On Thursday, December 17, Markus Brunnermeier joined Markus’ Academy for a summary lecture on economic lessons from COVID-19 on resiliency.
Markus Brunnermeier is a Professor of Economics at Princeton and Director of the Princeton Bendheim Center for Finance
Watch the full presentation below and download the slides here. You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.
COVID-19 is a naked swimmer moment and a trend accelerator. It has revealed our societies’ weaknesses — for example, the lack of universal health care and the disproportionate impact shocks have on minorities and low-income people — and what can be improved. The pandemic has also accelerated many different changes, almost too quickly, making it hard for many to adapt to.
We should not only focus on efficiency but also resilience. Resilience from an economics perspective is different from risk: while risk is measured by variance and we strive to mitigate risk exposure, resilience is measured by mean-reversion and the goal is being able to bounce back if exposed to risk. We want to design a society that can avoid traps and has the ability to bounce back, which can be aided by healthy economic growth. There is a tradeoff to be considered between a diverse and monocultural society in how shocks spread and are overcome.
Social contracts can be used to maintain resiliency. These contracts are used to limit externalities, whether that be from others or natural shocks, which doesn’t eliminate risk but instead provides society and individuals the ability to handle these risks. The pandemic has best been controlled through either technology or important social norms (e.g. Japan’s strong ‘care for neighbor’ norms). This health externality has temporarily shifted the best government system from open society to more authoritarian.
There has been a shift in social distancing practices between the first and second COVID wave. During the first wave, these practices were driven by fear and anxiety and everyone scaled back activity regardless of whether there were governmental lockdowns. In contrast, fear is no longer a driving factor during this second wave as we are encountering COVID fatigue and denial. The concept of optimal belief expectations can be applied here, where people are relinquishing the negative utility of fear in favor of believing they will not be infected for more positive utility, leading to laxness with social distancing practices.
There is health resiliency in the way we have developed vaccines and testing. The cost of testing and producing vaccines is cheap compared to locking down the economy. We have taken a portfolio approach in developing the vaccines and embraced redundancy over efficiency to maximize outcomes.
There have been both innovative and scarring long run effects to the economy. On one hand, accelerating trends have led to innovations in telemedicine, home offices, firms moving out of the inner city, online learning, webinars, digital money, and the virtual world as a whole. On the other, there has been belief scarring (people are more pessimistic and less risk taking which can result in less growth), labor market scarring (labor matches between firm and worker have been broken), firm scarring (debt overhang problems and liquidations problems esp. for small and medium enterprises).
From a macro money perspective, financial markets have experienced whipsaw from March till now. March markets were full of turbulence but were followed by strong recovery — IPOs are at a record high. The government and corporate bond markets were all very shaky in March but the central bank has stepped in as a market maker and removed tail risk. There exists tail/trap risk, where short run inflation has deflation of certain products (like restaurant food) but inflationary pressures come later which leads to a negative trap for resiliency. Policy-wise, need to accelerate to avoid deflation and put the brakes before inflation. Inequality has been exacerbated by regional inequality (poor in affluent neighborhoods suffered their source of income as the rich moved out), racial gaps, and the online education gap.
Global resilience will need to focus on emerging markets, the phenomenon of slowbalization, and global value chains. The pandemic has heavily hit emerging markets, where trade offs are more stark and there is limited policy space. Fiscal response has been focused on developed countries — need to look at debt reconstruction in developing countries and evaluating COVID deaths versus lockdown deaths. Trade has been growing very strongly in recent decades and now is stabilizing but there is deglobalization in services and technology transfers. Global value chains will focus on resilience instead of cost minimization and dual source their inputs from multiple suppliers from different countries.