COVID crisis

By Robert Huebscher, Advisor Perspectives

The world is smaller and people are poorer as a result of the COVID-19 crisis, from which it will take five to six years to recover, according to Martin Wolf.

Wolf is an editor, author, economist and award-winning journalist based in London. He currently serves as associate editor and chief economics commentator at the Financial Times of London. He spoke via webcast as part of the Munk Dialogues.

The COVID-19 crisis is much worse than the global financial crisis (GFC), according to Wolff, because of its “scarring” – closed businesses, private and public debt accumulation, more cautious governments and financial institutions, job losses that will erode motivation and skills, and lower corporate investment. “There will be some gains in technology usage,” he said, “but on balance this scarring will be long term.”

“This will be a five- to six-year hit to per-capita GDP growth,” Wolf said. “Unless things go spectacularly well, that is pretty well certain.”

But why are the equity markets signaling prosperity?

He agrees with Paul Krugman that the stock market is not the economy; it tells you what intelligent investors think about the present value of profits. But profits are only a small part of the economy, he said, and are much smaller than wages. “Profits can be good while real incomes are stagnant,” Wolf said.

Certain sectors of the market, like technology, have done vastly better than others. It employs very few people and no unskilled workers. It is quite possible for those companies to do “fantastically well,” he said, without providing a benefit to the public, except to consumers who buy those products.

He noted that Zoom passed Exxon in market capitalization, with only 1% of its workforce.

Real interest rates are negative, leading to attractive present values and high stock prices. “But it is a reflection of how terrible things are,” he said, “not of the true state of the economy.”

“The stock market is not telling you anything useful about the prospects for the economy,” Wolf said.


Trends are getting worse, Wolf said, especially between the U.S. and China. But President-elect Biden, who he supported, offers hope in important matters.

Wolf assumes that Biden will be significantly less unilateral and protectionist and more predictable. Biden will also use international institutions more effectively, and will revive U.S. participation in the WHO, the Iran JCPOA deal, the Paris accords and the WTO.

But with respect to China, there won’t be a big change. The general attitude in the western world is one of suspicion and concern about China’s role and its behavior. There are deep security concerns in the U.S. on a bipartisan level, as well as in Europe. Biden will approach this issue differently from Donald Trump, perhaps focusing on human rights. But the general tenor of the relationship will reflect suspicion and rivalry, Wolf said.

He said that some “high-level” Chinese believe Xi Jinping has been “pushing his luck” in a destabilizing and unproductive way. China is not a match of the U.S. yet, he said, and may decide to pull back and “calm down” to reduce tensions.

If the West’s aim is to stop China’s development, China won’t comply. A more practical policy would be to align China’s growth to be compatible with the stability of western economies, targeting moves such as WTO compliance. That might succeed if the approach is undertaken in a multi-lateral framework with our allies, he said.

China won’t accept a status of “permanent inferiority,” according to Wolf, but it would accept a controlled ascendency.

The west could choose to isolate China. That might not stop its growth, he said, but China would find such a policy “immensely hostile.”

Wolf asked, rhetorically: Do we want a 100-year conflict with China, or a way to coexist with a country that we disagree with on many points?

If we don’t solve this, he said, we won’t solve climate change or a variety of other issues.

The future of democracy

Has COVID-19 tarnished the view of democracy as the preferred form of government?

It’s a much larger story, according to Wolf. COVID-19 exposed our weaknesses and inequalities. Many prominent democracies, including the U.K. and U.S., failed to effectively address the pandemic. Scholars have called this institutional shortcoming a “democratic recession,” which Wolf said began around 2006, before the GFC.

Many emerging markets have shifted to autocracy: Brazil, Turkey, the Philippines and some in the former Soviet empire. They fared no better against COVID-19.

COVID-19 showed that, in response to a crisis, what matters is whether a government “cares about governing.” That is distinct from its form – democracy or autocracy. Vietnam, Taiwan, South Korea are democracies and handled it well, he said, because their governments were respected and trusted.

