Ken Rogoff - a very long slow recovery at best
Lingering scars of virus generation may haunt world economy by Ken Rogoff
Anyone with a parent or grandparent who lived through the Great Depression knows the frugal habits such an experience can leave behind.
The next few months will tell us a lot about the shape of the coming global recovery. Despite ebullient sharemarkets, uncertainty about COVID-19 remains pervasive. Regardless of the pandemic’s course, therefore, the world’s struggle with the virus so far is likely to affect growth, employment, and politics for a very long time.
But in a more pessimistic scenario, other crises – a sharp uptick in US-China trade frictions (https://www.afr.com/world/asia/how-the-us-came-to-ape-china-s-industrial-policy-20200816-p55m5b ) , a cyber terrorist attack or cyber war ( https://www.afr.com/politics/federal/cyber-attacks-on-the-rise-and-getting-more-sophisticated-20200903-p55ryk ) , a climate-related natural catastrophe (https://www.afr.com/policy/energy-and-climate/pandemic-is-no-excuse-to-ignore-climate-risk-20200724-p55f9w ) , or a massive earthquake – could occur before this one ends.
Moreover, even the optimistic scenario does not necessarily imply a rapid return to end-2019 income levels. The post-pandemic expansion – if there is one – may take years to meet the modern definition of recovery (a return to initial per capita income) in the aftermath of a deep recession.
Although the pandemic has underscored the huge problem of inequality in advanced economies, poor countries are suffering far more. Many emerging markets and developing economies will likely be struggling with COVID-19 for years to come, and face the real possibility of a lost decade of development. After all, few governments have the capacity to provide emergency fiscal support on the scale that the United States, Europe, and Japan are doing. Prolonged recessions in lower-income countries will likely lead to an epidemic of debt and inflation crises.
But the COVID-19 crisis could leave deep and lasting scars in advanced economies, too. Businesses may be more skittish about investing and hiring, owing to concerns about a public-health relapse or another pandemic, not to mention the huge political volatility that the crisis has amplified.
Although there may be an initial “catch-up” surge of consumer spending in advanced economies, in the longer run consumers are likely to save more. In an interesting paper presented at the recent annual Jackson Hole symposium, Julian Kozlowski, Laura Veldkamp, and Venky Venkateswaran ( https://www.bloomberg.com/news/articles/2020-08-27/pandemic-could-leave-lasting-scar-on-economy-jackson-hole-paper ) argue that the pandemic’s cumulative long-term costs for the US economy are likely to be an order of magnitude greater than the short-term effects, partly because of a long-lasting heightened sense of unease among the public.
Their analysis, which I discussed at the symposium, is especially convincing with respect to consumers. Anyone with a parent or grandparent who lived through the Great Depression of the 1930s knows that this scarring experience affected their lifelong behaviour.
In addition to its direct impact on investment and hiring, COVID-19 will impose longer-term productivity costs. By the time the pandemic is over, a generation of children, particularly those from lower-income households, will in effect have lost a year of schooling. Young adults who struggle to find their first job in a still moribund labour market can expect to earn less in the future than they might otherwise have done. (BB comment: This is not true of China where the economy and activity has returned to something approximating something like Pre-COVID19 levels FAR quicker than what has happened in the West).
The global economy is now at a fork in the road. Policymakers’ most important task is to try to reduce the massive lingering uncertainty while continuing to provide emergency relief to the hardest-hit individuals and economic sectors. But the insecurity fuelled by COVID-19 is likely to weigh on the global economy long after the worst is in the past.