The Great Depression-era economist understood that productive new businesses can rise from the rubble. But for that to happen, the old cannot be blindly preservedby Barry Eichengreen / May 26, 2020 / Leave a comment
You don’t have to be an economist to see that Covid-19 has stopped much of the economy in its tracks, or to wonder how and when it will bounce back. But there is also the question of what, once the economy settles into its new normal, that new normal will look like.
When economists think about this sort of question, they start with the concept of “potential growth”—that is, how quickly the economy is capable of growing without inflation or other worries, if all goes well and things live up to their potential. This concept is foremost in the minds of central bankers when they ponder for how long liquidity injections can continue without creating inflationary pressures. It is central to the thinking of Treasury officials when they ask how much additional public debt is sustainable. It is crucial, above all, for understanding how living standards will develop not just now but in the future.
The crisis will influence potential growth through four channels, three negative and one positive. On the negative side, it will interrupt schooling, depress public investment, and destroy global supply chains. Positively, by disrupting existing industries and activities it will open up space for innovative new entrants, through the process that the early 20th-century Austrian economist and social theorist Joseph Schumpeter referred to as “creative destruction.”
Where those multiple negatives are immutable and immediate—they are baked in, as it were—how powerfully the positive channel will operate remains uncertain for the moment. The answer, which will become apparent only over time, hinges on policy choices we make now.
Schools and hard knocks
The most important negative is the adverse impact of the crisis on schooling. Students who experience interruptions to their education generally do not make up that lost learning later. Not being in school early in life impairs cognitive development in ways that cannot be undone by spending more time in the classroom later. We know this from studies of pre-school programmes, which show that children enrolled in such initiatives, specifically those emphasising language, pre-literacy and mathematics, show superior cognitive development. We know it from studies of earlier pandemics, such as the 1916 polio outbreak in the United States, when schools shut down and…