Dr. John Lipsky is no stranger to predicting how the economy will be affected by major world events—and the pandemic is certainly major event. Professor Stephen Cecchetti (IBS) moderated a discussion on Oct. 21 with Lipsky where he talked about the current state of the economy and what policies may or may not have to change in order to assure a strong economy in a post-pandemic world.
Lipsky discussed what he thought were the biggest surprises of the way the pandemic was managed. He was surprised that the effect of the outbreak on the global economy has been only as drastic as the 2008 financial crisis, as he expected a far worse outcome. He was also surprised by the “lack of cooperation and coordination, everybody was acting big and acting quickly but not acting together in terms of fiscal policy. Everybody was acting on their own.”
Lipsky said that while in 2008, the financial system impacted the real economy, during the pandemic, the relationship is reversed. He explained, “To this point, it’s really been so far so good. And in fact, some folks have worried that it’s been too good that credit spreads are too low.”
In other words, the financial system is providing individuals with credit at low interest rates, making him concerned that future high interest rates could hurt the economy. Because of the low rates, there is an unrealistic optimism held by the public about the risk of inflation and interest rates, said Lipsky.
During this time, Lipsky said, there has been a drastic shift from public corporations to non-bank financial institutions. Lipsky said that he is worried that the current effect that the pandemic is having on the financial system may leave the world unprepared for “the real concerns [that] are down the road, an obvious one is credit exposure, especially the small and medium sized businesses,” as well as fluctuating real estate values.
Lipsky was asked by the audience about his views of current fiscal policies and how they have affected the pandemic. He said that it is hard to convince political authorities to invest money into insurance policies that would act as preventative measures for a pandemic. Lipsky also said he thought it was disturbing that the CDC failed to provide accurate testing material during a critical time of the outbreak and that the FDA slowed things down when they were being asked for help.
“As for the fiscal authorities, it seems clear that they relied very heavily once again on the willingness of the monetary authorities to take dramatic and unprecedented action to support financial markets and deck and economic activity,” Lipsky said. Although the current situation is not terrible, he believes it could have been approached and solved in a better manner.
Lipsky said the main problem currently is no one knows clearly how to or when to exit their respective expansionary policies. Due to this problem, Lipsky stated that more fiscal distortions will rise, but politicians will fail to reduce them since they fear being blamed for any downturn or negative change. An even deeper challenge, Lipsky noted, was the process of issuing educational and healthcare reforms along with proper unemployment insurance as all these have and will continue to be affected during the pandemic.
Following the discussion about fiscal policy, Lipsky refuted the idea that the government provided too much stimulus money to individuals. He noted that although almost 40 percent of unemployment recipients reported an income increase the current stipend is not an overshoot. Lipsky said it is not as effective as it could be because the stimulus check given to the public resulted in a quick recovery in consumer spending on durables rather than in services which are needed to keep the economy running. The public is spending most of their money on food and tangible items rather than services that require labor, the amount of jobs will begin to decrease as a result Lipsky explained.
Lipsky also talked about how sovereign debt is not a problem for well developed economies. The current nominal interest rates are very good and many people are not aware of this fact, but prior to the pandemic there was a consistent decrease in the percentage of tax revenues that were needed to serve public debt. However, Lipsky emphasized that this was applicable to well developed economies. Meanwhile, for emerging or developing economies, the debt crisis is around the corner if it has not already started for them.
The problem, according to Lipsky, boils down to the structure of debt. The issue as he mentioned is not the amount of debt, but rather getting major lending countries to agree to restructure their debt systems. China is just one example of a country that is refusing to change their debt structure unless the US’s structure changes first. Given all these factors, Lipsky believes that it is possible that a large amount of people will be forced back into poverty unless policies are implemented to help.
Lipsky was asked to comment on whether he believed the International Monetary Fund (IMF) report that over 100 million people could be driven back into poverty was an accurate statement. He responded that it is indeed a valid statement given that the amount of debt that will start to pile up for individuals who just managed to move themselves out of poverty, but will have a hard time paying back loans. Unless the world finds a way to supply inexpensive medical help and financial support to the general public, people will be driven back into poverty, said Lipsky. He added that the IMF and World Bank are attempting to start a debt suspension initiative that will make sure that certain debt will never have to be paid during the pandemic.
Lipsky addressed what effect he thinks the upcoming election may have on the current global economy and its policies. He stressed that the current global situation is not solely the United State’s fault, but rather the United States is just a piece of the problem. In order to keep the global economy sturdy, trade relationships need to be maintained as well as financial relationships, said Lipsky. The only way this is possible, according to Lipsky, is if the relationship between countries’ political leaders is strong.
He ended the talk by expressing his concern that despite months of political debates for the presidency, that no major comments and thoughts have been given to trade relationships, outside of saying “we need to work with our allies.”