Will the Covid-19-induced crisis lead to a re-shaping of the consensus around what a good economic policy is? As a recent article from the Financial Times suggests, to answer this question it may be well worth taking a look at what today´s stance of the IMF is. The historically orthodox global lender has in fact proved in the past its ability to guide governmental policy shifts even towards not completely orthodox directions – be it on matters of fiscal stimuli, high public debt or capital controls.
To this end the freshly released IMF´s World Economic Outlook (WEO) is particularly helpful. One significant finding contained in the second chapter is that not only imposed lockdowns, but also voluntary social distancing had a big impact in terms of detrimental effects on economic activity. In other words, easing lockdowns while health risk perceptions persist will not automatically bring a prompt recovery in economic activity. The report thus warns against prematurely lifting lockdowns and suggests “policymakers should be wary of removing policy support too hastily to avoid precipitating a further downturn and should continue to protect the most vulnerable through social safety net spending” (WEO October 2020, p. 70). Most importantly the IMF suggests that the “prevailing narrative” according to which there exists a “trade-off between saving lives and supporting the economy” – based on the short-term economic costs of lockdowns – “should be reconsidered” (pp. 74, 76). Curbing infections may in fact have medium-term gains sufficiently high to offset short-term costs. Similarly, in the third chapter it is assumed that there is no trade-off between decarbonization and economic growth. The 2050 net zero carbon emissions goal can thus be achieved through a policy package entailing a “green fiscal stimulus”, gradual increases in carbon price, and “compensatory transfers” to poor households equal to 25% of carbon tax revenues (p. 94).
Finally, in terms of policy priorities the IMF invites to temporarily suspend any fiscal rule that may curb action, create room for immediate spending needs also by increasing taxes on wealth, capital gains, high-end property and by removing poorly targeted subsidies, extend maturities on public debt and maintain low interest rates. In all cases, the bottom-line seems to be a renewed, active role of the state.
The full report can be downloaded here.