Economic responses to COVID-19

Print edition : April 24, 2020

Inside a supermarket in Hong Kong on March 4. Photo: Justin Chin/Bloomberg

The headquarters of the European Central Bankin Frankfurt, Germany. Photo: Kai Pfaffenbach/REUTERS

The two collections of articles represent a leftward shift of economic orthodoxy, with a recognition of the need for state expenditure on public health measures and government intervention to sustain demand in the economy.

In the past few weeks, various governments around the world have prepared responses to the economic fallout from the COVID-19 pandemic. In most countries these have taken the form of moratoriums on payments—tax payments and dues for businesses, suspension of layoffs and continued wage payments to workers, and stimulus packages to halt (or at least slow down) the fall in consumption spending and worker deprivation.

Two new works bring together articles by economists from different countries. The first is by, broadly speaking, progressive economists and is a set of policy briefs. It is available on the Economics for Inclusive Prosperity website ( The second volume, Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, is edited by Richard Baldwin and Beatrice Weder di Mauroe and published by the Centre for Economic Policy Research, London.

I shall refer henceforth to the former collection as Act Inclusively and the latter as Act Fast.

A good starting point for review is an article by Pierre-Olivier Gourinchas, which appears in both documents. His article describes the joint health and economic crisis in terms of the “curve-flattening” of which we have heard so much recently. He points out that the two curves (the public health/infection curve and the economic activity curve) are antonymous. When we work to flatten the public health curve by “social distancing” measures, we accelerate macroeconomic slowdown. This is a crucial point—reducing social interactions leads directly to a fall in output and employment, thus mitigating the physical impact of the disease but exacerbating the economic crisis.

Gourinchas’ argument is that the state must intervene, as it has done in the case of public health, to flatten the recession curve, working to mitigate the economic effects of the pandemic while accepting that there will definitely be some sort of recession. This is the starting point from which both sets of analyses take off. There is a surprising commonality across the spectrum with respect to their basic analyses. There is a general acceptance that there will be a major recessionary impact; approximated by Emmanuel Saez and Gabriel Zucman in their article “Keeping businesses alive: The government will pay”, in the Act Inclusively volume. The writers suggest that the drop in the annual gross domestic product (GDP) in the United States will be 7.5 per cent, on the basis of their estimate that there will be an evaporation of 30 per cent of aggregate demand over the next three months.

However, there are also some views from right-wing economists (like the former Goldman Sachs head Lloyd Blankfein, as well as some billionaires) who are pushing, especially in the U.S., for a quick return to work for most people1. This, they argue, could see off the threat of a recession, albeit at the cost of an (unforeseeable) increase in lives lost. This has been dismissed as “deranged” and extraordinarily callous, but like Larry Summers’ famous 1991 World Bank memo that called for increased environmental pollution in developing countries2, it is merely the logical conclusion of the idea that profit rates and the market economy are the best way to determine social outcomes. Mainstream economists in the Act Fast book, from Alberto Alesina to Olivier Blanchard (and echoed by most other contributors), have all expressed support for expansionary fiscal policies and unrelenting support by the European Central Bank (ECB) to its constituent countries in the form of deficit spending. Expansion is to be backed either by issuing Eurobonds or through the Outright Monetary Transactions (OMT) mechanism of the ECB (the tool behind Mario Draghi’s famous “whatever it takes” commitment in 2012 to rescue the Eurozone after the economic crisis). The writers express the need for increased government spending, both to keep businesses solvent and to provide social security measures for workers.

Gita Gopinath, the Chief Economist of the International Monetary Fund (IMF), has highlighted in her article titled, “Limiting the economic fallout of the coronavirus with large targeted policies” in the Act Fast volume, the deleterious effects of the pandemic and the commitment to emergency funding for developing countries that could amount to $50 billion. All the economists writing in the Act Fast volume, and in particular the French economist Charles Wyplosz, agree that, in times like these, “moral hazard”3 must be thrown to the wind and countries should spend extensively; their decision in this “moral” quandary being helpfully assisted by the extraordinarily low rates of interest around the world today.

