at Fitch Solutions in Asia says, the important role the

logistics industry plays in the economy goes without saying. You can have your factories, um, you know, produced the goods manufacturer exports Indian and you still require the logistics industry to move those goods around the world. Uh So I would say, UM, definitely a very important industry to have us trying to try to recover from the economic disruption. The hardships that Chinese households have suffered seemed to be just the beginning. All indications are that the impact of

COVID nineteen is far from over. The worst for the global economy is probably yet to come, and for China, if the virus returns, or even if it doesn't, the global downturn or prolong the pain. For Bloomberg News, I'm James Meager in Beijing. So that was the road level

view in China. A bit of a gear shift now because in this first episode of the new series, I thought we might step back to think about the economics of the coronavirus how economists have responded to this very different kind of shock to the global economy, and whether the right advice has been getting to governments as they

try to cushion the blow. One of the best people I could think of for talking about all that was my old friend Adam Posen, who has been president of the Peterson Institute for International Economics since and also served for a while on the Bank of England's Interest rate setting Committee. Adam, thanks very much for being with us from your booklined office. Thank you for having me, Stephanie. We're all living in a very different world from a couple of months ago, or even a few weeks ago.

How do you think economists have done in first assessing this shock and then thinking about how we respond to it. I think economists have displayed both the strengths and the weaknesses of the profession, the strength of being relatively empirical, and perhaps the people's surprise having agreement on some basic principles.

You know, policy context is very evident, so on the fiscal side, they it's fascinating to watch not just the Larry Summers or Jason Furman or Peter bell Fingers or people on John sunny Ferry on the left calling for

massive fiscal stimulus. It's also people on the right like Ken Rogoff and Glenn Hubbard and us context you served in Republican administrations, there is agreement that government had to be involved and couldn't be just the central banks, and we had to think in terms of essentially said bridge loans and job preserving programs on an incredible scale. And I think that people should take some part from that.

That for all to talk about economists never agreeing on anything, in this case, the response was clear, and that certainly was true with the central banks as well. They're all pretty much on the same page. But of course, as you well recognized, and I vi you to my shame cringing, if you look back to what economists were talking about, including myself in early February mid February, you know, we

were not seeing this coming. Our ability to forecast and our ability to think about what kinds of shocks are happening when remains very limited. That was true before the two thousand and eight crisis, although a few people saw things coming, and that's true again here. So it's this combination of conditional on what happens. I think the economists are behaving well and getting the right advice out. But in terms of early warning and foresight and optic well, yeah,

and I think it is. And of course we been going through the same exercise at Bloomberg. We had we have a group of economists who were actually very close, We have great expertise in China. They were looking at the data. We had a sort of China back to the work back to work tracker when we were looking in January and February, and we were able to see quite early that the shot to the Chinese economy was

bigger than people thought. And then we therefore we were then thinking in terms of oh, that's going to mean ex or why for the rest of the world. But it took a remarkably long time for us or I think anyone else to move from that to thinking, hang on a minute, it's not just going to be dealing with a shot from China. What if the whole world has to go through what China is going through now?

And it does seem to me extraordinary that more people didn't make that leap until really quite quite late, including us. I mean, is that something about people just not being able to compute a total change of regime or what do you think is driving that I think you thinks for driving that certainly one is as you say, it just require a willingness to think of things really deviating

from normal. Economists talk about, you know, small with the technical word perturbations or movements around an equilibrium, and this is moving from one state of the world to another. And economists are just as bad on that as everybody else. But I think another piece of it is ultimately fundamental, which is the talk between people who would do public health and do pandemics and not just economists, with foreign

policy people, market people has been quite limited. I was talking to somebody from one world's largest most successful investment funds, and they're one of those funds that sucks up every piece of big information that you know, big data that you know of. And even they didn't see this coming, They didn't make that mental transition, despite the fact that the person who owns this fund contributes to public health research.

So I think it's just a human failing. It's a very sad human failing, but it is one that we've just had a failure of collective imagination. What's interesting is we have got to actually just in the last couple of weeks, some of these conversations that had previously been on the sidelines now getting a bit more mainstream. I suspect as people get frustrated were being stuck at home about the trade offs between the public health emergency and

the economic emergency. And I wonder what you think, because there's there was Intuitively people said, well, we're we're sort of putting the public health first in and the result is we're really killing the economy and we know that, and we're going to try and do all we can, but we're prioritizing the health. But increasingly people have said that actually it's better for the economy as well not to have the pandemic. So do you think we had too long where there was a sort of false trade

off there between the economy and the public health emergency. Yeah, it was a very human thing, was very responsible of our political leaders in countries including the US, the UK,

Brazil and elsewhere can talk that way. The historical evidence has always been pretty dark, clear going back to this flu pandemic nineteen, going back to the nineteen fifties, flu academic going to natural disasters of this sort that you do better over not even that longer run, a relatively short run, by doing what you need to control the damage.

The damage is the real shock, the the loss of human lives, the loss of feman work hours, the capacity constraints on the hospitals and the medical system, the fear of people that is legitimate, and the withdrawal of purchasing in from certain sectors and certain activities. Those are all real. Those are gonna happen no matter what. And I think that's what people were reluctant to really recognize and admit.

