Not quite truth in numbers
Policymakers want to heal the economic wounds caused by Covid-19. Unfortunately, they are driving without headlights on an unfamiliar road.
The confusion starts with public health. It would be useful, to say the least, if politicians, central bankers, business leaders, financiers and other big decision makers knew what to expect from the coronavirus. Instead, they have to base their decisions on guesswork.
Take Rishi Sunak, Britain’s finance minister. He has to decide how long to keep subsidising the salaries of workers who have been sent home because their employers lack the revenue needed to pay them. His plan to end the current generous arrangements in October look premature, set against the rising number of positive virus tests. Stricter limits on social gatherings, announced by Prime Minister Boris Johnson on Wednesday, are likely to dampen spirits and slow down rehiring.
However, the declining number of Britons dying from Covid-19 supports Sunak’s more assertive approach to the job market. After 19 consecutive declines, the most recent weekly count of 101 deaths was the lowest since the pandemic began in March.
While the health situation is contested, the economic picture is clouded. Sunak and his global counterparts struggle to figure out just how much damage measures designed to contain the virus have done. Most standard numerical gauges of economic health are close to meaningless.
Start with unemployment rates. Government subsidies to employers of currently idle workers have a similar economic effect as direct government payments to people who have lost their jobs, but only the second group counts as unemployed. Reported rates therefore give little information.
Besides, government policies are supposed to be forward-looking. But no one knows when or whether the hardest hit industries – tourism, travel and public entertainment – will return to pre-pandemic levels. Even an accurate forecast of disease trends would not help, since fear and new habits may have permanently shifted people’s behaviour. It would be good for governments to help workers whose jobs are disappearing forever, but those workers are very hard to identify.
Measures of output are similarly baffling. The 15% cumulative decline in the euro zone’s real gross domestic product over the most recent two quarters suggests scope for a large bounce. But it gives no clue about how much of the lost output will be restored by easing restrictions, or to what extent additional fiscal and monetary stimulus can speed up the process.
Then there is inflation. Spotting patterns in consumer prices is always treacherous in an era of persistent disinflation, but the virus has made the signals even less informative. The reported 0.04% decline in the U.S. consumer price index in the last six months undoubtedly hides far more than it reveals.
Deflation could lurk behind the virtually unchanged number, if lower current incomes – and the fear of worse to come – make customers less willing or able to pay today’s prices. Alternatively, inflation may be about to rise. As fear and restrictions fade away, customers will be flush with the cash they were unable to spend during the lockdown. This monetary abundance could push up prices for whatever is available.
Economic forecasters do have other tools. They can look at commodity prices, for example. These are not much help, though, as the machinations of producers garble any messages about rising and falling demand.
Or they can search for wisdom in financial markets. Good luck with that. The global recession played its part in lowering the yield on 10-year U.S. government bonds from 1.5% in February to 0.65% today, but the stimulus-driven increase in the money supply arguably had a bigger impact. Similarly, it is hard to discern whether the MSCI World stock index’s recovery to pre-pandemic levels is the result of abundant liquidity or investors wisely gauging the pace of recovery.
Eventually, decision makers will recognise a new normal, but that might be months or even years from now. While waiting, the risk of policy accidents is high. Excessive stimulus could revive long-dormant inflation. Alternatively, poorly targeted support or excessive caution could do durable damage to labour markets.
The macroeconomic risks look unavoidable, but something can be done about one social challenge. Both the virus and the policies designed to combat it have generally hurt poor people more than their richer compatriots. In many countries, there are enough accurate numbers to show that, on average, the already affluent have been safer, received better healthcare, lost fewer jobs, suffered less disruption to their education, and been more likely to gain from strong financial markets.
There are many policies which could help reverse this outcome, and most of them will be effective whatever impact Covid-19 has on the overall economy. A tried and true approach is to increase taxes on the rich and distribute most of the proceeds to the poor. Some sort of universal basic income would add a contemporary twist.
Most specifically, the pandemic has exposed some problems that policymakers have tools to address. Wages for people who take health risks because they cannot work from home can be increased. Governments can act to help renters, rather than evict them. They can offer additional support provided to educationally disadvantaged children, while strengthening health and social care in poorer neighbourhoods.
The road ahead is foggy. That is all the more reason to be sure the car is running as well as it can.