The Taiwan Banker

Taiwan was hoping to isolate itself from the global spread of SARS-CoV-2 and its variants until it could fully vaccinate its population. As unfortunate as its current outbreak is, however, having bought itself a year through firewall containment measures, it now has the opportunity to learn from the successes and mistakes of other countries. The difficulty of the economic response comes from the fact that containment measures are fundamentally disruptive to work. Some parts of the economy can go virtual, but for industries like F&B and tourism, there is a direct tradeoff involved. At a basic level, the only question is how to account for and apportion the losses. This time, the finance sector is not the source of the crisis, but it must still cooperate closely on its resolution. The economic response can be divided into phases before, during, and after shutdowns. During the shutdown, the priority is compliance: people will be willing to risk their lives and those of others if they feel it’s necessary for their financial survival. After the shutdown, the objective is to ensure that the economy makes a smooth transition to a post-pandemic world. Economic policy making also plays a more abstract role in the phase before the lockdown. The ability to ensure that protection measures are not too painful feeds forward into government’s willingness to impose those measures in the first place. This process is invisible, but one of the most important elements of a country’s pandemic policy making. Measurement of value It should go without saying that medical response should be the most important aspect of budgeting, but countries have repeatedly ignored this principle. In July 2020, the economists Steven Berry and Zack Cooper calculated that less than 8% of US spending in response to the outbreak to date had gone to direct medical prevention measures. In Europe as well, a lack of discretionary funds caused the EU to focus on price rather than speed in negotiations with vaccine providers. The slow rollout probably cost it thousands of times more than it could have ever hoped to save on vaccine purchase price. Despite that unfortunate commonality, the US and European responses have also differed in important ways. European focused more on saving businesses, while the US focused on stimulating consumption as a way to save businesses. The logic of saving businesses is that bankruptcy destroys significant economic value – particularly so for the case of fire sales in the midst of a broad economic shock. For this reason, many countries implemented changes in bankruptcy rules, particularly in Europe, to the effect that bankruptcies were 15%-30% lower in 2020 than in 2019. When companies remain intact, the need for personal stimulus measures is reduced. The backlog in bankruptcies will eventually need to be cleared, however. A renewal process needs to occur, particularly in Europe, which was already at risk of ‘zombification’ due to negative rates. The cash-based approach of the US has also been criticized. New York Fed Surveys of Consumer Expectations have found that stimulus check recipients spent only about 25% of their proceeds, while using 34% to pay down debt and saving 42%. Relatedly, retail investors have driven several episodes of anomalous stock market behavior this year – most prominently Gamestop, which increased in value from $20 in early January to far beyond $100 in a widely noted short squeeze. It is possible that some of the stimulus money was a waste of public resources, although these savings make households more resilient to further shocks, and may help power the upcoming recovery. Demand before supply This however raises the question of how much cash is too much. Some controversy has emerged over whether the stimulus could cause inflation, particularly in the US. Around April, reports started to emerge of restaurants having trouble hiring. April job openings reached a record 9.3 million, up 1 million from 8.3 million in March, itself a 20-year record. A number of factors were blamed, including the pandemic response policies such as unemployment insurance. Shortages emerged in lumber, gasoline, and semiconductors, among other commodities. Each of these sectors has a specific story, but the larger trend seems to be that demand has recovered faster than supply. Inflation hawks worry that even short-term trends like this can feed into longer term expectations. A recent report by Deutsche Bank sounded the alarm on the possibility, while also implicating the pandemic economic relief policies. “Never before have we seen such coordinated expansionary fiscal and monetary policy,” said Deutsche’s chief economist David Folkerts-Landau, as quoted in CNBC. “This will continue as output moves above potential.” This however does not appear to be the mainstream view – the Federal Reserve anticipates 2.4% inflation in 2021, declining back to 2.1% by 2023. Many workers are probably waiting for further progress on the pandemic before searching for work. More substantially, a bargaining process is probably occurring as employers and employees adjust their expectations on work-from-home models. It’s worth putting all of these reports in the context of a new Fed framework, announced in August, which is just as concerned about deflation as inflation. Moderate inflation can help provide the impetus for growth. Across the world, however, Korea, one of the first countries to be hit, and which mostly controlled the outbreak early on, provides a different approach to long-term post-pandemic planning. Rather than demand-side stimulus, it has focused on industry support. Its Green New Deal and Digital New Deal, announced in July, provide substantial capital for key longer-term priorities. The two policies, collectively called the Korean New Deal, aim to invest US$ 102 billion in fiscal expenditure (about 6% of GDP) to create nearly 2 million jobs by 2025, in particular reducing the country’s dependence on coal, and promoting the “untact” economy – activities with no physical contact. To some extent, these are the government’s pre-existing priorities, but COVID has undoubtedly made a digital upgrade more urgent. The road not taken After a year in the COVID era, it’s also possible to identify possible responses that have never been tried. Economic responses around the world have involved flooding economies with money, in some form. An alternative approach might be temporary demonetization through the real estate sector. Almost everybody, whether producer or consumer, pays rents or mortgages. By deferring all mortgage payments, and forgiving rent, it might be possible to make the costs of lockdowns disappear, at least for non-owners. One side effect of this would be a frozen real estate market, but most people don’t need to move around much during the pandemic. The bigger issue, however, and the probable reason why this was never attempted, is the interests of savers. One can imagine that redefining defaults in this context for the purposes of derivative triggers and rating agencies, etc. would be a nightmare. Whether the effects are more substantial than a massive increase in debt, however, may be worthy of investigation. A number of countries have implemented eviction bans for the duration of the pandemic, but these only affect enforcement, not the amounts due at a given time. When the ban is lifted, the balance comes due as a lump sum, which still means that people must keep accumulating money throughout the crisis. Another measure that no country has attempted is a pre-emptive lockdown just as cases drop below measurable levels. At such a point, far from the level where hospital beds become a concern, it’s almost impossible to muster up the necessary political capital for further measures. The benefit would however be the possibility of eliminating domestic transmission. Every public health decision is the result of cost-benefit analysis, but epidemiologists are not usually economists. The finance sector may have a role to play in shaping public conceptions of risk regarding consequential, and frequently painful decisions. Case in point: Japan appears to be going ahead with its Olympic Games scheduled to start on July 23. This is a complex decision involving national pride, sunk costs, and various types of risks; whether it succeeds or fails, this will be one of the most notable elements of its pandemic story. A small number of key decisions with relevance to the economy can have more impact than a much larger number of incremental medical advances. Japan’s financial experts should be happy if the country’s perception of risk prior to the Olympics matches that after.