Well-argued and thought-provoking as usual by @dsmitheconomics but for once I disagree with the conclusion (1/8 or so)

https://www.thetimes.co.uk/article/the-rules-of-a-true-depression-are-being-rewritten-like-everything-else-bq9z965gd

I think this is too pessimistic.

Virus won't significantly affect physical, human or intellectual capital. As a consequence, most conventional models would predict little/no effect on potential output. That is, sharp bounce-back to “trend” should be both possible & likely (2/8)

David right to describe channels leading to permanent damage. First, firm-specific capital – some firms will indeed go under. But most are likely to be relatively small and in sectors (retail/tourism/hospitality) where turnover already high (& partly random in normal times) (3/8)

2nd: unemployment scarring effects. Again, yes – but UK labour market remarkably good at creating new jobs even in hard times. Policy errors – austerity and underinvestment - post-2010 contributed to abysmal levels of productivity and real wage growth, but jobs came back (4/8)

So IMO if we get *macro* policy right we can avert most permanent damage. That may actually be more difficult than in 2010-12 when fiscal policy errors were obvious to most economists. (5/8)

This time round it’s unclear if the problem, after lockdown, will be excess demand/inflation or excess supply/deflation. Good arguments both ways (see @ojblanchard1 on this) But government can and should adapt policy as we go along. (6/8)

Optimism contingent on phased exit from lockdown reasonably soon . Depth of peak-to-trough output fall is largely baked in. But the *permanent* damage is likely to be a strongly non-linear function of length of shutdown (6 months *much* more than twice as bad as 3 months) (7/8)

I’m aware I’m on the optimistic end of the spectrum here. See https://johnhcochrane.blogspot.com/2020/04/whack-mole-long-run-virus.html for an even more pessimistic take. Let’s hope I’m right. (8/8) ENDS