World economy faces ‘doom loop’
The world economy will be exiting the pandemic weighed down by much bigger debts and increased inequality that could hobble growth in the longer term.
That was one of the memes making the rounds at the annual meeting of the American Economic Association that winds up on Tuesday.
While global growth is widely expected to strengthen as more people are vaccinated, top economists at the virtual threeday conference focused on the glaring inequities that the pandemic had exposed and the fall-out fromthe efforts to combat COVID-19.
“We have met every crisis in the recent past with yetmore aggressive central bank accommodation and yet more leverage, both public as well as private,” said former Reserve Bank of India Governor Raghuram Rajan. “The real question is: Is this a doom loop? Does it keep going until it is forced to stop?”
Global debt rose by more than $15 trillion last year to a record $277 trillion, equivalent to 365 percent of world output, according to the Institute of International Finance. Debt from all sectors — ranging from household to government to corporate bonds — surged, based on data from the Washingtonbased IIF, which is comprised of the world’ s leading financial institutions.
Poor hit hard
Inequality has also increased — both within and across countries — as the pandemic has hit the poor particularly hard. In the U.S., Blacks and Hispanics have suffered proportionately more fatalities than whites, while low-wage workers have borne the brunt of the layoffs as those better off continue to work from home.
“The pandemic has exposed the depth of inequality and in many ways has exacerbated those inequalities,” said Joseph Stiglitz, a Nobel Prize-winning economist.
While rich countries like the U.S. have cushioned the blow to their citizens with massive amounts of government aid, poorer nations have been unable to do that. Stiglitz, a Columbia University professor, said the world’s 46 least developed nations accounted for just 0.002 percent of the $12.7 trillion in public stimulus spending.
“Inmany ways we could see after this pandemic an unwinding of decades of progress toward reducing global inequality,” said Harvard University professor and former International Monetary Fund chief economist Kenneth Rogoff.
Positive developments
Not everything coming out of the pandemic will be bad news, of course. The speed at which vaccines were developed and the rapid growth of telemedicine are developments worth celebrating.
Economist Nicholas Bloom of Stanford University has also pointed to the potential productivity gains that can be reaped from more time spent working at home — a trend he expects to persist post pandemic.
Even before the pandemic, the U.S., China and many other countrieswere experiencing rising inequality and increasing debt. As the coronavirus crisis eases, those two tendencies could combine to present problems for the global economy.
COVID-19 has “exacerbated inequality markedly which also raises the issue of financial fragility,” said World Bank chief economist Carmen Reinhart.
Many lower-income U.S. households, for example, hold a lot of debt and could find themselves squeezed as temporary moratoriums on mortgage and rent payments end, she said.
Rajan said small businesses could also suffer after many were kept afloat in the U.S. by the Paycheck Protection Program and other government measures. “There is a large wave of potential bankruptcies,” he said.
The U.S. and other wealthier nations will not be immune to having to rein in surging government debt, according to former White House chief economist Christina Romer.
“When we are through the pandemic we are going to need to get our fiscal houses in order,” saidRomer, who is now at the University of California, Berkeley. “We’re going to need to get our debt loads down mainly so we’ll be in a position to deal with the next crisis, pandemic, or whatever when it comes.”