What Top Economists Take From the Covid-19 Crisis

reports from Wuhan to Atlanta and Stockholm to Johannesburg. I've also got into what it means for policy now and in the future with top economists such as Joseph Stiglitz

and Stephanie Kelton. This week, I wanted to try to piece together some of what we've learned with two of my favorite economists well known to Stephonomics, Adam Posen, former interest rates center at the Bank of England, now president of the Peterson Institute for International Economic and Stephen King, former chief economist now senior advisor for HSBC, the author

of multiple books on the future of the world. Adam, I might start with you because we spoke right at the start of the series about economist understanding of this crisis, and we were surprised then at how difficult it had been in the early days for everyone to grasp the magnitude and the pace of COVID's impact on the global economy. Do you think that as a profession we economists have can have done better since then? Have we managed to sort of stay on top of what was happening? I

think yes, Stephanie. I think the economists, in terms of their immediate policy advice, in terms of the relative unanimity and being borne out by events, have done surprisingly well. And it's reflected by the odd irony that central bankers like j Palell and Christine Legard are basically getting away with huge public support, while doctors and epidemiologists are the ones being attacked. And if you had told me three months ago central bankers would be more trusted than doctors,

I would have been pretty surprised. But I think when we look to the longer term, meaning just in today's world, just a few months down the road, I think we may be reaching the limit of the economist success for three reasons. First, we're getting to the really hard question, which is when we get back to say, of recovery, what do you do with all the people in hospitality, tourism, local services, how do you restructure the economy? And then

the old ideological and genuine uncertainty divides among economists come back. Second, I think we're in a world where politics is much more powerful than it used to be, even though sort of banks are getting away with stuff. As you and I have discussed and you've discussed on this podcast, there's an awful lot of politics, as we just saw with the European deal, in in making any kind of judgment, let alone the public health in the US. And the

economists can't predict that. And and so the question is how do you get past that, not past that, overriding it, past that makes sensible sense of it. The third difference, which I think is really interesting intellectually and terrifying personally, is the extent of essentially irrationality in large parts of the American public and some other publics with respect the

mass and social distancing. The economist view borne out recently in Western Europe and East Asia is it's not really the lockdowns that shut down the economy, it's people's fear of getting the disease, which is why there's a lot of evidence Bloomberg's reported on about like it didn't really matter that much whether you were Sweden or Denmark in terms of the economy, even though it mattered a lot

in terms of the disease. But in the US, the assumption I've made, and most economis made is even if Trump messes everything up eventually, most Americans would really is, oh my god, I'm going to die or someone I know is going to die if I don't pull back and we're not seeing that happening yet, and if that continues, that is just both horrifying from a part counter sective,

but impossible to model. To put it very well, Stephen, I mean, I guess I put a similar question to you, but also whether you whether you agree with those some of those three points that Adams made. I mean, where where do we stand in terms of our understanding of the impact on the economy and what are the key unanswered questions that we may find ourselves unable to find

a solution to. So one thing that I do think has come through as a topic that I find puzzling in many ways is the idea of the v shape recovery the idea that people have confidence that everything is coming back, largely in the back of I guess Google

activity data over the last two months. It's trask me being very odd to argue that you can predict what's going to happened in the future on the basis of activity over the last two months, when lockdowns in some cases have come to an end, and inevitably things have improved a certain degree. The second thing where I think I absolutely agree with Adam is still the sense of this idea of scarring, this idea that we don't know quite what's going to happen over the next few quarters.

As national lockdowns come to an end, you can be more optimistic, but we also know it's gonna an awful lot of what I described as external lockdowns, that countries cannot relate to each other because they're in different stages

of dealing with the virus outbreak. And I also think that there's a potential difficulty with regard to not so much public debt, but corporate and personal debt in a situation where incomes are so much more depressed than people had expected six months or a year ago, and I wonder whether that has an impact in terms of the functioning of the financial system later this year until next year, which itself could be a major drag on the of me.

So I think we all as economist had a pretty good record over the last few months and understanding what lockdowns and changes in social behavior would due to the economy. I think there are huge puzzles for the next few months and quarters. We have had a very sharp bounce back in many places, certainly on continental Europe and also in parts of parts of the US. In Europe, particularly where we seem to have broken the link between economic activity and the virus coming back maybe in a more

effective way than we have in the US. Is it is it plausible that we could continue to have a v shaped recovery or do you think just inevitably we've had the best of it in the last couple of months as lockdowns were removed. Well, the removal of lockdowns has clearly been enormously helpful in getting a rebound and activity coming through. I think it's also fair to say that track and trade systems are much better than they would have been just a handful of weeks ago, let

alone months, So that's also good news. But I think there are also difficulties that exist which would really be on Europe's control. I mean, obviously we're talking about the world whereby even though Europe is looking better, many other parts of the world looking a whole lot worse. And when it comes to trade flows of capital business flowing in different directions around the world, I think a lot of that will still be heavily constrained in the months ahead.

