Imagining the AC Economy

April 3, 2020

AC is of course After-Coronavirus, and we need to distinguish short run from long run.

In the short run, the most important thing to keep in mind is the highly differentiated impact of the crisis, both health and economic.  The virus has hit different countries at different times, so recovery will not be synchronous.  Even more important, the policy response to the health crisis has been highly differentiated, and so too has been the competence with which even the same policy response has been implemented.  So the economic crisis will be highly differentiated, and the recovery as well.

The problem is that the BC (Before-Coronavirus) Economy was highly synchronous, with globe-spanning supply chains depending on each link moving in lockstep with every other.  So even if all we did was to restart the pre-existing supply chains, it’s not going to work.  There will inevitably be supply bottlenecks, and in addition there will be demand bottlenecks since there is no reason to expect that demand recovers synchronously with supply.  It’s not going to be a V-shaped recovery.

And even in the longer run, once everyone finally moves to recovery mode, we will not be restarting the BC supply chains because we have learned from the crisis about their fragility.  Supply chains of the future will be more resilient, with plenty of inventories and redundancies.  And certain industries deemed vital for national security will be on-shored.  The real challenge facing us is thus the challenge of reconstruction, which I take to be about resisting the drift to autarky and nationalism and embracing instead the challenge of re-globalization.

A significant resource for this process of reconstruction will be the fact that timely intervention by the Federal Reserve System has put a floor on the global dollar system.  That means we will not be adding an international monetary collapse to our list of troubles, and that we will likely avoid a global depression.  Even more, it means that we already have in place the monetary and financial infrastructure we will need for AC reconstruction.  No need for Bretton Woods.

The fact that we needed the Fed’s intervention however tells us that a significant job of financial reconstruction lies ahead.  No central bank ever wants to take the financial system onto its balance sheet—as the Fed is now doing–but the only way to avoid doing so is to prevent the crisis from happening in the first place.  That means we are going to have another round of financial reform, this time more global than national, and it is natural for the US to lead that.  It is, after all, a dollar system.

In other dimensions of reconstruction however the US is a less likely, and a less natural choice, to lead.  After World War II, the US was the only major economy left standing, accounting for 50% of global production.  Around the world, there were disparate views about the future toward which we should be building, but once the US formed its own view and began to work toward it, that became the focal point for expectations.  And it was those expectations more than anything else that guided individual decisions about how to rebuild.

Today not only is the US no longer the dominant global economic force, but it is also (at present) the global epicenter of the health crisis, and the economic crisis as well.  The US will not come out of this war unscathed.  Indeed, the problem of reconstruction is likely to loom as large or larger in the US as elsewhere.   Grappling with that problem of reconstruction will require, first and foremost, formulating a common US vision of the post-AC US economy.  The US is in no position to be leading global reconstruction; national reconstruction will be occupying its attention for the foreseeable future.

In this regard, it is perhaps important to remember that, unlike most other developed economies, the US has no remembered history of post-WWII reconstruction to appeal to.  Indeed for an American the very word Reconstruction most likely conjures up images of post-Civil War carpet-baggers, a very distant time indeed but perhaps a time with lessons for the present.  Today, not only is the country split politically between red and blue but also, like the world, highly differentiated geographically in its policy response to the crisis, and highly differentiated also in the competence of that response.  Everyone can see that West Coast is doing one thing, East Coast another, and South yet a third, not to mention the differentiation between urban and rural within states.

At the global level, the challenge is to avoid the drift to autarky and nationalism, and the way the US can best help is by getting its own house in order, first by recognizing that return to status quo ante is impossible, and then by building internal consensus around a possible US AC economy.

Not so easy.  The differentiated impact of the Covid-19 shock on vulnerable populations, and the overlapping differentiated economic impact of the policy response on those same vulnerable populations, together pose the biggest political challenge.  In the BC economy, globalization was sold as a potential win-win, meaning that winners would gain enough to compensate the losers, but of course they never did.  In the AC economy, reglobalization has to be an actual economic win-win, or it will prove politically impossible to reconstruct.