How will Europe Grapple with the Economic Downturn?

Madhav V. Rajan:          Good evening, ladies and gentleman. Welcome to Chicago Booth’s virtual Economic Outlook 2021. My name is Madhav Rajan. I’m the dean and the George Shultz Professor of Accounting at the University of Chicago Booth School of Business. I hope you’re doing well during this unusual time, and I’m truly grateful to you for taking the time to engage with the school in this way. Chicago Booth has a long tradition of informing public discourse through platforms such as the Initiative on Global Markets, the Chicago Booth Review publication, and of course Economic Outlook, which we started back in 1954. Economic Outlook provides a forum for our pathbreaking thought leaders to confront the future, evaluate emerging trends, and share insights that help reframe our understanding of the world to come.

We have an excellent program today, and I want to thank our distinguished panelists, Chicago Booth faculty Veronica Guerrieri, Randy Kroszner, and Brent Neiman for being here to share their insights related to Brexit, the US election, and the economies of EMEA. And my thanks also to Stephanie Flanders of Bloomberg for being here to moderate today’s panel. This is the last of three 2021 Economic Outlook events, based out of each of Chicago Booth’s three global campuses. Last week, we had more than 400 viewers tune in to Economic Outlook Hong Kong with Booth professors Randy Kroszner and Chang-Tai Hsieh and economist Richard Wong. And back in early January, we had more than 4,000 attend our virtual Economic Outlook in Chicago with Booth professors Randy Kroszner, Austan Goolsbee, and Raghuram Rajan. Recordings of both these events are available on our website, ChicagoBooth.edu. Now, after today’s event, our Admissions team will host a brief Q&A session, and I invite you to please stay connected when Economic Outlook concludes to learn more about Booth’s programs.

I also want to let you know a bit about some other great events coming up. Tomorrow, we have a Distinguished Speaker Series event, where I’ll interview Kunal Kapoor, Booth alum and CEO of Morningstar. On the 18th of this month, the Kilts Center for Marketing will host its second event in its Marketing for Good series. This event will focus on artificial intelligence and targeted marketing. And then on the 25th of February, we will host Diversity and Inclusion Dialogues with Nova Reid and Booth professor Jane Risen. This event will provide insight into issues of race, diversity, and inclusion from a British and European perspective. Again, you can find more information about all of these events on our website.

So with that, we look forward to hearing what’s on the minds of our renowned panelists. Let me introduce them now. Veronica Guerrieri is the Ronald E. Tarrson Professor of Economics and a Willard Graham Faculty Scholar. Veronica studies macroeconomics, labor and financial market frictions, dynamic contracting, and growth theory. Veronica has been a research associate of the NBER since 2013 and a consultant at the Federal Reserve Bank of Chicago since 2014.

Randy Kroszner is deputy dean for Executive Programs and the Norman R. Bobins Professor of Economics at Chicago Booth. Randy was a governor of the Federal System from 2006 to 2009. Randy chaired the Committee on Supervision and Regulation of Banking Institutions and the Committee on Consumer and Community Affairs, and took a leading role in developing responses to the financial crisis as well as initiatives to improve consumer protection and disclosure.

Brent Neiman is the Edward Eagle Brown Professor of Economics and a William Ladany Faculty Scholar. He served as the staff economist for international finance on the White House Council of Economic Advisers. Brent conducts research on international macroeconomics and trade, and is the director of the Initiative on International Economics at the Becker Friedman Institute.

We’re thrilled to have Stephanie Flanders as our moderator. Stephanie is senior executive and editor for economics at Bloomberg News and head of Bloomberg Economics. She’s the former chief market strategist for Europe at J.P Morgan Asset Management. Stephanie has also been a reporter for the New York Times, economics editor for the BBC, editorial writer and columnist at the FT, and an economist at the Institute for Fiscal Studies at London Business School. Thank you all again, and with that, let me hand it off to Stephanie

Stephanie Flanders:      Thank you very much, Madhav. We have plenty to talk about today. I know we are going to have a particular focus on the EMEA region, but obviously you can’t talk about EMEA and the recovery there without also talking about the world, and I suspect the Biden administration and China will both make an appearance.

We did have, though, if we are just going to the immediate outlook now before thinking about some of the longer-term lessons and potential risks out of the pandemic and how it’s particularly effected Europe, I wonder, Randy, if you look at the GDP numbers out today but also the concerns about the very slow pace of vaccine rollout over Europe, how much is that putting at risk the kind of recovery that we are expecting to see even maybe a month ago, in 2021?

You need to take yourself off mute.

Randall S. Kroszner:      Alright. Thank you very much for being here, and I’m really delighted to be with you in Europe. You can see we’ve got this great campus in London, which I look forward to bringing everyone into when enough people are vaccinated and when the virus is under control.

