The post-pandemic economy

"(…) Pharaoh dreamed that he was standing by the Nile River, when all of a sudden seven healthy, plump cows emerged from the Nile to graze in the grass that grew in the reeds that lined the bank. Right after that, seven more cows came up out of the Nile. Ugly and gaunt, they stood next to the other cows on the bank of the Nile River. But all of a sudden, they ate up the seven healthy, plump cows!" (Genesis 41, 1-4)

It's not possible yet to assess the economic cost of the pandemic: it depends on how long the confinement lasts, on the measures taken by governments to maintain or cancel non-essential economic activities, and on the resilience of businesses and self-employed people. Estimates of the fall in GDP are stark and predict a bleak scenario for the European economy.

But, beyond the economic consequences, the coronavirus crisis reminds us again of the fragility of human life, despite the optimistic predictions of the historian Yuval Noah Harari in Homo Deus, that humanity had already banished hunger, war and the plague. We don't know if this epidemic will be followed by others; if so, we will have to learn to live with the idea that a microscopic organism can make the capitalist system shake all over the world.

As a consequence of the coronavirus, the drop-in production and consumption will have a significant impact on the number of jobs, family income and economic recovery capacity in Spain, Europe and worldwide. At the moment, governments are moving between either confining everyone, which would be the best solution in terms of health, but involves serious damage to the economy, or maintaining economic activity at the price of a probable health collapse and, therefore, a high cost in terms of human lives. The dilemma is: "Either life or the economy".

Beyond the management of the health crisis, all governments are discussing shock measures to deal with the aftermath. As the objective is to recover economic activity as soon as possible, the proposals revolve around maintaining the liquidity of companies and workers. To this end, various fiscal measures are proposed, such as a reduction in some taxes and a moratorium on the payment of certain taxes; and monetary measures, with the opening of State-guaranteed credit lines to facilitate the financing of working capital.

In this context, the European Central Bank has given birth to a plan to purchase 750 billion euros in public and private assets. With these funds, European governments are assured financing for their stimulus plans, but some even propose that they be shared out among the public, in an almost literal application of the concept of "helicopter money". Some European governments have called for the issuance of Eurobonds, but in the face of the rejection of other EU countries, this option has been set aside (at least for the time being).

Everyone can relate these measures to the basic proposals of John Maynard Keynes, the economist who inspired most of Europe's post-World War II social democratic policies. With them, Europe moved from the misery and devastation of 1945 to widespread prosperity and welfare in 1965. It should be borne in mind that Keynes wasn't proposing to systematically increase public spending and money supply. What he was proposing was a counter-cyclical policy: giving governments and central banks the capacity to boost the economy with expansionary measures when the situation required it, and then reversing it when the economy grew on its own.

Good economic policy is not about getting into debt, it' s about having the resources to do public procurement, to help businesses and families in times of crisis and to always guarantee public services. If this can be achieved by financing the public sector with taxes, so much the better. It’s only when economic activity falls, and with it, public revenue, that public deficit and indebtedness are inevitable.

The problem is that this crisis has caught most countries in Europe with public debt already exceeding 80% of GDP and with the European Central Bank issuing money since 2008 to finance it, which reduces the room for manoeuvre in the face of the current crisis.

Keynes said it ninety years ago; Joseph, son of Jacob and an Israelite slave who ended up advising the Pharaoh of Egypt as an interpreter of dreams said it millennia ago: after seven years of fat cows, usually seven of thin cows come. The task of the competent authority (be it a pharaoh or a democratic government) is to fill the pantry during the first seven years in order to mitigate the effects of the crisis when the lean cows arrive.

This idea is very much internalized by Nordic politicians and economists, and of course by the Bundesbank. Their Lutheran tradition helps them to respect austerity as a good habit, according to Weberian theory. Moreover, the memory of the nightmare of hyperinflation experienced by their parents and grandparents after the two world wars keeps them vigilant against excessively lax monetary policies. But, sometimes, the European institutions impose the thesis of the countries of the south, less fiscally disciplined, and in favour of prolonging the expansive measures of the European Central Bank indefinitely.

Now, when we think of Keynes in the face of the huge economic downturn caused by the pandemic, it turns out that we have little scope for applying his recipes. That's the problem with remembering Santa Barbara only when it thunders. Welcome to government aid, helicopter money and Eurobonds. But let's not forget that everything will have to be paid back and it is not fair to leave the debt to our children. Global warming is a legacy enough.

Enric Casulleras Ambrós is Professor at the Department of Economics and Business, University of Vic - Central University of Catalonia. Enric Casulleras Ambrós doesn't receive a salary, nor does he do consulting work, nor does he own shares, nor does he receive funding from any company or organization that could benefit from this article, and he has declared that he has no relevant links beyond the academic position cited