Article: "Razing Hopes," The Economist, August 29th 2020
If the above link is behind a paywall, I have copied and pasted the article into a Google Doc here (don't tell).
As indicated by the article, post-pandemic growth will be determined by far more than a return to "normal" economic activity. Today, consumers and investors are reluctant to spend, as they worry about future economic performance. But their worries are not easily assuaged by standard macroeconomic indicators such as rising GDP or falling unemployment. Fear of future economic shocks, pandemics, or other unexpected disasters (e.g., those from climate change) increase saving and reduce aggregate demand.
What is needed to recover, then, is not simply low interest rates and a large money supply, but fiscal policy which will help alter people's beliefs about the future. The opportunities range from the prosaic (government spending on infrastructure or pandemic-preparedness, for instance) to the radical (universal basic income or a dramatically expanded social safety net). Whatever policies are ultimately enacted, they should be developed with the psychological scars of the pandemic in mind. Otherwise, economic growth will almost certainly be hampered by a lack of confidence in the future, no matter how close we begin to approximate "normal."
I think this is a very interesting article. Do you think that people will be stingy with their money for a long time following the pandemic in fear of future economic shocks? I think people will be stingy early but I think very soon people will become more willing to spend their money especially with lower interest rates. I also think that confidence in the system will be determined on how the election turns out and how people react to new policies.
ReplyDeleteI definitely agree that some people are being more stingy with their money with the uncertainty of the virus, but others are taking advantage of the low interest rates. For example, the housing market is doing very well considering mortgage rates are very low. I agree that consumer confidence does need to increase, but I think it will take time and will depend on reactions to policies.
ReplyDeleteWhile I agree that people are being more stingy with money, part of me wonders how much of that is due to limited ability to travel, go out to eat/drink, among other things. While consumer spending is down, the housing market has continued to do well and I think we will see spending bounce back shorter than most think. Low interest rates from the fed and the higher target inflation should help, atlas to a certain extent, to incentivize people to spend.
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