In these unusual days my affections are often...
In these unusual days my affections are often with those among us that are not so lucky and privileged to withstand the current health crisis without much loss of income and opportunity. The fact that many people out there struggle economically - although the lock-downs have been in place for only a few weeks, a ‘very short run’ so to say - painfully points to the fragility of even the most developed, rich and powerful countries in the world. Truth is, ‘we’ cannot afford to press the hold-button and take a break for, let’s say, some months as between one third and a half of ‘us’ is basically forced to live from hand-to-mouth and deeply delves into precariousness and worse as soon as we dare to press the hold-button. However, this connection between resilience and distribution is not the only economically noteworthy thing to observe in this crisis.
For one, the advent of this health-crisis can be understood as an example of ‘fundamental uncertainty’, that is, ‘uncertainty’ in “the sense […] in which a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention […]” (Keynes 1937). The crisis not only indicates that unforeseen (or ‘heavy-tailed’) events have an impact on aggregate economic development and individual business opportunities, but also demonstrates the relative merit of precautionary and preventive institutions. For example, strong healthcare-systems and benevolent unemployment-insurance substantially increase the resilience of societies via unforeseen risks and crisis. In such contexts, the subjective valuation of public assets often changes drastically: in Austria, my home country, free resources in hospitals had been chastisized as an inefficient and superfluous waste of resources for decades. Now they are praised as an invaluable resource to come to grips with the current situation and keep the death toll low.
Continuing this line of thought we can speculate about the relative merits (and doability) of restarting an economy in lockdown. Many frame this as a ‘classical economic trade-off’ between lockdown-costs and impact of the pandemic and, I presume, some would even tend to draw an indifference curve and a budget constraint for that problem (as I, with some pain, observed here). Here is the short note: Please do not do this. It is much more wrong than when you usually do it with Pepsi & Pizza, cigarettes and beer or whatever your favoriate example shall be. Actually, it illustrates how standard economic analysis tends to obfuscate core aspects of analyzed problems. Putting this trade-off in a standard framework overlooks many essential aspects (e.g., that every life saved is an economic benefit and, hence, there is complementarity), insinuates that aggregation of preferences is trivial (although people are rather heterogenous & the shock quite asymmetric), comes with implicit value judgements (drawing the graph implies you see no role for virtue-ethics here, drawing the line means you just attached a price tag for a human life…) and is conceptually fallacious as the budget constraint is either not immovable (from an aggregate view) or irrelevant (as some budgets will run out sooner than others due to pace heterogeneity).
For another, it is quite interesting for me to observe the current experiment in de-growth, which not only sharply illustrates how such a fundamental change, if happening unregulated, burdens economically weaker groups and lower income strata, but also provides some intuition on the relative decoupling of financial markets (already ‘back on trend’ after a first sharp fall) and the real economy (with outlooks becoming more devastating every week).
More thoughts could be added on which policy-measures could make societies more resilient in such contexts (I would be in favor of wide-spread moratoria for debt- and rent-payments as a kind of emergency-measure to increase resilience in pandemics) or on whether it is possible to somehow sustain the massive reduction in carbon emissions and waste that we are currently visiting, but I have run out of space and my students are eagerly waiting for me to produce their next video lecture ;-) So I will close at this point.
Many thanks and all the best,
Jakob
PS: In my last editorial I announced that the annual EAEPE conference will be postponed. This was incorrect: as you can see below the conference will take place online instead.