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‘Now’s Not the Time to Talk About Austerity’: OECD Chief Economist Laurence Boone
Laurence Boone, the chief economist of the Organization for Economic Cooperation and Development, argues in a Barron’s interview that governments will have to play a major role in the economy to emerge from the crisis. And they will have to keep spending to manage the transition to a new model.
The world governments’ actions that tried to shield people and businesses from the coronavirus shock will have to morph into more targeted policies to help the world economies transition to a new model, Organization for Economic Cooperation and Development (OECD) chief economist Laurence Boone says in an interview with Barron’s.
But governments will have to keep spending, and now’s not the time to talk about spending cuts or higher taxes. And the best way to lower the extra debt load inherited from the crisis will be through growth — even if the world has to live with slightly higher inflation. “No one can seriously say that inflation at 3% for a while would really be much worse than 2%,” she argues.
Q: Do you think we should already be talking about how government finances should return to normal, and how to deal with the debt load accumulated in the current crisis?
Laurence Boone: Before we ask the question about “after,” we must rebuild the “now.” This is a marathon, not a sprint. We’re facing a pandemic for which a vaccine may not become widely available before maybe a year if not more. And we know that we are transitioning to a world where many things will have changed.
We will not travel the way we used to, many industries and their workers will remain scarred by the crisis — think about the hospitality industry, mass tourism, or culture. Digital work will have increased sharply. We have to use the year or 18 months to come to review the economic policies that were implemented during this crisis, for transitioning toward a different future.
Q.: In which direction?
L.B.: Governments the world over shut down their economies to protect people’s health and put in place policies designed to shield people and businesses from the economic consequences of the shutdown, creating a big buffer. Now the situation has evolved, countries are moving out of lockdowns. Some sectors are thriving, others are still in freeze and new activities and ways of doing business are emerging.
This requires more focused and targeted policies. We need to manage the transition, allow a brisk dynamics of rising sectors, help the industries and sectors that need to restructure and change because of the crisis’ long lasting impact, and support workers who need to adapt. All this while keeping improving health care capacity, and preferably in a coordinated way.
There are many areas where government help and investment will be needed — think, for example, of the acceleration of the transition to an online economy in the retail sector, or implementation of digital grid to move faster to a cleaner environment. This will have, in turn, an impact on education, from primary schools to universities, and require some evolution of learning methods.
Q.: What do you think would be the macroeconomic consequences of such a shift?
L.B.: The response to the crisis, with fiscal and monetary policies acting in tandem, have been the right ones. But governments will have to keep supporting the economy throughout 2021, and central banks will remain involved in macroeconomic management for another few years.
We have not yet seen the full macroeconomic consequences. Beyond the extra spending needed for health, helping various sectors to become more digital, reviewing education methods, supporting most affected workers, we will likely see business failures, as in many transition periods. Governments provided businesses with the liquidity necessary to go through the lockdowns, but cannot support companies that are not viable. Capital needs to be reallocated to sectors with growth potential. So governments will lose money in some instances, take equity stakes in firms in others, extend loans, all that will increase public debt.
Q: To deal with the extra debt load, should we have to accept a little more inflation?
L.B.: There are three avenues to deal with the extra debt load: growth and inflation, tax and spending, and central banks. There will be a time to review public spending and taxes. The crisis has created a demand for more social equality, which suggests that taxes should become more progressive.
It has also increased resentment toward globalization: the OECD’s international taxation project is a way to move toward more global fairness. Public spending will have to come under review, to ensure that it is well targeted. And central banks will continue to buffer the shock and ensure that interest rates remain low for long.
But the best way to shrink public debt is through more growth. We have all already collectively accepted that we should have more inflation, because before the crisis, we were still dangerously below the 2% level that is the official target of most central banks.
So, implicitly, we have accepted that it should now be above for a few years. No one is seriously advocating or forecasting a return to the inflationary vicious circle of the 1970s, but on the other hand, no one can seriously say that inflation at 3% for a while would really be much worse than 2%.
(20min delay)