The Covid-19 Pandemic is Forcing a Rethink in Macroeconomics

The Economist
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The Covid-19 pandemic may be ushering in a new era of macroeconomics. Supply chains and production have been disrupted, but demand has taken the hardest hit. The impact of the pandemic on demand leads to future expectations for negative interest rates and inflation. Covid-19 has also exposed inequities in our economic system as many white-collar workers can work from home but “essential”, blue-collar jobs have to work in the field (for low pay) and are therefore at greater risk of contracting the virus. The pandemic hurts the poorest the hardest, which has developed a new sense of urgency to once again focus on the effect of the boom and bust of the business cycle on the poor. Getting back to full employment has emerged as a top priority for economists.

The hotly debated question is how to go about the recovery. There are, more-or-less, three major schools of thought. The first says that as long as central banks are able to print money to buy assets, they will be able to boost economic growth and inflation. The second school of thought says central-bank asset purchases cannot deliver unlimited stimulus so it’s better for the government to take fiscal policy measures, a.k.a. boost spending or cut taxes allowing for budget deficits. Finally, the third school believes negative interest rates are the solution.

Part A: Are China-US Relations Drifting Closer Towards War?

Shi Jiangtao, South China Morning Post
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In June, US Secretary of State Mike Pompeo and top Chinese diplomatic aide Yang Jiechi met in Pearl Harbor for a secret meeting that did little to heal the deepening divide between the US and China. The two nations have become embroiled in a new Cold War, as issues relating to trade, the South China Sea, Taiwan, Hong Kong, Xinjiang, and Huawei (among many others) continue to deteriorate the relationship at breakneck speed. Analysts see parallels to the US-Japan relationship in the final months of 1941; even at the time, Pearl Harbor seemed inconceivable. While the modern incarnation seems to have little appetite for a catastrophic war, the possibility remains (see below), especially as both countries adopt a more skeptical approach. In the US, foreign policy has been torn between engaging with China through the free market for its prosperity and constraining its rise to power. Henry Kissinger, the former US Secretary of State famed for his push to open the US to China in the 1970’s, is now pessimistic on the future relations of the two nations: “China and the US are almost destined for conflicts.”

Part B: US, China May ‘Stumble’ Into Conflict in South China Sea, War Game Scenarios Suggest

Eduardo Baptista, South China Morning Post
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In October of 1950, China’s People’s Liberation Army launched a surprise offensive on US-backed forces in Korea, eventually pushing the conflict line back to the 38th parallel and marking the last time Chinese and American forces would directly clash until the present day. Now, that streak is in danger of being broken, but military experts believe a conflict will most likely be the result of an accident rather than a deliberate attack by either side. Specifically, they anticipate that a stumble in the South China Sea – one of the world’s most coveted territories for its massive shipping routes and abundant natural resources in fish, oil, and gas – could provide the flashpoint for a conflict neither side is eager to enter. Indeed, the region has seen many close calls as China has continued to mark out an increasing territory in the region. The US under the Trump administration has taken a tougher stance on the region, looking to deny Beijing a “maritime empire” in the area. Furthermore, Chinese military technology has been tailored to control the region, creating a difficult scenario for US strategists. While US military capacity has a clear qualitative advantage in most areas, China has been narrowing the gap. This strategy has already been seen in the South China Sea, with Chinese ships swarming out other claimants to disputed areas. While the local economic effects of a more drawn-out conflict would provide the US an advantage, strategists foresee any conflict in the region as having a limited scope. However, as Hu Bo of Peking University puts it, “it’s impossible to control a war once it happens.”

Too Big to Prevail: The National Security Case for Breaking Up Big Tech 

Ganesh Sitaraman, Foreign Affairs 
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Big US tech companies often argue that they should not be broken up because doing so would undermine US national security and create opportunities for Chinese dominance. The author of this article suggests this argument is backward. On the contrary, breaking up and regulating Big Tech is necessary to protect US democractic freedoms and preserve the ability to compete with other great-power rivals, like China. Many companies in Big Tech have extensive operations in China and thrive off of the Chinese market. There are strong incentives for companies to behave as the Chinese state wishes even without direct pressure from the Communist Party. Without necessarily intending to, any US tech company working in China could be supporting the Chinese state and the expansion of their “digital authoritarianism”. Above all else, Big Tech acts on their commercial interests; US national security interests come second. Therefore, lobbyists are most likely to advocate for public policies that support maximizing shareholder profits even if they counter US national interests. 

It is also argued that breaking up Big Tech would make for a more competitive technology sector, which would in turn foster innovation and improve our competitive edge against rivals. Furthermore, it could mitigate the ill effects of lobbying and fewer companies would be dependent on the Chinese market. Those opposed to breaking up Big Tech argue that smaller companies could not afford the investment necessary for resource-intensive next-generation technologies. The counter-argument to this is that Big Tech’s main players would have plenty of money leftover and that whatever resource constraints did arise, could be offset by greater public investment in research and development. In summary, the best way for the US to remain at the forefront of technological innovation is through market competition, smart regulations, and public spending on research and development. This would require breaking up Big Tech. 

Dollar blues: Why the Pandemic is Testing Confidence in the US Currency

Colby Smith, Eva Szalay, and Katie Martin; Financial Times
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The coronavirus-induced economic crash in March created a rush on the US dollar, sparking a monster rally (9% over nine days). However, the dollar dropped 5% in July, the currency’s worst performance in ten years, highlighting the potential weakness of the US economy in the midst of the pandemic. The government bond market has shown that investors are looking for safe assets amid anticipated low growth. This is exacerbated by the abysmal situation in the US surrounding the coronavirus; Fed chair Jay Powell said the trajectory of the economy hinges on how the virus response proceeds, even as the Fed is expected to keep interest rates near zero regardless of the speed of recovery. As US Covid-19 politics fracture the dollar’s foundation, the EU is showing new signs of unity. While it is unlikely that the euro will replace the dollar as the world’s reserve currency any time soon, a continued “mismanagement” will chip away at the greenback’s status. Still, with 62% of global foreign exchange holdings allocated to the dollar, the euro has a long way to go if it is to bid for the top spot. Neither is China’s renminbi likely to challenge dollar supremacy as long as capital flow restrictions prevail, but regimes have been known to change. While it looks like the dollar is set to remain the world’s reserve currency for the time being, the clock is ticking, and the US must work hard to preserve its credibility if it wants to keep its spot as the world’s preferred currency.