To Fight the COVID Pandemic, Policymakers Must Move Fast and Break Taboos

Lambert here: For those who came in late, Willem Buiter was one of those who got the Crash (I mean, the last one, in 2009) right; see various posts at NC.

Sony Kapoor, Managing Director, RE-DEFINE, and Willem Buiter, Special Economic Adviser of Citigroup and CEPR Research Fellow. Originally published at VoxEU.

COVID-19’s economic impact on crumbling GDPs, collapsing tax revenues and ballooning fiscal deficits will be much larger than what has been reported thus far. Any hesitation in throwing everything but the kitchen sink at the health, employment, state aid and financial rescue interventions that are needed will literally kill citizens and destroy the economy. To combat COVID-19, central banks, including the ECB, must cross the Rubicon of monetary financing and immediately transfer the 20%-30% of GDP this will cost into fiscal coffers.

The lightning speed and gargantuan scale of the COVID-19 hit to the global economy, where large chunks of economic activity have come to a literal standstill overnight, requires a ‘shock and awe’ policy response that is overwhelming in both scale and speed.

Countries have launched a dizzying array of measures that range from the ECB’s pandemic asset purchase programme (PEPP)1 to the direct cash transfers2 the US has promised tens of millions of Americans, and wage subsidies3 rolled out across much of the EU. But these unprecedented measures are just the start.

Policymakers need to move fast and break taboos. After all, governments are the insurers, lenders, spenders, and suppliers of last resort. The risks for them to do too little, too late far outweigh the risks of them doing too much too quickly.

As GDPs Crumble…

With the pause button pressed on nearly half of economic activity in the US and the EU for what is likely to be at least a period of three months, consumption, investment and trade have all collapsed. A contraction of as much as 10-20% of GDP or worse is possible. Pervasive uncertainty about the timing of the development of a viable treatment and/or vaccine means there is no light at the end of the tunnel yet. Even when we get there, the trauma of the COVID-19 meltdown will keep investors and consumers on the sidelines.

…tax revenues will collapse…

This will blow a massive hole through tax revenues. Corporate taxes that derive from profits will collapse first. Sales and value-added taxes will register a dramatic fall in line with the collapse in economic activity. The gigantic scale of job losses and/or job subsidies to stem such losses will depress income taxes. Tax revenues may fall by 30%-40%, maybe more.

…and Deficits Balloon…

Even as tax revenues dry up, governments need to spend unprecedented sums of money not just on healthcare and social interventions to fight COVID-19, but also on welfare payments and job guarantees. Mortgage and rental market interventions, rescuing and resuscitating private sector firms, even whole industries, and inevitably bailing out large tracts of the financial sector will require record fiscal interventions. The pincer movement of falling taxes and rising spending will drive eye-popping fiscal deficits of 10%-20% of GDP, and beyond.

…Leading to Counterproductive Austerity

The double whammy of crumbling GDPs and ballooning deficits may drive OECD debt/GDP ratios up by 30% or so by the end of 2020 as countries scramble to borrow, mirroring the effect of the global financial crisis and its aftermath. It may push Italy and Japan past the 160% and 270% of GDP mark, respectively, and no country would be immune. Inevitably, this will fuel future calls for austerity, with the counterproductive logic and toxic politics of the EU’s Stability and Growth Pact and Fiscal Compact, driving long-suffering euro area economies further into the ground.

A Poisoned Political Economy

This will strain already fragile relations between member states, possibly to breaking point. But it will also worsen the intergenerational rift. Leaving our children with an unaffordable fiscal burden, on top of a climate catastrophe is not the legacy we wanted, nor one they might be willing to take.

There is one way out

There is, however, one way out that can both deliver the shock and awe necessary to get ahead of the pandemic, and deliver us from counter-productive future austerity, political conflict, and intergenerational schism.

Central Banks Must Break New taboos

And that is for the COVID-19 response to be funded not by borrowing, but through the creation of new money, particularly by OECD country central banks, which include the US Federal reserve, the Bank of Japan and the ECB.

The decade since Lehman’s collapse has already seen central banks break many taboos, but they must now cross the Rubicon of monetary financing. The case for them to do so has never been stronger, and in fact it may be irresponsible for them now not to do so.

The ECB and the Bank of Japan, in particular, have been struggling to hit their inflation targets, and the mass layoffs now underway will only worsen this undershoot. As large tracts of the economy have come to a dead halt, the circulation of money in the economy has been gravely interrupted. This breakdown of the normal channels of transmission of monetary policy will be exacerbated as the economic meltdown takes its inevitable toll on banks and the financial sector. With risk aversion high, and the propensity to consume and invest low, normalization is impossible in any foreseeable horizon. Printing new money can help mitigate each of these critical challenges

It Is Time to Print, But This Time for the Fiscal Authorities

The traditional notion of helicopter drops,4 wherein central banks transfer cash balances to citizens, are being talked about again, but they work best when the problem is primarily insufficient demand. Moreover, the plumbing to make these drops work is not yet in place, and time is of the essence.

