For An Effective Response To The Upcoming Crisis
Before analyzing the emergency plans that the global economy needs, we must remember that, as in the past, the prudence and responsibility of the civil society and businesses will help us to get out of this crisis.
In the face of an unprecedented crisis, we have to be realistic, responsible and cautious.
This is a supply shock added to a mandatory shutdown of the economy. As such, a serious response must be supply-side driven. It is ludicrous to try to stimulate demand with printed money and public spending in a forced lockdown where any extra demand will not drive supply up, even may drive it down.
A mandatory shutdown due to a supply shock is not solved with government spending or demand-side measures. Printing money and lowering rates help the already indebted and governments with already historic-low bond yields, deficits are already going to soar due to automatic stabilizers, so governments need to work on three things:
First, make sure that once there is a tested and approved vaccine, the production, distribution, and healthcare networks are going to be adequately prepared to respond to the population requirements.
Second, make sure that businesses don’t collapse due to working capital build in a domino of bankruptcies that leads to mass unemployment.
Third, eliminate all unnecessary spending to effectively use all fiscal space to mitigate the crisis effects and allow the economy to breathe and recover.
Governments that overspent in growth times, massively increased debt and ignored the pandemic risks only to then create a widespread lockdown cannot present themselves as the solution.
Small and medium enterprises do not need a government to incentivize demand, because this is not a demand problem, the shutdown is imposed by law due to a health epidemic that lawmakers preferred to ignore.
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