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1 Flattening The Curve

1. The COVID-19 pandemic has led governments to implement social distancing and lockdowns to flatten the curve of new infections and overwhelm healthcare systems. However, these policies require significant fiscal resources to support economies and mitigate deep recessions. The more severe the lockdowns, the greater the fiscal response needed. 2. Developing countries face even greater challenges from the pandemic in terms of public health and economic devastation. Most rely on exports, tourism, and remittances that are collapsing. They also lack fiscal space and access to international financial markets just as needs are rising. People may have to choose between work and starvation without support. 3. While giving money to people may help boost spending,

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59 views

1 Flattening The Curve

1. The COVID-19 pandemic has led governments to implement social distancing and lockdowns to flatten the curve of new infections and overwhelm healthcare systems. However, these policies require significant fiscal resources to support economies and mitigate deep recessions. The more severe the lockdowns, the greater the fiscal response needed. 2. Developing countries face even greater challenges from the pandemic in terms of public health and economic devastation. Most rely on exports, tourism, and remittances that are collapsing. They also lack fiscal space and access to international financial markets just as needs are rising. People may have to choose between work and starvation without support. 3. While giving money to people may help boost spending,

Uploaded by

Iulia
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1 flattening the curve

The public health community has made the differential equations that govern
contagion almost mainstream. People now talk about the role of the R0 factor
(the average number of new infections caused by each infected person) and
about the need to flatten the contagion curve through social distancing and
lockdowns.

Unlike the 2008 global financial crisis, which led to a collapse in demand, the
COVID-19 pandemic is first and foremost a supply shock. That changes
everything.
But one frequently unstated assumption of this approach is that governments will
be able to mobilize the necessary resources, essentially by borrowing more, if
needed, from their own central banks, as they implement quantitative easing
(QE). Economists refer to governments’ ability to borrow as fiscal space. In short,
the flatter you want the contagion curve to be, the more you will need to lock
down your country – and the more fiscal space you will require to mitigate the
deeper recession that will result.

2. developed/ing countries

COVID-19 is ravaging advanced economies such as Italy, France, Spain, and


the United States. Beyond the deaths and human suffering, markets are
discounting a catastrophic recession accompanied by massive defaults, as
expressed in the radical repricing of corporate credit risk by financial markets.
As horrific as this sounds, the situation in the advanced economies is likely to be
much more benign than what developing countries are facing, not only in terms
of the disease burden, but also in terms of the economic devastation they will
face. And while two academic communities – public-health experts and
macroeconomists – are starting to talk to each other, unfortunately the
conversation has mostly involved only the advanced countries.
Most developing countries rely for foreign income on a combination of
commodity exports, tourism, and remittances: all are expected to collapse,
leaving economies short of dollars and governments short of tax revenues. At
the same time, access to international financial markets has been cut off as
investors rush to the safety of US and other rich-country government-issued
assets. In other words, just when developing countries need to manage the
pandemic, most have seen their fiscal space evaporate and face large funding
gaps.
Under these conditions, even if developing countries want to flatten the curve,
they will lack the capacity to do so. If people must choose between a 10%
chance of dying if they go to work and assured starvation if they stay at home,
they are
Lastly, developed countries should not – as the European Union
unfortunately has just done – impede or prohibit exports of tests,
pharmaceuticals, and medical devices.bound to choose work.

3. Money to people

If output is collapsing because people do not want to or cannot spend, adding


spending power may help. But if Broadway theaters, universities, schools, sports
arenas, hotels, and airlines are shut down to stop the spread of the virus, giving
money to people will not reignite those industries: they are not lacking in
demand. They are shut down as part of the public health policies implemented to
flatten the curve. If firms are not producing because their workers are locked
down, boosting demand will not magically make goods appear.
As a consequence, macroeconomists are now focusing on how to make social
distancing and lockdowns tolerable and limit the damage that the supply shock
will generate.  In the US and the United Kingdom, governments are planning
large fiscal packages to expand health-care provision, protect payrolls, provide
additional unemployment insurance, delay tax payments, avert unnecessary
bankruptcies, shore up the financial system, and help firms and households
survive the storm.
4. stopping it

of slowing economic activity, no matter whether social distancing and reduced


mobility are voluntary or enforced
policymakers implemented strict mobility constraints, both at the national and
local level—for example, at the height of the outbreak, many cities enforced strict
curfews on their citizens
 significant economic costs. By all indications, China’s slowdown in the first
quarter of 2020 will be significant and will leave a deep mark for the year.
Chinese policymakers have targeted vulnerable households and looked for new
ways to reach smaller firms—for example, by waiving social security fees, utility
bills, and channeling credit through fintech firms.
most larger firms have reported reopening their doors and many local employees
are back at their jobs—stark risks remain. 
Mitigating the health crisis is the first priority. Give Dr. Fauci anything he asks for.
5. covid vs 2008

2008 was a global systemic financial crisis fuelled by the endogenous


interactions of market participants. The forces of the crisis fed on deep
weaknesses in the financial system that had built up out of sight.

COVID-19 is an exogenous shock to the economy, and the question is whether


there are sufficient latent weaknesses for it to prey on. We think this unlikely.
Instead, the locus of the problem lies outside the financial industry, in a real
economy in which shops, services and business are being closed by state fiat,
and the income of employees involved is collapsing.

On Friday, Goldman Sachs projected gross domestic product (or GDP, a


measure of the size of the economy) would fall at a 24 percent rate in the
second quarter of the year.
 The consensus is that the virus will cause a negative supply shock to the world economy,
by forcing factories to shut down and disrupting global supply chains (OECD 2020).

. The lesson is that the coronavirus epidemic, through its negative impact on agents’
expectations of future productivity growth, might induce a demand-driven recession

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