Is the Pandemic the Answer to the Productivity Puzzle?

of England, Andy Holding. I hope we can get into an interesting conversation not just about this incredible year twenty but what lies ahead for the world and also maybe for economists and policymakers. And we have actually next week on the show, I'm going to be talking to Bloomberg correspondence about twenty and thinking about the year ahead. And I'm going to start by asking them what their most memorable moment of was, what, what was? What's going to

stand out for you? Do you think? Thanks? Thanks that kind of reduction. A Merry Christmas to to you and

everyone else well with support for choice art. With this year, memorable events, as often happens at Christis time, have come thick and fast, but from a polentially very long list, I would say the one of the signature moments of the year would be back in March, when everything was really kind of kicking off, not least in financial markets, and we saw within financial markets people moving away even from the on the face of its safest sets of

assets on the planet, you know, government securities in the major advanced economies, and into cash, the so called dash for cash. And that was a pretty sobering moment, a pretty surprising moment, a pretty scary moment all the ess is, and of course elicited in response a big policy reaction from central banks globally to try and staunch that that dash for cash, I'd say, in what has been a

memorable for all the wrong reasons. Yeah, that event, above all others, will probably stick with me for quite some time. As you said, there was a remarkable response to that from central banks, and then ultimately a big fiscal response from governments to the crisis. I'm not going to I don't want to dwell too much on what's happened in the past, but as one of the many people who had wondered about the possible policy space room for policymakers

to respond to the next crisis. You know, over the last few years, given how much we've had to do after the global financial crisis, and how hard it had been to unwind that support, especially coming from from central banks, were you sort of pleasantly surprised that there was still quite a lot of ammunition that central banks and others could bring to bear. I think I was pleasantly prize that, Um, we've learned some of the lessons from the earlier crisis.

I think central banks and governments too had um you know that their twitch muscle have been developed, their policy twitch muscle have been developed during the last crisis, and that meant I think were much better prepared this time to act at real pace and to act at real scale. And it's been both. I mean, let's at the Bank of England by home institution, we've announced more quee this year in the ten months since the crisis started as we carried out in the preceding ten years. So that

is so bring backdrop as well. But I think crucially and crucially different than ten years ago, we've had fiscal and military acting in partnership at scale and at speed, and that doubling of the dose I think has made a crucial difference, and a necessary difference given the pace and scalle the crisis we've had. Were you talking about doses? Of course, We're now watching vaccinations go forth across the UK, the US, surely other countries to follow. We've already had

a lot of people vaccinated in China. How much of a bounce back do you think we'll see from that? Do you think will be surprised by how quickly economies bounced back? Well? I think near term, very near term, the next quarter or two, as the vaccine rolls out, it's going to remain a bumpy ride. Not as bumpy as earlier this year, but bumping on the less because we see virus cases on the rise, we see restrictions on the rise, and some of that stop go cycling

we've seen this year. I think we'll persist very near term as we move into let's say the second quarter, certainly the second half of next year. UM I could well imagine, uh, not so much a relief rally, we've seen that in financial markets, but a kind of relief recovery as the virus risk dissipate. Now the key question for me is at what pace. Um, will we see behavior you know, only gradually drift back, as after the global financial crisis, or as after the Great depressions? Say?

Or will we see more of a snapback in behaviors, in sentiment, in socializing, in spending lots of s's in the sentences today? UM? I don't know. I think the jury is out on that. UM. I think this has been a different sort of crisis, with a different sort of source, And therefore I think there at least the potential the prospect of us being in World two and of a not quite as sharp as the fall, but

nonetheless a much sharper than we'd no ordinarily expect. When you speak to people, you can almost taste that pent up demand, that desire to get back to something closer to normality, And that would certainly be my hope and perhaps even my expectation, For we spent the whole year of central banks always do saying how uncertain things are. But things really are uncertain, and especially very near term. Funnily enough, the further you appear into the future right now,

in a way, the clearer things are becoming. Now in the light of the vaccine new so I feel much more confident about H two than I do about Q one, which is unusual but should be encouraging because you know, the plans do now look sunny. I tried to mention

the word Brexit and things. I'm sure we'll continue to be uncertain for some time around that, but looking at brexit short term impact as an economist, you know, we've obviously the Bank of England, everyone has had their own estimates about the short and longer term impact of certain whatever range of arrangements with the European Union, and there's

been plenty of discussion around that. Of course, when it actually happens, we should be able to see to get an answer to what the impact by me start to isolate some of these consequences. Is COVID going to make that completely impossible that we will be no clearer in six months time what the short term impact of Brexit was than we were right now. Well, I think COVID makes it tricky getting a reader anything at the moment

