We should not go as far as the Canadian economics professor Joshua Gans, who spoke of a “triumph of economists”. But it is impressive how successfully many governments have tackled the economic crisis during the pandemic. A crisis that could have degenerated into a much deeper and longer recession. However, there were also weaknesses to learn from.
The crisis is not yet over. Nevertheless, we can already give a first assessment. On March 9, 2020, the German stock index collapsed by 8.2% at the start of listing. The DAX lost that much in a single day, September 11, 2001, the day of the terrorist attacks in the United States. One indicator of the scale of the crisis has been the increase in the number of unemployed people. In Germany, this has been shown in the statistics of short-time working: while at the end of 2019, only a good hundred thousand people were registered for short-time work, this number rose to around six million in April 2020. Never previously so many people in Germany had not been on short-time work. In the United States, which does not have such an instrument, unemployment rose from 5.8 million in February to over 23 million in April 2020. The blockages had led to a sharp drop in demand in certain sectors such as hospitality, accommodation and entertainment. . At the same time, the physical absence of the workforce has been a challenge for many companies. International supply chains have been disrupted. There was great fear that the economy would collapse. The time for macroeconomists in governments, central banks and advisory bodies has begun. As the name suggests, macroeconomics takes into account the big picture, not the players in the economy individually.
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Achim Wambach is President of the Center for European Economic Research (ZEW).
(Photo: Stéphane Rumpf)
In order to maintain the economic cycle, solvency measures have been used in particular, and on a large scale. The experience of previous crises has helped. With the 600 billion euro economic stabilization fund, the federal government has given a clear signal that it is ready to secure corporate liquidity. The expansion of the partial unemployment benefit has clearly shown that the lean periods do not come at the expense of the workforce. The bridging aid, which has been extended several times, has allowed even small businesses, some of which had suffered massive sales losses, to remain in the market. The European Central Bank has responded decisively with its € 1,850 billion pandemic emergency procurement program and thus reduced the cost of credit for businesses and states. Mistakes like in the previous crisis – in which the key rate was temporarily raised and then lowered again – did not happen. After all, the European ‘Next Generation EU’ plan, worth 750 billion euros, has helped to engage European countries in a growth strategy.
Innovation spending has declined only slightly, especially in relation to the financial crisis
The main thing is that Europe is doing well with these measures, better than expected. The economy is picking up, the outlook is positive. A euro crisis like the one that followed the financial crisis did not materialize. In addition, innovation in Germany has suffered little from the crisis: according to the ZEW innovation survey, the economy assumes that innovation spending for 2020 fell by only 2% despite the crisis in Corona – during the financial crisis it was 11%.
While the response at the macro level was impressive and for the most part unmistakable, the same is not true for the micro and operational levels. In his book “The Disenchanted State”, Bonn economics professor Moritz Schularick vividly describes how Germany “stumbled through the crisis”. These include issues of purchasing masks and medical equipment and, at European level, vaccines. Added to this is the late, manipulable and not always targeted use of funds.
Now the crisis is new in its kind, so there was a certain learning curve to be expected in government action as well. It will be all the more important then to evaluate the measures in order to better understand what works and what does not. The first studies on temporary VAT reductions show, for example, that this was passed on to customers not only for everyday consumer goods, but also for consumer goods such as furniture and household appliances. Many expected otherwise and assumed that companies would not adjust their prices during the six months of the tax cut.
A major obstacle was the lack of access to real-time data
Coherent assessment requires political will. After the financial crisis, no assessment was made as to whether the measures, in particular to stabilize the financial sector, were appropriate and proportionate.
When evaluating the corona policy, special attention should be paid to two points. On the one hand, there is the provision of data. Lack of access to real-time data and inadequate data linkage have been major obstacles in tackling the crisis. For example, it is still unclear how high the insolvency rates and exit rates of the corporate market are. The government and the banks, where failed loans will eventually pile up, are in the dark. Bankruptcy studies can derive risk measures from historical data, but cannot provide more detailed analysis due to lack of access to real-time data.
Second, the use of the latest economic methods in crisis policy can be extended. Knowledge of market design could have been used more in the procurement of vaccines, for example, with pandemic watch contracts planned to secure vaccine production capacity in Germany, this has been done better. Behavioral economic findings and methods such as field experiments could have been increasingly used when designing lockdown measures or the vaccination campaign.
The economic instruments and understanding of politics to tackle economic crises have increasingly improved over the past decades. Much of what was once controversial has now become common property. The transition from the macro level to the micro level is not without friction, however. Here too, knowledge of the economy should increasingly find its way. However, the subject must also face the task itself: Too often, level efforts are ignored when making economic policy recommendations.