Sunday, April 5, 2020

Renaissance bonds and economic ideas

There is no shortage of articles by economists trying to make sense of the current crisis and making proposals to address the economic and social consequences of the COVID-19 pandemic. Although a few of them rush to make proposals that only look at the advantages of the proposed solutions, most authors are aware of the existing trade-offs, like for example LSE economist Ricardo Reis. Emergencies do not eliminate dilemmas, if anything they make them more acute.
There is a general consensus that stopping the economy is necessary now to save lives (although some have been slow to reach the conclusion), and this will require first emergency funds to treat the ill, and second funds to support the incomes of those most hurt by the sudden break of economic flows. In a third stage, it will be necessary to revive the economy with demand side stabilization policies (fiscal and monetary).
But some authors have gone beyond this, and have noted that exceptional supply side policies will be needed as well, because the usual market mechanisms will not be able to efficiently deal in the short run with the necessary coordination to gradually revive the economy with those that are immune or not ill. In the CEPR-Vox portal, there are interesting articles in this direction by Baldwin, Dewatripont and Ichino. The need for some sort of careful and sophisticated planning based on an intensive use of technology is also emphasized by Weil and Sethy in this article. Of course the use of immunity tests will have to be balanced with the associated concerns for privacy and the unintended effects on the incentives for some individuals to get infected.
If European mechanisms and global coordination are needed in the aggregate demand mechanisms and to support those regions most affected by the pandemic (these regions as we are seeing may be different over time), they will also be needed in this planning stage to gradually revive the economy in a sort of large scale public-private partnership. This has the political pre-requisite of trying to defeat the national-populists, Trumps and Bolsonaros that still believe that this is a national war, or otherwise isolate them with experts and both lower and higher level governments.
This need to think about supply policies should not make us forget about the urgency of the fiscal problems. That is why I have signed (together with many others) an Open letter which included this paragraph:
"In line with other appeals that we also subscribe to, we propose issuing Eurobonds, that we suggest calling “European Renaissance Bonds”. These bonds could be backed by some common fiscal capacity or other financial instruments created ad-hoc, considering that the fear of moral hazard cannot play any role under the present circumstances. Moreover, let us stress that this new common debt will not imply any mutualisation of existing sovereign debts but will refer only to the expenses that are needed to face the huge common shock hitting all EU countries. If a collective political determination and consensus emerges, no technical problem is unsurmountable." Although high levels of debt will be needed, some authors have already proposed to start thinking about how to raise taxes to pay the final bill. Landais, Saez and Zucman, for example, have proposed  a Progressive Wealth Tax, which is not incompatible with a tax on the extraordinary profits that a few firms will make with the crisis.

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