🔒 WORLDVIEW: What can we do about coronavirus “Greater Depression”?

More than 2 billion people – including the entire population of India – are in lockdown. This is an unprecedented situation. Never before has the world so quickly and dramatically put itself on ice. Stores are closed, factories are idle, and hundreds of millions of jobs are gone.

Hopefully, this is temporary. In China, even the city of Wuhan is slowly reopening, and activity in Hubei province is picking up. Many economists believe that the downturn, while painful, will be temporary. The consensus seems to be a 12-14% decline in global GDP in the first and second quarters, with things picking up quickly once the lockdowns are lifted mid-year.

But there is a very real danger that the coronavirus crunch is anything but temporary. As lockdowns stretch into weeks, and perhaps months, the economic damage could easily become permanent.
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Famously gloomy and negative economist Nouriel Roubini has warned that the global shutdown could easily become a “Greater Depression” – an economic downturn even deeper and more painful than the Great Depression of the 1930s. And many are indeed predicting economic pain far greater than that experienced during the Great Depression – 30% unemployment in the US, say, or a 50% drop in US GDP. The situation will be as bad or worse in the rest of the world.

And here’s the really scary part: We don’t know how to deal with this type of economic crisis.

Consider the 2008 crisis. The problem was caused by financial market shenanigans. Bad bets in US mortgage markets sparked a global credit crunch, which derailed financial markets. This had a knock-on effect on businesses and households. The credit weirdness of that period is still with us – the world has never been more indebted than it is today. But ultimately, it was a financial shock and financial solutions patched it up.

But what’s happening now has very little to do with financial markets. In 2008, there were as many workers and factories and businesses after the Lehman collapse as there were before (well, except for Lehman, I suppose). The productive capacity of the economy was intact, it was just the lubricating flow of money that went awry. Ultimately, this hurt businesses and workers, but the roots of the problem were financial.

This is different. Productive capacity is down because workers have been asked – in many cases, forced – to withdraw their labour from the market by staying at home and businesses have been asked or forced to stop producing, to close their doors and stop making and selling goods and services. We are not experiencing a financial shock that ultimately leads to dislocation in the real economy. The real economy is the thing that is in shock.

This means that a lot of governments don’t really know what to do. In a financial crisis, the solution is to support the financial system, to get the lifeblood of money flowing again. This happened in 2008 and the economy limped back to life. (Of course, many, many economists argue that governments didn’t do nearly enough to help the actual households who were the real victims of the crisis. Banks were bailed out, but millions of people lost their homes. This is why the post-crisis recovery has been so disappointing for so long. But it must be said, there was a recovery.)

This time, lower interest rates aren’t going to help. The problem isn’t that businesses cannot borrow. It’s that businesses cannot operate – they have no workers and people are not allowed to come and buy things. Making loans easier to get is great, but it doesn’t really solve the problem.

Some economists and politicians are arguing that what we need is a wartime response. During World War II, governments took on a massive role in the economy, spending enormous sums to build arms and armaments, pay soldiers, and mobilize the wartime effort. The UK ran a budget deficit of 20% of GDP during that period.

Many historians note that the Great Depression didn’t actually end in the US until the massive government spending that accompanied WW2. While the famous New Deal helped get things on track, it was the government spending 20-30% of GDP a year to fight the war that actually ended mass unemployment. And the enormous investments made in infrastructure and manufacturing capacity at that time (and before, under the New Deal) paved the way for America’s huge post-war boom.

So far, governments have been acting cautiously. The world is a different place today than it was in the 1930s. Financial markets are much more complex and far more global. And it’s not clear how countries like South Africa can fruitfully apply the lessons of the Great Depression and World War 2. The SA economy is reliant on foreign capital flows and is constrained in many ways that wartime America was not.

But the bottom line is this: While the economy may – hopefully will – bounce back, it may not. There is a chance that we are about to enter a very scary time. And everyone – governments, businesses, households, and entrepreneurs – need to be thinking big and thinking boldly. Extraordinary times call for extraordinary measures and extraordinary national solidarity.