Monetary policy alone cannot stop a coronavirus-induced recession. A coordinated public policy focussed on health is needed
Back in September, the UNCTAD’s flagship publication, the Trade and Development Report, warned that the economic imbalances, social inequities and financial fragilities left unaddressed since the 2008 financial crisis were storing up serious problems for the global economy. With advanced economies stuck in secular stagnation, weakening global demand and debt levels at historic highs in both the public and private sectors and across countries at all levels of development, there was an urgent need for coordinated policy action. It hasn’t happened.
A looming trade war, tensions around the transfer of technology and currency clashes seemed the most likely triggers of a downturn. It turned out that something a good deal scarier was brewing in a food market in central China. With the economic contagion from the health shock now spreading faster than the virus itself, a global recession is no longer a matter of speculation but rather a clear and present danger.
The UNCTAD last week warned that the global economy was, indeed, heading for a recession. However, it went on to suggest that a combination of asset price deflation, sinking aggregate demand, heightened debt distress and a worsening income distribution could trigger a more vicious downward spiral.
Widespread insolvency and possibly another “Minsky moment” — a sudden, big collapse of asset values which would mark the end of the growth phase of this cycle — could not be ruled out, with the damage in the trillions of dollars.
That moment seems to have arrived. With economic pundits vying with each other to promote the scariest doomsday scenario for the global economy, the US Federal Reserve took it upon itself to cut its interest rate for a second time in 12 days. But choosing a Sunday evening — which evoked memories of the weekend scramble to save Lehman Brothers — to calm the markets has had the opposite effect. What happens next will depend on good luck, bold policy and better cooperation.
Medical professionals know what is needed on the health side, and governments need to commit to doing “all that it takes” in terms of financial resources and effective public policy/action to contain the virus, treat the sick and advance the vaccine search. Given that Covid-19 is here to stay, bolstering public health systems will be part of longer-term strategy.
Public health policy
Fortunately, public spending has to be part of the response to the short-term economic problems, as monetary policy cannot solve this alone. Targeting that spending at the health crisis is a no-brainer. But macroeconomic policy is not sufficient.
The panic seen is a reminder that footloose finance continues to distort economies and stronger regulation, promised but not adopted after 2009, will be needed. Steady attempts globally to turn health into an asset class open to financial innovation and speculative capital has been an unmitigated failure.
The lack of investment in public health and safety is also a reminder that private capital cannot deliver the kind of inclusive and sustainable outcomes we want.
Institutional reforms to deal with the lack of patient capital (no pun intended) will be needed, including a return to public banks and an expanded mandate for central banks (whose idea of “last resort” cannot be limited to stock market collapses), as well as fairer and efficient ways to deal with countries in debt distress, which is sure to mount.
In the face of recent events, former UK Prime Minister Gordon Brown asked why governments and central banks have fallen so far short of what is needed. Brown laments the lack of global leadership and the recent tariff wars, which have not helped advance a spirit of international cooperation. But multilateralism was in crisis well before US President Donald Trump appeared; the leadership that Brown demonstrated in 2009 proved ephemeral.
The bigger failure is that all governments in the core of the global economy have been eager to pursue neo-mercantilist actions at the behest of their own corporate and financial interests, whether through the Washington financial institutions, the WTO, WIPO (World Intellectual Properties Organisation), or the WHO. In this environment, cooperation in support of public policy goals and the provision of global public goods is a non-starter.
Because many of the crises we currently face — including the current Covid-19 pandemic — involve the provision of global public goods, an effective multilateral response remains essential, including policy coordination at all levels and across a variety of areas.
An opportunity to rewrite the rules of the global economy in the decade since 2008 has been missed, and the opportunity now could be lost again, given geopolitical tensions and the stranglehold that neo-liberal ideas still hold over policymakers, particularly in advanced economies. Macron is right to call for a war on the coronavirus, but the battle of ideas for a more inclusive and sustainable world order is still raging.