And that is one of the key things, because that’s what’s really driving the economy is the virus, and then the responses to it. It doesn’t really matter how much physical stimulus or monetary stimulus. If people won’t go out to shop, if people won’t be able to go into the office, if there’s policies that don’t allow stores to be open, you’re never going to get full recovery. And the vaccine is extremely important in this, both from a saving- and saving-livelihoods perspective. But I think there was too much optimism that suddenly we’d be able to vaccinate everyone in a month or two, and [clapping] everything’s just going to be fine.

Even if the vaccine rollout had been moving really smoothly, we see that, let’s say in a country like Israel, which has vaccinated 25 percent of the population already, they’re still seeing outbreaks. And so we need to get a lot further along to be able to say that we’re going to get some benefit from the vaccine. And so I think it’s going to be a slow and difficult recovery no matter what.

I think Europe has had some particular challenges because they have been very slow in authorizing the vaccine and then actually getting the vaccine out. The UK has actually been much ahead of that curve, having authorized the vaccines very quickly and making progress toward—I think they are about 10–12 percent of the population—focusing on the most vulnerable. That will take out, fortunately, the people who are most likely to pass away from the disease, and that will then allow for the reopening of the economy. And that’s really the key thing is getting the virus under control, to get the economy under control. But, and so I think all of the discussion of monetary and fiscal policy is in some sense second order until you get that done. And I think that should be where all of the focus is, on that. Europe really needs to speed things up. They’ve gotten a bit slow on this. The UK is moving along, and the US is moving along also.

Stephanie Flanders:      Also we are reminded, as the Boris Johnson administration sort of takes a bow for its fantastic vaccine rollout, I guess we have to keep remembering that both the economic and the human cost in Britain has still been [inaudible 00:08:35]. But the question now is: How much is Europe losing with the months of delay relative to the UK? And I think that’s a serious issue. How do you expect behavior to play into this? And Randy said it’s crucial that people feel confident going out and spending. We also have a sense that we are actually quite optimistic about people . . . once they do feel confident, there is a lot of suppressed demand out there. How do you think that’s going to interplay. And do you think there is a risk that we are going to have . . . in Europe particularly, that the continued fear is going to get in the way of the recovery we were expecting?

Randall S. Kroszner:      So I think that fear is going to persist, because unlike, let’s see . . . I was working in the White House when the tragedy of 9/11 happened. And the response then was very different. It was: “Although we’re never going to be able to assure 100 percent that there is no terrorist event, we’re going to do our darndest and we’re going to make flying safe, and you should go out and live your lives normally.” Obviously, the message has been very different here, wisely, to be very cautious.

But also a big difference is you can’t tell whether someone is vaccinated. And even if someone is vaccinated, we still don’t have the data yet to be able to determine whether they are infectious or not. They may not become ill, but they could potentially make other people ill. After 9/11, you could see that the cockpit door was hardened. You could see that you were going through a lot more hassles at the airport. So there were very obvious things that had occurred to make you feel more comfortable to fly again, to travel, to then go out and consume, and do all these kinds of things.

And so I think it’s going to persist. It’s going to linger. And I think that’s then where fiscal policy has to come in and realize the structure of the economy has changed. Much of the policy, particularly in Europe, has been to support the existing jobs or jobs that existed a year ago. I think we’ve really got to pivot to understand that many of those jobs are not coming back, and we have to have policies that provide a transit support for families and the transition that will be occurring rather than trying to hope for a distant past that is just not going to come back. And that’s only going to slow the recovery. It’s also not going to be good for workers. If they’re not working, their job skills decline even if they’re getting income support. It’d be better to get income support that’s helping to move them to the new structure rather than try to keep them in a world that just isn’t going to come back.

Stephanie Flanders:      And I apologize, [inaudible]. I wonder, Veronica Guerrieri, how you might feel about the kind of policy support that we’re going to see this year in Europe. We clearly had a step change in the fiscal approach last year, which is only just now starting to come on stream, the recovery fund. Is that going to be in time to get over any uncertainty in demand that we might see from the kind of things that Randy’s talking about?

Veronica Guerrieri:      You addressed that to me? Sorry, I couldn’t hear you.

Stephanie Flanders:      Yes, Veronica, yes.

Veronica Guerrieri:      Yes, sorry. Yeah, so first let me to do a little step back on what Randy said. So I agree with Randy that there is a restructuring of the economy, and there is a lot of uncertainty about how these demand shocks and productivity shocks that have been introduced by the pandemic are going to last in the long term, in the medium term. It may be that there is going to be very huge restructuring. It may be that some of these jobs are going to come back because in the end, people like personal interactions. And so it’s not obvious to me that we’re going to translate completely to an online world whenever you can do that.

I think this makes it particularly hard to decide in terms of fiscal policy how much you want to keep the job attached to the firm to ensure speedy recovery when the demand comes back and how much instead you want to let the jobs get destroyed because you want to allocate your resources in what is going to be more productive and efficient in the medium run. This makes it very hard for fiscal policy to decide the right course of action.