The failures included autocracies that had no interest in governing, like Brazil, the U.K. and U.S.

“They like the performance of power, not the reality,” he said.

“What has emerged is that we need and want governments,” Wolf said. “If democracies don’t provide them, people will go for effective autocracies.”

“The people of the world want governments that work,” Wolf said. “It is rather a good thing.”

Have we reached peak globalization?

Until the GFC, we had an extraordinary period where trade grew much faster than GDP, Wolf said. The key moment was China’s ascension to the WTO in 2001, which triggered a shift to a global supply chain. China took a major role in that chain.

The role and power of that supply chain dwindled since the GFC. Now trade growth is slower than GDP, because trade liberalization stopped and much of the opportunities to unbundle supply chains have been exhausted. Real wages in China “caught up” and other countries can replicate what it offered, Wolf said. It has become increasingly uneconomic to bring supply chains back home.

But COVID-19 exposed the vulnerability of those chains. The friction between the U.S. and China was reinforced by COVID and led to a decoupling.

We need to see if the Biden administration will use the WTO as a lever to restart and liberalize trade, Wolf said. The U.S. may try to approach China using its allies. But the Biden administration will not regard trade liberalization as a priority. At best, he said, the trading of goods will “mark time.” Indeed, China may emerge as a destination of goods.

But Wolf offered a caveat.

Virtual globalization will explode for the service sector, he said. We can organize production in the service sector without people being in an office. We will introduce more robots, controlled across borders. Virtual offices and factories will emerge, he said, but the implications are “unclear.” Health, education, entertainment may accelerate through virtual integration and defy any trade barriers, and create a new form of globalization.

Pandemics, political polls and policymaking

Wolf offered his thoughts on a number of other topics.

We know what it will take to fight the next pandemic. Countries must have the capacity to create a safety net and ramp it up quickly. The bigger issue, he said, is providing better support for health systems to allow cures and treatments to be developed and deployed quickly.

The world health system is “staggeringly underfunded,” Wolf said. We need the capacity to produce and store essential materials. We need to accept that pandemics are health-system emergencies, he said, and those systems are very weak. It was shown in our testing and quarantine capabilities, according to Wolf.

Given their widespread failure in this and the prior presidential election, are political polls of any value? Their methods are under-polling certain voters, Wolf said – those who are difficult to get to and are suspicious of pollsters. That also happened in the Brexit vote, he said. But polls can’t achieve results within the margin of error that the public wants.

The problem is that small errors have enormous consequences for electoral outcomes, according to Wolf, and achieving the degree of accuracy the public desires may be “pretty close to impossible.” This is no different from economic forecasting, he said, where the difference between 0% and 3% GDP growth is enormous, but within the margin of error. “Polls can’t answer the questions we want them to answer,” Wolf said.

Can Biden rein in Wall Street to address inequality? He won’t make much of a difference, according to Wolf. The old industrial economy that generated good wages for the middle class is “gone and not coming back,” he said. We haven’t generated an economy to replace that. We have to profoundly change how labor markets work. Along with that, we have problems with competition, he said, such as monopolies that are hard to break up.

Biden has a decent set of programs, Wolf said, but also donors who want to be “looked after” and a Senate that will be divided. He won’t be able to transform the economy, he said. There will be improvements to address inequality, but not reversals.

We won’t see a significant wealth transfer as a result of COVID-19. The powerful and wealthy can “hold the line against that,” he said, and prevent a “massive” increase in taxation. Since we won’t shift taxes, and unskilled jobs will gradually disappear, then we will need a universal-basic income (UBI) or “people starve.” We are not there now – most people can get jobs – but they are not well paid. We can support people through employment, Wolf said.

Ultimately, Wolf said we will need to provide support for basic needs and offer a UBI. He is not sure if the U.S. will move toward a generous safety net and a modest UBI, or just a high UBI. He believes in targeted assistance complemented by strong basic services. But that means the U.S. needs strong public health care, education and pension support.


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