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The Economics of Coronavirus: A Reading List

recommended by Ricardo Reis

As we deal with the economic fallout of coronavirus, what lessons can economic theory and economic history teach us as we navigate the months ahead? Ricardo Reis, professor of economics at the London School of Economics—and consultant to both the Bank of England and the Federal Reserve—recommends four books and one article to help us think through the economic challenges posed by Covid-19.

Interview by Benedict King

A lot of the books you’ve recommended to help us understand the economic impact of coronavirus deal with historical parallels and digging out lessons from economic history. But are there any parallels in history for the economic situation we’re in? It’s not like wartime, because in wartime production capacity is maximized, which ours absolutely isn’t. At the same time, it’s a rather odd collapse in demand because it’s been forced on the economy by the government.

As always, one can learn from history and learn from past experiences, but it is undeniable that this shock is unique in terms of how it’s affected our economy. Even in terms of health pandemics, which have been with us for a very long time, this coronavirus is a unique phenomenon when it comes to its economic impact. That doesn’t mean that drawing some analogies and looking at past experience are not useful. For instance, in the last century, looking at the 1918 Spanish flu pandemic is certainly useful. Looking at World War II is useful. And, even, looking at periods when the merits and flaws of free trade have been questioned, or when questions have been raised about what to do about debt, is useful. Those are all useful for us in thinking about how different parts of the problem relate to different things that we’ve learned about. But I agree with you that this is a unique event. And, as important, is the fact that often the historical analogies that are made are abuses of history, which don’t necessarily apply.

When it comes to the books, let me give a defensive answer to your question. The study and development of economic theory tends to be published in journal articles, whereas economic historians publish more books. As a result, the bias towards books is reflected in me recommending more things to read that look at the past and its pattern in history, rather than theoretical models, which are mainly elaborated in journals and which I doubt your readers would be so interested in.

From an economics point of view, what are the known unknowns and the unknown unknowns of this situation? Not in relation to the virus itself and its behaviour, but the economic management and unwinding of the lockdown and the return to ‘normal’—what can we say about what may be coming over the hill at us?

We have a handle on some of the uncertainty from past experiences. Not that we know what will happen, but at least we have seen it before and can make slightly more informed guesses:

1. The first is on how much public debt will rise during this crisis, how much it should rise, and how it will be paid for. While there is much disagreement, the arguments on different sides are based on logic that has been thought through and data that has been gathered over the years.

2. What do central banks do in these circumstances and how can we think about inflation targeting or other objectives over the next few years?

3. The importance of safety nets and programs, like unemployment insurance or the welfare state, when it comes to addressing these very large aggregate shocks.

4. Fourth, the way in which debt and financial markets can propagate these shocks, especially if policy neglects them. Generally the role of debt in propagating crises.

5. And fifth, the extreme importance of people’s expectations in relation to what the government will and will not do, whether they will follow government advice, and whether they will trust transparent government advice or be mistrustful, with that leading to the backfiring of policies.

We can’t know exactly how those things are going to play out this time, but they are things that we at least have a handle on and can discuss in terms of how they usually work. We can at least conjecture how they will work this time around.

Unknown unknowns are much harder:

1. We’ve never frozen an economy to this extent and frozen it so quickly. That’s a big experiment, just like if I gave you a piece of pork and you’ve never frozen anything before, you never quite know which bits are going to come out good and which bad when you unfreeze it.

2. What medium-term transformations this virus will lead to in people’s desire to consume leisure goods in public or private, or in the extent that this will lead to changes in how much people work from home or not. More generally, the sectoral structure of the economy could change a lot, or not at all. That’s just an unknown unknown.

To give a concrete example, people ask me whether the tourism business is going to collapse or not. The answer is that I don’t know. I could see it boom as opposed to collapse, actually. You can tell convincing stories both ways. Similarly, is teleworking going to become more prevalent? I don’t know. It could go either way. But the answers can matter a huge amount when thinking about the post-virus economy. To pick a more fun example, remember three months ago we were all worried that robots were going to take our jobs? Now, I think it would be great if a robot could do my job.