But more generally, I guess there are three objectives of fiscal policy that we should keep in mind. First of course, help stabilize the cycle, and this is particularly important now because conventional monetary policy cannot be used because we are close to the zero lower bound. And in Europe, that is particularly important because there is only one monetary policy because we are in a currency union. So it’s particularly important. And there are some fiscal policy tools for stabilization in action.

Second, it’s going to help provide social insurance, which in general is one of the main objectives of fiscal policy. This particularly important for the pandemic, given that the pandemic is a shock that is particularly asymmetric, in the sense it hits some workers much harder than others because some sectors have been hit more heavily—the ones that require more personal interaction. And this is particularly important also thinking about inequality going forward, because this is the side of fiscal policy that can help mitigate the rise in inequality in response to this type of shock.

And third, of course, fiscal policy can be used also—and this is where next-generation planning is pushing toward—can help in thinking about stimulating investment for the growth in the medium and longer run.

Now, of course . . . First of all, I think it’s fantastic that the pandemic has been an occasion for the European Union to start first step toward a fiscal union. So this is a great signal, and I think it is very ambitious and a great objective to try to help stimulate the growth in Europe that has been quite slow for a while now. But unfortunately, I believe that it’s not as clear how effective this type of investment can be because if you leave a lot of funds to single countries, it is very hard how to monitor how effectively and efficiently these funds can be used. And in particular, there can be, and there is, as we know, a lot of heterogeneity in the way in which these funds have been used. And this, of course, can create also lot of tensions, as we have seen in Italy—a lot of political tensions also in the decision about the use of these funds.

So in that respect, I think that it is good to be ambitious and try to have funds invested in this type of longer-term objective. But I think where we know fiscal policy is effective, and there is more, broader consensus on that, is in stabilizing the cycle. And automatic stabilizers in particular are quick to act and quick to be rolled down if needed. And so they are a particularly good way of spending money to help the economy. So where I think that some energy should be devoted to and some funds should be used for is also in this path toward a fiscal union in reinforcing automatic stabilizers, and in particular maybe creating some centralized automatic stabilizers that can be indexed, of course, to the macroeconomic indicators of different countries. And this, I think, is something that would make the economy recover better, respond better to all the uncertainty about how fast we are going to recover, and this is going to be something good for the . . .

Now, of course it’s difficult for political reasons to create automatic stabilizers at a decentralized level. But I think that’s an effort that is worth trying to put on.

Stephanie Flanders:      That’s an interesting question we might get into later, whether any of the political tensions over vaccine rollout actually end up hurting the move toward closer integration that we did see in the fiscal domain last year. We’ll maybe think about whether there’s a long-term impact.

But Brent, I want to bring you in. When Veronica talked, it sort of reminded me: I think of the recovery in a sense, the story of this year is a little bit dependent on these two unknowns or sort of sleeping giants. One is the amount of hidden unemployment, particularly in Europe, of all of these workers on furlough. We don’t know how many of the jobs that they’re normally in will actually turn out to be [inaudible 00:18:11]. That could potentially be a negative. But on the other side, you have hidden demand. You have suppressed demand, and almost piles of money on people’s bank balances that could be pushed into the economy when people can spend again. How do you think about the interaction of those two, in Europe, but also in other countries?

Brent Neiman:              Thank you. It cut out a little bit, but let me glom onto the key issues, I think, which is on the labor side, heterogeneity and who’s working from home, and then this pent-up demand-side issue. Let me actually go in reverse order. On the pent-up demand-side issue, one thing I think that is a bit of an unknown, and it’s actually something our colleague at the University of Chicago has been working on, is how much pent-up demand exists given the very peculiar nature of this shock, of this crisis. So typically, one might think of forgone durable consumption purchases, forgone investments—if you didn’t buy a car this year because of something that happened in the aggregate economy, it’s very likely that you’re going to want to buy it next year.

By contrast, services were hit disproportionately to durables in this recession, for obvious reasons. Those were the kinds of things that were the most contact intensive and put your personal health at greatest risk. And it’s not obvious that the bounce back, that making up for missed consumption of services will look the same as what one might otherwise expect if it was a more standard recession. For instance, to put it most simply, if you skipped 100 meals out at restaurants over the last two years, it’s unlikely that you’re going to make up for it by consuming 100 more in the way that you might if it was an upgrade to your home or a new-car purchase. So on the demand side, I think there is certainly good reason to expect a strong bounce back once the public-health concern abates. But it is worth noting that the dynamics for the reasons I described should look and might look different from what we’ve seen in other financial crisis, recessions, when uncertainty and hesitancy to spend and invest returns.

On the side, essentially on the productive capacity of the economy, the question of who’s working and how, like you said, it’s very difficult to understand— even in this early return in some countries to labor markets—who opted out of work, who worked at home, who stayed home but was paid and so shows up on the employment bankrolls. You cannot compare unemployment rates, let’s say, in the United States and Germany. They took very different paths, but that largely reflects the fact that in Germany, many workers were essentially connected to their firms and public policy made it such, even when they weren’t really working, when they were simply staying home.

