Otto von Bismarck, 19th century Germany’s Iron Chancellor, is reputed to have said ‘laws are like sausages, it is better not to see them being made’. With the benefit of very recent experience, the same is true of economic and monetary policy. The lightning speed with which a public health crisis has morphed into a deep, financial crisis has resulted in chaotic policy brawl where bouts of market volatility are met with new initiatives.
There is little sign yet of coordination across nations and regions, and between monetary and fiscal policy authorities. The US, Europe and China are all guilty here. In the short-run, the flow of policy moves will likely eventually swamp market volatility. Policy makers, be it in the Treasury, White House or the Fed may sigh with relief when volatility dies down, but they will do well to focus on the potential of their actions.
While the speed with which the coronavirus has morphed into a deep financial crisis has humbled policy makers, it has also revealed the faultlines in a deglobalizing world.
For instance, world debt to GDP is the highest since the second world war, labour markets have been hollowing out, and instead of investing in capital spending many American companies have deployed cashflow to buyback shares (Boeing, which has spent tens of billions of dollars on stock buybacks and is now seeking a bailout of sorts is an example).
The relevance of share buybacks here is that they have pushed up earnings per share, the choice benchmark for CEO pay. So, with two-thirds of CEO’s being paid according to rising earnings per share, playing a ‘financial’ trade rather than say making better products (e.g. Boeing) has been attractive for executives.
Yet, having debated ‘stakeholder capitalism’ at Davos in January, the corporate world is now entrenched in ‘survivor capitalism’. The risk now is that in treating the fallout from these faultlines, that has been catalyzed by the coronavirus crisis, policy makers paper over bad economic behavior that has contributed to unimpressive productivity over the past decade, and growing wealth inequality.
In this context, policy action needs to have a ‘quid pro quo’. The phrase entered the lexicon of American politics through George H Bush, and more recently in the President’s impeachment case. The notion of a quid pro quo should reign over policy interventions, in potentially, a range of ways that will produce a more sustainable and resilient economic model.
A first suggestion is that though the USA has no corporate governance framework in the same way that the UK does, a ‘quid pro quo’ skeleton framework can be introduced in return for policy support. For instance, it should tie executive pay more closely to underlying profitability and an array of measurable goals, rather than earnings per share. Tax and securities laws can make overly enthusiastic share buybacks and excessive debt loading less attractive.
Second, many businesses that will require assistance – such as airlines and energy companies – are vital cogs of the economy but also contribute to climate damage. One brief upshot of the now worldwide coronavirus quarantine is that the skies over China have cleared of pollution and the waters of Venice have a healthier hue.
Here, financial assistance to companies should come with the rider that as a quid pro quo they change business models to become more environmentally friendly – that can entail more investment in green sources of power and raw material, less investment in extractive industries and an acceleration in the adoption of a ‘green’ approach to urban develop.
Then, while medical studies suggest that the human cost of the coronavirus can be severe – one scenario in an Imperial College London study points to over 2 million coronavirus related deaths in the US – the coronavirus crisis, like the global financial crisis, has laid bare the vulnerabilities of American society.
At a time when life expectancy in the US has been falling and where healthcare is a locus of inequality, and when tens of millions of workers are vulnerable to layoffs, this crisis presents an opportunity to rethink the US healthcare model and to fashion a more resilient labour market. If this is not done now, there will be a severe political backlash.
The idea of a ‘quid pro quo’ is to encourage policy makers to stop and think about the faultlines that the coronavirus has exposed, to mend them and to steer industries and society towards a more sustainable path.
Otto von Bismarck also said that ‘politics is the art of the possible’, now is the time for policy makers to grasp this by matching urgency with foresight.
Have a great week ahead,