In the heat of a global crisis more sudden and severe than anything in living memory, economic orthodoxies are getting tossed aside at a furious pace. Some of them may be gone for good.
Public debt, for example, has often been seen as a drag on economies -- but right now it’s their lifeline. The coronavirus has shut down swaths of private business. In the U.S. alone, it threw about 3 million people out of work in just a week.
Whatever their prior views on budget deficits, leaders have been forced to fill the gap by channeling cash to households, businesses and markets -- strengthening safety nets that are paid for out of the public purse, and improvising some new ones.
With government spending helping to steer countries through the pandemic, it may not be easy to turn off the taps afterward. Politicians will have little incentive for belt-tightening measures that could endanger a rebound. Economists, especially from the rising Modern Monetary Theory school, will argue that in a low-inflation world there’s no need to try.
Even when the acute phase of the health crisis has passed, “political pressures for large fiscal stimulus to be deployed whenever possible will remain strong and open-ended,” says Stephen Jen, who runs hedge fund and advisory firm Eurizon SLJ Capital.
That’s what happened to monetary policy after the last crisis in 2008, he points out, with central banks still struggling to remove their unconventional stimulus more than a decade later. For the few parts of the developed world, like the U.S., that managed to move away from emergency settings, the pandemic has sent them crashing back there.
In the low-rates era, governments are already the biggest borrowers. Now they’re about to go into overdrive.
The U.S. is poised to smash records with a fiscal package worth about $2 trillion making its way through Congress, and lawmakers expect more measures to follow. Other governments, when measured against the size of their economies, aren’t far behind.
The European Union and its powerhouse Germany have ditched once-sacred spending caps. The U.K. government has pledged to cover 80% of the wage bill for workers whose jobs are at risk because lockdowns have shuttered entire industries. Countries from South Korea to Australia have torn up their budget plans and pivoted to more spending.
“A one-off fiscal stimulus, even of the size the U.S. and major European countries are planning, doesn’t fundamentally alter debt dynamics. It’s wide deficits sustained over a number of years that do that. If the outbreak comes quickly under control, and economies spring rapidly back to life, fiscal sustainability won’t be an issue. If either of those conditions don’t hold, policy makers could quickly find themselves running out of options," says Tom Orlik, Bloomberg chief economist.
Many economists say that even more fiscal firepower may be needed, because it won’t be possible to assess the full extent of economic damage until the virus is contained. Once that happens, support for the spending bonanza may be tested -- on the markets, and in politics.