3. Finally, the third unknown unknown takes us more into history or political science, namely how we are going to revisit that classic question, ‘What’s the role of the state?’ given its response to the virus, the increasing role of government, and the invasions of our privacy. That’s the third unknown unknown, in that I don’t really feel like I have a good handle of which way it’s going to go.

I’ve seen very plausible, even passionate, arguments for each three of these that it will go in one direction. And equally passionate arguments that it will go in the other direction.

Let’s move on to the books you’ve chosen to help us better understand the economics around coronavirus. The first one is Free Trade Under Fire by Douglas Irwin. This is basically a defence of free trade. What story does it tell and why is it relevant in the current situation?

Ever since Adam Smith economists have been writing book after book trying to explain why free trade leads to an improvement in the welfare of everyone. Why is it that imposing trade barriers is as much of a good idea as dropping rocks into one’s harbours? Or that refusing to allow people to migrate makes people poorer both at home and abroad? Or why is it that a country choosing to go it alone, making everything domestically and stock piling goods, is expensive, inefficient and makes you worse off? And finally, why is it that a country shouldn’t really try to specialize in a little bit of everything but rather follow the principle of comparative advantage, first elaborated by David Ricardo? Economists have been doing this for a while. I picked this book because I think that, in the last 10 years, it is the one that has revisited this topic most eloquently.

“The case for free trade continues to be as strong now as it was 100 years ago”

The reason why I bring this up now is that at the household level, we’ve all seen very clearly these lessons that economists have been articulating for a long time. We see the virtue of being able to trade with the butcher and the baker and how my life is much worse now that I can’t. Instead, I can only trade with the few that do deliveries, as opposed to trading with all, and this restriction on trade has made me worse off. The virtue of specialization is very apparent now that I’m cleaning my toilets, now that I’m making all of my meals, fixing everything around the house, now that I’m home schooling. I was much better off when I could specialize in just doing economics. The book also talks about how raising barriers to collaborating with others makes all of us less productive, how the inability of people to move and therefore to learn from each other and makes us worse off.

I know it’s a classic lesson in economics, and maybe some people will be tired of reading it. But Douglas Irwin’s book shows how—five years ago, ten years ago—the arguments against free trade are always there and always resurfacing. And yet, the case for free trade continues to be as strong now as it was 100 years ago, and I think this lockdown period has shown it on a very personal scale.

He even takes on anti-dumping duties, doesn’t he?

He does. He also covers commercial policy quite a bit. And again, that’s a lovely example for us to think about now. To what extent, if some firms right now during lockdown give me a discount or don’t charge me for delivery, should I call that dumping? Some people are keeping their prices unchanged, but imposing rationing, while others are raising theirs. The experience of the lockdown has been that many of my tradesmen, sadly not all, have been able to give me free delivery. Would you call that dumping?

Douglas raises another important and relevant question about the relationship between inequality and trade, and how free trade can lead to inequality. And, similarly now, in some ways, you can say that my experience of the lockdown and that of my wealthy surgeon neighbour is that we are more equal than we were before, but neither of us is really better off. Moreover, protectionism creates inequality itself. Some families are doing much better with homeschooling duties than others are. Some families enjoy much better places to be locked down in. Again, the link between free trade and inequality is anything but obvious.

The next books you’ve chosen to help us understand the economic impact of the coronavirus is A Monetary History of the United States by Milton Friedman and Anna Schwartz. You specifically wanted to talk about this book—and a related article—in relation to the post-World War II Treasury-Fed Accord. Could you tell us a bit about the about the Accord and what it replaced?

Let me say why I think this book is important, and why it’s a particularly appropriate one to read on monetary history. I think many people in your generation and many of your readers will have lived most of their life in an environment in which we had an independent technocratic central bank whose goal was to deliver inflation equal to a target. For the most part, central banks have succeeded in delivering that goal. For instance, over the past 25 years in the UK inflation has been at its lowest and most stable in 500 years.

However, if one looks at monetary history just a century ago, one sees that often central banks do other extraordinary things. They change their operations and they change their goals in ways that are, one might argue, appropriate for the circumstances. And, indeed, the current shock, insofar as it bears similarities in some of its effects to World War II or the Great Depression, invites comparisons. When we look at the monetary history of the United States and ask whether, during those times, the central bank looked anything like it does now, the answer is ‘no’. It’s a book that addresses why that was.

