Simon Johnson’s Best Response to the Crisis


We can and should prepare for any specific shocks we can imagine. And what we’ve learned over the past 30 years is that the best way to prepare for the unpredictable is to help people live healthier, more prosperous lives in good times, and to offer as much help as possible to anyone who needs it during inclement weather. the times are coming back.

WASHINGTON, DC – If a meteor hits Earth, if a major natural disaster strikes, or if any other shock of previously unforeseen dimensions occurs, how should economic policymakers respond? There are two plausible alternatives: focus on helping the financial sector, like what was done in 2008-09, or go as far as possible by helping all those who need help, like this. was done in 2020-2021. While the response to the 2008 crisis was better than many alternatives, what was achieved in 2020 should become our point of reference for dealing with systemic cataclysms.

Next time around, however, we’ll have to do even better to help those at the bottom of the income scale. This requires significant investments in social infrastructure which should really start today.

In the aftermath of the 2008 global financial crisis, the consensus among policymakers in the United States and Europe was that bailouts should focus on preventing bankruptcy in the financial sector. This involved providing additional equity on favorable terms and trying to drive up asset prices as much as possible. The amount of aid given directly to homeowners and the unemployed was small in comparison, and no consideration was given to non-financial businesses (restaurants, shops, hotels, etc.) that were blinded by the disaster.

In 2020, things were different. The financial system was also in danger, but this time there was much more political appetite to help innocent people outside of finance.

Of course, most people who lose their jobs or suffer loss of income during an economic downturn should be viewed as innocent bystanders. But economic policymakers conventionally view such losses as normal or inevitable – or even, to put it mildly, a necessary part of “creative destruction.”

Keep in mind that people at the higher end of the income scale rarely experience such losses. A few might go bankrupt, but in general, the best educated and most successful people are likely to keep their jobs – or find new jobs and rebound faster once the economy recovers. Rich people with deep pockets, i.e. money in hand, often do well in slowdownsbecause they can buy assets cheaply.

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Like former US President Donald Trump said in 2006 of a potential collapse in house prices, “I kind of hope that happens because people like me would come in and buy.” Pressed on this point in 2016 by Hillary Clinton, during a presidential debate, Trump replied: “It’s called business, by the way.

What we have learned from the COVID-19 crisis, however, is that it doesn’t have to be so. By providing generous unemployment insurance (compared to historic levels) and other forms of support (such as eviction protection), the government has been able to keep people housed and fed – and prevent a downward spiral in unemployment. asset prices, wealth and prospects.

In fact, asset prices have been remarkably strong over the past 18 months. The total wealth of Americans increased by $ 13.5 trillion in 2020, in part because of soaring stock prices, but in large part because house prices have gone up instead of down.

Billionaires behaved well in 2020, just like after 2008. The difference this time is that ordinary households were better protected.

Of course, the public support system has proven to be far from perfect. It has been far too difficult to get money into the hands of the people who need it, including low-wage workers in the service sector. Small businesses applying for assistance have had to deal with red tape. And access to public health resources has remained extremely uneven.

We know how to solve these problems. Create a central bank digital currency that would allow direct provision of funds to individuals, under appropriate circumstances. Use the latest technology to understand the financial needs of businesses that are hit by an unpredictable shock. And ensure that everyone has systematic access to quality medical care (which is the best way to build trust in doctors, so that people listen to their advice when it matters, for example on the subject of vaccines) .

The good news is that the US Congress is moving in this direction in its plans to invest in new infrastructure. The latest consensus apparently includes funding to expand broadband access.

There will be future shocks, and there is no reason to believe that they will be smaller than those that are in the living memory of most people. Over the past 30 years, the Berlin Wall has fallen, China grew, terrorists attacked the United States, the housing market exploded, and a global pandemic shut down almost everything.

We can and should prepare for any specific shocks we can imagine. But each of these major disruptions was viewed by most people – and all policy makers who mattered – as a low probability event.

But now we should know better. The best way to prepare for the unpredictable is to help people live healthier, more prosperous lives in the good times, and to offer as much help as possible to those who need it when the bad. moments return.

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