Whereas in the United States, it was much more common that there was a separation, and they would show up in the statistics. And here, one thing worth noting is just it’s unbelievably heterogeneous the extent to which across countries and industries there is a capacity to work from home. And as we come out of the global health crisis, and as we see offices and factories and retail outlets welcoming employment back in person, a question is: Do we revert back to where we were originally? Does it take a year or two to do so, or have we witnessed a permanent change?

And if you had to stereotype one way or another to simplify whether it’s across countries, whether it’s across cities within a country, or across industries, those sectors with higher pay, on average, are those where workers have been able to work from home more. And where, frankly, I expect them in the future to work from home more. And so there will be a question as to whether industries that didn’t have that capacity early on in this pandemic, countries that didn’t have that capacity early on in the pandemic, if this is productivity enhancing, do they take steps to try to enable more and more of their workers to do those things, to return to contribute to the economy but in a safe way, potentially remotely?

Stephanie Flanders:      I’m just going to go with my audio because there’s been a few problems with my internet. I apologize. Just to encourage people—we’ve already got some great questions, but just to encourage people to continue to submit those. Randy, in response to some things that Brent said, clearly there has been a different approach to labor adjustment in the US and Europe. And some have been quite quick to say that the US has shown a better capacity to achieve adjustment through the bigger amount of entrepreneurship that has happened, creation of small businesses, whereas potentially we may have hundreds of thousands, millions of people in jobs that are no longer viable still in Europe. Do you think it’s too early to say that the US approach has been the better one, or how do you compare them?

Randall S. Kroszner:      This really gets back to what Veronica was saying, because it really depends on how much we move back to where we were before, and so—as well as what Brent was saying: How much of a transition do we have? If we are going to go back closer to the old world, then the European approach in the long run may be better. If we are going to move to a fairly different world, then the US approach is going to be a better one. As you can see, I tend to lean toward the view that there are these fundamental structural changes and that they’re going to be persistent. I think that probably means in the short run and in the long run, the US approach is going to be a bit better. But that said, the US also did a number of approaches like the Payroll Protection Program that are very much like the furlough scheme in the UK and other schemes in Continental Europe. The US actually took a few leaves out of the European playbook. And so they did kind of a more mixed approach than is typical. And I think that is probably a better mix, rather than just trying to max out on trying to preserve the old, because, after 9/11, as I said, people came back. They felt confident when they could see the changes that had been made. But also, I think technology plays a very important role, which is, as Brent was saying, we didn’t have something like the technology we’re using now. Over this last year, since the pandemic hit, we’ve had record issuance of equity and debt. It was of course known that it was impossible to sell equity or debt unless you have a road show where investors could look the issuers in the eye and ask the questions one-on-one, but we did record issuance and not a single road show. So I think there’s a lot of things that are going to change, and that’s going to be persistent. And so that’s why I think the policies of focusing more on providing support to the household rather than support to the job, at least from my point of view, seems to be the better outcome because I think we’ll get to the new equilibrium faster.

Stephanie Flanders:      Just on the short term, the people in Europe care the most probably in the US about whether or not the recovery will continue to be supported strong fiscal stimulus. What are you seeing. What are you expecting?

Randall S. Kroszner:      Well certainly things changed dramatically when the Republicans lost control of the Senate. It’s much more likely that President Biden will get through a larger package of spending than he otherwise would. There’s now a debate between the Republicans and the president over $600 billion versus $1.9 trillion. And actually I think it’s unfortunate that the focus is on the headline number. We have spent a lot of money. If we were at the beginning of the pandemic and people were debating, should we spend, or should we not spend, I think it’s obvious that you need to respond to a crisis like this.

But back a year ago, or almost a year ago, we spent 15 percent of GDP, $3 trillion. At the end of last year, we spent another 5 percent of GDP. We’re up to almost 20 percent of GDP spending. You have to take it from that point of view. We’re at 20 percent of GDP spending. What’s next? I think, as I said before, the focus should really be on the rollout of the vaccine, about health policy, and then we can think about additional stimulus down the line. Because if you look at the US, overall spending has hardly contracted. The unemployment rate is elevated, and problematic, but not as high as from before. We are providing important unemployment benefits, and they’re generous, and I think they should continue to be generous for the foreseeable future.

But let’s focus on the health problems and then think about spending the money otherwise, because at some point, the chickens come home to roost. You can’t just keep spending money. Let’s make it as effective as possible. This also relates to one of the questions that came in about, should we be discriminating in the expenditures? I think that it’s really important that we do focus on the biggest bang for the buck, which is now all about health. I’m not sure the US really needs more general stimulus at the moment.

Stephanie Flanders:      Veronica, sorry, I think I’m cutting out. We may have to give up on my internet. I’m so sorry. I’ve done lots of events and I’ve not had any issues, so I apologize. It’s just bad luck. But Veronica, there are a lot of question we’ve had. It’s a very responsive audience. A lot of questions about fiscal union in particular, and whether we are really moving in that direction. And I guess there’s a question about what’s the best way to do that, and also what is most plausible given some of the political dynamics we might see even in Italy, but certainly change of leadership in Germany as well?

