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| Just How Bad Could a Coronavirus Recession Get? | |
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| Whether this week’s collapse of stock and oil prices will spiral into a much deeper economic crisis, perhaps even eclipsing that of 2008, depends on how the United States and other governments react. The United States has now, belatedly, taken drastic actions on travel and announced some support for businesses. But these are too late to prevent the coronavirus from spreading and too little to stave off a deeper economic downturn. | Whether this week’s collapse of stock and oil prices will spiral into a much deeper economic crisis, perhaps even eclipsing that of 2008, depends on how the United States and other governments react. The United States has now, belatedly, taken drastic actions on travel and announced some support for businesses. But these are too late to prevent the coronavirus from spreading and too little to stave off a deeper economic downturn. |
| Swamping the markets with liquidity, as was done in 2008, is not going to resolve the problem this time. The markets are already awash in cash, and as was again demonstrated in early March, further cuts in interest rates no longer translate into growth. What is needed now is leadership that focuses on the domestic challenges and seeks to build international cooperation — rather than scapegoating other countries. | Swamping the markets with liquidity, as was done in 2008, is not going to resolve the problem this time. The markets are already awash in cash, and as was again demonstrated in early March, further cuts in interest rates no longer translate into growth. What is needed now is leadership that focuses on the domestic challenges and seeks to build international cooperation — rather than scapegoating other countries. |
| How bad could this get? Breaks in supply chains, factory closings and worker quarantines have disrupted supplies. Restrictions on hospitality and travel, and fears regarding contagion have hit demand. Growth is being dragged down and could turn negative in a range of economies from Germany to China to the United States. The crippling of retail and consumer businesses could quickly escalate into bankruptcies, the downgrading of corporate debt and impairment of the balance sheets of banks. | How bad could this get? Breaks in supply chains, factory closings and worker quarantines have disrupted supplies. Restrictions on hospitality and travel, and fears regarding contagion have hit demand. Growth is being dragged down and could turn negative in a range of economies from Germany to China to the United States. The crippling of retail and consumer businesses could quickly escalate into bankruptcies, the downgrading of corporate debt and impairment of the balance sheets of banks. |
| While this crisis is different in its origins from the last one, it is following a similar cycle of collapsing consumer and stock market confidence, leading to a spiraling down of demand, growth, employment and incomes. With central banks impotent and fiscal policy undermined by supply bottlenecks, novel approaches are needed. | While this crisis is different in its origins from the last one, it is following a similar cycle of collapsing consumer and stock market confidence, leading to a spiraling down of demand, growth, employment and incomes. With central banks impotent and fiscal policy undermined by supply bottlenecks, novel approaches are needed. |
| There is much that should be done immediately. Banks, supported by governments, should provide discounted loans and increase their tolerance of late repayments by businesses that risk bankruptcy because of the absence of supplies or customers, or because of late payments by creditors. Gig-economy and hourly contractors, estimated to include 57 million people in the United States, require particular help, and government should help employers to guarantee a basic income and to ensure that workers who are not currently entitled to sick pay — a quarter of the U.S. work force — are covered for the period in which they are unable to work. | There is much that should be done immediately. Banks, supported by governments, should provide discounted loans and increase their tolerance of late repayments by businesses that risk bankruptcy because of the absence of supplies or customers, or because of late payments by creditors. Gig-economy and hourly contractors, estimated to include 57 million people in the United States, require particular help, and government should help employers to guarantee a basic income and to ensure that workers who are not currently entitled to sick pay — a quarter of the U.S. work force — are covered for the period in which they are unable to work. |
| These and other wide-ranging targeted interventions, including tax cuts for the lowest-income earners, would restore confidence and help working people and the businesses that could be devastated. The Government Accountability Office estimates that the 2008 crisis cost the U.S. economy over $22 trillion, including a $750 billion bailout for banks. This time, governments should use targeted interventions of a different kind to prevent the fears of a total economic collapse from turning into a prophecy. In Britain, this week’s budget commitment to mitigate the impact of the coronavirus provides a powerful demonstration of what can be done, even though the $38 billion allocated is too small compared with the $650 billion bailout given to British banks after 2008. | These and other wide-ranging targeted interventions, including tax cuts for the lowest-income earners, would restore confidence and help working people and the businesses that could be devastated. The Government Accountability Office estimates that the 2008 crisis cost the U.S. economy over $22 trillion, including a $750 billion bailout for banks. This time, governments should use targeted interventions of a different kind to prevent the fears of a total economic collapse from turning into a prophecy. In Britain, this week’s budget commitment to mitigate the impact of the coronavirus provides a powerful demonstration of what can be done, even though the $38 billion allocated is too small compared with the $650 billion bailout given to British banks after 2008. |
| However, national policies alone, adopted government by government, will not be enough to forestall a global catastrophe. For that, countries around the world must work together. When the markets crashed in September 2008, President George W. Bush called the leaders of China, Germany, France and Britain, securing a collective response and participation in a crisis summit. Actions agreed to by 20 heads of state, including an unprecedented spending boost by China, helped avert an even greater disaster. The concerted collective response calmed markets. The contrast with today could not be greater. | However, national policies alone, adopted government by government, will not be enough to forestall a global catastrophe. For that, countries around the world must work together. When the markets crashed in September 2008, President George W. Bush called the leaders of China, Germany, France and Britain, securing a collective response and participation in a crisis summit. Actions agreed to by 20 heads of state, including an unprecedented spending boost by China, helped avert an even greater disaster. The concerted collective response calmed markets. The contrast with today could not be greater. |
