The War economy
Edition 3. Artisanal hand sanitizer, Backstreet Boys and unconventional policy responses
Rathin Roy, a former member of the Economic Advisory Council to the Prime Minister of India had an eye-grabbing quote in this excellent interview assessing the economic impact of COVID-19.
The economics of running a wartime economy are fundamentally different from the economics of running a peacetime economy. A wartime economy involves investing in winning a war because if you do not win the war, there is no economy to invest in.
A war economy poses critical questions of resource allocation to the government. It is marked by a do-whatever-it-takes approach to ensure survival. However, the choices made tend to stick long after the war itself has ended.
India has taken the same route in the past. Import restrictions, administered food prices, rent control were all instituted as a response to World War II as Niranjan Rajadhyaksha explains in this sparkling piece.
Even now, the RBI has opened the floodgates by releasing cash into the system by cutting the quantum of deposit a bank needs to reserve for a rainy day, reducing the rate at which it lends to banks and carrying out special ops to make lending more attractive, and giving the banks an option to forgive EMIs for its borrowers.
A loan is classified as ‘bad’ if the EMI is delayed by 3 months. It also adversely impacts the credit score of the borrower. RBI in effect mandated that loans will not be classified as bad and the credit score will not be impacted. Is the RBI the dark knight that India needs? This piece thinks so.
These are big bold steps. Yet the EMI holiday came under fire.
For one, communication was unclear. It took a while for the RBI to clarify that the interest on the loan would still accrue leading to a lack of clarity on what the implication of this EMI holiday was. Vivek Kaul, a commentator on the economy noted
Andy Mukherjee, a prodigious commentator on the Indian financial system, noted in this sharp piece that the measure will reach too few people (since the payment holiday is at the bank’s discretion). Moreover, its second-order effects might jeopardize financial institutions such as mutual funds who have exposure to loans (through securitization) and are not protected under this payment holiday.
Would the measures by central banks including RBI spur lending? In times of uncertain demand and prolonged pain, it is not clear businesses would borrow in the short term even if the interest rates are low. The low-interest regime is here to stay.
What of the governments? While the central banks are trying to ease liquidity in the economy, the governments have moved in with extraordinary steps globally.
Germany, for instance, known for its chronic fear of inflation, has agreed to take on budgetary debt for the first time since 2013. The most striking policy measure though belongs to Denmark which has agreed to pay 75% of the salary of all employees for the next 3 months in companies that do not undertake lay-offs. This and other fiscal measures are expected to cost an eye-watering 13% of the total country GDP. (India’s fiscal measures in comparison amount to <1% of the GDP).
The fascinating passage below in this insightful interview sums it up.
Denmark is putting the economy into the freezer for three months. We know that all these people won’t be able to work for the next few months. It’s inevitable. Rather than do rounds of firing followed by rounds of hiring, which will delay the recovery, let’s throw the whole economy into a deep freezer, and when the virus winds down we can thaw it out and almost everybody will still be with the company they worked for in January.
As we discussed earlier, policy choices made in the war economy tend to stick even when the war has been won. Is this the war where policy responses such as UBI finally cross the long hurdle and become a part of the mainstream fiscal toolkit? It certainly seems so.
In other news,
Speaking of a war economy, Ray Dalio, the enfant terrible of the hedge fund industry, penned a wonky long read on how the USA financed the civil war and USA and other countries financed the world wars. Hint – money was printed liberally, and monetary policy worked lock-in-step with the fiscal policy. Much like today.
Images of migrant workers walking back home have rightly occupied much of the news cycle in India. A journalist in Pune discovered that overnight journey of vegetable trucks in Maharashtra brought not just food but also migrants, hiding from authorities and undertaking a perilous journey by paying large sums in a bid to get back home in defiance of a monstrous lockdown.
While recession seems doom and gloom (and for many it is), an unexpected outcome is that it is likely to end up saving lives. Studies consistently show that mortality decreases during economic downturns. This article sums it up well. Residents of Delhi, for instance, are certainly breathing better air than they have in years.
In less boring other news,
COVID-19 has had some unforeseen challenges and outcomes. While the Russians are doomed to be stuck in loveless marriages as divorces get banned till June 1st, Walmart is seeing sales of tops increase while those of bottoms drop. People are obviously concerned only from the waist up.
My favourite tidbit is about this Brooklyn distillery that decided it was an opportune moment to make artisanal hand sanitizers.
What is an artisanal hand sanitizer you ask?
87 percent alcohol that is “perfectly good gin that is a little bit old, and doesn’t taste the way we want it to.” As a result, his hand sanitizer smells a little bit like Christmas, which is characteristic of the juniper berries used in the distillation of gin.
Okay, then.
In all the gloom, socially isolated Backstreet Boys decided to do a remote rendition of the classic, “I Want It That Way”.
That is all for the current edition. If you like it, earn good karma by sharing it with others who might like it too. Feel free to send suggestions on twitter at @romit_ud or at romitnewsletter@gmail.com. Stay safe!