It has been less than a year since COVID-19 became a part of our new reality, but many experts and professionals have already given their opinions and predictions on the ways the virus has and will affect the global economy. On October 29th Olivier Blanchard contributed to this discussion with his predictions on the corona crisis and the inequality it brings. Former chief economist of the International Monetary Fund, graduate and eventually professor of economics at MIT, one of the most cited economists in the world (according to IDEAS), a fellow of Econometric Society — the list of Olivier Blanchard’s achievements goes on. Notably, he headed the IMF between 2008 and 2015 — during the Great Recession, marked by the near-collapse of the euro, a world financial crisis, housing bubble, and three-act Greek tragedy. Dr. Blanchard spoke about dealing with the economic consequences of the Corona crisis and the publication of his book in February.
Being chief economist of the IMF implies slightly different work compared to conventional economists. Dr. Blanchard, while working at IMF, was the “closure” of the chain of multiple academics as well as practitioners, who researched the field and provided advice in combating crises or inducing economic growth. Olivier Blanchard is known for his Keynesian approach, which he finds natural, and, while being the head of IMF, he made a big focus on fiscal policies in combating the Great Recession of the past decade.
Dr. Blanchard is positive about the response the IMF has done so far to tackle the crisis caused by the COVID-19 pandemic. This time the International Money Fund is clear about the necessity of fiscal response, and they have been highlighting the importance of it for quite a while. He believes at this point that there is not enough room for a monetary response, which, of course, is still needed, but not vital to combat the crisis. The reason for that is the fact that interest rates were already low at the outset of the pandemic, and that’s why the IMF strongly advises Central Banks to provide liquidity for markets and investors. Encouraging spending and providing liquidity for emerging markets has also been one of IMF strategies that Dr. Blanchard is positive about.
With small and medium businesses closing worldwide due to restrictions imposed by governments, it is vital for the IMF to serve as a financial safety net. Traditionally, they gave out an equal amount of grants and loans; this time, however, as Dr. Blanchard emphasizes, the corona crisis requires an adapted approach, and thus a different ratio of grants and loans. He believes grants should be prioritized over loans, and more criteria are needed for countries to qualify for the latter.
What’s more, one of the hot topics he covered in his interview was the question of today’s youth bearing the costs of the pandemic in the future. With the rise in debt and budget deficit due to the crisis, young people are alarmed at having to face difficulties in the future and be the ones to pay the cost of the virus. Surprisingly, Dr. Blanchard has good news: future generations won’t have to bear the consequences of COVID-19. Since interest rates are lower than the growth rate of economies, there’s no need for governments to increase taxes in the future. Nevertheless, someone will still have to pay the costs, and the investors are going to be the ones to fall victim of the crisis. They will pay it off in the form of value interest rates, meaning they will have to accept extremely low rates to hold the debt.
Now that the question of future payout is cleared up, what do we do with the economic consequences of the pandemic in the present? Dr. Blanchard talks about world inequality in his upcoming book and emphasizes its place in the context of the pandemic. In the Western world, a very common comparison is often used between the US, notorious for the lack of policies and support, and Europe, an example of a relatively equal society. Dr. Blanchard explains such a difference with two reasons: one being trade, and the other one technology — progress in science leads to hollowing middle income jobs, eliminating them from the labor market and leaving millions unemployed.
But how do we deal with such an unfortunate situation? Dr. Blanchard explains three phases to deal with emerging inequality by using the metaphor of “producing” inequality in social structures.
- Pre-production. Providing high quality education to everyone in society, “skilling up” the population to influence future financial capital. Increase inheritance taxes and affect the transmission of wealth: basically, prepare the ground for the equal set off.
- Post-production. Mitigate the existing consequences of inequality: progressive taxes, affirmative action.
- Intervention in the production process. Restricting trade, slowdown technological process in order to let people adapt, and support close-to-extinction professions.
Dr. Blanchard admits this approach to be conceptually appealing, but believes the practicalities are not yet clear. He highlights the importance of intersectionality when addressing inequality: governments should use policies in combination — in a set of comprehensive measures.
If you would like to watch the original interview, you can do so here, or find it on Room for Discussion’s Youtube page, on Spotify or Soundcloud. If you’d like to read more reviews on Room for Discussion interviews done by Rostra, you can check out our Room for Discussion section.