COVID-19, Economic exceptionalism

We are entering another state of exception – but this time it’s economic too

From http://www.koco.com

     In the last few weeks, governments all over the world have been declaring states of emergency to deal with the coronavirus. Given the remarkable powers that governments at all levels have been acquiring through these measures, it’s not surprising then that both state leaders and commentators are talking about this moment being akin to a state of war.

     Although this comparison is powerful—and in many ways correct—it only tells part of the story. Yes, governments are invoking emergency powers and imposing a state of exception of the kind that we usually see in wartime. Yet, if the goal is to save the lives of citizens against and attack, as it is during wartime, then why would government leaders like British Prime Minister, Boris Johnson, have delayed social distancing measures so long for fear of their economic consequences? And why does President Trump continue to flirt with the idea of opening the economy back quickly in some parts of the country in spite of the likely impact on the number of COVID-related deaths?

     The answer to this puzzle lies in the fact that the kind of exceptionalist policies that we are seeing being put into place are, for some leaders at least, as much about protecting the economy as it they are about ensuring the public’s security.

     Although we often forget it in calmer times (remember those?), liberal democratic governments do reserve for themselves the power impose a state of exception in times of crisis, such as a war. Such exceptionalist measures are designed to temporarily suspend normal liberal democratic rights and processes in order to respond to a supreme threat to the state and its people. The last time we saw this occurring on a broad basis was of course after 9/11, although many have also drawn parallels to the Second World War.

     In many ways, the current emergency declarations and measures do bear important resemblances to these wartime measures. Governments have acted with extraordinary speed, rushing legislation through or using executive powers to give themselves the flexibility to act to fight the virus’ spread. They have partly sealed off their borders, turning inwards and actively seeking to manage the supply of essential medical equipment. We are also beginning to see the adoption of subtler, more technocratic measures that are closer to those we saw after 9/11, like the use of data surveillance in South Korea and other countries to map, track and control populations deemed a danger.

     All of these exceptionalist measures suspend or constrain normal democratic processes and liberal civil rights in the same of the security of the state and its people.

     Yet there are also several key ways in which the exceptional measures being proposed and introduced today are different from these war-time emergency policies. This time around, governments are simultaneously seeking to secure their population’s health against attack while also protecting their economy from ruin.

     Governments have historically invoked states of exception not only to fight wars but also to tackle economic crises. Confronted by the ravages of the Great Depression, President Roosevelt famously argued in his inaugural address in 1933 that he was willing to use “broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.” During the 2008 global financial crisis, political and economic leaders again called for exceptionalist measures ranging from bailouts to stimulus measures in order to respond to what they described as an economic emergency.

     This time around, governments are facing two existential threats at the same time—a public health threat to their citizen’s lives which can only be treated through a series of measures that themselves pose an existential threat to the economy. The Second World War’s mobilization of a wartime economy helped to rescue western states from the prolonged crisis of the Great Depression. This time around, mobilizing against the health threat means partly suspending the economy, not energizing it. These two sets of emergency responses are necessarily in tension with one another.

     While political leaders’ willingness to sacrifice some individuals’ lives for the sake of the economy may strike us as a fresh horror, it actually has a long history. Over a decade ago, I wrote an article entitled “Why the Economy is Often the Exception to Politics as Usual,” in which I suggested that neoliberal international institutions, like the International Monetary Fund and the World Bank, had proven willing to suspend the political rights and freedoms of the citizens of poorer countries in the name of re-establishing a sound economy. In these countries, the supreme goal of economic stability, not political security, was treated as a sufficient ground for exceptionalist measures, even if the consequences were often extreme poverty and deprivation—and yes, very likely, death—or some.

     In the Global North, while we remain on average the lucky ones, these recent twin crises have revealed just how vulnerable we have made some of our population in our pursuit of a mythic “sound economy”— including those in the gig economy, without secure employment, and working in essential but unrecognized jobs. These crises have also shown just how willing some political leaders are to require the ultimate sacrifice of some of our citizens in the name of that same “sound economy.”

