Value context and insight. lkm@koreatimes.co.kr
Contribution Biden to be more favorable on trade
Robert J. Barro
By Lee Kyung-min
By Robert J. Barro
The top economic story of 2020 is the second quarter's COVID-19-related world recession. The associated partial economic lockdowns amounted to voluntary adverse supply shocks. These shocks led to unprecedented short-term declines in real GDP, on the order of 30 percent at an annual rate in the U.S. and many other countries.
However, this downturn differed from previous recessions, as it did not feature substantial losses in physical or human capital and did not exhibit major dislocations in financial or housing markets. Instead, the situation amounted to everyone deciding simultaneously to take extended, though not enjoyable, vacations.
This aspect of the recession created the potential for a sharp, V-shaped recovery, as has already occurred in the U.S. and elsewhere in the record GDP growth in the third quarter.
The main sector left out of the U.S. recovery so far is the 20 percent or so concentrated in travel and leisure. These areas will rebound dramatically once the pandemic has ended, likely by the second quarter of 2021 because of the remarkable technological progress in vaccines.
At that point, the losses in GDP and employment should have been fully reversed, though permanent changes will remain, for example in locations of work and shopping and in methods of communication.
This prediction of favorable economic outcomes in 2021 is reflected in strong stock markets in the second half of 2020 ― that is, stock markets really are leading indicators.
The economic and financial developments since the second quarter of 2020 reflect mainly the pandemic and the responding medical treatments ― that is, it is all about disease and technological responses in the health sector.
Government policies outside of healthcare, including the dramatic monetary and fiscal expansions, have been sideshows. Some of the expanded social safety net was a good idea, but the overall economic policy impact was minor.
Perhaps the second-most-important economic story of 2020 was the continued movement of China away from open markets and capitalism and back toward a government-run system.
Strong centralized control can be useful in some circumstances, such as in countering the global financial meltdown of 2009, and this control surely enhanced China's ability to contain the spread of the COVID-19 pandemic in 2020.
However, the longer-term implications for economic growth are negative. China grew dramatically for decades since the late 1970s by enhancing economic incentives and private ownership, not through government fiat.
It is unimaginable that China can grow a lot further and converge toward the per capita incomes of richer countries by relying on a system in which open markets and freedom of choice are diminished and the central government is the main economic decision maker.
During the Trump administration from 2017 to 2020, the main favorable economic policies concerned tax reform and reduced regulations, related especially to energy and the environment.
Unfavorable policies included expanded restrictions on international trade and the vast expansion of national debt due to spending motivated by the COVID-19 pandemic.
The Biden administration promises to undo the positive tax and regulatory changes and to generate further enlargements to the public debt in order to fund questionable un-targeted transfers, such as the absurd practice of sending checks to most individuals.
Policies are likely to be more favorable on trade, notably to include U.S. involvement in free-trade deals, such as in Asia and, perhaps, the United Kingdom. A major infrastructure program might also be productive if carried out efficiently.
The writer is a professor of economics at Harvard University.