Author: Jonathan Portes
Both economists and policymakers have highlighted the danger that the short-term measures taken to limit the spread of Covid-19 could lead to lasting economic damage. This column identifies and discusses five conceptually separate channels that could lead to such ‘scarring’ and attempts a very rough quantification of the potential impacts in both the short to medium term and longer term. Policy will eventually need to ‘pivot’ from helping firms survive and preserving jobs to helping workers into new jobs.
From the beginning of the Covid-19 crisis, economists have been remarkably united on what policymakers should and should not worry about from an economic perspective. The very sharp fall in GDP resulting from health-related restrictions, as well as individuals’ own decisions, is not the main concern – indeed, it is necessary to suppress the virus and therefore allow economic recovery. Rather it is to prevent permanent damage to the economy, often referred to as ‘scarring’. “The key is to reduce the accumulation of ‘economic scar tissue’” .
The term ‘scarring’ – which seems to have replaced ‘hysteresis’ among economists as well as the general public – has appeared 32 times in the Financial Times since the beginning of the crisis; in the previous year it appeared only a handful of times in the economic sense. But it is a catch-all term, referring to a number of quite different ways in which transitory economic conditions can negatively affect the long-run level or growth of output. In thinking about policies, both now and as countries emerge from lockdown, it is helpful to distinguish between these potential channels and to assess their relative importance. [Continues]
SOURCE: Portes, Jonathan. “The Lasting Scars of the Covid-19 Crisis.” VoxEU, 1 June 2020
ACKNOWLEDGEMENT OF COUNTRY
The Brotherhood of St Laurence acknowledges and recognises the Traditional Owners of the land upon which we live and work, and we pay our respects to their Elders both past and present
Produced by the librarians at the Brotherhood of St Laurence in Melbourne, Australia