Ignore short-term GDP and avoid ‘fiscal stimulus’ – the upside-down economics of coronavirus

Even if not a technical recession (two quarters of negative growth), a severe coronavirus-induced downturn looks certain across major economies.

Markets signal it. Top economists predict it (a recent IGM poll showed 62% to 8% “agreeing” it would happen.) And many “feel it” already – from disruptions to supply chains and work arrangements, to collapsing demand for leisure, travel, and entertainment.

This, though, is no ordinary downturn. Economists and commentators who talk about it as such, pushing the same-old “fiscal stimulus” arguments for encouraging spending to “protect the economy,” are not just wrong right now, but dangerous.

The first implication of coronavirus economics is that a sharp slowdown in activity is necessary to contain the virus, because it represents the social distancing required to reduce its spread. While usually a reasonable proxy for economic health then, GDP is temporarily useless as a metric of social welfare. We should ignore it.

Second, ensuring this pause in activity does not do longer-lasting damage should be our key objective. We want this to play out like a bad agricultural season, or an extended “Christmas week” – with a Nike-tick recovery or, given some spending will never occur, a V-shaped rebound that redistributes activity over time.

Both these points mean policy success should be judged not by short-run GDP, but ability to mitigate distress among vulnerable households and businesses, preventing business failures or mass layoffs in viable firms, or severe hardship for those without significant savings or employer benefits. We can judge longer success by assessing the path of GDP over 1-2 years.

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Πηγή: capx.co