economically beyond COVID itself. But I do think, you know, and we'll see what comes to passing that in the dos and weeks ahead. On that front, I don't think there will be any have any problems identifying um what frictional effects leaving the Customs Union, which of course will happen come what may at the end of this year, will have upon trade, on the movement of goods and

services and of people. Think that would be very visible, but COVID is already caused these enormous shortages and backlogs at DOT at ports all over the world, so in

the sense even that is harder to see. It's true that in lots of ports, including some UK ones at Southampton and Felix Stowe, there have been um frictions there frictions that actually are complete unrelated to BRECKX are largely unrelated to Brexit in the sense that they're to do with the asynchronous pattern of recovery, with China recovering far more rapidly than say that the UK, and that means, as you know, lots of empty containers stacked up at

ports in the UK not yet ready for a return journey. But I do think when it comes to the Brexit effects that will show up in a what different and a somewhat different way, identifying that effect will be very clear. We've been doing intensive surveys of businesses, as have many others to try and gauge the degree of preparedness. A lot has been done, but there's still some residual uncertainty that more needs to be done and that could make

for some frictional costs come the new year. As I say, irrespective what deal ends up being done, I mean, funny enough. One of the one of the benefits that very small silver linings from this crisis has been that we know that to become much more inquisitive about new sources of data, including sources of data for example, about what is happening around ports, how long are the lorry queues, how fast

is transport moving. We've used that for COVID purposes, and this will serve useful double duty when it comes to understanding the Brexit effects in a few weeks time. Well, you give me a great opportunity to plug the Bloomberg Economics is own daily activity indicators that we've we've produced precisely to capture some of this very short term data like the Google mobility data and restaurant bookings and indeed

port movements. We have got some satellite footage of sports and things that we're bringing onto the Bloomberg terminal and it is. You're quite right that it's come into its own all those data sources. I don't want to go into the all the sort of arguments that have happened over Brexit or where we're going and everything else, but

I wonder, I mean, people from the outside. Certainly many economists have always it's fair to say they've tended to see this as a very odd move for a country like the UK to make, just from a straight sort of economic standpoint. But I noticed at least one Tyler co And, who writes for Bloomberg, did a column the other day suggesting that actually COVID had slightly changed his mind about the pros and cons because of the great emphasis that put on countries being able to be nimble.

I wonder whether the last few years had made you think in a more in a just in a sort of pure economic sense, taken a different view of the costs and benefits of leaving a big trading block like the EU. So I think even a pre COVID, even pre Brexit, actually steph within the economics community, we were slightly changing our tune when it came to thinking through

fully the costs and benefits of increasing globalization. I think net overall, we'd sort of majored on the benefits, the fruits of which tend to be spread quite widely and quite thinly. That probably under emphasized the costs that were felt by often a minority, but a very important minority,

because the costs were very large. So I think even pre pre any recent events, there's been a bit of an imbalance in the debate about the benefits of trade, the distribution of of winners and losers, and that had started to shape debate about trading a somewhat different way. On top of that, we now get the COVID crisis, and one of the big learnings from that was just how quickly global supply chains fractured and broke, and just how quickly nation states went to ground when facing situations

of acute stress. In some ways, this has very many similarities the situation ten twelve years ago at the time a global financial crisis, whether fractures were not in global supply chains for goods and services but instead in global credit chains for flows of flows of moneys, and the lesson we took away from that, the key lesson we took away from that was one of greater resilience within the financial sector, and I hope one of the lessons we take away from this COVID crisis is the need

for greater resilience, in this case in the non financial parts of our economy. Me now to be clear by that, I don't mean we should try and make everything at home. We should honor shore everything that moves and moved to quasi autargue when it comes to trade. That is not the right message, as it was not the right lesson to have learned from the global financial crisis. We have preserved open and free and liberalized international financial system, and

that of course delivers great benefits. But we have an addition, put much greater focus on the resilience through the domestic resilience of our financial institutions. And that's a self same debate we need to have about the non financial sector. Now, this is not either or open or closed. This is a situation where we're resilience calls for having both international and domestic supply chains serving as insurance policy. This is slightly different flavor of pobalization than the one we had

pre COVID. You talk about not about open and clothes. Of course, the intriguing thing about the campaign campaign for Brexit was that both arguments we used. It was used as a reason for having more openness and also to be more closed, and we've been working through some of those contradictions over the last few years. You're you're getting into the territory of broader lessons from the COVID experience

for the global policy maker. What are the what are some of the or the one or two sort of key takeaways for you in terms of how it could affect policy in practice. So I think looking to next year, there's going to be too at least two very crucial pivots policy pivots going to be needed staff Um both are You're going to need some fancy footwork to be pulled off elegantly, but I hope they both can be.

