The world is at war
The fight against COVID-19 is a full-on war. China seems to have won the first battle. Hong Kong, Taiwan, Singapore, and Japan have also chalked up visible successes in mitigating the outbreak, no doubt owing to their experiences in dealing with the 2003 SARS epidemic. Europe and the United States, on the other hand, are only just awakening from their illusions of invulnerability. As a result, the epidemic is now raging across the West.
The hardest-hit Western country so far is Italy, which has particularly strong economic ties to China. Northern Italy is now the new Wuhan (the Chinese megacity where the coronavirus first emerged). With its health system overwhelmed, the Italian government has slammed on the brakes, shutting down the retail economy and quarantining the entire country. All shops except pharmacies and grocery stores are closed. People have been instructed to stay home and may enter public places only for necessary shopping or commuting to work. Many public and private debt obligations (such as housing rents and interest payments) have been suspended. Italy is attempting to slow down the economic clock until the coronavirus dies out.
Meanwhile, although Germany has had very few coronavirus deaths so far, the number of infections is now skyrocketing as quickly as anywhere else. In response to the crisis, the German government has introduced a short-time work allowance and granted generous credit assistance, guarantees, or tax deferrals for distressed companies. Public events across the country have been canceled. Schoolchildren have been told to stay home. And Austria, for its part, has long since closed its border with Italy. Austrian schools, universities, and most shops have also been closed. Initially, France pursued a more relaxed approach, but it has now also shuttered its schools, restaurants, and shops, as has Spain. Denmark, Poland, and the Czech Republic have closed their borders with Germany.
US President Donald Trump has declared a national state of emergency. Congress has approved an $8.3 billion emergency program to fund efforts to contain the epidemic. Even larger sums are awaiting passage by the Senate. The federal government has also barred foreign travelers, first from China and Iran, and now from Europe.
Globally, not all responses to the crisis have been well targeted, and others have not been strong enough. Most worryingly, some governments have convinced themselves that they can merely slow down the spread of the virus, rather than taking the steps needed to halt it entirely. The predictable overcrowding of hospitals in many heavily affected areas has already exposed the folly of such complacency.
On the economic front, a severe recession can no longer be avoided, and some economists are already calling for governments to introduce measures to shore up aggregate demand. But that recommendation is inadequate, given that the global economy is suffering from an unprecedented supply shock. People are not at work because they are sick or quarantined. In such a situation, demand stimulus will merely boost inflation, potentially leading to stagflation (weak or falling GDP growth alongside rising prices), as happened during the 1970s oil crisis, when another important production input was in short supply.
Worse, measures targeting the demand side could even be counterproductive, because they would encourage interpersonal contact, thus undermining the effort to limit transmission of the virus. What good would it do to give Italians money for shopping trips, when the government closes the shops and forces everyone to stay home?
The same arguments apply to liquidity support. The world is already awash in liquidity, with nominal interest rates close to or below zero pretty much everywhere. More interest-rate cuts into deep-red territory might help stock markets, but they also could trigger a run on cash.
The brutal decline in economic activities that epidemiologists say is required make crashing stock markets inevitable, given that central banks’ policy of excessively cheap money and pooled liabilities caused an unsustainable bubble. Because they used up their ammunition at inopportune moments, central banks bear responsibility for the bubble that has now burst.
What is really needed are fiscal measures to save companies and banks from bankruptcy, so that they can recover quickly once the pandemic is over. Policymakers should be considering various forms of tax relief and public guarantees to help firms borrow if necessary. But the most promising option is a short-time work allowance. This approach, which has been tried and tested in Germany, compensates for the underemployment of the workforce through the same channels that are already used for unemployment insurance. Better yet, it costs hardly anything, because it prevents the losses that would follow from increased real unemployment. All countries should be replicating this part of Germany’s policy to prevent job losses.
But, most important, all governments need to follow China in taking direct action against COVID-19. Nobody on the front lines should be constrained by a lack of funds. Hospital intensive-care units must be expanded; temporary hospitals must be built; and respirators, protective gear, and masks must be mass-produced and made available to all who need them. Beyond that, public-health authorities must be given the resources and funds they need to disinfect factories and other public spaces. Hygiene is the order of the day. Large-scale testing of the population is particularly important. The identification of each case can save multiple lives. Surrendering to the pandemic simply is not an option.