THAT 1970S FEELING For starters, the next recession is likely to emanate from China, and indeed may already
be underway. China is a highly leveraged economy... It cannot afford a sustained pause today any more than fast-growing 1980s Japan could. People, businesses, and municipalities need funds to pay back their outsized debts. Sharply adverse demographics, a narrowing scope for technological catch-up, and a huge glut of housing from recurrent stimulus programs – not to mention an increasingly centralized decision-making process – already presage significantly slower growth for China in the next decade. Moreover, unlike the two previous global recessions this century, the new coronavirus disease (COVID-19) implies a supply shock as well as a demand shock. Indeed, one has to go back to the oil-supply shocks of the mid-1970s to find one as large. Yes, fear of contagion will hit demand for airlines and global tourism, and precautionary savings will rise. But when tens of millions of people can’t go to work (either because of a lockdown or out of fear), global value chains break down, borders are blocked, and world trade shrinks because of countries’ distrust of one another’s health statistics, the supply side suffers at least as much. Affected countries will, and should, engage in massive deficit spending to shore up their health systems and prop up their economies. The point of saving for a rainy day is to spend when it rains, and preparing for pandemics, wars, climate crises, and other out-of-the-box events is precisely why open-ended deficit spending during booms is dangerous. But policymakers – and altogether, too many
economic commentators – fail to grasp how the supply component may make the next global recession unlike the last two. In contrast to recessions driven mainly by a demand shortfall, the challenge posed by a supply-side-driven downturn is that it can result in sharp declines in production and widespread bottlenecks. In that case, generalized shortages – something that some countries have not seen since the gas lines of the 1970s – could ultimately push inflation up, not down. Admittedly, the initial conditions for containing generalized inflation today are extraordinarily favorable. But, given that four decades of globalization has almost certainly been the main factor underlying low inflation, a sustained retreat behind national borders owing to a COVID-19 pandemic (or even lasting fear of pandemic), on top of rising trade frictions, is a recipe for the return of upward price pressures. In this scenario, rising inflation could prop up interest rates and challenge both monetary and fiscal policymakers. why open-ended deficit spending during booms is dangerous. The point of saving for a rainy day is to spend when it rains, and preparing for pandemics, wars, climate crises, and other out-of- the-box events is precisely
44
March 2020
Made with FlippingBook - Online Brochure Maker