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There is a big pothole in the road up ahead and we need to stop looking in the rearview mirror if we want to avoid it. I’m talking about assuming that traditional anti-recession policies will work in the current downturn. 1/n
Our usual recession is caused by a demand shock. In 2008, bad financial market regulation froze markets and caused a US housing price crash. 2/n
That put a ton of mortgages underwater, and destroyed the personal wealth of millions of American consumers. It took years for them to rebuild their finances. 3/n
Gov’ts and Central Banks around the world responded in traditional ways. They drove down interest rates, flooded the economy with liquidity, and started spending like crazy. 4/n
It wasn’t perfect, but it worked. Within a few years, the global economy was chugging along again, albeit from a permanently lower starting point. 5/n
This time, however, we are facing a supply shock. Something we haven’t seen the likes of for almost 50 years, since the oil price jump in the 1970s. The pandemic has essentially made a whole lot our capital equipment less productive (and the workers who use it too). 6/n
Planes can’t fill middle seats, restaurants can only use half of their tables, parents are fearful of sending their kids to school or daycare. 7/n
Low interest rates and gov’t infrastructure spending won’t fix this. We need a new set of targeted policies to help us transition to the post-pandemic reality. 8/n
Owners of some capital will make major changes in how they operate. Other will take big losses and perhaps fail. Taxpayers can’t afford to shelter them all from the pandemic fallout. 9/n
Hopefully we won’t waste a lot of time and a ton of money on the old policies. We still have time recognize the pothole speeding towards us and to think about a new set of policy tools to help up transition to a fiscally-sustainable, post-pandemic world. n/n
