Governments across the world must continue taking bold fiscal action to address the potential long-term economic damage from the COVID-19 crisis.
Governments also need to better coordinate a policy response to the pandemic in order to get help to the hardest-hit segments of the global economy, according to panelists at a Reuters Virtual Newsmaker event last week.
The event, Coronavirus and the Global Economy, hosted by Reuters Breakingviews Global Editor Rob Cox, included panelists Laurence Boone, Chief Economist of the Organisation for Economic Co-operation & Development (OECD) in Paris; Jason Furman, Professor of the Practice of Economics Policy at the Harvard Kennedy School; and Kevin Warsh, Visiting Fellow in Economics at Stanford’s Hoover Institution. Gina Chon, a West Coast columnist for Reuters Breakingviews also participated.
“There is an intense liquidity crunch across everything,” said Furman, who was also a former Chair of the Council of Economic Advisors under President Barack Obama.
Government shutdowns of their economies have created “massive” economic damage in the short run, Warsh said, and, at least in the case of the US, these shutdowns have done even more economic harm than people had expected they would.
US new jobless claims of more than 10 million over the past two weeks confirmed how quickly and hard stay-at-home orders have hit the US economy, though even that unprecedented number was larger than many analysts and economists expected. “Forcing the country to close was done on purpose by the government and done, in my view, for a very good reason,” Furman added. “The bigger question — and what we don’t know yet is — is this like a natural disaster and the economy springs back, or is it like a financial crisis and takes a very long period to get back?”
As policymakers try to answer that, “it’s better to spread too much than too little at this juncture,” Boone said of the need to continue supporting economies with aggressive and sustained fiscal action.
Warsh agreed. “We need to buy time to see what the future is of the virus and of the economy,” he explained. “The best way to do that in central banking is to roll out liquidity to all solvent comers.”
Panelists agreed that governments’ economic response to the crisis thus far has been “impressive” in both scope and speed. They emphasized the need to continue prioritizing “more and faster” over precision, warning that over-engineering plans now creates bigger risk in getting support to the sectors that need them urgently. While that may open the door for abuses and waste, legislators can refine laws later on to control some of that, they added. “Policy needs to do what it needs to do in the short run. There definitely will be some messes we need to clean up later,” Furman said, adding that the world is facing an existential crisis.
Gaps in support
While acknowledging how much governments have already done to help broad segments of workers, businesses, and industries through stimulus and policy interventions, other segments remain overlooked or underserved by actions taken so far, panelists said. Among Boone’s biggest concerns, for example, are low-income countries that don’t have the same institutional structures or policy tools as do advanced economies to respond to an economic crisis like this. Unlike advanced economies with “almost unlimited funding,” Furman said, the International Monetary Fund (IMF) — a key growth and emergency funding resource for developing nations — doesn’t have an unlimited amount of money to sustain economies.
The IMF has $1 trillion of available lending capacity for its member countries, and has already begun providing funds to fight the pandemic. As of the end of March, more than 80 countries had applied for emergency funding, the largest number of requests for assistance the IMF has ever received at one time.
Boone also highlighted challenges in supporting the “informal job market” — those operating as independent contractors and freelancers in the gig economy. While small business lending facilities and qualifying these workers for unemployment benefits may help some, she believes governments will need to provide additional support, possibly in the form of more direct checks.
“The bigger question — and what we don’t know yet is — is this like a natural disaster and the economy springs back, or is it like a financial crisis and takes a very long period to get back?”
Furman, for his part, thinks states and localities will have large unmet funding needs and less power and capacity as borrowers to address them directly. “The entities that can best borrow at this time are national governments,” he said. “They’re effectively borrowing on behalf of sub-national government.”
States and localities, while receiving $150 billion to fight the pandemic in the US government’s $2 trillion CARES Act, will also need substantially more support, in part to offset what is expected to be massive tax collection shortfalls. “The biggest absence in the legislation was general fiscal support for states and localities,” Furman observed, noting while the money in CARES helps with the emergency, some states, like New York, didn’t receive nearly enough funds to tackle even that.
How long and severe the economic crisis is going to be depends on a lot of unknowns, but the panelists agreed that making good choices now, collaborating, and operating transparently will greatly impact the ultimate outcome for the global economy. “For the European Union, I think it’s a real test,” Boone said, highlighting how EU countries have begun to show solidarity and build a coordinated response. Boone added that she hopes the collaboration continues.
Furman said he is hopeful too. “It’s hard to see fiscal and monetary policy letting” the world slip into a global Depression.