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The socioeconomics of pandemics policy and the Great Economic Mismatch

People are slowing turning their minds to what the recovery may look like. Economic policy is going to be vital – a resumption of the same growth-dependent approach will result in the same inequities. Here’s a perspective from the US, which has been ravaged more than most.


Dennis J. Snower writes:

In response to the COVID-19 pandemic, governments around the world have provided a massive fiscal and monetary stimulus. While this policy is welcome in the short run, it does not address the underlying problem in the medium and long run.

The reason is that the pandemic has not given rise to a generalised shortfall in aggregate demand. Rather, it has generated a Great Economic Mismatch, characterised by deficient demand for things requiring close physical interactions among people and deficient supply of things compatible with social distancing, where appropriate.

Expansive macroeconomic policy can stimulate aggregate demand, but when social distancing is enforced, it will not stimulate production and consumption whenever this demand is satisfied through physically interactive activities.

Readaptation policies needed

To overcome the Great Economic Mismatch, “readaptation policies” are called for. In the medium run, these policies promote a redirection of resources to activities compatible with social distancing; in the long run, these policies make economies more resilient to unforeseen shocks that generate a Great Economic Mismatch.

Once the pandemic is over, a more profound rethinking of decision-making—in public policy, business and civil society—is called for.

First, decisionmakers will need to supplement the current focus on economic efficiency with greater emphasis on economic resilience.

Focus on people’s prosocial motives

Second, economic policies and business strategies will need to focus less on incentives for selfish individuals and more on the mobilisation of people’s prosocial motives.

Finally, to encourage people around the world to cooperate globally in tackling global problems, policymakers at local, national and global levels will need to encourage people around the world to cooperate globally in tackling global problems, with the aid of two powerful tools that humans throughout history have used to coordinate their efforts: identity-shaping narratives and institutions of multi-level governance.

Governments caught off guard

Governments around the world have been caught off-guard by the COVID-19 pandemic. The rich countries have responded by seeking short-term protection of their citizens’ health and livelihoods. Whereas this response averted a major worldwide economic collapse, the medium- and long-term implications have not received much attention thus far, even though the longer term may be only weeks away. The nations of the world face grave dangers from the economic and social fallout that lies beyond our immediate planning horizon. It is not yet too late to avert these dangers, but time is running out fast.

The current rich-country policy responses are helpful in the immediate short run, but they are inadequate for the medium run. Vast swathes of the world economy have been closed down through the widespread social distancing regulations; at the same time, the demand for essentials, produced and consumed through physically distanced activities, has exploded.

Massive excess supply and excess demand

Over the medium run many countries face the prospect of massive excess supply alongside massive excess demand: for example, large inventories of face masks and medical gowns in some production centres, while doctors and nurses elsewhere treat COVID-19 patients without adequate protection; food rotting in the fields, while some urban inhabitants go hungry.

Unless this Great Economic Mismatch is tackled, the monetary and fiscal stimulus unleashed by the rich countries will turn out to be surprisingly ineffective. After all, the expansionary macroeconomic policies will give people access to the goods and services they need—medicine, food and lots more—only if these goods and services are produced.

But in the presence of the Great Economic Mismatch, more income does not guarantee more output. If output were not to rise adequately, then the macroeconomic stimulus would serve primarily to reduce the recession-driven downward pressure on prices. That would lead to economic and social disaster.

Free market forces by themselves are unlikely to surmount the Great Economic Mismatch in time—namely, by the time people spend their incomes to obtain products that have not yet been produced. On this account, “readaptation policies” will be called for.

Novel economic conditions

These are policies that induce people to readapt to the novel economic conditions created by the pandemic and that make economies more resilient to such shocks in the future.

In the medium run, these policies promote a redirection of resources towards production and consumption processes that are compatible with widespread social distancing.

In the long run, these policies comprise a new economic strategy that plays a role analogous to Keynesian automatic stabilisers. But whereas the latter stabilise business cycles in response to fluctuations in aggregate demand, the readaptation policies provide automatic incentives to recover economically from unforeseen shocks that cause a Great Economic Mismatch.

The readaptation strategy also enables us to move from short-run crisis measures (such as the massive grants and loans in response to the pandemic) to a medium- to long-term policy framework in which the Mismatch automatically generates mismatch-reducing incentives.