Once you admit that, and once you admit that, the real binding constraint for us all in even in the rich world, as we've seen in Italy and Spain now New York, is hospital capacity medical systems, because you can't It's like for a thousand of your flood, you can't always have enough medical capacity for this kind of pandemic. On the hand, once you recognized that is the binding constraint for everything, then it just falls largically. This is no place where I will see you kind of got

it right. The overwhelming majority immediately said we're better off doing the medically induced called offer these sectors and it will pay off. And it's not because it's gonna be wonderful, but it's because it's better than the t and the one of the big bits of advice, I guess that's particularly you can see it, particularly in the European government's efforts, is this effort to if you like, hold the economy

and suspended animation. You know everything that that the sort of bottom has fallen out of demand um and obviously a lot of businesses feeling that they will go under very quickly seeing the kind of fallen been the kind of falling revenues that you don't get even in a really deep procession, if you're talking about nine or a hundred said in some cases rather than even the worst kind of recession, which might see twenty or thirty fall

and in demand. But the economists have basically said, now what you have to do is is do what you can to fill that hole that's been blown into the economy so that the economy is then intact when you come out the other side. We know what we should

be trying to do in principle. Do you think in practice we're going to be able to do that or do you think that there will be there will be permanent cost of this even though we know there was nothing fundamentally wrong with the economy and we went into it. I think you've hit the profound insights, which is that even more than the usual recession, this is something where there's abroad sudden stop and who falls apart in terms of businesses and jobs depends entirely on cash flow at

that moment. It's not about sort of merit did you have a good product, did you invest, did you save enough? It's really just the side of economic death is do you have the cash right now or do you happen to be in the wrong industry at the wrong place. And so the response that we've put together other and I should say, well, I mean the cultum unity is put together is really one about providing essentially a bridge

loan for everybody. It's the goal to say, don't foreclose the mortgages, don't foreclose on loans, don't put people off of jobs if you can hold onto them. If we the government leave the public funds, you to keep those jobs. Because there is this reality that once something goes under, it's a company, if it's a job place, and people

leave that it's very hard to rebuild. I mean, small businesses may be easier to rebuild and back than than big businesses because there's less capital involved, there's less reputation, there's less network, but nonetheless you do have this permanent scarring. I think that we also have to think about in terms of behavioral changes that persists. So we saw that after two thousand and eight to two ten or two thousand twelve in Europe, where you had extended increases in

female labor force participation, extended rises in households savings. People were being holding off and moving out of the house and building family surprising houses. These were all sensible, understandable precautionary measures. I think we're going to see a lot of the same, but it's going to be biased towards

or against, frankly, certain ministries. We can talk about cruise ships, we can talk about nails a lots, we can talk about tourism, and that part is going to be a permanent scar well, if we're thinking about potential long term changes. You mentioned at the start that economists on the left and right actually had ended up having a similar advice for governments in response to this crisis, and that was about spending a lot of money and doing a lot

of things that they're not used to doing. Um, do you think that could also be a change that the attitude to government could change, and we could see even in the US, a desire for government to take a bigger role and maybe also have better long term safety net for gig workers and the like. I think it will. I think there will be pressure in that direction, and I'm hopeful, But I also think this is going to be much more contentious. I think that there will be.

I'm already talking to people who say, and again not completely and reasonably, well, we don't want to communize the system. We don't want to have permanent ownership of government of all the main industries. But I certainly believe the US has a real opportunity and a real reason now to move towards more safety net, as you say, for its workers,

for its people. And I think also what's become very clear but it changes in the unemployment regime in the US, is that we do have a lot to learn from Europe that you need to make it so the jobs are not as fragile as low connection as you mentioned, gig workers informal sector, part time people, but also eating full time people in the US tend to have much more tenuous support and connection to do their jobs at the lower end of the income scale. That should change.

I use the term I think it's not very sexy term, I guess, but I think we need to start taking terms offer stocking, that businesses, people and especial government create a reserve, and that reserve can be stockpiles of masks and medical equipment. That reserve could be money for people who temporarily lose their job in this kind of crisis, as opposed to quitting or something else. Well, we could definitely see that also in the in the health care sector.

I guess My final question is, and it is true, having conversations like this about the proper role of government and what governments are currently doing in Europe to respond to the crisis has led a number of people to say that Europe might come out rather better from this pandemic than the US. Do you think that's right? Or it feels very odd to be saying that Europe might come out ahead on anything, really, because we're so used to saying it's a very sclerosic, inflexible economy with two

larger role for the state and all these things. But is it possib well that those things are actually going to be a competitive strength at least in responding to this virus. I think it will. I think it should. I think it will. Even before this virus crisis, the productivity gaps and especially the per capita income growth gaps between Europe and US and UK say, we're much smaller as productivity is declined throughout the Western world in the

last decade. And so then you have to keep asking yourself, well, if you're just having a much nastier economy and much scarier economy, a much less equal economy, and now economy much more vulnerable to disaster and illness. And when I say economy, I really mean the people, what are you getting for it? And it is not clear at all that the US is getting awhere near as much for that as they would like, as we would like. And

so I think that discussion has to take place now. Uh. That said, Europe is messing itself up in a different way by its unwillingness to share and neutralized risk cross borders. You know, it's it's like New York and Louisiana have to come together. There is still very strong objection to sharing of risk within Europe and so yes, European system. The European values what they get for their greater government

intervention versus what they give up looks increasingly attractive. But Europe and the euro Area in particular is starting to fail on a different basis. Adam posing, thank you very much, Thanks for having me, Thanks for listening to Stephanomics. Like everybody, we're working in unusual circumstances right now. The program might sound a bit different week to week, but we're certainly going to have plenty to talk about, and Bloomberg reporters

and economists are still hard at work. You can catch all the latest news and analysis from Bloomberg Economics on the Bloomberg News website or by following at Economics on Twitter. The story in this episode was written and reported by James May and Julian It was produced by Magmas Hendrickson and edited by Jeff Black and Scott Lamman, who is also the executive producer of Stephanomics Special Thanks to Adam Posen. The head of Bloomberg Podcast is Francesca Levie.