Economist Mohamed El-Erian says “no one knows” how long the current economic crisis will last.
But one thing is for sure: Restarting the economy is a lot more than just “flicking on a switch,” says the chief economic advisor at Allianz and president-elect of Queens College.
Even then, the post-coronavirus economy will look very different. For one, businesses are going to start prioritizing resilience over efficiency.
In the past, companies “had really bought into global supply chains because you can minimize costs,” he says. “Now they’ve realized that if there’s a shock to that system, it’s a question of survival.”
U.S. companies were already questioning the wisdom of global supply chains as the
trade war with China dragged on. But now, El-Erian says, the coronavirus has accelerated the mental shift.
“Now, with what first has happened in China and is now happening today, people realize that we should have a ‘home bias,’” he says. “We should bring things home.”
While El-Erian is confident the Federal Reserve can keep the financial system’s “plumbing” in working order for the time being, he admits banks do face a real dilemma.
On one hand, he says, banks should lend because many of their clients are facing short-term problems. If they don’t lend now, they run the risk of creating long-term problems that could cause the system to crack like it did in 2008. In other words, liquidity problems today become solvency problems later if businesses can’t get the loans they need and file for bankruptcy.
The rub is that banks — like employers — are scared because they don’t know how long this will last, El-Erian says. That’s why you see small businesses cutting staff, he says, even though the best thing for the economy as a whole would be to try to keep them on.
To be clear, El-Erian says the question of individual versus collective action is one we are facing in our daily choices, too.
“Why did we collectively empty out the shelves for certain products?” he says. “Not because it was in our collective interest, but because we are selfish.”
To some extent, El-Erian concedes, that selfishness is understandable. “It is very hard when people are taken out of their comfort zones in such an abrupt and violent manner to align both individual and collective incentives,” he says — but that is exactly what we must do and where the government should step in.
Complicating the problem further is that the coronavirus isn’t just a threat to the U.S., it’s a threat to the whole world, including developing countries with weaker health care systems.
If the coronavirus spreads even further, he predicts developing nations will make the exact same choices the U.S. has: protect their people at all costs. The difference, El-Erian says, is that he’s “terrified” these countries could see larger death tolls than the U.S.
“We can afford it. Many of these countries can not afford it,” he says. “So while understandably they will follow in our footsteps …. pretty soon the reality is going to catch up with them.”
Right now though, the U.S. is dealing with its own crisis at home.
While President Trump and some members of Congress have called for even more spending to help American business and the unemployed, some Republicans are wary of going further into debt. El-Erian says this isn’t surprising: It’s called “adjustment fatigue,” or the idea that it’s hard to keep exerting massive effort when you’ve not yet seen results.
But any future spending needs to be done with clearer principles, he says. Take the airline industry, for instance. The government is bailing them out without answering very basic questions, he says, like “Why are we doing this? When are we doing it? How are we doing it? And how are we going to exit and on what terms?”
El-Erian says this is important because the airline industry isn’t the only one that’s suffering.
“We need to develop general principles,” he says, “instead of going ad-hoc.”
In imagining the future post-void, El-Erian sees only one acceptable choice ahead. The coronavirus has exposed, more than ever, what some are calling “the velvet rope economy” — where some people wait in vain for COVID-19 tests while others cut the line.
He says without intervention, inequality “not just of income, but of opportunity, will get a lot worse.” This should concern all Americans, he says.
“Opportunity is the basis for the social contract. And as I tell people over and over again … you can’t be a good house in a bad neighborhood,” he says. “How good your house is also a function of the neighborhood. And the neighborhood we all live in, whether we live in a good house or a bad house, has been hit hard. And we will need an element of collective responsibility to address the neighborhood.”
Otherwise, he warns everyone will “converge towards the bottom.”
This article was originally published on WBUR.org.
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