And alongside that, even with the rebound that we've seen, there could be lots of areas of activity that are likely to be permanently depressed. Whether it's retail, restaurants, air travel and all these things are likely to be more depressed they have been for really quite some time. So it can be pockets of economy that we permanently weaker and permanently scarring the economy as a whole in the months and quarters ahead. I mean, Adam, you mentioned that

as one of the key challenges. I mean, we clearly are at a different stage in terms of policy making in places where the governments are gone from trying to put a floor under the economy to actually try to help it grow, but grow in a world that still has to deal with covid um. I wrote something the other day which talked about this trade off or the decision that governments have to make about how much can be protected and how much needs to be reinvented. Does

anyone have a good handle on how to approach that uncertainty? Right? I'm gonna be slightly more optimistic than Stephen, I think, but against a very grim baseline. I think the top end of companies and people employed in those companies, top end, not in quality and size and revenue, in market share,

they're going to be fine. And we've seen that with the Fang companies and other companies, and we've seen that even in airlines that as grim as it is for airlines, they're successfully extracting bailouts from from the government's I think the very micro businesses, people running very small restaurants they're suffering is very real. But I also think that to sound sort of dickenzie In or Milton Friedman, those are people who are in those businesses because they had to adapt.

They were trying to make a living for their for their for their families, their entrepreneurial they're used to having business failures, frankly, and they're used to having to change jobs. And I think their resilience. It's very sad, but I

think the resilience is going to surprise people. What I think gets caught are the sort of mid the employment in the middle tier, the employment in in those that are not political or big enough to get the support and that are too big to be just sort of no capital, no reputation, just move on to the next thing. And I think at some point very soon government support for those people, if they got any and those businesses

is going to run at um. But the place where I get to be more optimistic is that I think the governments that did a better job, like in Western Europe and East Asia in dealing with the pandemic, will also be more resilient going forward because they'll have more faith from people and investors that that the situation can

be stabilized and vice versa. The US, Brazil, possibly India, places that have really messed it up the UK to orser degree but still real may suffer an ongoing penalty that people are just less trusting the government can put a flora under things. Is that going to affect how

investors look at the world. I mean, we've had we've had this disconnect for some months now with you know, there's a stock market acting as if basically the last seven months has not happened, having gone way down, but also now where up, but also betting on the US relative to Europe. I think on the grounds that the US is just in your words, Adam has just been more resilient in the past, has been more able to

make these kind of adjustments. Um, if you're right, then that might be wrong and we should actually be expecting Europe to come out falster than this. I I thank you for picking up on that, Stephanie, and I think that is a direct implication of what I'm saying. Um I I I am able to rationalize the stock market generally for all the reasons that you've talked about with

others on this program and are well rehearsed. I think the most important thing is to recognize in the U S stock markets, in the in the UK stock markets, and a lot of advanced economy stock markets, this is a very particular section of the economy. This is mostly multinational companies are large companies. It's the ones that happened not to have been taken private. It's not represented the

economy as a whole. So in some ways they are, knowing that they've survived, that they have political access, that they're going to have more market power, frankly because some of the competition is being driven out, that there's going to be less wage pressure because so many people are going to be unemployed. You can rationalize, frankly why the stock market is up. But the rotation as it were, between US versus Europe, I think, and frankly China and

East Asia is the right thing to consider. And and one of the things I've most reconsidered over the last three months is my general assumption that the US always wins the least ugly contest. Um. I'm beginning to think for obvious reasons, but I don't think the markets and the currency markets in particular put this together yet that the US is actually getting ugly or faster and Europe has managed to get a little good plastic surgery in. Now we should lift our sites a little bit to

the longer term picture. And we've had quite a few debates on the economics over the last few months about whether things that had happened as a result of COVID, possibly the acceleration of some trends we've had in the past could end up forcing positive change in the world or instead sort of set us on further on faster on the path to doom as we had newer Rabini

he definitely believed. But Stephen, you've spent quite a lot of time over the years thinking about the long term prognosis for the world and some of these deep structural changes.

