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Priorities for the COVID-19 Economy

With hopes of a sharp rebound from the pandemic-induced recession quickly fading, policymakers should pause and take stock of what it will take to achieve a sustained recovery. The most urgent policy priorities have been obvious since the beginning, but they will require hard choices and a show of political will.

NEW YORK – Although it seems like ancient history, it hasn’t been that long since economies around the world began to close down in response to the COVID-19 pandemic. Early in the crisis, most people anticipated a quick V-shaped recovery, on the assumption that the economy merely needed a short timeout. After two months of tender loving care and heaps of money, it would pick up where it left off.

It was an appealing idea. But now it is July, and a V-shaped recovery is probably a fantasy. The post-pandemic economy is likely to be anemic, not just in countries that have failed to manage the pandemic (namely, the United States), but even in those that have acquitted themselves well. The International Monetary Fund projects that by the end of 2021, the global economy will be barely larger than it was at the end of 2019, and that the US and European economies will still be about 4% smaller.

The current economic outlook can be viewed on two levels. Macroeconomics tells us that spending will fall, owing to households’ and firms’ weakened balance sheets, a rash of bankruptcies that will destroy organizational and informational capital, and strong precautionary behavior induced by uncertainty about the course of the pandemic and the policy responses to it. At the same time, microeconomics tells us that the virus acts like a tax on activities involving close human contact. As such, it will continue to drive large changes in consumption and production patterns, which in turn will bring about a broader structural transformation.

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