Veronica Guerrieri:      This brings me back to what I was touching on before. Unfortunately, I guess, when there is a lot of money to be spent, there is a lot of interest around. And so everybody tries to get the money allocated to what they think is best or what they think is good for them. And so this creates a lot of tension. And the problem is of course creating political instability and tension in the running of different countries. I think the problem is also that this makes it very slow to use these funds.

So it means that the funds are there and may not be spent. And so this defeats the purpose of a program, of huge programs like these in the moment of a big crisis like the one in which we are now. And when we want some support, we want the support to be quick and effective. This is why I think something more centralized would be much more appropriate.

I sincerely believe that this is the first step toward a fiscal union. I see this as a big positive, so I stand by that. But I think the way toward a real fiscal union is still long and it’s still going to have a lot of challenges. And then of course, I think to try to have something that is more objective, or some type of policies that are attached or conditioned to some indicators that can be objectively evaluated at a decentralized level, that would help a lot in the running and the use of these funds, the quicker use of the funds. And also, if there is need to cut, it’s much easier to cut something that is automatically stabilized rather than to cut huge funds that have been there for a while and where people have been used to get.

I think it’s true also in a sense for the US, meaning that the huge Biden plan, of course it’s still good to have a lot of fiscal policy in a moment in which still there’s a lot of people that do not have their job and big losses in income in particular and when there is a lot of inequality about that.

But on the other hand, I think one way to maybe use these funds more effectively would be to do something like Janet Yellen did at the Fed after the financial crisis to condition the package or the funds to, for example, the unemployment rate and the evolution of the unemployment rate so that you can track better how huge the situation is and how the medical emergency is going to shade out and how this will impact the economy. So in general, I believe that both in Europe and in the US, and everywhere, having something automatic will make it easier to use funds, to use them more effectively, and to use them when they are needed. And these will help also on the fiscal-union side.

Stephanie Flanders:      Just briefly on the question of Italy, a lot of people felt that the real test of whether or not the recovery fund would be the beginning of a big change for Europe would be how well the Italians spent the money because many Germans and others would be looking at that.

Veronica Guerrieri:      Yeah, that is exactly . . . I totally agree. [crosstalk 00:32:25]

Sorry, you cut out, but I imagine what you asked is: Are the Germans right that they cannot have a union with Italy because Italy doesn’t know how to spend their money? And what I’m saying is that it is an issue. And that’s why the fiscal union has to be thought about carefully, and that’s why I think there is . . . for sure Germany has been more effective and probably is going to be more effective in using its funds. In Italy, the political situation was not so solid to be able to push a well-thought plan it had without some political tension. And other countries may have that political situation in the future. We don’t know that. And so if you have different countries together that pool their funds and try to have a fiscal union, I think it’s important to have something less discretionary, I think, to push in that direction. And it’s of course hard, but it’s feasible. That’s where we should be headed.

Stephanie Flanders:      Brent, if I can still be heard. One of the things we haven’t spoken about is Brexit, which is always a relief for British people who’ve spent too much time thinking about it. But clearly, we have seen some important impacts already. One of the questioners notes that 600,000 EU migrants have left the UK in the last year. More generally, do you think that the micro impacts are turning out to be maybe larger than many anticipated, or more or less in line?

Brent Neiman:              For an international economist like myself who would love to study and home in on exactly what the impact of Brexit is, the timing really is horrific. The fact that you’ve got Brexit with COVID, both major shocks—of course COVID is a much larger and really horrible shock—but these two shocks together means it’s very hard to identify the independent impact of one versus the other. The latest news in Brexit is the trade deal with the EU. And on the one hand, there was essentially no tariffs, no quotas. In this sense, what I would’ve imagined would be a much larger shock that could have been a part of the Brexit package did not materialize. On the other hand, what economists would refer to as sort of nontariff barriers, issues with licensing and professional permits, things that are important, for example, for services trade, we’ll have to see, but certainly could put a wedge in the flow of economic activity across that border.

Zooming out a little bit, one thing, if we’re thinking about international trade and global integration more generally, I do think it’s quite useful to take stock relative to where we were at, let’s say, in March. When the COVID shock first hit, a very reasonable forecast, in fact, my expectation would have been for a collapse and a persistent collapse in cross-border flows of goods, trade, and of capital. And in fact, you did see the collapse of good trade volumes in a pullout of international capital from emerging markets. For example, portfolio flows contracted at extreme speed in a way that signaled there might’ve been a global sudden stop from emerging markets in developing countries.

