Reviewer on economic recovery: removing all restrictions would sadly end

Previously it was thought that before long-term damage was done, governments could lift restrictions and restart their economies. Production would quickly return to previous levels. So the recovery path would have been V-shaped, not U-shaped, and certainly not L-shaped.

But now that is unlikely. Some countries have begun to ease restrictions and allow some companies to resume operations. Others are preparing. But they all move carefully. Everyone understands that even very strict controls only delayed the appearance of new infections, but did not stop them at all.

If it is softened too much, new waves may occur, perhaps even heavier than the first, and then you will have to quarantine again. Governments are advised to apply some restrictions indefinitely until a vaccine is developed and widely available.

The problem is not only that restrictions will be maintained, but also that people will adapt to prolonged uncertainty. The business is afraid to resume normal operations, and consumers will be in no rush to return to past costs, as if Covid-19 had not existed. As long as people are afraid of the disease or what is being done to put it down, they will not behave differently without receiving instructions. (Berlin has just opened its stores after five weeks of quarantine. The business is not yet thriving.)

Form V thinking seems dated, but it continues to underpin current economic policy. The idea was to match the suffocating temporary constraints with mass temporary Fiscal and monetary support. The increase in demand when supply decreases does not represent an inflation risk, since the crisis will end soon and supply will return to normal. For the same reason, there is no need to worry about aggressive fiscal expansion leading to excessive debt accumulation.

As the recession continues, those fears will not go away. Obviously, the most pressing problem (especially in Europe) is too little (rather than too much) macroeconomic-political support. Even in the United States, despite the huge monetary and fiscal expansion, the initial impact of the pandemic was deflationary (suggesting that the impact of demand was even greater than the impact of supply).

However, this may change if the slowdown does not end quickly. Financial markets could start to rebel if month after month, quarter after quarter they have to sustain aggressive fiscal expansion. New economic and financial gaps will emerge. The longer things last, the more likely it is that supply and demand shocks will reinforce each other.

So where do you look for the answer? Simply removing all restrictions would really end sadly. There will almost certainly be new and bigger waves of infections, far more deaths, more and more anxiety, and new measures to stifle the economy.

It would make more sense to relax the constraints gradually and gradually, with close monitoring of the results.

The V-shaped theory of recovery in part means a sudden economic response to an equally sudden political decision. Either the government is doing enough to overcome the disease (in which case the economy is recovering rapidly) or not. However, the question arises of how to handle a public health emergency that does not end there in any way. If we do not return to normal in the short and medium term, and if a long-term recession will cause great harm to people’s lives, a balance will have to be struck between stopping the spread of new infections and allowing the economy to falter.

How to implement this commitment? So far, it’s hard to say that data is missing. But while social media tribes insist on “prioritizing life” and “freeing people,” remember one thing: it is beneficial for different governments (and levels of governments) to experiment with different approaches, because it helps extract information. what do you need.

Have countries reduced the rate of virus transmission enough to ease restrictions without causing the spread of infections? What restrictions make the transmission of the virus more difficult, given its economic costs? And another strangely forgotten question: to what extent does the appropriate degree of restriction depend on local circumstances? Let’s say it seems obvious that restrictions in densely populated areas like New York should be stricter than in cities that are not as densely populated, let alone suburban and rural areas where people are not as crowded, how strict?

Without a vaccine or intervention from nature, this crisis will not end so quickly. To manage it smarter, it’s important to recognize how little we know about it, even now. The only way to improve politics is to watch and learn.