“I am not saying that we’re certainly going to see financial repression, but it is on the table”

Second, why the Treasury-Fed Accord? Let’s talk about the Fed and the Bank of England and what they’ve done in the past few weeks. They’ve undertaken extraordinary measures. They’ve taken measures in particular that have been strongly supportive of the fiscal authorities, by intervening very strongly in the government bond markets—the gilts market in the UK, the Treasuries market in the US—and they have also provided an enormous amount of credit to the private sector. In the US the changes in the law voted in Congress effectively took away some of the independence of the central back. That hasn’t happened at the Bank of England, but has very clearly happened, in a legislative sense, in the US.

That is not a bad thing per se. Again, from history and reading Friedman and Schwartz, one learns how that often happened during these circumstances. But what’s also important to understand—and this is why I picked the Treasury-Fed Accord and this lovely article by Bob Hetzel and Rich Leach, “The Treasury Fed Accord: A New Narrative Account”—is to understand how we go from the extraordinary time back to the ‘normal’ time. At the current juncture, we need to try and understand how we will transition in the next few months, maybe the next few years, from these very fiscally driven, highly interventionist central banks—which are really focused on financial stability right now—back to the old let’s-keep-inflation-stable central banks.

The story of the Treasury-Fed Accord is a fantastic history of political manoeuvring. It could really inspire a political sitcom or a West Wing-type TV show, given the amount of political manoeuvring that the US Treasury and the Fed did, fighting each other to try and influence the President towards establishing an independent, inflation-focused central bank, the Federal Reserve that we know today.

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When you have an enormous amount of public debt outstanding there is big pressure for monetary policy to be mostly about keeping long-term interest rates low, so that servicing that debt and issuing new debt is a seamless process for the finance ministry. So, the central bank is, in many ways, subordinate to the finance ministry because its job is to make the job of the finance ministry easier. That situation, if maintained over a long period of time, does mean that inflation becomes volatile and unanchored. And indeed, inflation was volatile in the United States in the 1940s and in the UK through the 1950s.

There comes a time when the central bank says that it should be focused on controlling inflation and no longer just on trying to keep rates low just to finance the debt. The finance ministry, of course, does not like that because now its job is going to be much, much harder. Potentially it’s going to have to deal with high interest rates, especially if it does not behave responsibly with respect to its deficits. As a result, this conflict arises. The Accord was, if you like, the peace treaty. The Accord set out the separation, with the finance ministry—the US Treasury—dealing with fiscal matters and worrying about long-term interest rate and the central bank, the Fed, setting short-term interest rates to try and control inflation.

What was the leverage that the Fed was able to use during the conflict, to get its way?

Simply that part of the nation’s economic goal is having stable inflation.

Your next choice in our discussion of economics and coronavirus is The Liquidation of Government Debt by Carmen Reinhart and Belen Sbrancia, an article published in Economic Policy in 2015. We all know that eye-watering levels of government debt are being created and governments are running extraordinary deficits. What does this article tell us about our potential exit from this state of affairs?

This article explains how advanced economies, from the end of World War II up until the 1980s, paid for the very large debts that resulted from World War II. But the authors also draw from a series of other historical analogies, partly building on the book written by one of the authors, Carmen Reinhart, together with Ken Rogoff, This Time is Different, about how debt often gets high, but also, how sometimes it gets paid.

Much of the emphasis in Carmen Reinhart’s and Ken Rogoff’s early work had been to do with how often we have sovereign debt crises, resulting in defaults, which is why their book was called This Time is Different. But right now it is more important here in the UK and the US to think not about sovereign default, but instead about the issue that is the focus of this article by Reinhart and Sbrancia, which is how the debt is paid. We learn that there is a common answer. You pay the debt in large part, around half of it, by running a primary surplus. ‘Austerity’ is the ugly word we use for that nowadays. ‘Fiscal responsibility’ is what they used to call it. But the other half of how the debt is paid off is by having interest rates lower than the growth rate of the economy. This is the particular point that Reinhard and Sbrancia make.

