In the beginning of 2020, COVID-19 virus overturned almost everyone’s living in the world. So far, it has been exerting a huge impact on various industries from tourism to medical treatment to catering. According to poll data, 46% of respondents globally believe that the world will be completely changed after the epidemic.
PKU Financial Review interviewed Lord Adair Turner, senior fellow of Institute for New Economic Thinking and former chairman of Financial Services Authority; and Daniel S. Hamermesh, editor-in-chief of IZA World of Labor, IZA Network Director, and distinguished scholar of Barnard College. They shared their concerns and insights into policies and controversies, and predicted the global economy after the epidemic from different perspectives.
PKU Financial Review: How do you predict the impact of Coronavirus on global economy? Will it experience a V-shaped turnaround or a prolonged recession?
Lord Adair Turner: The IMF World Economic Outlook April 2020 forecasts something close to a V shaped recession and recovery, with global growth at -3% in 2020, but with a strong recovery (+5.8%) in 2021, so that looking forward it’s as if we lost one year of growth but then returned to pre-existing trend.
How realistic is this? Well I think there will be an element of a bounce back. Economies are depressed in part because we have deliberately shut down several sectors of the economy, and once we are able to loosen the controls, they will bounce back. And we are already seeing that in the Chinese economic figures. But I doubt whether the bounce back will be as strong as the IMF figures suggest.
That’s because many companies will probably go bankrupt in this crisis, many workers will lose income and incur debt, and because even those who come out of this crisis in good economic shape and with larger savings (because their income has continued but their consumption been constrained) will be more cautious – there will be higher precautionary saving. And some sectors of the global economy – in particular tourism – could be constrained for a year or more, only returning to pre-crisis levels when and if we get a vaccine. So that implies a sharp downturn followed by a gradual recovery. There is however a lot of potential for good policy to improve the pace of that recovery.
Daniel S. Hamermesh: Almost certainly a prolonged recession, if by "prolonged" we are talking about 1 year or so with quite high unemployment.
PKU Financial Review: How global supply chain will be affected by Coronavirus? Which industries will be hit in particular?
Lord Adair Turner: Global supply chains were initially badly hit by the closedown of the Chinese and Korean economies, which were the most effected in the early days of the crisis. But many factories in those countries have now reopened very effectively, and many physical supply chains now operate far more effectively than consumer focused sectors of the economy (after all, it’s easier to maintain social distance and hygiene disciplines in a containership with a crew of about 20, than in a cruise ship, with 3000 passengers and over 2000 crew).
But I think the crisis will lead companies to want to make supply chains more resilient and that will usually mean shorter. So we will probably see manufacturing moving closer to end consumer markets (returning to advanced economies in Europe and North America), but in a highly automated, job-light form. And that’s going to be a big challenge for still low income developing economies which hope they will follow the East Asian path to prosperity–starting with low wage, labour intensive manufacturing. That supply chain based route to growth out of poverty is looking much more difficult after the crisis.
PKU Financial Review: How do you predict the unemployment rate of US during the Coronavirus pandemic?
Lord Adair Turner: Before the crisis, US unemployment was about 4%, it’s now up to 15%: as lockdowns are eased, maybe it will return to high single figures. But I suspect it will either stay at that level for quite some time, or that many people will just get discouraged from looking the jobs at all. Either way I think we’ll see a depressed employment rate for many years, and without good government policies, which I don’t see on the horizon, that will mean still further increases in inequality.
Daniel S. Hamermesh: I would estimate that the US unemployment rate now, which will be released in the CPS on 8 May, and show that we are at 16 percent unemployment.
PKU Financial Review: What do you think of the various policies and measures adopted and will be adopted by the US government to stimulate economic development, such as unlimited QE Measures?
Lord Adair Turner: Unlimited QE has been a sensible policy. Many people are worried that governments are incurring high levels of debt as a result of the crisis: they feel their country will have to repay this debt in future. But this is not debt owed to other countries, but debt owed within countries. Governments are raising debt, but that increased fiscal debt is offset by either (I) increased savings on the part of those households who have continued to receive good income during the crisis, and who are accumulating large savings (II) central banks which are buying government debt, and which are in turn owned by governments, which means that no increase in consolidated public sector debt occurs.
There are important policy choices to be made about these different ways of financing the deficit, which might have different implications for future inflation. But the one thing not to worry about is “how on earth will we repay this debt”.
Daniel S. Hamermesh: I approve of them in principle. Administratively, however, they appear to have real problems, as is evidenced by the large businesses eating up most of the "small business" funds.
PKU Financial Review: While Modern Monetary Theory (MMT) is still under debated, it has been widely used in practice. What do you think of it?
Lord Adair Turner: Modern Monetary Theory is broadly correct but not at all new. If you read Milton Friedman’s 1948 paper “A Monetary and Fiscal Framework for Economic Stability”, all the essential theory is there. Friedman argued that if a government wanted to stimulate aggregate nominal demand, the most straightforward and in some ways the lowest risk way to do so, would be to run a fiscal deficit financed by printing money rather than by issuing debt. The technical aspects get a bit more complicated than in Friedman’s paper when you consider the role of fractional reserve banks, and the fact that central banks don’t create the end money used by companies and households but the monetary base which banks hold as reserves.
