What the pandemic has taught us about the economics

News: Economy is affected by two types of shocks exogenous and endogenous. 

Exogenous shocks are those that come from outside the system, like the COVID-19 pandemic. 

Endogenous are those which come from within the system, like the 2008 North Atlantic financial crisis.

What are the economic lessons that one can draw from the pandemic? 

The pandemic provides some economic lessons, as well as some lessons for economists

Strengthening the supply side: Pandemic has shown that broken supply chains can worsen both the economic cycle as well as inflation. Supply-side impacts growth over the long term. Strengthening of supply chain is not only important to tackle challenges of the pandemic, but also those posed by the climate change. 

Human action matters: Controlling the pandemic is extremely dependent upon the human actions like wearing of masks and following government guidelines. In essence, the behaviour of the people also matter, other than things like the number of susceptible, infected and recovered citizens etc. It is essential to understand and incorporate understanding about human behaviour (both rational and irrational) when deciding on policies or economic models. 

State capacity is important: Public health has externalities. It is believed that Indian state has ample capacity at the top, but get increasingly weaker down the line, till it is almost broken at the street level. But, the reality is far more nuanced. Frontline workers like Asha workers, police personnel, etc did a commendable job in the pandemic. They were the first line of contact that citizens had with the system. Thus, it needs to be strengthened.

Scenarios along with forecasting: Economic forecasts are often wildly off the mark, and epidemiological models too. The world is uncertain, in the sense that there is much that cannot be assigned objective probabilities. It is sometimes better to be data-driven, and then adjust to the emerging reality as the evidence emerges. 

For the possibilities of the decades ahead, it is better to build scenarios, from an approach partly inspired by the work of the English economist G.L.S. Shackle.

Inequality: The pandemic era shows that, in India at least, both the costs of lockdowns as well as benefits of the economic recovery have been unequally distributed. This highlights the importance of reintegrating distributional issues into economic policy.  

Usually, fiscal policy deals with distribution issues through taxes and spending. However, a new class of models called HANK ( Heterogenous Agent New Keynesian models) which take distributional issues into account are also becoming popular. 

Source: This post is based on the article “What the pandemic has taught us about the economics” published in Livemint on 29^th Dec 2021.