Covid-19 has brought the global economy to its knees, The pandemic has been an

enormous synchronised global economic shock on a scale which has not been seen
since the second world war By the end of 2020 the world’s GDP may be about 7.5%
lower than it would have been without the pandemic Globally more than 15% of young
people who were in work before covid-19 have lost their jobs Widespread lockdowns
have turbocharged changes that were already affecting the world economy technology,
finance and trade How governments adapt to these seismic changes will determine
how rapidly countries’ economies can recover In April this year American
unemployment was the highest since the Depression Back then around a quarter of
Americans were jobless But from the bleak Depression of the 1930s was born the “New
Deal” An ambitious federal plan to create jobs and kickstart the economy 40% of those
seeking work have found it We have a long way to go but we are on the way
The crises of the 20th century forced governments to change their policies for the better
It’s often been the case that after big periods of economic upheaval you’ve had a
reforging of the relationship between the individual and the state The second world war
was followed by an expansion of the welfare state in Europe And high unemployment
and inflation of the 1970s led to Ronald Reagan’s and Margaret Thatcher’s free-market
economics But in the 21st century the largest economic shocks have not led to such a
change The global financial crisis People thought maybe you’d have a rethinking of how
banking worked But in the end, you only got incremental reform The effects of trade
with China were not adequately anticipated by Western policymakers They did not think
about the impact it would have on some workers who were exposed to it and I don’t
think enough thinking had been done about the implications of big tech for the economy
and society Those on the losing side of these economic shifts have felt left behind the
result is: you’ve got the rise of populist politicians like President Trump The vote for
Brexit The rise of right-wing, economically nationalist populism around the world And
then among the young you have this leftward drift This support for politicians like Bernie
Sanders, for Jeremy Corbyn The pandemic is the fourth economic shock of the 21st
century This time, governments could choose to respond differently In the aftermath of
the global financial crisis many governments, especially in Europe to tighten their belts
rather than spend The result was slow economic recovery You had governments which
turned to fiscal austerity to cutting spending to balance their budgets too soon which
also weakened the recovery and made it slower than it otherwise could have been Now
we have the pandemic an economic downturn that’s very deep And I think it’s important
that governments don’t repeat the mistakes of the 2010s So far, spending is exactly
what governments have been doing And to pay for that spending governments have
been borrowing a lot To keep borrowing costs down central banks in America, Britain,
Japan and the euro area have created new money worth almost $4trn That money has
financed household-income payments furloughed millions of workers and bailed out
businesses At the moment, interest rates are very low and so despite the fact that you
have this enormous debt that’s been run up as a result of the pandemic the costs of
servicing it are not high So there is no doubt that there’s space for governments to
support the economy But no one knows if—or when interest rates are going to rise And
should that happen it’ll be the taxpayer forced to shoulder the burden of this vast public
debt The balance governments have to strike is not turning to austerity too quickly But
then once, if and when interest rates start to rise to be aware that they are very indebted
and they need to ensure that their fiscal policies are sustainable The pandemic has
brought about enormous changes Perhaps the biggest is that for many people the
office has gone from here to here And on the whole, they seem to prefer it 60% of
Americans who can work from home want to continue doing it at least one day a week
after covid And in the long term it could boost economic growth and actually decrease
inequality One of the chief constraints on growth
was the fact that it was very expensive to live near cities where jobs were increasingly
congregating, especially good jobs in places like London, Paris, San Francisco, New
York, Tokyo So there is clearly an opportunity if people do shift towards working from
home to ease that constraint Working remotely has been made possible thanks to a fast
and widespread adoption of technology which existed before the pandemic but wasn’t
being used to its full potential This digital push that’s now taking place as a result of the
pandemic will lead to accelerated change in the economy Ultimately, disruption is what
drives long-term living standards The important thing is that governments I think,
embrace this change rather than standing in the way and seeing it as a scary force that
must be stopped Of course, not everyone will benefit from the remote-work revolution
The urban service sector, in particular, is expected to shrink But voters may be more
likely to support disruption if the risks are shared more equally When the world went
into lockdown millions of businesses found themselves unable to operate and with no
way to pay their employees So governments were forced to respond in an innovative
way I think that’s because there was this widespread sense that you couldn’t do
anything about the fact that you were unemployed as a result of the restaurant at which
you worked being shut Lockdowns were a bolt from the blue And so the government
stood behind everybody and replaced household incomes to an extraordinary degree In
America Congress announced a stimulus package worth $2trn which included direct
cash payments to almost every American The British government rolled out a £30bn
job-support scheme And in Europe’s five largest economies more than 40m workers
were placed on government-funded, short-work schemes The downside to furlough
schemes is that they do have this potential to keep people locked in zombie jobs which
aren’t coming back when the economy recovers But the principle, that household
incomes in some sense can be underwritten during a large economic shock over which
those households have no control is, I think, an interesting one that could be applied in
future
What we’re seeing this year is that governments can move pretty fast to put money in
the pockets of households directly and the households will spend that money Direct
cash transfers to households do work fairly well and are not subject to quite the same
level of haggling and perhaps the same degree of waste that you might get with other
forms of fiscal stimulus While governments have sought to intervene domestically
internationally there has also been an increase in protectionism when countries shield
their industries against foreign competition The crisis has caused panic about the
fragility of global supply chains Stalled production lines across China The global supply
chain right now is disrupted A lot of firms this year paid a lot more attention to their
supply chains And it’s more fashionable now to think about the robustness and
resilience of those supply chains which often means bringing them closer to home or at
least diversifying your suppliers There was concern in particular around personal
protective equipment Many countries blocked export of PPE and similar items
According to the IMF there have been almost 120 new export restrictions this year This
is coinciding with a movement towards protectionism on a global scale, with a trade
war between America and China And it’s clearly a risk that coming out of the pandemic
you have leaders who are very concerned about promoting national champions less
concerned about competition rules and really want supply chains brought home Despite
this shift towards protectionism there is reason to be optimistic Government economic
response to the virus has been swift and on a massive scale I don’t think many people
would have predicted that government would act that fast and that capably They’ve
acted much better I would say on the economic side than they have in terms of
controlling the disease in many countries As with the economic shocks of the 20th
century covid-19 presents an opportunity for a reforging of the relationship between
government and the individual In ways many hoped would follow the previous shocks of
the 21st century The question is whether today’s politics is up to the job