Covid-19 has given conventional economic wisdom an overhaul4 min read . Updated: 04 Oct 2020, 08:04 PM IST
Much of what we took for granted has been pushed aside as we grapple with a problem that has upturned old assumptions
Whatever else one may believe about the ongoing covid crisis, one aspect is abundantly clear and beyond dispute: it gives us an opportunity—nay, it forces us—to rethink established concepts and models and hoary conventional wisdom. I was thinking about this while preparing my lectures on international trade and economic development. How much of what I taught my students 20 years ago, five years ago, or even last year before this crisis, would I stand by today? Perhaps not as much as I would have hoped.
Thus, much of conventional macroeconomics—especially as applied to economic policy—is in the process of being junked. The government “printing money" to pay its bills, until recently seen as a mortal sin, has now been downgraded to a venial sin, at best. Some heterodox economists—and a few mainstream ones too—now even see it positively, as a virtue.
Likewise, the idea that there is a limit to a government’s capacity to tax, and hence a limit on how much debt it can accumulate as a share of national income, has been thrown out of the window. The new orthodoxy says we don’t need to worry much about debt, as long as the nominal growth rate of the economy exceeds the interest that must be paid on the debt. And, with policy interest rates near zero, what’s the difference between raising revenue through taxation or by printing money? It’s all free money either way, evidently.
How about international trade? Preparing a class on the economics of globalization, I was reminded of an important article by economist Alan Blinder, which appeared in the journal Foreign Affairs in 2006. In fact, I wrote about it in these pages (‘The return of trade protectionism’, 13 February 2016). Paraphrasing and summarizing what I said then, Blinder argued that the conventional distinction drawn by trade economists between traded and non-traded goods and services had become obsolete. According to the old view, goods (say coffee beans) were tradable, but services (such as a piping hot cappuccino prepared for you by your favourite barista) were not.
Blinder recognized earlier than most that technological change and the rise of outsourcing had rendered this old distinction moot. Now, what was relevant was whether a good could be transported cheaply or not, and whether a service could be delivered remotely without a serious degradation in quality.
Coupled with outsourcing, technological advances jeopardized blue-collar jobs in manufacturing, but also white-collar jobs that could be done more cheaply elsewhere. Thus, with the cost of reading X-rays much cheaper in India than in the United States, radiologists in the US might be out of a job, along with factory workers. Interestingly, the jobs that would be secure were at the very low and very high ends of the value-addition chain. Thus, at the low end, until driverless cars and robots become an affordable reality, Uber drivers and restaurant waiters are safe; at the high end, celebrity sports stars are also safe.
While Blinder’s distinction remains conceptually valid, covid has turned the dial more at the high than low value-added level. Thus, drivers and waiters are still secure—indeed, they and other blue-collar workers are bearing the brunt of exposure to the virus, because their work requires physical presence—but supposedly secure white- collar work at the upper end is no longer as secure as was thought until recently.
Thus, an example of a safe job in my 2016 article was that of a celebrity psychiatrist. Which patient would want to fork out big bucks for a high-priced psychiatrist only to chat over Zoom? The experience of the psychiatrist’s couch, and his or her soothing presence, were part of the package—or so we thought. Now, with face-to-face contact all but impossible without putting oneself at risk, many high-end psychiatrists, wealth managers, and even spiritual gurus, are meeting their clients only virtually.
Similarly, those of us teaching at research-oriented brick-and-mortar universities used to look down with disdain at online universities. Yet, with few exceptions, most universities, even many prestigious ones, have gone mostly or partially online. In theory, this is temporary; in practice, this might last much longer than anyone predicted. And by the time conditions become safe again, would both professors and students have developed a preference for virtual rather than face-to-face interaction?
Something seemingly temporary may become permanent. These are the sort of “hysteresis" effects I have discussed in this column in recent months.
Then, why stop there? If you are watching your economics professor online, unless he or she is a Nobel laureate, why not pick a cheaper, remote option? Already, evidence suggests that many Chinese students, who have kept universities afloat in the Anglo-American world by paying hefty foreign student fees, are staying away in droves, and opting for the cheaper option of registering with local universities. If it’s all online, why pay more for a professor sitting in the US or Canada, unless they are a bona fide celebrities and you can afford the cost of admission?
When the dust settles, far more white-collar jobs in the rich world may be vulnerable to outsourcing than many realize. Now, that’s one prediction I’ll stand by.
Vivek Dehejia is a Mint columnist