I mean, the first is that will handoff between, if you're like um, public sector demand and private sector demand. So of necessity has been a year when the when governments have had to have stood tall and of supported demand near term consumption jobs incomes to keep economies afloat.

As as I hope happens, the recovery comes on stream next year, there will then need to be a handover as private sector demand picks up, and public sector demand can then switch down, leave the accurate demand hopefully intact and indeed rising. Getting the timing of that right is going to be absolutely crucial for those of his in the policy community. But actually there's a second pivot. Let's let's discussed, but in some ways every bit as important.

But that's about the composition of demand as between consumption versus investment on the part of both the private sector and the public sector. This year has been a year about keeping near term spending current spending up and investment spending as understandably being the casualty of that given the

uncertainty about futured amount. But if we are indeed to sustain the near term recovery, to sustain growth in productivity and living standards, that investment will need to come back on stream at pace supported by both the private sector

and by the public sector. And that switch from consumption to investment, from spending for today to spending for tomorrow is for me as important a policy pivot to bring about with our fancy footwork during the course of next year about building out the supply side of our economy, about using the crisis opportunity to tackle some of those long standard, deep seated fault lines in what might be colloquially called the apply side of our economy, fault lines

that were yawning pre COVID and which have become of anything larger still as a result of COVID. But I mentioned at the start, you have tended to stray outside some of the sort of traditional macroeconomic policy. You know, you don't just when you give your speeches, you don't always just talk about inflation and monetary policy. You've talked

about local economics and issues around fairness and equity. Do you think there's a risk if if central banks are inevitably going into this territory, because if you like, that's kind of where the action is, and it's an important part of how monetary policy works that it interacts with these aspects of economies and societies. On the other hand, it does take you out of your comfort zone and potentially take you beyond what many people would say was your mandate um do you how do you think about

that tension? You know that central banks are sort of thinking about talking about more stuff, but actually still have quite a strict, narrow mandate. Hen maybe two points on that stuff and it's a perfectly it's a good challenge, UM. I mean on the core mandates, um, they have never been more important than now. So without financial stability, this

awful crisis would have been much worse. And when it comes to the montrely side of our mandate, absolutely crucial if we enter that there's sunny uplands next year, the recovery next year, that there is an absolute laser focus on our core inflation mandates because absolutely last thing the world needs right now it's a nasty inflation surprise. So core mandates never been more important than now, um, particularly

as we enter the recovery phase. Equally, there are indisputably these mega trends, these meta forces, aping the path of our economies, of our jobs, markets, of our businesses. Right now. You mentioned a few of them. Issues around the spatial distribution of activity, issues around um inequality imbalances be they income or wealth, or generational issues around the potential fruits

of technological innovation. Those are shaping our economies in ways that central banks simply cannot afford to overlook or ignore, by and large, by and large, climate with another one. Of course, by and large, these aren't things that we are central bankers with our meager set of tools, can

actually influence their structural things. But are these things crucial in doing the day job of keeping the economy strong unstable, of reshaping the financial system in the way that keep it keep it strong unstable, in setting the appropriate level of interest rates to keep the economy growing. Absolutely they are. If you look at the factors, for example, have driven down levels of global real interest rates over time, the list there is exactly the list that we've just recounted,

issues of demography, or inequality or technology. So for me, these are very much in mandate because without a deep and rich understanding of those things as central bankers, we will set policy wrong and the economy will suffers a consequence. You talked about the avoid the importance of avoiding an

inflation surprise in the short term. You know, the Bank of England has has looked through jumps up an inflation that have come from specific causes over the last few years, whether it's increases in tax rates or changes in the value of the pound. Do you think that if there's a if there's a bounce up an inflation that seems very associated with the immediate bounce back from COVID. Is that something you would look through in the same way,

do you think? I think this has to be very much a case by case uh A lot hinges on how how short to miss short, and how temporary is temporary. Um. There are certain you know, for forces and factors which you expect to have a very temporary effect, For example, shifts in indirect taxes the like of which we've seen a number of countries, including the UK, shifts in oil prices,

even shifts in the exchange rate. UM. There are other shifts on the supply side of the economy whose effects can be slightly longer lived in their impact on inflation.