| President Trump has responded belatedly and erratically to the pressing domestic needs. Internationally, he has isolated the United States and, by turning his back on the world, has stymied an international response. And he is just the most prominent symptom of a wider problem: Since the 2008 crisis, governments around the world have become more nationalist and have adopted a zero-sum approach to international politics and economics. Yet today’s crisis shows isolationism escalates, rather than reduces, foreign threats. | President Trump has responded belatedly and erratically to the pressing domestic needs. Internationally, he has isolated the United States and, by turning his back on the world, has stymied an international response. And he is just the most prominent symptom of a wider problem: Since the 2008 crisis, governments around the world have become more nationalist and have adopted a zero-sum approach to international politics and economics. Yet today’s crisis shows isolationism escalates, rather than reduces, foreign threats. |
| The collapse of American leadership could not come at a worse time. After 2008, Britain led the European response to the crisis, but now Brexit has ended Britain’s ability to lead Europe, and squabbling among key countries means that the European Commission cannot speak for its 27 members. China has been turned from an ally of the United States in dealing with common threats like finance and climate change into a perceived enemy. The trade war and the United States’ withdrawal from the Paris climate agreement are the most visible expressions of wider tensions that have been eroding not only global growth but also the potential for cooperation. | The collapse of American leadership could not come at a worse time. After 2008, Britain led the European response to the crisis, but now Brexit has ended Britain’s ability to lead Europe, and squabbling among key countries means that the European Commission cannot speak for its 27 members. China has been turned from an ally of the United States in dealing with common threats like finance and climate change into a perceived enemy. The trade war and the United States’ withdrawal from the Paris climate agreement are the most visible expressions of wider tensions that have been eroding not only global growth but also the potential for cooperation. |
| The priority now needs to be the immediate needs of pandemic management, with governments collaborating to accelerate the development of vaccines, to produce urgently needed medical equipment and other supplies, and to coordinate restrictions on movement and the treatment of foreign nationals. | The priority now needs to be the immediate needs of pandemic management, with governments collaborating to accelerate the development of vaccines, to produce urgently needed medical equipment and other supplies, and to coordinate restrictions on movement and the treatment of foreign nationals. |
| But the world also needs a coordinated economic response. Vulnerable governments that risk buckling under the strain of the pandemic require financial support to prevent the global health crisis from also becoming a financial crisis. Italy is already in urgent need of a fiscal shot in the arm, and many developing countries will soon be, too. Coordination to preempt a systemic collapse of economies around the world is vital, with the International Monetary Fund and other agencies taking a lead, encouraged by the United States. | But the world also needs a coordinated economic response. Vulnerable governments that risk buckling under the strain of the pandemic require financial support to prevent the global health crisis from also becoming a financial crisis. Italy is already in urgent need of a fiscal shot in the arm, and many developing countries will soon be, too. Coordination to preempt a systemic collapse of economies around the world is vital, with the International Monetary Fund and other agencies taking a lead, encouraged by the United States. |
| The international solidarity that arose in response to the 2008 financial crisis was short lived. The question now is whether the current crisis can be turned into an opportunity to take a different path. Domestically, this situation could be used to restore faith in government and in the expertise that is required to address the pandemic and stop a global economic collapse. Internationally, there could be a fresh commitment to restore trust in global institutions by ensuring that the World Health Organization and other vital agencies of the United Nations, as well as the I.M.F., the World Trade Organization and the World Bank, are equipped to meet 21st-century challenges. The United States’ role is pivotal. Not as a bully, but as a leading member of the global community addressing shared threats. | The international solidarity that arose in response to the 2008 financial crisis was short lived. The question now is whether the current crisis can be turned into an opportunity to take a different path. Domestically, this situation could be used to restore faith in government and in the expertise that is required to address the pandemic and stop a global economic collapse. Internationally, there could be a fresh commitment to restore trust in global institutions by ensuring that the World Health Organization and other vital agencies of the United Nations, as well as the I.M.F., the World Trade Organization and the World Bank, are equipped to meet 21st-century challenges. The United States’ role is pivotal. Not as a bully, but as a leading member of the global community addressing shared threats. |
| Achieving this in the current climate may seem unlikely because the rich countries have not only fired all their fiscal and monetary ammunition but also lost the political will to cooperate. Governments are trapped in a cycle of stagnant growth and mounting debt, postponing much-needed investments in risk management and infrastructure. Political gridlock undermines the will to work together. Breaking it is our biggest challenge, but is necessary if we are to minimize the damage done by the current crisis and prevent future more dangerous threats from climate change, conflicts and pandemics. | Achieving this in the current climate may seem unlikely because the rich countries have not only fired all their fiscal and monetary ammunition but also lost the political will to cooperate. Governments are trapped in a cycle of stagnant growth and mounting debt, postponing much-needed investments in risk management and infrastructure. Political gridlock undermines the will to work together. Breaking it is our biggest challenge, but is necessary if we are to minimize the damage done by the current crisis and prevent future more dangerous threats from climate change, conflicts and pandemics. |
| No wall is high enough to keep out the threats to our future, even for the mightiest countries. Growing global integration brings rising interdependency. The greatest risk we face is not from any of the individual systemic risks. It is the lack of willingness to cooperate with others to resolve these problems. Why are we waiting? | No wall is high enough to keep out the threats to our future, even for the mightiest countries. Growing global integration brings rising interdependency. The greatest risk we face is not from any of the individual systemic risks. It is the lack of willingness to cooperate with others to resolve these problems. Why are we waiting? |
| Ian Goldin is a professor at Oxford University and the author of “The Butterfly Defect” and “Age of Discovery.” | Ian Goldin is a professor at Oxford University and the author of “The Butterfly Defect” and “Age of Discovery.” |
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