This crisis is different. It is governments that need to spend on healthcare, employment, critical supplies, state aid and bank rescues and are best placed for targeted interventions on all of these fronts. A one-off transfer of 20%-30% of GDP worth of cash to governments by their respective central banks may be the single best macro policy to fight the COVID-19 crisis.

It will provide the kind of lightning speed and gargantuan scale needed to outrun the meltdown and will leave no debt overhang or counterproductive future austerity. It will help avoid the kind of hesitation, from governments trying to raise cash or balance books, that can literally kill citizens and destroy economies.

A percentage of the transfer – say, 5% of the overall amount – could be set aside to help fund the COVID-19 fight in developing economies that are not in a position to either borrow cheaply or print their own money. This would be then be sufficient, alongside the issuance of new SDRs5 by the IMF, and enhanced support from the Multilateral Development Banks and Development Finance Institutions to fund a genuinely global response to the pandemic.

Outside the euro area, the central banks’ transfers to their national treasuries could be affected by crediting the treasury’s account with the central bank. Article 123 of the EU’s Treaty explicitly bans credit and overdraft facilities from the ECB for the EU and member states, but says nothing about helicopter drops or transfers, which are neither. Nor does it ban a one-off ECB extraordinary dividend payment of an equivalent amount to member national central banks (its shareholders), and through them to member states’ governments. It will be challenged and litigated no doubt, especially in the German Federal Constitutional court, but at least the euro area will have lived to fight another day.

Print Friendly, PDF & Email
This entry was posted in Banking industry, Pandemic on by .

About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Tomonthebeach

    It would be great if some articulate MMTer could explain what Lambert is suggesting in a way that makes it clear that such a move is basically putting the economy in suspended animation until such time as the economy reboots. Is that not what printing money will essentially be doing?

    1. Noel Nospamington

      Sorry I do not see how the economy can be put in suspended animation, since people still need to buy food, medical services need to be provided, utilities (gas, water, electric, sewage, telephone, Internet) are needed, infrastructure (rail, roads, transit, airports) have to be maintained, banking services need to be offered, etc.

      All of this requires private and public money to be flowing throughout the economy.

      Lambert’s solution of printing money and having the state distributed in a fair and equatable manner to provide maximum benefit to citizens seems quite reasonable. Especially if other countries do the same, so that no one currency is singled-out for devaluation. Basically if all global currencies are devalued, it will be as if none are.

      After this pandemic, government debt needs to be addressed by returning to the more progressive tax rates of the past, prior to the decades of right-wing tax cuts, when the wealthy paid a more reasonable higher tax rate, and most tax loopholes were closed. Not to mention also cutting corporate welfare, especially to harmful industries, such as fossil fuels.

  2. Susan the other

    I remember Buiter as understated. This minces no words. When he says 25% of GDP I’m assuming he means every year until we find our new equilibrium. My imagination tells me this is just token accounting and that it will be the civil version of martial law around the world complete with rationing food and shelter and enough helicopter money to maintain some semblance of a market. What else can we do?

    1. taunger

      Mincing no words? Let the serfs die while the lords find effective methods to wring the last semblance of humanity off the face of the planet.

  3. notabanktoadie

    The traditional notion of helicopter drops,4 wherein central banks transfer cash balances to citizens, are being talked about again, but they work best when the problem is primarily insufficient demand. Moreover, the plumbing to make these drops work is not yet in place, and time is of the essence. Sony Kapoor, Managing Director, RE-DEFINE, and Willem Buiter [bold added]

    It is, of course, a national disgrace that citizens may not use their Nation’s fiat in account form, as this virus crisis is revealing – along with other institutional flaws, e.g. Easter Duty anyone?

    “The Lord works in mysterious ways …” , it’s safe to say, I’d say, and thanks to Him for vindication, I’d also say.

    1. Bert Schlitz

      Central Banks never set up transfers. What do you think 1200 checks are??? Helicopter money???? Already there.

      1. notabanktoadie

        Already there Bert Schlitz

        Really? Then what’s this 4-5 month delay I hear about? When banks get their fiat INSTANTLY?

        Ever hear of equal protection under the law?

        But it’s true that Central Banks don’t do xfers unless you consider overpaying for assets a xfer, which it is in real terms, I’ll bet. But that should change since:
        1) Banks should pay for their large scale use of the Nation’s fiat, i.e. via negative interest.
        2) All fiat creation beyond that created by deficit spending for the general welfare should be via an equal Citizen’s Dividend – funded in part, at least, by the negative interest collected in 1).

        It’s interesting to me that applying ethics to money creation results in a system that is almost, if not not entirely, the opposite of our current system. Almost as if ethics was used as a guide as to what NOT TO DO with our current system …

  4. Mel

    Breaking new taboos? Setting up new restrictive commandments so we can ignore them? We haven’t even invented them yet. We’ve been ignoring them all along, whatever they are. We could save ourselves the time …

    1. Ian Ollmann

      Such as the taboo of printing money.

      Or the taboo of printing money merely to give it to a foreign power because they are having problems stabilizing their foreign currency reserves.