What are you currently thinking about how COVID interacts with those. Well, I had a dream the other night which is all about the World Health Organization being treated as a new important international institution that would be respected by all comers and would set new health protocols for every country around the world, and we could suddenly trust each other in ways that weren't plausible brieviously, and I woke up and actually spotted the reality, which of course is fundamentally different,

with the U S having removed its funding of the World Health Organization and the w h O effect of being caught in a kind of US Sino spat. Actually it's more than the spack now, of course, but that basically is what has happened. And I fear that the pandemic, although it's led to you know, huge amounts of scientific cooperation around the world which is a glorious site to behold. Really.

There's also lead, I think to new language begining to emerge in terms of national champions, strategic industries, the kind of language we have seen back of the nineteen fifties and nineteen sixties, perhaps, but it's kind of re emerging. There are new questions about how fragile global supply chains are, and that a lot of things I think are in one sense being used as an opportunity to grab more in the way of a nationalist agenda and isolationist or

protectionist agenda that was already there. But I fear at the moment it is likely to become worse rather than better in the years ahead. Adam, how are you thinking about the future? And I guess one aspect there's one aspect, which is about is this going to reverse globalization or merely accelerate some of the things that we're already seeing in the way of automation m for example. But I think another side of that is doesn't change our attitude

to government in a lasting way. No, I think that's right, Stephanie. The you know, so, I think about trends that were accelerated or reinforced by the pandemic and the response. And I think I think in terms of as I think we've discussed the corrosion of globalization, rather than it rolling back or forward, that that it becomes more brittle, more uneven, uh, certain kinds of connections free, but it advances in other way.

So you know, you can have the EU of all places putting on restrictions on exports and medical equipment at the same time that the CPTPP nations are creating a safe zone. So it's less even across the world, but

deeper in some places. I think the types of political backlash we're talking about are likely but still to play for Frankly, Um, when you see the economic nationalists like Bolson, Arrow and Trump and Johnson and their Air Dowan and do air Day not having a good run of it dealing with the disease, that may in the end make

a difference, and that goes to the more positive side. Again, I'm in the odd position of sounding more optimistic than many, um, which just goes back to something you and I talked about in the first episode, which is the there may be greater demand for a European style economy, UM, particularly in the Commonwealth countries and in East Asia than had

been seen previously. It's partly that the cost benefit of being a free market totally lays a fair which exaggerates obviously, but anyway, the more American Anglo American style hasn't prevented either the crisis of two thousand eight or the bad

response of two thousand twenty. But it's also partly that we're seeing in fact with the French and the Germans and the Danes and the even the Italians and the Greeks are doing is having pretty good results in terms of keeping people back in employment and keeping firms open. And then there's the issue, of course, that is my colleague at Peterson Olivable and Chart has led the charge on not exaggerating the the constraints on fiscal room, not

exaggerating the debt risks. Again, that's not a MMT carte blanche, but it is it goes with this, and so I do think there is a possibility that we we see, if you're about performs, we see some shift to greater acceptance of a demand for the European style state. I'm interested, Stephen,

do you think that's plausible. I think it's plausible in the sense that What does emerge from this crisis is the idea that countries regions that have a sense of social responsibility supposed to individual freedom have tended to do to date rather better than those that have oft the

focus on individual freedom. Certainly from a a sort of British perspective, observing the debate in the US about wearing masks, it strikes me as being a pretty odd debate, but it's something that seems to be uniquely American perhaps rather than European um. And when you've got those kinds of differences in behavior, then perhaps it's not so surprising was seeing differences in terms of outcomes with regard to the

virus UM. The difficulty, of course, is that it may well be that Europe has a good crisis, but it is also the case that Europe over a much longer period of time has not really delivered an awful lot of economic growth, and there are plenty of countries around the world who would like to see more growth than

Europe itself has delivered. UM. So I think a big question here is whether coming out of this crisis, Europe, through these new fiscal packages and so on, can deliver something which actually makes a monetary union at the fiscal union work together in a politically sustainable fashion, and that I think is still a very very big challenge for

the for the years ahead. I guess one final thing is just about when we think about long term impacts, often one is surprised by how behavior changes in response to this kind of experience. And we all know, you know, the evidence that suggests the big financial crisis can really change people's attitude to too savings or to the kind

of financial assets they might might want. Is there a possibility that this crisis does pave the way for inflation down the road, not because of the sort of short term impact of the money being pumped into the economy, but because of a change in attitude towards borrowing and spending.