Helicopter money

Jordi Gali’s suggestion (again present in both documents) goes further to suggest the launching of “helicopter money”, an additional fiscal transfer from the state to businesses and individuals in order to stimulate the economy (that is “paid” for by the Central Bank itself, showing up as a reduction in the bank’s capital, essentially acting as a transfer from the bank to the government). Saez and Zucman suggest that the state should provide liquidity to businesses and individuals, with the state acting as payer of last resort, ensuring a certain baseline level of funding to enterprises and people unable to work. Among the other progressive policy suggestions, Tyler Cowen in “Plans for economic mitigation from the coronavirus”, in Act Inclusively, goes a little further and recommends direct unconditional cash transfers to the people by the state (despite his generally conservative ideological stance). There is also the more radical suggestion that this is the moment to implement systems of Universal Basic Income (UBI), an idea that is rapidly being accommodated by the mainstream of economic thought (as evidenced by its suggestion in both documents). The $1.5 trillion bailout by the United States in response to the crisis, in fact, contains a one-time cash transfer of $1,200 to individuals; it has widely been suggested that this should be transformed into a recurring payment of a greater amount of money. The European states have announced measures that reinforce traditional social security arrangements such as unemployment insurance.

The two compilations largely propose policies for developed countries, although there is mention (by Adam S. Posen in his article “Containing the economic nationalist virus through global coordination” in Act Fast) that developing countries may experience withdrawals of liquidity if the reaction to the crisis is done on national lines. These expansionary fiscal policies in the developed world may also limit the amount of money transferred as development aid.

Countries like India have neither the fiscal space nor the unconventional monetary tools to undertake many of the policy proposals put forth. Targeted cash transfers in developing countries are also considerably more complicated owing to the paucity of data about businesses and individuals’ incomes, and the fact that people in developing countries often face multiple forms of deprivation that will only be exacerbated by the current crisis and require more complex social policies than monetary transfers. Developing countries are also less likely to carry out policies such as helicoptering money or quantitative easing, as their interest rates are not as conveniently low as those in the West.

The broad similarity of the suggestions across the two sets of documents is notable. However, what is even more striking is that most states have generally signed on to these platforms, ensuring relief to businesses and individuals, as well as reassuring them with the promise of fiscal stimuli to come. There has been a spate of articles around the world that have (often disparagingly) declared that the government response to the COVID-19 pandemic has shown that, in times of crises, we are all “socialists”. This does not mean that governments are calling for socialisation of vast sectors of the economy (although some countries have nationalised previously privatised parts of the health care industry and some are promising to go even further and nationalise other industries), but increased government spending (and borrowing) and heightened state guidance of the economy are pretty much universal in the present crisis.

The consensus in the two publications under review represents in some ways a leftward shift of economic orthodoxy, with widespread recognition of the need for state expenditure on public health measures and government intervention to sustain demand in the economy4. At the same time, it reveals a lack of radical proposals for the future. There has been no demand for widespread nationalisation or government control over industries that are to be bailed out. Expanding medical insurance and employment guarantees are all discussed, but are expected to be temporary.

Both publications have an appraisal (and appreciation) of the economic and societal institutions facilitating the response to the pandemic, and are particularly approbative of the institutional structure of the East Asian countries, which reacted rapidly and responsibly to the crisis. However, the current crisis does not seem to have provoked any deeper soul-searching about the nature of globalisation and its institutions. The fact that nation-states have been the fundamental unit of response to the pandemic has aroused surprisingly little commentary about the nature of pan-national institutions such as the European Union. Reality may actually turn out to be more radical, with the aforementioned nationalisation in countries such as Ireland and Spain, and Italy’s gesture of friendship and gratitude to countries such as Cuba and China, which have assisted it in dealing with the crisis.

In an obituary in New Left Review, Perry Anderson recalled Alexander Cockburn writing about his reaction to the lack of radicalism in the Occupy Wall Street movement:

“I clamber up to the dusty top shelf, furtively haul down Vladimir Ilyich’s ‘April Theses’ of 1917 and dip in: end the war, confiscate the big estates, immediately merge all the banks into one general national bank…. The blood flows back into my cheeks, my eyes sparkle…. ”

Perhaps, we too should dare to imagine a more radical restructuring of society after this crisis.

Madhav Tipu Ramachandran is currently doing a Masters in Economics at SOAS, University of London.


1 Views unrepresented in either of these columns, now seen as perhaps too right-wing for the economic mainstream.

2 Summers (in a somewhat tongue-in-cheek argument) had proposed that developing countries could “afford” more pollution than developed countries, and, therefore, they should export environmental pollution to the developing world.

3 “Moral Hazard” is the term economists use when countries mischievously tend to increase their borrowing and subsequent spending when they are aware that they will not bear the full costs of that borrowing.

4 It is disputable whether this shift will be permanent, and will show itself politically, but it is undoubtedly a shift towards Keynesianism, away from the ideas of austerity and budget balancing that were the accepted ideas in mainstream economics until less than a decade ago.