Excessive health damage from Covid-19 will be followed by excessive wealth damage – unless governments act now

Published on 2 April 2020

Michael Lipton

Emeritus Fellow

Kipling’s The Gods of the Copybook Headings is one of my unfavourite poems – as an author he has his critics, but perhaps is too complex to be simply an imperialist bad guy – but it has much to tell us about the economics of coronavirus.

The Covid-19 shock to demand and supply

First, coronavirus is a massive simultaneous shock to both demand and supply. Demand is sharply cut, as both sick and isolated buy much less. Supply is sharply cut, as they produce much less. Governments have, in my view rightly, responded by fiscal policies and actions that bring:

(a) massive injections of demand, to ensure continued incomes for the sick or isolated, and post-crisis survival for many companies;
(b) massive reductions of supply, by ordering large numbers of workers to stay home.

It is a Law of the Copybook Headings that (a) plus (b) produces inflation. “Though we had plenty of money, there was nothing our money could buy”. That law holds despite big issues of timing, velocity of circulation, initial spare capacity, banks’ conduct, monetary policy, etc. (If it’s safe, you can check this in price trends at local shops and delivery services.)

To consume a closed system must produce

Second, though in the short term rich countries can (and should) draw on resources and borrow to compensate many people who can’t work, in the long term it’s a Law of the Copybook Headings that, to consume, a closed system must produce. “If you don’t work you die” is valid for the world, and for each individual country within it (unless it colonises or enslaves others).

Reductions in the standard of living

Third, as with the two oil shocks of the 1970s for oil-deficit countries – so for all countries with coronavirus: a large simultaneous shock to supply and demand implies a reduction in the real standard of living (very crudely approximated by average GDP). It’s a Law of the Copybook Headings that the reduction can either fall where it may – as with most plagues through history – or, better, be shifted via post-virus taxes to those best able to bear it (in Kipling’s caricature “robbing selected Peter to pay for collective Paul”, in this case, so rejected Paula may survive and prosper).

Longer-term economic impacts of Covid-19

In our sensible (if tardy) concentration on reducing short-run damage from coronavirus, we have forgotten these three issues. The first, inflation, is already coming back to bite us, and will bite much harder. The second issue – of maintaining at least basic production – will bite if isolation continues for long. The third issue – fair distribution of the inevitable real fall in living standards – is perhaps the hardest. Britain can perhaps tolerate a 10-20 percent cut in average living standards, but not if the poor suffer more. If everyone in Ethiopia, or even Nigeria, suffers a 10-20 percent cut, many of the poor will die of hunger. If the damage is to be shared even tolerably, the rich (even in tax havens) must be made to pay a lot more tax.

Medium/long-term economics of the virus (and the policies required) start at the Laws of the Copy-book Headings, but don’t stop there. Keynesian issues also arise. J. M. Clark’s “acceleration principle” shows that, if demand for consumer goods fails to grow, then demand by consumer-goods-making companies for new equipment/building falls to zero; and if demand for consumer goods falls, those companies may not even replace worn-out equipment/building. When consumer demand catches cold, investment-goods producers – construction, machine-making – catch coronavirus.

All these issues are amenable to policy, but the time to develop such policy is now. We are suffering excessive, delay-induced health damage from coronavirus. Unless the above issues are tackled, this will be accompanied and followed by excessive, delay-induced wealth damage, due to the virus, but exacerbated by Governments’ responses to it, and failure to think ahead.


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