I mean, it could be that people from now on just will not listen to politicians who tell them that there are constraints on spending and borrowing, because they've seen, when push comes to shove, that they can spend any amount of money to get themselves out of a hole. I don't know who, what, Stephen, do you think this is when historians look back? Is this paving the way for inflation? I'm let me go first, because I think Stephen will very different. I'm inflating myself, um, I think

I think there's two opposing forces, Stephanie. On the one hand, as you say, sort of the the the wolf has been called out, and it doesn't mean that there's no fiscal limit, but it means it matters a lot on context what the fiscal limit is, and it matters a lot on what you spend it um and both of which have been largely absent from the discussion of fiscal hawks and fiscal hawk politicians. And so I do think there will be this sense of liberation, as it were.

But as we've seen with Japan and as we've seen with Italy, you can have very long term accumulation of a lot of debt and it doesn't necessarily lead to inflation. And I think the countervailing force is large economic. Going back to behavioral changes, is people save more, are more risk averse in this kind of situation. I mean, think about your children are too young, but maybe Stephen's children.

You know that they've seen their contemporaries and their peers go through two rounds of large unemployment and two rounds of setback, and they're going to like our grandparents in the thirties, they're going to be more cautious and there's fewer things to invest in. The risk adjusted investment propositions are so and the one in private savings are going up. At the second time public savings may be loosened, so that battle I'm not sure how it works out. I

see both forces. But the political angle, and this is why I made reference to Carter and the seventies is you know, I have a a very retrograde vision of inflation in the sense that it it's associated with political breakdounds. It's associated with UK in the seventies and only the seventies, Argentine in the eighties, when people lose faith that there can be agreement that the government can raise taxes if necessary, and even if they don't, you need that sort of

threat that they can raise taxes to establish credibility. And if you have social political breakdown, you can't do that. And that's when people start from the outside and inside looking abroad. And so to me, that's really going to be the determined of inflation. How much political division and inoperability of government of legislatures we get, and then you might get back to the us once again, it's not

really being attractive to people in a kind of fundamental way. Stephen, And when I say Stephen, I mean Stephen, Thanks Stephanie, Thanks Adam. Um So, I think one thing that has emerged from this whole crisis is a sense of a generational divide. And this is very unfortunate and probably quite a sensitive topic to talk about, but the reality is that the majority people who are particularly vulnerable to COVID

nineteen are relatively mature. The majority of people who are particularly vulnerable to the economic consequences of lockdown and so on are relatively young. And I'd also observed that although Adam is absolutely right about the ability to have government debt rising a lot further than we've seen so far, we also know from wartime going back over two hundred years or so, that when debt levels get to these very high amounts, they eventually do find a way of

coming back down again. And they come down either because you're very lucky to have very strong income growth that denominators rising very quickly, as was the case from the nineteen late forties nine fifties onwards, or it's because of inflation has happened to particularly buy my Republic and Austria

and so on after World War One. Or it's higher taxes of one kind or another, which is what William Pitt the younger introduced in in order to fund the Napoleon it was, And I just wonder whether we should think about the inflation debate, not so much in terms of whether inflation comes along almost by a mistake, but rather it is one option to redistribute income from those who have got wealth to those who are in debt.

You can do us through a wealth tax, but wealth taxes themselves are a tricker to implement, often deeply unpopular, and so on. So inflation actually is a mechanism by which you could redistribute income and wealth from the older generation to the younger generation. Of course, the problem with us is that with boomers and the seventies and above, the older generation is not going to really vote for this. But there may come a time, and may come a

point what actually this does begin to come through. An inflation could be, at least in the short run, an easier option to take than trying to impose nasty taxes and people who really want to resist them. Well, Stephen, as well as giving us our insights. You have given me an idea for a cracking new podcast series about economists and their dreams, which I will invite you on. Economists talk about the interesting dreams that they have had.

Now that was all. That was all excellent, and I appreciate you helping me reach the end of our Stephonomics series. Adam Posen, Stephen King, thanks for listening to this last in the current series of Stephanomics. We'll be back in October, I think, and do keep an eye on this feed because if I talked to anyone really interesting before that, we'll put it out as a special episode. Who knows what the world will look like in a few months time.

But you can always find us on the Bloomberg terminal, website, app or wherever you get your podcasts. And for more news and analysis during the week from Bloomberg Economics, just follow at Economics on Twitter. This entire series was masterfully and patiently produced my Magnus Hendrickson, with help from executive producers Scott Lammon and Lucy Meekin special thanks this week too to Stephen King and Adam Posen. The head of Bloomberg Podcast is Francesca Leaving