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Governments have a unique chance to reshape the economy post coronavirus

Coronavirus stimulus should focus on people and sustainability

I'll give you a bit of time back and only write a short article this week. Government's have big choices to make around stimulus as we recover from coronavirus. Do they provide top-down or bottom-up support? Do they initiate big infrastructure projects or provide more welfare? Or both? It's a headache deciding how to support the economy. The broad principles in my mind should be to bailout from the bottom, support environmental sustainability, and invest in building communities.

Governments giving stimulus to the economy

Bottom-up support is about directly supporting people with lower incomes and wealth. Welfare for those who lose their jobs is a good example. Bottom-up support makes sense as it helps people buy items that they need. A useful contrast is helicopter payments, which is basically giving money to everybody. Helicopter payments aren't a good idea as they are not targeted. Those who don't need money also get it. The United States recently initiated the CARES act which provided up to $1,200 per person for those with an income below $99,000. While I don't have massive issues with this payment; I would have thought it can be focused better.

As a rule of thumb, targeted payments to those who have little make the most sense as they have a higher marginal propensity to consume, and the payments make the biggest difference in supporting their well-being. Put simply, people with less are more likely to spend it, and that stimulates the economy. That's critical at the moment with consumer demand being so low.

Governments have a big opportunity to make headway on supporting green initiatives. With the economy in trouble investing in green energy like solar or wind makes sense to stimulate demand and support decarbonisation. Setting up funds to help households transition from energy or water-intensive appliances to environmentally friendly options is another good way to go. Economy-wide there are many more opportunities like electrification, vertical farming or simply paying people to plant trees and build green spaces. Throwing money at big infrastructure projects isn't the only option on the table anymore.

With the huge rates of unemployment, we can expect coming out of social distancing measures, governments are going to need to invest to create jobs. Not all investments are created equal when it comes to job creation. Economists can use analysis like general equilibrium modeling to estimate the number of jobs created from an investment. At times like this, every job counts. Investment in infrastructure will naturally be on the table. The NZ Government is identifying 'shovel ready' infrastructure projects to start when the lockdown ends as a way to boost the economy. We should ensure that these projects meet broader goals around environmental sustainability and public transport. Infrastructure investment is typical in a crisis and it's how many countries worked there way out of the Great Depression.

Isn't infrastructure investment a bit old school though? Investment in the economy is about more than big projects. We should be investing in communities. What about libraries? Community centers? Social housing? Pocket parks? Community care facilities? Projects that support schools, teachers and children should also be in the mix like provision of laptops and books, and investment in classrooms. If all we get are some big roads and buildings out of this, it will feel like a bit of a waste.

Governments worldwide will be under pressure to demonstrate economic recovery from coronavirus before the next election cycle. There will be a need for speed to make sure people can get back to living reasonably normal lives. Balanced against this though, governments have the responsibility to improve civil society, make progress on climate objectives and address inequality. Coronavirus offers a unique opportunity to reshape society. Let's not rush back to the way things were when we can make them even better.


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