So while I think you know it's likely that very any very temporary spike in inflation would be looked through in a situation where there's still a significant output gap in many economies, we'd be super vigilant, you know, with so much monetary stimulus and fiscal stimulus having been put in the system that doesn't show up in any more medium term measures of inflation expectations, because what can even appear on the face of it to be a temporary

effect if it affects expectations, could easily get locked in and we're not there at the moment. I hope we don't get there, but it's definitely a risk we need to pay account of. Just going back to climate change, because you mentioned how that might affect lots of things

that the central banks are interested in. There has obviously been quite a lively debate about how much central banks should have climate the climate change of gender in their mandate and have it actually affect, for example, the bombs that they purchase when they're trying to push money into the economy through quantity divis ng um Lord Nick Stern said on this show he thought it was absolutely part of their purview because one of the jobs of a

central bank is to pursue the sort of broader economic objectives of a country. But we've also had Harry some Is saying that they should clear stay out of it, stay out of these kind of claiming that they can affect these things, and the German Central Bank governor doesn't like it either. What do you think, well, I mean,

you absolutely right. It take the Bank of England's mandate that within that we have a responsibility both when we're setting monetary policy and financial stability policy to support the government the UK government's policy economic policies, one of which is a net zero target by UM. Now we don't

have is an explicit climate mandate. And indeed that what we can do our central banks to address climate risks, at least with our own portfolios is relatively limitedless in the Bank of England we have about twenty billion pounds sterling of corporate bonds. That's a pretty modest portfolio. Shifting that around is very much marginalia. When it terms comes to risk pricing of dirty or clean ass it's can

we should? We have a somewhat broader role when it comes to thinking about risks being run across the global financial system or the domestic financials. Yes, yes we yes we can, and yes we should and yes we are when it comes to better understanding those risks, shining a searchlight on those risks and asking financial firms to manage those climate risks in a more upfront and forth right way than having the past. And that's a role we've

been playing for the last several years now. Indeed, I think the banking and probably played a pretty prominent role under Mark Kearney and putting that on global central banks agenda.

For me, it's absolutely right and proper that it's on our agenda, and we play our part, our classic um catalytic role with the private sector in getting them to pay proper attention to these risks and to manage them in a way that supports the broader climate agenda than Next and others have been promoting for for so many years, and very successfully. You have touched on inclusive inclusivity inequality.

We know that this crisis has had a very unequal impact on the population, and you've even got a big chunk of the population potentially benefiting from not just the money that's gone into the economy from the government, but also the fact that financial markets have bounced back um

so quickly. You know it has, because it's been increasingly clear and I think a concern to some people in central banks how central bank policy has become associated with rising wealth inequality, rightly or wrongly, because such a big lever of policy has been increasing asset prices, and of course we have generally rich people who have the most assets.

Do you feel a little bit better about the money that the Bank of England and others have pumped into the economy this time around, in that so much of it was also along going alongside a big fiscal expansion. Does that feel like I feel like it's going to have a better impact in terms of the gap between rich and poor to you? Or is it much more complicated? No? I think absolutely that we've had a you know this, this physical monetary partnership has certainly and surely has helped.

I mean, the truth be told, central bank tools haven't got surgical precision when it comes to tackling differences across different cohorts of the economy, whereas physical tools do, and indeed have been used during the course of this year to support those their incomes, their jobs that were most

in need. And that is any that's a very sensible assignment of tools, with monthly policy to an extent, playing second fil and supporting ACRID demand alongside fiscal policy in the front line supporting ACRID demand, and within that supporting the parts of ACRID demand that have been hardest hit. Truth be told, I was comfortable about our monthly policy

actions even before this COVID crisis. Very seriously, I should say the question of has have our actions worsened inequalities of society, whether those are income or wealth, or generational or spatial and I've cut the data every which way, almost house held by a household actually to try and

engage with that question. I mean, what I conclude from that research is the reason I can sleep at night is because I'm pretty confident that without the monthly response that we saw here in the UK would have seen you know, anyway, betwe in three quarters of a million and a million more jobs having been lost, and of course those jobs would have been lost disproportionately among the

poorer people in society. And if you work through both the jobs channel and the asset price and income and wealth channel that you mentioned, the net effect of our montreactions has not, in fact been to worsen inequalities of

income or wealth, or indeed even generationally either. And while our tools, I say, aren't best equipped to tackle those problems anyway, as best I can tell, both pre COVID and post COVID monetary policy central banks haven't made what is no, without question, a difficult in a quality situation any worse. That is not the same as saying, to be clear, I don't think those problems haven't been made worse by the crisis. They surely have. Certainly, income and

wealth wise and must certainly generationally as well. And that's why those structural questions, as supply side questions are ones that the politic community collectively including central banks, need to really get onto with. As I said, renewed zeal And force come the second half of next year. I guess, however, you look at the data, though, we have had yet another year when Wall Street, broadly conceived, has done a

