Healing the Economic Scars of the Pandemic

On Sept. 21, 2021, Investopedia teamed up with another member of the Dotdash online publishing family, Verywell, to offer a unique virtual conference, “Your Money Your Health.” This article presents key insights and observations from the first session of that event, “Healing the Economic Scars of the Pandemic.”

Participants included Investopedia’s Editor-in-Chief Caleb Silver and Ethan Harris, head of global economics research at Bank of America Merrill Lynch Global Research. For background to their talk, Investopedia previously published an article on the future of fiscal policy.

Long-Tail Effects of the Pandemic

Caleb Silver noted that the COVID-19 pandemic has produced “constant scarring” and asked Ethan Harris for his opinions on the likely “long-tail effects.” Harris responded, “The whole world realizes that we have to be prepared for pandemics” and that this will require a reallocation of resources from other priorities.

Harris commented later on that the pandemic story this time was not about the effects on population, as it was 1918, but on shutdowns. “This has not been written about in economics texts for decades,” he said.

Additionally, Harris observed that “U.S.-China relations have not improved” and that arguments about whom or what to blame for the pandemic may intensify the U.S.-China trade war. Moreover, the pandemic also is apt to create a protracted “lack of confidence” going forward. Harris also noted that “disruptions to global supply chains” have created a period of “de-globalization” that will be a big issue going forward.

While increases in COVID cases will likely impair back-to-work plans, Harris expects that “we will see a pretty robust recovery” once we are past the delta wave.

Positive and Negative Outcomes From the Pandemic

“Stress and crisis are the mother of invention,” Harris said, citing advances in “labor-saving technologies” and in the reorganization of the workplace. Regarding the latter, he referred to the widespread adoption of hybrid and work-at-home arrangements by organizations that previously were uncomfortable with having employees not under constant direct supervision.

“Revamping the workplace is a great thing,” Harris said later on. Nonetheless, he also stated that it is important to have people gather in office environments to build teams.

On the negative side, Harris agreed with a comment from Silver that “the ladder has gotten steeper” for lower-income people. Harris elaborated that “high-touch jobs are a problem,” involving tasks that cannot be performed remotely. Additionally, he stated that the pandemic has delivered an “uneven shock in the U.S. and globally, with lower-income workers and countries hurt the worst.”

‘Unprecedented Support From Government’

Harris stated that “unprecedented support from government” in the forms of stimulative fiscal and monetary policy has helped to mitigate the impact of the pandemic in many countries. “We are very bullish on the U.S. and Canada, which have had strong policy responses to COVID, especially the U.S.,” he noted.

Harris believes that the current low interest rate, low inflation environment in the U.S. will “stick for a while,” calling Federal Reserve policy a “lubricant” for the economy. However, he added that it will be “a good sign when the Fed can reduce bond purchases and let interest rates rise, so they can rearm for next crisis.” He expects interest rates to rise over next few years and warns that supply constraints will persist until COVID is under control. Currently, Harris notes, used cars are the hottest market precisely because of supply chain problems.

Fiscal Discipline Needed, but No Debt or Dollar Crisis Ahead

Harris warns that the U.S. government must exercise better “fiscal discipline” going forward. “As you get into a more normal recovery, there are two problems: you are hoarding resources, and massive deficits will rob Peter to pay Paul,” he said.

He also warns that, while over-stimulus is a problem, “a debt crisis and people abandoning the dollar are not an issue.” In his opinion, the U.S. dollar is still likely to remain the dominant currency due to rule of law and open markets. By contrast, Harris says that China is too regulated and too anti-market. He sees a big equity risk premium in China due to “heavy-handed” and unpredictable shifts in regulation that are “destroying value” in various sectors. He also casts doubt on whether the euro will survive in the long term.

Responding to a question about the global uptrend in debt, Harris said, “It will be hard to convince governments and individuals to cut debt” as long as high-debt advanced countries are not penalized with paying discernible interest rate premiums on their bonds. This will “make the world vulnerable to inflation and interest rate rises,” he added.

‘An Existential Problem’

While Harris sees negative economic impacts from the “decoupling of trade,” he added that “failure on geopolitical and climate issues would be an existential problem.” Indeed, he observed that “some of the most vulnerable countries in other respects” are also the most vulnerable to climate change, and many of these are in the southern hemisphere. About climate change, he stated that developing appropriate responses “has to be done in a combined effort … we are starting to move in the right direction … it’s a challenge for the next century.”

Nonetheless, Harris added, “I am fairly optimistic about countries that have figured things out,” with stable institutions, including many east Asian countries. On energy, he noted that the “gradual shrinking of demand for carbon” has replaced past concerns about shortages, with worries about gluts in producer nations, as “renewables and conservation” will be a focus in the future.