“Over the past 25 years in the UK inflation has been at its lowest and most stable in 500 years”

Of course, every policymaker would say, ‘Well, let’s just grow out of the problem by having high growth rates.’ But high growth rates push interest rates up, so they don’t really help you per se. What policy needs is that interest rates stay low while growth is high.

And what policy can do something about directly, much more than delivering high growth, is keeping interest rates low. And how does it do so? Reinhart and Sbrancia point to financial repression. By that they mean forcing banks and financial institutions to keep interest rates low by holding government bonds, regulations that keep interest rates low, and constraining financial development so that people can’t avoid getting a low return on their savings. In doing all of these things, the government exerts financial pressure to keep interest rates low.

If you are in the developed world and worrying about the debt and you don’t want to think about default as an option, then financial repression is the thing to read about when trying to think about the problem of high debt.

Thinking about the current situation, is there a different story for the US and other developed countries and for emerging economies?

Absolutely. That’s why I picked this one. When it comes to emerging markets, then we’re talking about debt forgiveness and we’re talking about sovereign default. That’s why I chose this article over the Reinhart/Rogoff book, which is more about defaults. What I wanted to give you was something that would help people think about the likely resolution for advanced economies. That means the US and UK, the euro area as a whole, Japan—essentially the G20.

But there is an interesting side issue here, which is what happens if you only have one region in Europe with high debt and not the others. That was the novelty of 2010-12, that in a banking and monetary union a member state could not implement financial repression on its own. Only the Eurozone as a whole could do it.

If we are going to see financial repression, what are the broader implications of that for going back to ‘normal’.

That’s going to be the big debate. I am not saying that we’re certainly going to see financial repression, but it is on the table, together with austerity, two ugly expressions. If you want to use pretty words, you can say ‘fiscal responsibility’ and ‘keeping financial markets in check’. If there isn’t going to be a default, then there will be some mix of those two. I think if people start reading about this, understanding it and being aware of those trade-offs, they will have a leg up in the debates that we’re going to see arising in the next three-to-five years in economic policy. In the end, it’s going to be a mix of the two, but what mix will be is, I predict, going to be a hotly debated topic in economic policy in many forthcoming elections.

And if we see financial repression in the UK, the US and the eurozone as a significant economic result of coronavirus, won’t that lead to the fragmenting of financial markets, driving up the costs of doing business?

Absolutely. If we do see financial repression, there will be less cheap financing for people’s mortgages. With repression will come more segmented financial markets and more monopoly rents for the banking sector, potentially. An example of this comes from the United States in the 1970s. When policy tried to force financial institutions to hold government debt that paid a very low interest rate, the banking sector successfully lobbied for the introduction of laws that made it illegal to pay interest on deposits. So, banks earned very little return on the government bonds they held, but they also ended up paying no interest on deposits. So, who ended up paying for the financial repression? The poor depositors, those who could only have their savings in checking accounts, as opposed to other investments whose return rises with inflation. Those who had their savings in checking accounts were the ones that lost the most. And it’s from the 1970s, from precisely that episode, that comes the sense that inflation is the cruellest of taxes. One might say financial repression allowed inflation to be the cruellest of taxes.

Let’s move on to the fourth book. This is The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon. This telling a story about the re-emergence of monopolistic capitalism in the United States. How does it help us to understand the potential economic impact of the coronavirus?

In choosing my books around the economics of coronavirus, I felt a little guilty that I hadn’t chosen any recent books. But this one is very recent, published just a few months ago (Philippon is still going around giving talks about it). It’s a book on what was already a very important question before the virus in the US, in Europe, in China and Japan and the advanced economies. It has ceased to be a focus of attention over the last month, and rightfully so because we have had other things to worry about. But, I think the question is going to come back even more strongly six or twelve months from now. The question is going to be crucial at all future elections and in economic policy debates. The question is, ‘How worried should we be that a few companies, like Facebook, Google, Amazon, Apple have such a very large market share and are so powerful in our societies?’