lot better than Main Street. You know, the financial markets have had a much better year of it, and indeed a lot of financial institutions have had a much better year of it. Then you might have anticipated for the worst recession in living memory across industrial economies. So I just I mean, how sustainable do you think it is to year after year to continue to have that gulf between the two. Well, I'm hoping that one step is the year when the gulf begins to be closed. We've

been saying that for years. Well, this time, this time, I'll be right, right. I mean, there are very good reasons to I think, to expect, with the fantastic vaccine news and with the support from policy in place in the tank already to think that that next year we'll see a reverse or a sharp reversal. I hope in our economic fortune, so particularly those who may have lost their job, that they're able to return to work at speed. That's a crucial thing for avoiding those long term scarring effects.

That that's a near term prognosis. And for me, there there are plenty of positives there. But it's necessary, but by no means sufficient for growing living standards, for growing productivity over the medium term. It wasn't enough pre COVID, and it certainly has not will not be enough in the light of COVID. And that's why this other agenda

really comes in tackling those structural fault lines. Ultimately, staff will be the thing that closes those gaps between the best off and the less and at least well off, or between if you like Wall Street and Main Street. The truth is, and this is a crucial point, those fault lines, those inequalities, um are not irreducible. That we

know from past experience. They are amenable to purposive policy action, the right type of purposive policy action on innovation, on skills, on infrastructure, And my hope for twenty three one would be that those things got another fair hearing and a big push because ultimately that will that will close the gaps you've rightly identified. Okay, I'm going to put you on the spot and ask you the same question that

I'm going to ask the brainy correspondence next week. What's your what's your wild card for the next year or two something? You know, this time a year ago, none of us, certainly the equivalent podcast, we did not see COVID coming. Um. What do you think we might be talking about over the next year or two a lot more than we are now? Well, I think, and I hope actually that that um, for all the right reasons that inflation is a more central part of our narrative

as financial market participants are central banks. Um. Of the right reasons inflation returning to target, remaining at target. UM. But for me, the real wild card would be productivity perspectively, So we had this crisis, you know, globally with productivity laid low. A bunch of reasons for that, which I won't rehearse because many of the listeners will know about

them already. I think there's a chance, steph that some of the structural shifts brought about, behavioral shifts brought about by COVID might be a factor, perhaps even a key factor that reverses the fortunes of global productivity in the years ahead. The truth is often a cessity. This year many businesses have had to get themselves digitally match fit. There shouldn't been matched fit previously, but now of necessity they have been. They've had to, and so two of

their workers. And I think that might lead to a quite striking change in business models. That the if you like, the optimal capital to labor ratio within many firms might

be altered decisively in ways that are positive productivity. I think where it comes to the way we work, how we work, you know, the truth is pre COVID we were stuck in this rather odd equilibrium where many of us spent too many of our working hours doing the most unproductive and the worst paid work ever invented, namely commuting. Because of course that's what commuting is. It's unpaid, unproductive work.

If many of us will do less of that unpaid, unproductive work, that too, ought to be a boon for activity and for productivity. So I think there are within you know, there's lots of reasons to be cautious, lots of reasons that's something that could go wrong. But when it comes to those behavioral shifts and their consequences for how we work, how we run businesses, I think many of those could could if we're if we're canny, be a productivity positive and could leaders to tackle decisively what

has been a longstanding productivity puzzle. There's laid behind many of those rising equalities that you mentioned earlier on I'm very glad you say that I had the same debate with our economists because I had to force them to put a positive productivity shock in their scenarios as one

of their scenarios. Coming out of this, we've had so much discussion of our poor productivity globally making not making more stuff with the same number of people, um that it's almost hard for them to compute that we might have good news. But I think you might be right. The other thing I liked about what you said it shows what the true central banker you are. That what you want for Christmas is inflation on target? What more

can you are andy holding. I don't know who'll be listening to this, but if you are out there having felt that you've already had far too much of your closest and nearest family over the Christmas period and you've taken refuge in this conversation. I hope it did the job and thank you very much. To the chief Economists of the Bank of England, Andy holding Thanks thanks for

listening to Stephanomics. We'll be back with another special edition next week, looking ahead to one the meantime, remember you can always find us on the Bloomberg Terminal, website, app or wherever you get your podcast, and for more news and analysis from Bloomberg Economics, you can follow at Economics on Twitter. This episode was produced, as ever by Magnus Hendrickson, with special thanks to Andy Holdane and everyone at the

Bank of England Press Office. Lucy Meekin is the executive producer of Stephanomics and the head of Bloomberg Podcast is Francesca leaving h