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March 27, 2020, 10:07 a.m. EDT

This isn’t your ordinary recession — the U.S. is now experiencing a economic meltdown more typical of a Third World natural disaster

Advanced economies are saddled with structural and institutional impediments that have stifled growth in a manner quite familiar to developing economies

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By Mohamed A. El-Erian of Project Syndicate


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A man enters a makeshift morgue outside of Bellevue Hospital in New York, U.S.A.

LAGUNA BEACH, Calif. (Project Syndicate) — With the coronavirus devastating one economy after another, the economics profession — and thus the analytical underpinnings for sound policy making and crisis management — is having to play catch-up.

Of particular concern now are the economics of viral contagion, of fear, and of “circuit breakers.” The more that economic thinking advances to meet changing realities, the better will be the analysis that informs the policy response.

That response is set to be both novel and inevitably costly. Governments and central banks are pursuing unprecedented measures to mitigate the global downturn, lest a now-certain global recession gives way to a depression (already an uncomfortably high risk).

As they do, we will likely see a further erosion of the distinction between mainstream economics in advanced economies and in developing economies. Such a change is sorely needed.

Breaking news : Follow the latest on the coronavirus.

With overwhelming evidence of massive declines in consumption and production across countries, analysts in advanced economies must reckon, first and foremost, with a phenomenon that was hitherto familiar only to fragile/failed states and communities devastated by natural disasters: an economic sudden stop, together with the cascade of devastation that can follow from it. They will then face other challenges that are more familiar to developing countries.

Consider the nature of the pandemic economy. Regardless of their desire to spend, consumers are unable to do so, because they have been urged or ordered to stay home. And regardless of their willingness to sell, stores cannot reach their customers, and many are cut off from their suppliers.

First things first

The immediate priority, of course, is the public-health response, which calls for social distancing, self-isolation, and other measures that are fundamentally inconsistent with how modern economies are wired. As a result, there has been a rapid contraction of economic activity (and therefore economic wellbeing).

As for the severity and duration of the coming recession, all will depend on the success of the health-policy response, particularly on efforts to identify and contain the spread of the virus, treat the ill, and enhance immunity. While waiting for progress on these three fronts, fear and uncertainty will deepen, with adverse implications for financial stability and prospects for economic recovery.

When thrust out of our comfort zones in such a sudden and violent fashion, most of us will succumb to some degree of paralysis, overreaction, or both. Our tendency to panic lends itself to still deeper economic disruptions. As liquidity constraints kick in, market participants rush to cash out, selling not just what is desirable to sell, but whatever can feasibly be sold.

Financial liquidation

When this happens, the predictable result is high risk of wholesale financial liquidation, which, in the absence of smart emergency policy interventions, will threaten the functioning of markets. In the case of the current crisis, the risk that the financial system will reverse-infect the real economy and cause a depression is too big to ignore.

That brings us to the third analytical priority: the economics of circuit breakers. Here, the question is not just what emergency policy interventions can achieve, but also what lies beyond their reach, and when.

To be sure, given that simultaneous economic and financial deleveraging would have disastrous implications for societal wellbeing, the current moment clearly demands a “whatever-it-takes,” “all-in,” and “whole-of-government” policy approach.

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