How do we act effectively when there is so much that we simply do not know about what lies ahead? This is the challenge that policymakers face today on two very different fronts: public health and the economy. There is so much that public health officials don’t yet know about COVID-19, but they have to act nonetheless. As the current economic crisis deepens, economic policymakers must also take steps while facing huge uncertainty about what the consequences will be.
While this double dilemma is alarming, the comparison between these two challenges is also instructive.
I spend a lot of my time studying how economic ideas and expertise work, particularly in the context of crises. As I have been watching the current public health crisis unfold, day by day and hour by hour, I have been struck by the parallels and differences in how economic and public health policymakers deal with what they know and, more importantly, what they don’t know.
It turns out that there are some common takeaways for how to develop policy—and communicate about it—in the context of extreme uncertainty.
1. Wishful thinking and denial are dangerous
In both public health and economic cases, we can see the both the temptation and the danger of engaging in wishful thinking and denial. Although Donald Trump is the most obvious and egregious example of this kind of willful ignorance, he is not alone. Just look at the UK government’s extremely optimistic (but short-lived) embrace of the theory of “herd immunity” as a way of coping with the pandemic without having to pay the social and economic cost of social distancing.
Economic policymakers aren’t immune either to the temptations of willful ignorance. We also saw a lot of wishful thinking and denial about the huge economic risks being taken in the early 2000s, which led to under-regulation and helped precipitate the 2008 financial crisis. Today, we need our policymakers to avoid wishful thinking about how bad things could easily get, and take dramatic and decisive steps to support the economy.
2. Policymakers need to find ways of admitting what they don’t know
If you pay attention to reputable news outlets and the quickly growing number of scientific papers being published on COVID-19, what you discover is a frank and evolving discussion of what is and isn’t known about the virus and the best way to respond. News sites provide updates on both what we do know so far and what we don’t know yet. In a public health crisis, scientists and policymakers alike are willing to both admit their ignorance and build it into their response.
When it comes to economic crises, things tend to work differently. Most economists have very definite ideas about how the economy works and how to fix it when it’s ailing. In recent decades, many economists have become convinced that the way to make the economy work best is imposing simple rules—monetary rules for central banks and fiscal rules for government. Added to that is the belief that for a policy to work it must be credible—which means sticking to your guns in following the rules, come what may.
Of course, during the 2008 economic crisis, policymakers were forced to break the rules in their response. Even the most orthodox of economists (usually) become pragmatists in a crisis. Yet within a couple of years, policymakers treated this response as an exception and have sought to return to “normal” ever since then (good luck with that).
In theory, a central banker or finance minister isn’t allowed to say “I don’t know” for fear of markets’ panicked reaction. Yet, in practice, central bankers like our own Governor, Stephen Poloz, have admitted (long before this current crisis) that they are often confronted by extreme uncertainty. We need economic policymakers to take a page from the world of public health and find better ways of communicating both what they know and what they don’t know today.
3. We need a flexible and contextual response
Much contemporary economic thinking assumes that the basic rules governing economic behaviour never change. This is a recipe for rigidity, not resilience. It ignores the fact economic dynamics are always social and historical. They depend on how people act, which changes over time. What works in response to one crisis, or in one national context, may not work in another.
In the public health debate there is a much greater awareness of the fact that the effectiveness of a given policy response depends on how people respond. Because the coronavirus’s spread and mortality rate also depend partly on how we react to it, answers to key questions about how to respond have to be contextual and evolving.
Although it’s scary to admit our ignorance, it also turns out that it’s vital—whether we’re talking about the novel coronavirus or its effects on our economy today.
This post was original published on the CIPS Blog on March 25, 2020.