But those technical complexities do not undermine the compelling case for monetary finance in some circumstances which Friedman set out. The crucial issue on monetary finance is therefore not technical but political – whether it is possible to devise governance arrangements and rules to make sure that we only use monetary finance in a disciplined fashion and appropriate amounts, rather than using it excessively, which would be bound to produce high and perhaps hyperinflation. Ben Bernanke suggested a framework for such governance and rules in a Brookings Institute blog of April 2016, and I agree with the propositions he set out there. Supporters of MMT sometimes need to be clearer what their answer is to the political discipline question as against the technical aspects, on which they are largely correct.
PKU Financial Review: Several U.S. officials have become concerned that the United States may not have enough industrial chains to produce necessary supplies during the Coronavirus pandemic. They have proposed to give out subsidies to revive businesses. What are the consequences of this proposal?
Daniel S. Hamermesh: Subsidies to business at this point are a waste, and nearly corrupt. Business will pick up with consumer demand; and without that, the subsidies are simply transfers to the well-to-do.
PKU Financial Review: Looking back at several crises in the history, what are the similarities and differences between them and this crisis?
Lord Adair Turner: The one previous crisis in which I personally had a public policy role, was the Global Financial Crisis of 2008, since I became chair of the UK Financial Services Authority on September 20, 2008, just five days after Lehman Bros had collapsed. That was a crisis which emerged entirely from within the guts of an inherently unstable financial system, and which subsequently created a real economic shock. During this crisis, by contrast, the financial system has remained resilient despite a major real economic shock. That resilience reflects the major changes in financial regulation which were introduced across the world after the 2008 financial crisis, and in particular much higher capital requirements for banks. This suggests that sometimes at least we learn from previous mistakes and take appropriate action!
Daniel S. Hamermesh: There has really been nothing like this. In World War II we did have a shortage of consumer goods, but demand was high as incomes were at a peak. Today goods are absent--supply is restricted, but so is demand, as incomes are reduced.
PKU Financial Review: US Oil prices turned negative for the first time in the history, and hundreds of US oil companies could go bankrupt. How do you think of this?
Lord Adair Turner: Oil prices have collapsed. But it is worth remembering that they also fell by over 50% in autumn 2008, but by 2011 they were back over $100 barrel. That was partly because when marginal suppliers go bankrupt, and cease investing, we can end up with a supply shortage just three years later as demand begins to recover. But while I anticipate some recovery this time round, my hunch is that oil prices will remain low compared with the average of the last 10 years, given the structural factors now reducing oil demand – in particular electrification of transport, which is essential to tackle climate change, and increasingly economic. So it’s at least possible that oil demand is past its peak and will now start a gradual decline: in which case, the most likely outlook is for relatively low oil prices.
Daniel S. Hamermesh: I don't worry about this. The oil rigs are still there. If existing companies go bankrupt, others will enter the market and buy and use the existing capital stock.
PKU Financial Review: Since the public is not satisfied with WHO’s handling during the Coronavirus pandemic, is it necessary to establish an economic and social organization to co-ordinate global health, similar to the IMF?
Lord Adair Turner: I think the WHO has done a good job, and that President Trump has withdrawn the US from membership in an attempt to divert attention from his own catastrophic failure to prepare the US for the impact of COVID 19. So it’s not clear to me how setting up a new international body would solve that problem: the US might refuse to be part of that as well.
Daniel S. Hamermesh: Who isn't satisfied?Trump isn't, but he's just using WHO as a scapegoat for his own failings. WHO is doing as well as any international organization could do.
PKU Financial Review: How do you view the spread of Coronavirus on social media? Is it shaping our fears? With words related to populism showing up on social media more frequently, do you think that the trend of “deglobalization” is accelerating?
Lord Adair Turner: Social media poses a huge challenge to the informed debate and respectful international exchange of perspectives and ideas, which we desperately need in order to tackle the world’s problems. Its short attention span, soundbite nature gives a natural advantage to participants who are uninterested in dispassionate consideration of the facts.
Certainly on social and economic issues, but even to a degree on some scientific ones, the truth is not absolute, but partial and nuanced: not black-and-white, but shades of grey which need to be analysed carefully, respecting other people’s arguments, and trying to see the problem from different perspectives. That’s very difficult in the world of social media, which creates a great environment for xenophobes, conspiracy theorists, cranks, and manipulators. We need to offset its impact by creating as many opportunities as possible for thoughtful debate: such as this question-and-answer session.
Daniel S. Hamermesh: No decline in the trend toward globalization--the current problem is a temporary very large blip.
Lord Adair Turner, senior fellow of Institute for New Economic Thinking and former chairman of Financial Services Authority
Daniel S. Hamermesh, editor-in-chief of IZA World of Labor, IZA Network Director, and distinguished scholar of Barnard College.
The Chinese version of this article is published in PKU Financial Review, an academic publication initiated by PHBS and Peking University HSBC Financial Research Institute. Sponsored by the Nanfang Media Group, it focuses on cutting-edge theories and critical practice in the finance field, creating an open platform to promote academic research and industry innovation in China's financial sector.
