DRAFT: Þe Plague Years Have Made Me More Optimistic About þe Future of þe Global Economy

Remembering last year at Jackson Lake Lodge: Global worthies' longing to pull þe austerity-leash choke-chain appears curbed; & þe plague years have shifted þe balance of human activities in þe...

Remembering last year [CORRECTED] at Jackson Lake Lodge: Global worthies' longing to pull þe austerity-leash choke-chain appears curbed; & þe plague years have shifted þe balance of human activities in þe direction of more high social-return investments…

Two things worth remembering from the papers and drafts prepared for last year’s Federal Reserve Bank of Kansas City’s Jackson Hole symposium <kansascityfed.org/research/jackson-hole…>:

1. John Fernald & Huiyu Li: The Impact of COVID on Productivity and Potential Output <kansascityfed.org/Jackson%20Hole/docume…>: ‘The pandemic has left its mark… potential output fell 1.5 to 2%-points… mainly through reduced labor supply. This level effect should… unwind…. Reasons why pandemic disruptions… boosted or harmed productivity…. largely balanced out…. But… both the positive and the negative effects are large…. WFH [industries] have grown somewhat faster…. Hard to… WFH [industries] have performed extremely poorly…. The beneficial level effects are likely to remain. We are hopeful that some of the pandemic disruptions… in goods-producing and high-contact industries will ease over time…

2. Gita Gopinath: kansascityfed.org/Jackson%20Hole/docume…: ‘[On r*] it seems either unlikely that the pandemic will have much of a quantitative effect on… key determinants… or the effects are simply uncertain…. The pandemic has clearly spawned rapid technological progress in areas such as online retail, but may have also increased… concentration… restrain[ing] future technological advances…. Aging demographics and rising inequality… are likely to keep r* low… [with] high uncertainty.… There is good reason for concern… [about] an era in which supply shocks are larger, and in which inflation expectations may be less well-anchored…. Accordingly, central banks must act decisively today to ensure that inflation expectations are anchored…

Those are the two pieces up on the FRBKC website from which I learned a lot, about the economic effects of the plague years from the first, and about how global worthies view the situation from the second. Global worthies seem very aware of and wary of a return to the unfortunate zero-lower-bound days of secular stagnation, and that makes them much more wary of pulling on the austerity leash choke-chain than they were fifteen years ago. And the growth-accounting and industry-level data we are seeing about the effects of the economic reaction to the plague see a fall in productivity in rival physical-commodity and a rise in productivity in nonrival information-commodity production—and as time passes the plusses from the second seem to me likely to overwhelm the first.

Thus these two pieces have reinforced my increasingly optimistic view of the likely long-term consequences of the plague.

True, the plague was a deadly and devastating shock to humanity and to humanity’s economy, bringing, primarily, megadeaths, while also causing unprecedented disruptions, losses, and uncertainties. Yet the plague years also focused humanity. I suspect that the plague years have stimulated innovation, improved governance, and enhanced resilience. In the long run it is these factors that will shape the furture and far-future prospects of human economic growth and welfare once we look beyond the next business cycle.

I was surprised during the plague to find that humanity’s governments had both more and less state capacity than I had thought. “State capacity” is the ability of governments to effectively design and implement policies that serve the public interest. On the one hand, I was impressed by the remarkable speed and scale of scientific research and development (R&D) that led to the discovery and deployment of vaccines and treatments for COVID-19. This was largely driven by public funding, nation-level coordination, international collaboration, and knowledge sharing. On the other hand, I was dismayed by the failure of many governments to contain the spread of the virus and protect their populations from its health and economic consequences. This was largely due to poor planning, communication, and enforcement, as well as by political polarization and misinformation.

However, the absence of state capacity in public health came as such a shock that attention is now focused on boosting it—and not just in public health. The plagure exposed the weaknesses and gaps in many aspects of governance: social protection, education, infrastructure, regulation, and taxation. Bureaucracy quality and implementation effectiveness are now much higher on the problem list, and are receiving much more attention than they used to. This has to be good. I expect that governments will learn from their mistakes, and invest more in building their institutional capabilities and accountability mechanisms. I also hope that citizens will demand more from their leaders and hold them responsible for their actions. And, of course, we have every reason to think that governments will build on their successes.

Another reason why I am more optimistic about the future of the global economy is that I see the plague as spurring entrepreneurship and experimention, I belong to those who think that the market economy massively underinvests in R&D. After all, how could it possibly be otherwise? Small firms do not see a benefit from researching development that quickly diffuses elsewhere. Large firms see some benefit, but they see bigger benefits from creating moats to maintain their current market power.

Thus something like the plague years, which focused a lot of attention on how to produce in the future, and which generated a lot of experimentation and learning from that experimentation, has to be good. It created a strong incentive and opportunity for innovation across sectors and domains, as businesses and consumers have adapted to new realities and needs. As far as digitization and automation are concerned, it crammed two decades of experimention and build-out into two years. Thus there is the potential to increase productivity, efficiency, and quality.

The plague years tested our physical, mental, and social capacities in unprecedented ways. It challenged our values, beliefs, and norms. Yet humanity has shown remarkable abilities to cope, recover, and transform—and to empathize and express our solidarity, compassion, and generosity to help. (Admittedly, the MAGA goons who yell at the doctors treating them for going along with the Covid Conspiracy are frightening and saddening—but they are a small minority.)

All in all, the plague years have stimulated positive forces pushing for greater innovation, more competent governance, and improved resilience, all of which I hope will interact and reinforce one another in a virtuous cycle.

The future for humanity is brighter than it was four years ago, I think.

Note that this does not mean that I expect any increase in the trend rate of economic growth. Global warming has arrived, and has sat down at the table to start to dine.