The reconstructed economy should not be modelled on the industrial structure of the 1950s

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The air is tingling with a sense of cheerful optimism. Throughout the entire Western world, countries are cautiously lifting their lockdowns. Governments, with their frequent references to “a war against the virus” and recovery “based on a Marshall Plan”, are reinforcing expectations of reconstruction optimism and strong recovery. Not only can companies reopen for business, they will benefit from all the demand that has accumulated. Investors are finding it almost impossible to decide between numerous new opportunities. In many cases, reconstruction– after a war, or following a natural disaster – is driven by large government projects to create jobs, turning a sharp recession into strong growth. The economic term for this pattern (which is caused in part by the simple fact that steep growth is necessary if you are starting from zero) is V-shaped recovery.

We need to identify the possibilities for future growth as soon as possible Sandra Phlippen Chief Economist ABN AMRO

As much as I would love to share this optimism, I fear that it is unrealistic. But, and this is a big “but”, the government can make it a little more realistic. For a strong recovery, we must be capable of coping with a second wave of infections without forcing the country into a new lockdown. Optimally, this would be when we have developed a medicine that is available worldwide. In a less ideal scenario, we can handle renewed infections by quarantining only the persons affected, and anyone who has been in direct contact with them.

For now, we should only take a very cautious step, and the only indicator of whether – and when – we can take another is the infection rate. The uncertainty is barely any less than it was before. It is also possible that we will need to take a step back, particularly if the political pressure to relax the lockdown becomes so great that the government has no alternative but to go along with it, even if the virus does not permit. In some US states this is a real risk; whether it will happen in Europe remains to be seen. Even if the virus allows for a gradual return to the new normal, some very nasty second-round economic effects still await. Even the wonderful support schemes will not be enough to entirely prevent job losses and bankruptcies. A downward spiral of job losses, and fear of job losses, will make consumers and investors reluctant to spend, will depress the country’s exports and could turn a liquidity crisis (not enough cash) into a solvency crisis (not enough earning capacity).

But that is also where I see a glimmer of hope. We need to identify the possibilities for future growth as soon as possible. Obviously, they are linked to sustainability: it would be highly unwise to remodel our reconstructed economies on the industrial structure of the 1950s this time around. Instead, we should apply the structures of the future. The government should play a leading role there, and it has plenty of time. The time that the strong recovery is on hold waiting for a vaccine can be used to properly prepare for a carbon-neutral economy. As a rule of thumb, this requires a tax impulse that (measured as a percentage of GDP) matches the recession.

Every week, Sandra writes a newspaper column for daily newspaper AD (in Dutch only), which can also be read here.


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