The Coronavirus and the Economy of Sense

There is no compelling reason why the public health crisis should turn into an economic crisis. None, except the obstinacy of economic orthodoxy.

by José Gusmão (MEP Bloco de Esquerda, economist) and Vicente Ferreira (Assistant to José Gusmão at the European Parliament, economist)

We do not yet know the extent of the Covid-19 pandemic and we do not intended to contribute to the epidemic of clinical opinions, of variable competence, which abound in our public space. On the public health response, listen to the experts and act accordingly. But even if we follow the guidelines of international institutions to alleviate the public health crisis, the truth is that even in the most positive scenarios, a vigorous response in containing the epidemic will not prevent many of its economic impacts. Some of the public health responses are, in fact, a factor aggravating these impacts. This does not mean, of course, that they will not be put into practice, but it does require that an equally determined economic response be associated with the clinical response.

"The only thing to fear is fear itself." Roosevelt’s famous phrase in his inaugural speech as U.S. President was delivered in 1933, at the height of the Great Depression. With the economy collapsing and unemployment on the rise, Roosevelt responded to people’s panic and despair with a huge increase in public investment, a state employment programme, pension guarantee systems and unemployment benefits, and the strengthening of financial regulation. The New Deal was crucial because it mobilized the state and society for a strong and supportive response.

Roosevelt was apparently not impressed by Keynes and the General Theory would only be published later, but it is difficult not to find very obvious points of contact, including in the candor with which they faced one of the darkest moments of the world economy. "We have a dynamo problem," Keynes wrote three years earlier. Both showed the tranquility of those who have a plan and don’t need to choose between panic and nonchalance.

Today, social panic is associated with measures taken by public authorities and the symptoms are multiplying: closure of factories and interruption of production chains, at a time when industrial production rates were already showing signs of slowing down. In China, car sales fell by 92% in the first half of February alone. The OECD has warned on the economic consequences of the epidemic, which could cut world growth forecasts in half (from 2.9% to 1.5%) and lead Japan and the eurozone into recession already this year. The financial markets sharp falls led to, in the US, interrupting transactions for 15 minutes – a "brake" that had not been applied since December 2008, in the midst of the subprime crisis. The Federal Reserve reacted quickly and announced a strengthening of liquidity injections into the markets to $150 billion per day, but uncertainty remains.

That is why OECD chief economist Laurence Boone advocated urgent measures to deal with the coming period – we need a "budgetary big bang". With a monetary policy at the limit and negative real interest rates, the economist recalled that "it is not the central banks that will save us this time, but state budgets can do that". On the impact of these measures, Boone was clear cut: "We shouldn’t be asking to which extent the deficit will increase. We simply have to do it if we don’t want to add an economic crisis to a health crisis".

Mario Draghi and Christine Lagarde had already made it clear that the ECB cannot be the only one to engage on counter-cyclical policies in order to avoid a deflationary trap. On 11 March, Lagarde warned governments that public spending and investment must be reinforced as to avoid a situation identical to the 2008’s. The Financial Times has dedicated an editorial on the need for fiscal policy to take an active role again. The IMF’s (International Monetary Fund) own research centre published a study, a few years ago, on the importance of public investment for growth and job creation, stressing that the impact on the economy is greater in periods of low interest rates, such as the one we are going through.

The lucidity of so many unsuspected people contrasts with the negligence of the European Commission. Commissioner Paolo Gentiloni acknowledged the negative impact of the virus, but stressed that the current rules already include the necessary flexibility. Valdis Dombrovskis, a well-known austerity advocate, quickly joined him. Faced with criticism, the president of the Commission announced a financial package of… 0.05 to 0.18% of EU-27 GDP. European leaders seem to have learned nothing from the euro crisis and are preparing themselves to make the same mistakes. The concern is not to create a precedent of heterodoxy, in case it might work.

Around here in Portugal, the government seems to be following the wait-and-see strategy. The proposals already made limit the economic response to support companies that do not even provide full income to their workers and are financed by social security embezzlement. Measures that do nothing regarding public services that can help contain the pandemic; such measures rely on the idea that the money will be best used by the private sector. This prejudice, which is not generally true, is even less so in times of crisis. Just look at how everyone, whether liberal or socialist, turned to the National Health Service (NHS) in their hour of need, while the insurance companies pull the horse out of the rain. This option further confirms that the government still has one eye on the crisis and another on the deficit, and not even tries to take advantage from the public statements by European officials on the flexibility of budgetary rules. Stubbornness over the surplus is not just about Brussels. It is convinced foolishness.

Originally published at Público