This week we focus on a single scholarly article, published in money.163.com, with the attention-grabbing headline:
Nothing is more dangerous than answering the wrong question correctly.
Written by Professor Liu Qiao, Dean of Guangha School of Management at Beijing University, it is detailed analysis of the possible global economic fallout from the COVID-19 pandemic.
Professor Qiao examines the forecasts that China made in February.
Most market participants believed that the GDP growth rate in the first quarter may decline by 2 percentage points, and that it may fall by 0.5 percentage points throughout the year. Basically, it can still maintain a growth rate of 5.5% to 5.8%.
However, on March 27th, he noted that global COVID cases numbered over 500,000 and deaths were close to 20,000. (Just one week later, global cases now number over 1 million and deaths stand at 52,000.)
Most countries are locked down, economic activity has almost halted. Unemployment is rising rapidly. This is a natural disaster, the Professor concludes, with huge economic losses in the short-term. It is quite different from the recession of 1929 or the financial crisis of 2008. These were recessions brought about by structural flaws in financial systems.
This epidemic impacts the real economy.
Thus, tackling current economic issues in the way we previously tackled financial crises, is ‘answering the wrong question perfectly’. National stimulus plans currently start with national financial systems.
However, once the financial crisis finally erupts, the impact of the financial system is fed back to the real economy, forming a vicious cycle of negative feedback. The global economy may end up in ruins.
In other words, what is happening around the world today could make the long-term economic consequences even worse.
Professor Qiao believes that approaching the global crisis as a natural disaster (as opposed to a financial one) is essential.
Macro policies must be precise and must not worsen structural problems.
Small and medium industries are the key to stimulating demand. In most economies, they provide 80-90% of all employment. He cites the USA where unemployment has risen in one week to 2% or 3.3 million people. Some forecasters predict unemployment in the USA could reach as high as 20%. Structural liquidity, like quantitative easing, needs to reach the firms and individuals that provide employment. Large infrastructure projects, for example, take time to implement and even longer to benefit SME’s.
Professor Qiao’s suggestions are mainly aimed at the PRC. However, they are equally relevant elsewhere:
- VAT and other taxes should be reduced. If firms die, there will be no tax revenue anyway.
- Loans to SME’s are critical. (In the UK, for example, despite Government promises, SME’s are finding it hard to get loans of any kind.)
- Raise personal income tax thresholds for everyone
- China is interested in ‘consumer vouchers.’ Western countries suggest some form of basic guaranteed personal income. The idea is the same – enable citizens to be able to spend
- Investment is essential to be sure. But it must be investment that is targeted towards raising consumption.
We want to emphasize that macro policies should start with consumption, employment, and small and medium-sized enterprises. We need to answer the correct questions … rather than answering the wrong question perfectly.