What this author notes very thoroughly is how the extent of competition in the US economy, as measured in a bunch of different ways, has significantly declined in the last 20 years, partly through the influence of these very large companies. They seem to have more market power and with that has come less productivity, less investment, fewer new entrants, less business dynamism and lots of concentration.

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Now, why has that happened? As the author notes, the difficulty here is that by the nature of their businesses and the innovation that’s come with the IT revolution, a lot of them require these network effects that require very large companies. We might not want to have 59 different social networks. But, because of that, our approach to any possible antitrust concerns has been to let them grow in a way that we didn’t let Microsoft grow in the 1990s, or other companies grow before. The question today is whether we have overdone it. Have we put the network effects argument too much ahead of the anti-competition argument? Are we now too much on the opposite side of the curve, where these companies have become too powerful and the network effects, and the scale economies they are generating are actually not quite so relevant any more? This is a very important debate. And, by the way, it’s not obvious to me at all what the right answer is. But the author of this book, even though he clearly has one point of view, does a great job of highlighting the different sides here.

Over the past month we have already seen the increasing importance of delivery systems, at which Amazon excels, of online social networks like Facebook, and of online digital collaboration where Google or Apple are more important. That situation has boosted the importance of this debate and has, if anything, brought the urgency of it forward in time. It is going to be a very important one over the next few years.

Does Philippon suggest what the shape of any sort of new antitrust legislation to deal with these companies might be? Is the antitrust legislation the US did in the late 19th century a possible template, or will some new approach be required?

The author suggests that there are many different ways in which we could deal with it. But I think the book’s importance is more general, and lies in how he argues—somewhat controversially, I should say—that antitrust has been much less active in the last 20 years. So, it’s not so much a question of what tools are required, or the ways of operating them, as the extent to which antitrust in the United States has been less active, less willing to intervene.

And is that because of effective lobbying?

That would be one reason, and the author discusses that. One of the four parts of the book is about the role of money and politics and lobbying. That may have had an impact and I think it’s important to discuss that. But I think the economic debate is more interesting. It is less obvious and less about the ‘bad lobbyists’. Economics says there’s an argument for why Facebook should be a very large company. It’s a network and it doesn’t make sense to have small networks. There are clearly economies of scale in distribution and deliveries, and so, it makes sense that Amazon is a very big company, in the same way that Walmart is a very big company. And these companies are extremely productive and efficient in some ways precisely because they can have such large scale.

The question is how to weigh those benefits against the costs in terms of lack of competition, lack of innovation and lack of productivity growth. And it’s looking at those trade-offs, where the picture’s much less obvious and where we need to spend much more time thinking harder about them, discussing them and trying to measure them that I find interesting. Sure, maybe the bad guys went and threw money at it and bought politicians, which may be true, but I find that less interesting.

It’s striking that they are all American companies. The EU has, I think, been much more aggressive on antitrust issues. Aren’t these huge companies a massive advantage for the US in a general sense, with their global reach and dominance?

They are, but as Philippon notes, they’re also a disadvantage, because they may explain why the US economy’s productivity growth has been quite dismal over the past 20 years, to give one example.

Let’s go to the final book Hard Head, Soft Hearts: Tough-minded Economics for a Just Society by Alan S Blinder. This is a story about the 1980s primarily, isn’t it, but one that has lessons for how we think about our response to—or policy options in the face of—the economic impact of the coronavirus?

I really like this book, in no small part for its title, but also because I think its conclusions resonate with truths of today.

First of all, as background, Alan Blinder is a well-known left-wing—in US terms, liberal—intellectual and economist, who has served in many Democratic administrations. He notes that if one has a soft heart for the under-privileged, one also has to have a hard head in discussing policies. We cannot just say, ‘We need a bigger government that does more things and just give money to people; that will solve all the problems.’

What is a hard head together with that soft heart? In the last few weeks, we’ve had to support businesses and households in the face of the initial economic impact of the coronavirus. A lot of people would have suffered enormously without that. The unemployment rate has shot up, there’s greater poverty, children in abusive families are being locked down at home, people are unable to work and make a living, firms are failing through no fault of their own. It’s important to have a soft heart.