      Or the taboo in the US of free medical care for everyone.

      Or the taboo of letting everyone vote by mail.

      Or employers’ inflexibility about letting employees work from home.

      Or the taboo about taking out a forgivable loan purely for the purpose of paying your employees to do nothing. Pay them to do nothing? Inconceivable! It doesn’t matter that the loan is forgiven and you can use part of it to pay your own rent. But the workers will not be working! The next thing you’ll know they will want coffee breaks during idle time too! at home! With paid medical leave! While not working! And getting paid too! For not working!

      Thinking has been a little inflexible.

      1. Brooklin Bridge

        Good list of taboos! Just not going to happen; won’t be broken. Certainly not in the time frame or to the extent necessary to work. Mars will have cities first.

        Sanders, AOC, Gabbard, have become the focus of what our political class is fighting against tooth and nail. This psychotic clique of narrow minded, painstakingly groomed intellectually challenged, moral bankruptcies, arc welded supports to a merciless profit structure and ideology – they are going to suddenly turn on a dime and shovel money at what they consider lower than animal live stock – the working class? These people who over the last 40 years have forgotten how to even formulate legislation, never mind write it – so much so that it is entirely designed and written for them by lobbyists and special interests – they are going to turn (cover the children’s ears) sss-oo-ci–a–lii-sssst just like that???

        Not likely.

  5. Mikel

    “governments need to spend unprecedented sums of money not just on healthcare and social interventions to fight COVID-19, but also on welfare payments and job guarantees..”

    Cuomo (just one example) still making cuts? Or even admitted how wrongheaded he has been? NO.
    Any of the neoliberals and neocons and assorted servants of the oligarchy admitted they have been wrong for the past decades?NO.
    Are they still in power? Yes.

    There is nothing about this death machine system that is going to save as many people as imagined.
    Nothing. It can’t be reformed to save people. It is created to destroy. I’m only reminded of that whenever GDPs, etc are mentioned.
    The establishment in this country hasn’t cared about the health of the population and they do not care now. They only care about the RF economy.

  6. Bert Schlitz

    I don’t get the point of this post. Your so mumbling, you don’t seem to understand your numbers don’t add up and the end to shutdowns will reverse much of the damage.

    Central Banks are irrelevant.

    1. Mel

      Ignoring that scrap of gibberish that grabbed all my attention off the bat there, this article is OK. It is nice. It’s a suggestion for a project proposal, or set of proposals that will let governments take action to fight the Covid-19 disease itself, and to ease the hardships that the disease and the fight are causing. The taboo to be broken is the one that says that the government has to keep its grubby hands off the nation’s money; in fact that’s a pretty well established taboo. With direct funding in the Central Bank, the government can take direct action to solve the problems without suffering delays while obscure market conditions come into alignment, or conditions plump up to a suitable scale.
      The Central Bank is relevant because it’s at the root of the payment system — it’s conduit for all money that gets spent.

      1. Bert Schlitz

        It’s only one part of the transfer system. Not the part that really can transfer to the populace.

        I just don’t see the big deal nor emergency. By this time in 3 months, Covid 19 will be forgotten except for the hangover, which simply will take time like all hangovers. Much of it poor non bank lending.

  7. Mikerw0

    My benchmarks to tell if a country is doing the right things to minimize death and have an economy to restart. In the US of A I have little hope.

    First, all healthcare expenses will be paid by the federal government

    Second, an initial three month forbearance on all fixed payments system-wide; rents, leases, debt, etc. Freeze the flows and if the banks need help the Fed will do it anyway.

    Third, base income for all families. I mean all.

    Fourth, military takes over logisitcs for health care supply distribution

    Fifth, military/FEMA takes over logisitcs to make sure everyone has food and can eat.

  8. Tom Stone

    The looting will be epic and the peasants ground into dust.
    Expecting anything else is delusional.

    1. Aumua

      I don’t think anyone here is expecting any of this to happen. Lord, no LOL. That doesn’t mean we shouldn’t discuss possible solutions anyway.

    2. notabanktoadie

      If no alternative is presented then, by definition, TINA.

      But there clearly is an ethical alternative and too bad if that causes some some cognitive dissonance; they should consider the cognitive dissonance of those who’ve suffered under the current system and thought it justice.

      1. Brooklin Bridge

        This at least gives them a good target to focus their energy against. Well, actually, to focus the energy of their lobbyists and special interest groups. It’s not as if they had the intellegence, patience, or energy to do it themselves.

  9. farmboy

    2008-9 in the retrospectiscope was good practice, got everyone used to the idea of central bank intervention, treasury spending, and gov’t running big deficits in real time, not ww2. Imagine attempting all those without Lehman Brothers going broke nearly taking the US banking system with it. No congress critters would have aclue what to do today, remember repubs wanted to just let the purge happen until someone pointed out that would probably start a revolt.
    Next months will be transformative because they have to be. And not an extinction, herd thinning process, all the innovation, great art, and higher standards of living worldwide are from the rise in population. Humans thrive when pushing the norms

Comments are closed.