Economics after the Virus

This novel virus has created a novel economic predicament. In a country after country, the government-imposed lockdowns have resulted in a recession which is fundamentally different from more typical recessions, which are the result of the market-driven business cycle. Arnold Kling, writing in National Affairs about the United States, argues that instead of crafting a new strategy to respond to these unprecedented circumstances, policymakers have dusted off the playbook they used during the 2008 financial crisis. “It is far from clear that these were the right plays to call in 2008,” he writes. “It is even less clear they are the right plays to call now.” He adds: “What is clear, however, is that the COVID-19 pandemic has accelerated the deterioration of the concepts that underpin contemporary macroeconomic-policy thinking in America. That deterioration consists of a growing disconnect between the ideas that ground macroeconomic policy and the realities of the modern economy. The time has come to jettison both the Keynesian and monetarist paradigms that macroeconomic policymakers employ and to pursue an alternative paradigm more suitable to the conditions prevailing in today’s economy. Such a paradigm might be best described in terms of patterns of sustainable specialization and trade, or PSST. This new model offers us a more accurate understanding of the forces at work in our economy — and a more constructive foundation for public policy — than either the Keynesian or the monetarist models do.”