From today’s vantage point, things look quite different, and I think it’s worth pointing out. It’s one of the at least potential optimistic parts of recovery is that the portfolio flows, in fact, did go back as quickly as May to those emerging markets, who of course need the funding to be able to continue apace and make the changes they need to adjust to the health crisis. Trade in fact has roared back to a level. The recovery was much, much faster than the collapse of trade we saw in the global financial crisis, for example. In fact, right now, container shortages have driven up a price, where trade is actually quite costly. Shipping costs right now are quite costly. There is quite a long way to go, but when we think of some of the international frictions that might’ve been associated with COVID, at least on those particular dimensions, things do not look as bad as a year ago, most of us or many of us might have thought they would at this point.

Stephanie Flanders:      Just quickly on that. There are queues of container ships outside LA and Rotterdam, let alone the UK, and many difficulties for exporters trying to get their ships out of Hong Kong, and other things. Do you think that in the short term we should actually worry about those supply-chain bottlenecks hurting the recovery? Brent?

Brent Neiman:              Relative to the other first-order issues that we’re seeing on the global economy right now—the vaccine rollout, the production of the vaccine, distribution etc.—I would hope and anticipate that the supply-chain disruptions, which we also had in the spring, won’t be a first-order concern relative to some of these other major, major issues. But of course it is an impediment. A huge share of global international trade is in intermediate inputs. It’s not just that consumers can’t get the thing that they want; it’s that producers are waiting to make their final good because they need the input that they want. And if they can’t get that, or there’s a delay and they have to try to change their production process, this can of course represent a really important headwind, I should say, an important headwind. Is it on the top few list of things I’m concerned about right now when thinking about the evolution of the global economy? No. But of course would it be better if those bottlenecks smoothed out, if the price of shipping restored to a more normalized level? Of course it would. And I do anticipate that in due time that will happen. The global trade system’s really whipsawed. It had, as I said, a very stark collapse but then a very rapid recovery. Countries are growing at very heterogeneous rates, which of course you can imagine is very difficult logistically to make sure you have containers empty and available in the places where you need them to be. But hopefully this will resolve and work through the system in due time.

Stephanie Flanders:      Randy, we have a question from Edwin Wiley, which is one of the questions that many people ask when they look at just the numbers that are being spent governments. You talked about the scale of borrowing that the US and other countries have done. And he asks: What are the possible negative consequences of the massive public deficits that continue to mount up with no end in sight?

Randall S. Kroszner:      At some point, they have to be repaid. Now, this is really an issue that is probably going to be affecting most importantly future economic actors, our children in the next generation. There’s an enormous amount of debt that’s come in. And as I said, when you have a crisis, it makes sense to respond to it that way. It’s exactly how you finance a war. For example, World War II, lot of debt was issued. It was completely sensible to do that and then gradually pay it down.

And that’s why I want to be careful about how we actually spend the money going forward because I think we’ve done in many countries—it’s not all countries, but there are many countries that still have not had a strong response—but in much of Europe and the UK as well as the US, a very strong initial response. We should be really careful about additional spending, an additional burden on future generations that are going to have to repay that. We hope that borrowing costs will stay very low. That’s one of the arguments for doing so much borrowing now and also an argument for doing even more for infrastructure projects and other projects like that.

And obviously, a low cost of borrowing does encourage more borrowing, and it gives a signal that it’s OK to do more of that. But the challenge is that we always think that, or our model suggests that things will be very smooth. We’ll get more signals, that as the market become more concerned about repayment, that gradually there will be signals that’ll slow people down from doing more borrowing. The way that the world works, things often change very quickly. Confidence changes quickly, but we don’t fully understand exactly what undermines that confidence. When we look at some emerging-market countries, a country like Argentina, which for a few years was the darling of the markets, borrowed 100-year bonds in US dollars, and two to three years later was effectively restructuring that debt. I’m not saying the developing countries are Argentina. I think they have a lot more room to run in being able to borrow, but the transition can come quickly. And I think we shouldn’t dismiss that. That, “Oh well, interest rates are low. We continue to borrow. No problem.”

At some point, that’s not going to be the case, and as that debt burden rises, it’s going to be difficult to do policies at that time. And it’s also a big burden on our future generations.

Stephanie Flanders:      Well, Alessandro Parenti has a follow-up [inaudible 00:42:33] to that from an EU context, [00:42:42 audio skips ahead] but also how that might interact with inflation developments. I guess one of the thoughts here is that the European Central Bank will feel torn about increasing the cost of government finance at a time when the debt stocks are so low. What do you think, Veronica?

Veronica Guerrieri:      So far, one good thing is that the European Central Bank has been acting as a lender of last resort with no doubt of sort. This has for sure helped at least in avoiding self-fulfilling sovereign debt crisis like the ones we had seen in 2011. And so this is already something good. In this moment in particular, this is something very good, and it basically did absolutely the right thing doing that and is helping in an emergency situation that we have never seen of this size.

