In the coming days we will ask Schar School experts to weigh in on the COVID-19 crisis as it pertains to their field of study.
Maurice Kugler is one of the world’s foremost experts on labor markets, productivity growth, global value chains, and international trade. Before joining the faculty at the Schar School of Policy and Government, Kugler taught at Stanford University and Harvard University. He has served as the Head of Research of the UN’s annual Human Development Report and as a Senior Economist at the World Bank.
What challenges will policymakers face due to COVID-19?
Kugler: The critical challenge for economic policy in the face of the coronavirus is that modern macroeconomic policy instruments, both monetary and fiscal, are most suited to dampen fluctuations originated by aggregate demand shocks, primarily affecting consumption. But COVID-19, in terms of its economic impact, started as an aggregate supply shock—impacting production costs—disrupting global value chains as Chinese exports dropped dramatically with ripple effects.
The Fed has dropped interest rates in the face of the global crisis. How will this impact the US economy?
Kugler: The half-percentage point interest rate reduction by the Fed was seen as largely symbolic since the problem in the economy was not the high cost of credit but rather the high production costs. A further drop in the nominal interest rate might help in the sense that the COVID-19 shock has now mutated into an aggregate demand shock also impacting travel, tourism, and services. Monetary policy can help avert an even more severe macroeconomic contraction.
Last week, the stock market saw the most severe decline in 30 years. What is the most worrisome development from the collapse in major financial portfolios?
Kugler: One day after the ongoing health crisis was declared a global pandemic by the World Health Organization [WHO], the indices measuring financial asset values in the main stock exchanges around the world plummeted catastrophically—and in unison—by more than 10 percent.
The most worrisome development is the simultaneous drop of all the stock indices and the credit default swap [CDS] numbers that provide an indication of how desirable treasuries and other forms of debt have become. Normally when investors shed risky debt from their portfolios, there is flight to the safety of Treasury bills and other government bonds. But now, the evidence points to a sizable shift towards cash, with the U.S. dollar gaining value against all major currencies, except the Japanese yen. Some have interpreted it as signaling potential panic among global investors beset with extreme uncertainty.
What does all of this mean for the future of the global economy?
Kugler: Epidemiologists have lamented the sluggish implementation of social distancing and more widespread virus-testing to slow down transmission. Now that there are concerted efforts around the world to follow the WHO directives, the [idea that the] peak of the virus diffusion will happen within two months may gradually induce a global macroeconomic recovery.