    Responding to these twin public health and economic crises, while also ensuring that we come out the end of this process in something that still resembles a democracy, will not be easy. What’s clear, however, is that those who insist that that the economy’s survival trumps the right of its people to life are mobilizing a particularly vicious form of economic exceptionalism—one that must be recognized and resisted.

This post was originally published on the SPERI blog on April 17, 2020.

COVID-19, Political economy, Varieties of ignorance

Why it’s important to acknowledge what we don’t know in a crisis

Why it’s Important to Acknowledge What We Don’t Know in a Crisis
from http://www.cips-cepi.ca

      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.

Banking, Canada, COVID-19

Can the Bank of Canada come to the rescue again?

Bank of Canada headquarters.
Bank of Canada headquarters – from globalnews.ca

Like central banks around the world, the Bank of Canada has cut its target interest rate in order to tackle the economic effects of the novel coronavirus.

Does that mean that central bankers are once again our knights in shining armor coming to save the day in an economic crunch? Or is this finally the right time to recognize that we can’t keep counting on the Bank of Canada to do all of the economic heavy lifting in a crisis?

This rate cut does signal the central bank’s willingness to do what it can to counteract the economic consequences of the virus’s spread. Yet there is only so much that lower rates can do. They can make it easier for people and businesses to borrow and they will reduce payments on a flexible rate mortgage. But low rates won’t help companies continue to make the products that rely on parts made in hard-hit countries like China and South Korea, and they won’t help people afford to take time off of work if they get sick.

While it isn’t yet clear yet how serious the economic effects of the virus will be, this is a good time to take stock of what tools we have to respond to the next economic crisis.

Ever since 2008 financial crisis, the Canadian government, like governments around the world, has relied an awful lot on the super-powers of the central bank. G7 politicians decided that they didn’t want to have to keep using fiscal policy to stimulate the economy and started treating central banks like “The Only Game in Town,” as former Bank of England Deputy-Governor, Paul Tucker, put it.

Yet the last decade has made it clear that there are very real drawbacks to assuming that central banks can always save the day.

The Bank of Canada has had to keep interest rates very low for a very long time to keep the economy going. While this has worked, to a point, it has had perverse consequences. Canadians took advantage of the low interest rates to go on a spending spree—building up debts worth as much as 177% of their annual income. This borrowing binge and the housing bubble that has gone with it has limited the Bank of Canada’s options moving forwards: by cutting rates, they run the risk of pushing debt even higher, but by increasing rates they could precipitate a crisis for the many families who can barely make their interest payments.

Given these limits, one option for the Bank of Canada would be to pursue unconventional monetary policy. In doing so it would be following the lead of the US, Japanese, British and European central banks that have dabbled in more esoteric monetary policies after the 2008 crisis, including “quantitative easing,” which has central banks creating new money to buy up government and private sector bonds and securities.

While these unconventional tools may be useful and even necessary, they do produce winners and losers. Top-down strategies like quantitative easing have actively contributed to growing inequality (by increasing the value assets that are mostly held by the wealthy), and has accelerated the climate crisis by disproportionately investing in carbon-intensive firms. On the other hand, bottom-up strategies, like “helicopter money,” where the central bank distributes new money to individuals, have been overlooked to date.

Politicians had hoped in the last crisis that they could avoid making difficult political decisions by passing the buck to central bankers who are insulated from the democratic process. Unfortunately, this past decade has taught us that there is no such thing as an apolitical solution to an economic crisis. Whatever role the Bank of Canada plays, it needs to be guided by democratic—and not just technocratic—priorities.

We do need central banks to play their part now—and we will need them again in the future. But we also need to make sure political leaders stop waiting for their knight in shining armor to come to the rescue and take responsibility for their own role in responding to economic shocks.

This blog post was original published as an opinion piece in the Ottawa Citizen on March 11.