In the long run, we will need to address fundamental problems that can be overcome only by rethinking some fundamental principles of economics, business, and public policy thinking. I will  focus on three such fundamental problems.

Radical uncertainty

The first concerns the current emphasis on measuring performance in terms of efficiency, that is, choosing the most effective means to achieve predetermined ends under conditions of risk (unknown events with known probabilities). When we face radical uncertainty (unknown events with unknown probabilities)—such as from a new sort of pandemic—we cannot identify the most effective means for achieving predetermined ends and then we should strive for resilience. Thus economic and business performance needs to be assessed in terms of both efficiency and resilience.

A second fundamental problem is a widespread belief that we can overcome future pandemics—as well as other global shocks such as climate change—through prevailing policy and business models predicated on the assumption that people are selfish, lazy, materialistic, and rational. In the future, we will need to develop new models that we show us how to mobilise people’s prosocial motives.

A final fundamental problem is that the rising tide of nationalism is dramatically inappropriate for addressing pandemics and other global problems. In order to extend people’s willingness to cooperate across national borders, we will need to develop new identity-shaping narratives and institutions of multilevel governance. In doing so, we will need to reach beyond our current ideological toolboxes, covering the right-wing versus left-wing spectrum. The corresponding portfolio of policy approaches ranges from laisser-faire (individualistic free market activity) to centralised planning (top-down government intervention). These approaches are utterly inadequate for fighting pandemics, which require strong reliance both on public compliance and international coordination. The time has come to generate new political movements that are compatible with multilevel governance.

Dennis J. Snower is a nonresident senior fellow in the Global Economy and Development program at the Brookings Institution and senior professor of macroeconomics and sustainability at the Hertie School, Berlin. He is also president of the Global Solutions Initiative, which provides policy advice to the G-20; a senior research fellow of the Blavatnik School of Governance, Oxford University; and a visiting professor at University College, London.

This is an edited extract from the Brookings Institution’s Working Paper #138, Global Economy and Development, and published with permission. The full paper is available here.

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#HealthEquity16
#HealthMatters
#IHMayDay (all years)
#IHMayDay 2014
#IHMayDay15
#IHMayday16
#IHMayDay17
#IHMayDay18
#LoveRural 2014
Croakey Conference News Service 2013 – 2019
2013 conferences
Australian Centre for Health Services Innovation Forum 2013
Australian Health Promotion Association Conference 2013
Closing the Credibility Gap 2013
CRANAplus Conference 2013
FASD Conference 2013
Health Workforce Australia 2013
International Health Literacy Network Conference 2013
NACCHO Summit 2013
National Rural Health Conference 2013
Oceania EcoHealth Symposium 2013
PHAA conference 2013
2014 conferences
#IPCHIV14
AIDA Conference 2014
Congress Lowitja 2014
CRANAplus conference 2014
Cultural Solutions - Healing Foundation forum 2014
Lowitja Institute Continuous Quality Improvement conference 2014
National Suicide Prevention Conference 2014
Racism and children/youth health symposium 2014
Rural & Remote Health Scientific Symposium 2014
2015 conferences
#CPHCEforum
#CRANAplus15
#HSR15
#NRHC15
#OTCC15
Population Health Congress 2015
2016 conferences
#AHHAsim16
#AHMRC16
#ANROWS2016
#ATSISPEP
#AusCanIndigenousWellness
#cphce2016
#CPHCEforum16
#CRANAplus2016
#IAMRA2016
#LowitjaConf2016
#PreventObesity16
#TowardsRecovery
#VMIAC16
#WearablesCEH
#WICC2016
2017 conferences
#17APCC
#ACEM17
#AIDAconf2017
#BTH20
#CATSINaM17
#ClimateHealthStrategy
#IAHAConf17
#IDS17
#LBQWHC17
#LivingOurWay
#OKtoAskAu
#OTCC2017
#ResearchTranslation17
#TheMHS2017
#VMIACConf17
#WCPH2017
Australian Palliative Care Conference
2018 conferences
#6rrhss
#ACEM18
#AHPA2018
#ATSISPC18
#CPHCE