Debate Economics 103: The Coronaconomy and its implications

If Tonneson had his way, we would probably all be dead. And so, the fact that we are still very much here and alive to read this likely indicates (by contrapositive) that Tonneson was not correct. Given that the Covid-19 pandemic has not only given us some of the worst economic statistics since the Great Depression, but simultaneously done it in a much shorter time interval, a natural question to ask if the econ disad (or at least, the traditional economic arguments) are still viable. Given my proclivity for these arguments, the (optimistic) answer is yes; in fact, I believe the recent crisis, and part of its long-reaching impact, highlights how important economic issues are and their ability to hide behind (or turn, if you will) many other impacts and scenarios.

The Good

There’s not much good to say about the awful quality 2020 has to offer. Yet there are a few things that can be said that show that the decline itself could, in fact, support some of the key predictions that much of the impact evidence in econ debates has traditionally predicted.

First, coronavirus did decrease trade between countries. The U.S. and China have seen massive decoupling [1] and the WTO predicts a substantial decrease [2] in trade as a result of the pandemic. (Certainly causality doesn’t flow the other way!) This is real-time evidence to the claim that decline precipitates decreases in trade linkages, for which there is good IR and policy evidence that this, in turn, causes increasing tensions which exacerbate the likelihood of war

This next claim, too, is starting to concretely materialize. In June, China and India started a skirmish in Ladakh that ended with over a dozen deaths [3]. And while both countries retreated, its unlikely confrontations like these would have occurred absent massive economic decline. Likewise, Trump has accelerated his trade war against China as his inability to whip votes based on economic growth has led to virulent Sinophobia – the same behavior one would expect from a declining world power whose influence was suddenly shorted due to a major world shift desperately trying to maintain its status [4][5].

Yet not all has been lost. Should countries have the political will, the coronavirus has shown that strong redistributive programs can come into place at this time. Europe has pledged to rebuild its economy in a less extractive manner that drastically reduces emissions [6], and lump-sum wealth redistribution (as has been happening with coronavirus stimulus checks) is a  theoretically robust method to reduce inequality. Taken together, it is very possible that the recession will help create both a more utilitarian and a more humane economic future.

The Bad
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The most obvious bad is the thumper—as alluded to in the first sentence, one would expect the economy to have crashed and led to a global nuclear war. The fact that this didn’t happen (while making me extremely happy) does lead to a number of (not-so-subtle) technical issues for our doom-and-gloom predictions about economic decline. However, I think that there are a couple of creative ways out of this bind. First, it’s important to note that expectations in the corona recession are unique in the sense that investor optimism is high (even as economists attempt to downplay that and suggest it will take much longer than expected) [7]. This is probably best highlighted by a rebounding stock market that seems fundamentally out-of-touch with real-time economic conditions (because its high bet on manufacturing and the emergence of a vaccine) [8]. This highlights a key argument: many believe that as soon as a vaccine is distributed, it will be “back to normal,” so both stock market investment and capital investment are likely to be unperturbed. This may not be true in many of the internals that economics disads often rely on. A second, perhaps more salient argument establishes a relevant brink: with the Fed keeping interest rates near total zero for the foreseeable future, any further recessions distinct from corona in the coming years could see a Fed with no wiggle room to stimulate the economy—leading to unmitigated disaster and possibly even bank-runs [9]. Such an analysis would then imply that corona merely pushed us near the brink—and a smart economics student could easily say that another could do anything from lead to a long-term bear market (no Fed stimulus and different conditions) to permanently erode dollar hegemony (by decreasing the valuation of the dollar as a safe assets). What this means, of course, is that big stick econ disads still exist—we just need to get creative.

Yet recessions do not just cause extinction. There are material social effects of even limited recessions that the pandemic has highlighted, giving independent reasons why recessions are atrocious. For example, this recession has uniquely hurt women in their economic opportunities; and a weak recovery will only encourage unchecked xenophobia and jingoism [10][11]. Likewise, colonialism’s legacy has caused the Global South to be disproportionately ignored, with possible long-run economic effects in terms of both macro-level wealth redistribution and development [12]. The structural effects a recession will have on society are large; and many of the important long-term effects have just started to play out. To see how the structure of the economy moves may take half a decade or more; much too far in the future to be definitely predictive now.
   
The Ugly

The entire pandemic, and much of 2020. Given the content of this article, perhaps the infiltration of the Federal Reserve by undereducated goldbugs who believe it shouldn’t exist is not only fitting, but reflective of the actively anti-mathematical and anti-intellectual paradigm the government seems intent on brandishing during a time that necessarily calls for more math, and more intellect.

[1] https://www.forbes.com/
[2] https://www.wto.org/
[3] https://www.bbc.com/
[4] https://www.scmp.com/
[5] https://www.foxnews.com/
[6] https://www.jdsupra.com/
[7] https://link.springer.com/
[8] https://www.marketwatch.com/
[9] https://www.usatoday.com/
[10] https://www.nber.org/
[11] https://www.theguardian.com/
[12] https://www.justsecurity.org/