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But a soft heart that is properly connected to a head says: ‘Let’s provide a lot of support, but let’s remember this is not just about giving more cash quicker to more people, like the heart says, because there are trade-offs now and there will be more trade-offs soon.’ We need to have a hard head to choose the best way to help people, to decide the best way to use the scarce resources of the government, and to understand the pitfalls and the virtues of different options. That is what it is to have a hard head. Blinder wrote his book in the context of different policy debates that were going on in the 1980s, but the general approach of combining the soft heart with a hard head is ever present.

Moreover, the lessons he draws are also relevant today. In the last chapter he talks about the roots of bad economic policy, and asks why it is that sometimes the heart beats the head and we end up with bad policy. He has three answers. One, that reality is complex, it can’t be encompassed by a T-shirt slogan. Two, that ideology often overrules pragmatism. And, three, that the presence of special-interest lobbying subordinates the common good.

“As an economist, I feel I should offer a warning that we are advocating revolutions in response to a temporary shock”

And, if I think about the difficulties we’re likely to face with hard head/soft heart issues right now, those three lessons still have a lot to teach us. First, it’s much easier to have a slogan that says, ‘Let’s give money to lots of people right now,’ than to think about the complex reality of how to get money to people, how best to use that money and who to help when incentive problems are raised. When it comes to the second lesson, which is ideological forces versus pragmatism, I’m always struck by how people who have been defending ‘X’ for 20 years see that this crisis provides an extremely strong argument for ‘X’ to be done right now, even if for 20 years they’ve been unable to convince others of ‘X’s merits. The role of ideology is quite striking. And, third, special interest groups. Look at the extent to which, very quickly, we see special interest groups saying, ‘My business should be bailed out, not some other one.’ It’s hard to protect the merits of free trade that we spoke about earlier on, if you’ve got these special interests trying to take over the government.

So, I think all three of Blinder’s lessons are very visible now and that’s why I thought this was a way to conclude my five books with those three lessons and the more general motto: to have a hard head in spite of a soft heart.

Have you noticed a clamour for particular policies anywhere that are particularly worrying you?

I don’t want to say they worry me because that makes it sound like I’m against these changes. I’m just pointing out that they’re clearly driven by an ideological desire to change our society. Some of them I may actually be in favour of, while others I may find less appealing. It’s more that, as an economist, I feel I should offer a warning that we are advocating revolutions in response to a temporary shock.

Those revolutions could be policy proposals to give an enormous role to the government from now on—buying goods from everyone, deciding who gets what. They could be proposals for dramatic changes in the tax system, taking more from some than from others because we like redistribution. Or they could be proposals that use a very heavy hand to promote more climate-responsible or green industries, as opposed to others, when the economy reopens. They could be proposals to protect airlines because they’re public infrastructure, so their shareholders are bailed out. There are proposals for closing borders now, using the fact that the virus has spread internationally to bring protectionism back, disguised as a way to keep us healthy.

It’s not about highlighting any one in particular, my point is that all these proposals share this characteristic of being ideologically driven.

Interview by Benedict King

April 29, 2020

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Ricardo Reis

Ricardo Reis

Ricardo Reis is the A.W. Phillips Professor of Economics at the London School of Economics. Recent honors include the 2016 Bernacer prize for best European economist under the age of 40 working in macroeconomics and finance, and the 2017 Banque de France/Toulouse School of Economics junior prize in monetary economics, finance, and bank supervision for a researcher of any nationality based in Europe. Professor Reis is an academic consultant at the Bank of England and the Federal Reserve system. He directs the ESRC Centre for Macroeconomics in the UK and has published widely on macroeconomics.

Ricardo Reis

Ricardo Reis

Ricardo Reis is the A.W. Phillips Professor of Economics at the London School of Economics. Recent honors include the 2016 Bernacer prize for best European economist under the age of 40 working in macroeconomics and finance, and the 2017 Banque de France/Toulouse School of Economics junior prize in monetary economics, finance, and bank supervision for a researcher of any nationality based in Europe. Professor Reis is an academic consultant at the Bank of England and the Federal Reserve system. He directs the ESRC Centre for Macroeconomics in the UK and has published widely on macroeconomics.