Now, going forward, I agree with Randy, and that applies to Europe as well. Of course we cannot keep spending. And I want to add one thing, which is that many people are arguing interest rates are low now, so it’s a good time to borrow. In part, this is true. It’s cheaper to borrow, but there is another side of the story that could be troublesome going forward. That is, when interest rates are low is also when the monetary authority has less space to conduct conventional monetary policy. It’s a situation in which, if we are going to face another shock in the near future and another recession, fiscal policy probably has to do again the part of the stabilizer and help the economy recover, if monetary policy cannot do that. Now, there are unconventional monetary policies that can do part of the job, but we know that they are not as effective as conventional monetary policy. And so you will need to pair that with some fiscal policy. If that is the case, it’s really the case that when interest rates are low, it’s cheaper to borrow, but you also need to build up more fiscal space because it’s when fiscal policy may be needed the most. And so this is, I think, the tension, and I think that’s why we should be careful going forward.

Now, in terms of worry about inflation, I agree there has always been this tension, and in particular in Europe. Inflation has always been one of the big fears. Now, we are clearly far from an outlook where we should be worried about inflation, but we have to think a step ahead and think what’s going to happen.

If, for example, the Fed in the US is going to . . . at some point, the medical emergency is going to disappear. The economy is going to recover. And I believe that when the medical emergency is going to disappear, the economy is going to recover fast in the US. Then maybe the monetary authority is going to actually start responding and increasing interest rates. And then so what’s going to happen in Europe if Europe is going to speed up as well because growth is staggering, and so forth. There is when the ECB, if it’s worried about inflation, may actually generate a new contraction, and so forth. So it’s something to be worried about, but we should keep the big outlook in mind: inflation in this moment I don’t think is of concern, but for sure we have to think about fiscal space and building up a fiscal space for a future emergency, which may occur sooner than later.

Stephanie Flanders:      Oliver Gil Martin has raised a question about the fairness of the impact of the crisis, which is clearly very unfair, but also how policy might respond to that in the future. And one particular question he raises is: Will the winners and losers from this health crisis mean that we have a louder volume on the call for universal-income policies?

Brent, do you think you will see support for those kinds of policies or more generally a greater focus on fairness and equity in thinking about the long-term fiscal approach, for example?

Brent Neiman:              Even just thinking about the short-term fiscal approach, many of those issues correctly are prominent and important. Of course, one needs to think about the sustainability of a country’s debts. But if you think of some of the most urgent uses of the stimulus packages, of the debts taken out by countries around the world, they really are aimed toward, at least in many cases, quite compelling uses that reflect this inequity of the COVID crisis.

Let me give you one example. If you’re concerned about scarring of the workforce, you’re worried that human capital will depreciate as people are forced to stay home, leave the workforce, and again, to a large extent, those that were most likely to lose their jobs or to have to risk their health in order to keep going to their job are those that had lower income, less education, less ability to maintain their human capital in other ways.

Another important example would be education. Children around the world are potentially taking a year off of school, which could have potential long-run productive implications for everyone, for the world, and that problem is probably most strong, most important to deal with for those families and children that perhaps don’t have the resources to find educational stimulus at home, maybe because both parents are trying to work or don’t have the resources to be able to do so.

Even thinking of scouring in terms of the loss of productive capability on the business sector, the IMF had a really interesting plot included in their update to the World Economic Outlook released a few weeks ago that showed the trajectory of bankruptcies of small to medium enterprises around the world in a standard recession, in the global financial crisis, and in the COVID crisis. And despite the COVID slowdown being far sharper than what we’ve typically seen, you don’t see the same level that you would otherwise expect, the same sharp increase in bankruptcies. And a lot of that must be due to the fiscal support leveled around the world.

I guess the last point is for decades economists have wondered and puzzled: “Why is it that emerging markets, for example, aren’t able to conduct countercyclical fiscal policies?” And there’s some evidence in this COVID crisis, because markets have permitted governments to borrow at relatively low rates, you have finally seen policies for some of those countries follow that standard playbook that a lot of economists would have put forward. I think the cause for some of the use of this fiscal stimulus is strengthened in fact by the fact that it’s being spent and will hopefully be spent in a lot of cases on preventing scarring and helping those in the economy that are most in need. And had the shock not been so unequal, not been so unfairly distributed, we might be speaking in a different way on the merits of these fiscal expenditures.

Stephanie Flanders:      Well, Randy, Brent has touched on the financial conditions, and we’ve got quite a few questions about the US stock market. Of course, some people think that the poorly targeted fiscal stimulus you’ve had in the US means that some people have been spending their checks on Robinhood accounts and trying to put those hedge funds out of business the last week or so. Someone was asking, Dina Gabaro was asking about bubbles [00:51:05 audio skips] and whether speculation . . . There was a broader question from an anonymous attendee highlighting the disconnect between the markets and, say, the level of unemployment.

Randall S. Kroszner:      I think of a lot of different pieces there. [crosstalk 00:51:21]

One aspect of it is: Broadly, why has the stock market recovered as it has and why are markets relatively positive, and especially for tech stocks? Part of that has to do with the discount rate, because if you think about stock market valuations, what are they? They’re looking at the [inaudible 00:51:43] kind of value, so those future revenues, those future profits, if interest rates come down very significantly and are, let’s say, effectively at zero, or in much of Europe, in negative territories, what that suggests is that normally you discount this. The future is worth less than today, but if interest rates are zero or even negative, that’s not true. So you can take a much longer horizon and think about, well, will Tesla in 10 years be able to make an enough money to make this evaluation be reasonable? I’m not making any stock picks or recommendations on that. But I think part of what it is as you go out further to the future, the revenue streams are less certain, but they’re being less discounted. People’s optimism about the long-run future has helped to buoy things, but also think that makes things much more volatile because you’re relying on the far future in thinking about how you do your evaluation today. That gets more weight, but there’s much more uncertainty with that. And I think that means there’s going to be more volatility. Broadly, central banks, by bringing rates down and making credible commitments to keep them down for very long periods of time, generally raise the value of a lot of assets, particularly equity-type assets.

Then, in the particulars, certainly many people have seen their incomes, even if they’re unemployed, because of generous unemployment benefits, many of the people have seen their incomes maintain themselves, and they have more time on their hands. And so we’ve seen record numbers of people signing up, not only at Robinhood, but even at more traditional brokerage houses of the smaller D-trader types or just individuals. They have gotten into markets. It’s actually amazing to see what . . . It’s sort of a version of crowdfunding that, by using these internet chat rooms and things like Reddit and elsewhere, that effectively a large number of small players can act like a big player and can act as even bigger than the biggest player and challenge them.

That was something that I don’t think markets or regulators had contemplated before. And that’s something new. We need to think very carefully about that. One of the issues that has come up is the infrastructure. People have been very concerned about Robinhood and others slowing trading in certain stocks and saying, “Oh, you’re trying to slow down the little guy because you’re trying to protect the big guy.”

But what it is there’s a market infrastructure behind that. There’s this Depository Trust [& Clearing] Corporation, the DTCC, that requires firms to post margin if they’re doing a lot of trading in volatile [inaudible 00:54:42] because the way we settle things . . . It’s not . . . When you buy a stock, you bought at that moment, but in the background, it actually doesn’t happen until two days later. This is just crazy that it takes two days to do that. This should be done automatically. Many other countries have real-time gross settlement. You are able to settle in real time or at least within the day.

But because there is a risk that something might happen over those two days— some of those players may not be able to make good on their commitments of either producing the stock that they’re supposed to when they’re shorting or being able to make the transfer or having the money in their account two days later—there’s all this risk that’s in the background, and that’s why the requirements for posting collateral went up so much. This is why Robinhood has had to raise billions of dollars, because if they’re going to allow the trades to occur, they have to do this. Now, the large hedge funds were already doing this kind of risk management. Little guys weren’t doing this before. We’ve got to rethink the structure that’s behind this. So I really think this is not, like, a big guy versus little guy kind of thing. I think it’s really a market infrastructure and regulatory thing that should get a lot more attention than it’s getting right now.

Stephanie Flanders:      Right, we’re going to run out of time. So I’m going to ask Veronica and Brent very briefly to end this on a high by asking you to say quickly what you think, if there’s one unexpected or important positive development that might come out of the pandemic, what are you thinking of, Veronica?

Veronica Guerrieri:      I would say one good thing about the pandemic is of course that people have quickly learned to use online platforms. Smart working is becoming a larger part of many jobs. I think one important positive effect in the longer run for this is that women are going to be able to participate better, like to have a more flexible schedule. It’s going to make it easier for women to have a career. It makes it easier because maybe they don’t have to travel as much as before, maybe because they can adjust their hours to their schedule at home with kids, and so forth. This is going to be important for the future of the economy.

Stephanie Flanders:      Working from home, maybe—homeschooling, definitely not. But Brent, what do you think?

Brent Neiman:              I second that: homeschooling, definitely not. A hope of something that could come out—I don’t know if it’s a prediction, but in recent years there’s been a real push, a sort of trend away from global engagement of policy-makers, some difficulty in cooperating around issues of the global commons. This could be problematic as the world faces health issues like COVID going forward, faces climate issues going forward, immigration, tax policy, international trade. One thing that could come out of this is a greater attention to how each country’s actions on any of these major issues in the world have clear spillovers to their neighbors and the rest of the global community. Hopefully, we develop more effective ways to jointly govern around those issues.

Stephanie Flanders:      And we could have a whole other session about the climate going forward and the changes in policy potentially there. I’m going to hand over to you, Randy, and you can talk about what you’re expecting on the positive front, but I know you also have another session to introduce. Thanks for everyone bearing with me on the internet connection. I swear it’s gotten worse since Brexit, but we’ll see you again.

Randall S. Kroszner:      (laughing) Thanks so much to you, Stephanie, and thanks also to my colleagues for this. On a positive note, just very quickly, we made incredible strides in health, and I think we’ll be able to do that in the future. We’ve also done some regulatory changes that will allow us to move vaccines and other medicines forward more quickly, so I hope those are not lost.