Jean Tirole

I.S.E.O Institute is partnering with Università degli Studi di Brescia for the project “Nobels and Economists for Covid-19”: a gathering of articles, essays and short videos by Nobel Laureates in Economics, economists and scientists from all over the world willing to give their contribute to comprehend what effects the Covid-19 spread will have on our lives and economies. We will be regularly publishing new papers on our website (under the section Conferences/Covid) and the on the webpage of the Università degli Studi di Brescia. Our area is at the heart of the Coronavirus spreading: and with all our events suspended, we felt like we had to carry on our activity anyway. This is exactly the mission our beloved founder Franco Modigliani wanted the I.S.E.O. Institute to have: help understanding global economy. If we can’t do it by promoting conferences and Summer Schools because of the virus, we can do it by sharing distinguished and respected economists’ views on the web, reaching a huge and worldwide audience.

Rebuilding the world after Covid-19

What will the world look like when it emerges from isolation and the ravages of Covid-19? Predicting what will happen after the pandemic is difficult, not least because we have little information about how long the outbreak and restrictions will last. As a rare event, we have limited historical evidence; as an unexpected event, little thought has been given to how to deal with it.

In the optimistic scenario, demand and supply shocks will create a temporary disruption in the productive system and an increase in overall debt. If the 2008 crisis is of any guidance, an economic stimulus will facilitate the transition back to normal, boosted by the budgetary and monetary efforts already underway. There will be a severe recession and a loss of purchasing power for a couple of years but the crisis in the business world will be confined to a liquidity crisis, avoiding severe insolvency problems.

If damage from Covid-19 is prolonged, this raises the specter of more pessimistic scenarios, even dystopic ones. Debt in Southern Europe could skyrocket, even though the ECB is likely to keep the cost of borrowing for safe borrowers very low for a long time. This would not necessarily be catastrophic, unless financial markets start speculating against sovereign debt. A harbinger is the rise in interest rates demanded by investors in Italian and Spanish bonds prior to the Christine Lagarde’s announcement of a strong ECB support. These will be testing times for European solidarity.

Another big question mark hangs over the long-awaited resurgence of inflation. If it comes, will inflation remain low enough to avoid a debt-rollover crisis and huge losses for holders of cash and nominal debt?

One thing is certain: authorities will need to inspire public confidence to facilitate the recovery. Building trust will require a delicate balance between showing strong leadership and humility, acknowledging that we learn as we progress. Showcasing scientists modestly expressing both their knowledge and its limits, as medical experts have done in France, may contribute to recreating such trust.

Wartime altruism

Whether civil, international or sanitary, wars leave their mark on society. Faced with anxiety-provoking events, people may reconsider their goals in life. Research in the social sciences shows that our individualistic tendencies decline, and we display more empathy. We behave more cooperatively and altruistically and are more likely to join social groups.

Much of this new altruism is parochial; it is directed toward those who are “on our side”. But unlike internal wars, external warfare generates common interests that bridge the gaps across groups. In the war against Covid-19, the in-group extends to all mankind and there is no out-group other than the virus (provided we do not follow the US president in calling the virus a “Chinese disease” and that “every country for itself” fails to prevail). If this crisis exhibits the same gap-bridging pattern, this might be good news given the recent trend toward populism, nationalism, and ethnic and religious intolerance. In this respect, President Macron’s rephrasing of the coronavirus event as a war may have been judicious.

Economic solidarity

Today, solidarity with patients and health workers goes without saying; it is both ethical and logical. But solidarity should similarly target the economically most fragile. Liberal precepts call for society to insure and protect citizens from events, such as a pandemic, they have no control over. In this respect, countries with strong social protection (like France) are better equipped to limit the pandemic damage than those without (like the US).

In the next few weeks or months, French workers on short-term contracts (CDD) or laid off at the end of their notice period will be unable to find a job, regardless of how much effort they put into it. Neither will the unemployed who are no longer eligible for unemployment benefit. Unlike salaried workers under long-term contracts (the CDIs, who will receive 84% of their salary while staying at home) and civil servants, independent workers will lose their source of income. These people require (and will receive) financial support; others do not: the US-style universal-check-for-each-adult approach is easy to implement, but onerous and unfair; and it cannot stimulate an economy which is under confinement.

Smaller firms, which are less diversified and more credit-constrained than larger ones, must also be supported: shopkeepers, craftsmen, restaurants and hotels, the entertainment and mobility industry and many others no longer have sources of income and their very survival is at stake. Banks also will face liquidity problems. The recent massive rescue plans by many governments and central banks are well-advised. To be cost-effective and fair, they will again have to focus on the fragile, and not create windfall gains for the others.

Facing the future

We can be cautiously optimistic about increased solidarity, but when will we learn that policymaking must take a longer-term perspective? We underinvest in education, retraining, environmental policy, and various other measures that would limit the damage done to the next generation when confronting climate change, artificial intelligence, debt, inequity and other impending challenges. Covid-19 reminds us of our vulnerability. We must invest in efficient healthcare systems and promote research that will allow us to promptly respond to emerging threats. We were already aware of the dearth of research on antibiotics, given the growing antibio-resistance. We were concerned by biological warfare. We trembled with fear about the melting of the permafrost, which, besides emitting large volumes of greenhouse gases, will release ancient viruses and bacteria. We now realize that the problem is even broader. Global health crises are no longer “rare events”.

Unfortunately, people have short memories, rarely learning from history. Are we prepared to spend enough on healthcare research? Are we willing to pay a carbon tax to save the planet? If our answer to these life-threatening questions is still negative, our tendency to procrastinate, our motivated belief that problems will disappear by themselves or be solved by “others”, our collective irrationality will do us in.

We must also reconsider our Weltanschauung, our world-view. We must face reality rather than hiding behind pseudo-ethical postures. Even the best hospitals around the world face a terrible ethical dilemma: overwhelmed by Covid-19, they may have to select who will live and who will die. The public is often unaware, however, that hospitals face similar dilemmas in normal times: the allocation of their budget and personnel prioritizes some patients over the lives of others with different illnesses. Life is not priceless. In our actions if not our stated beliefs, people view life and money as commensurate: for instance, we may not be willing to accept a much higher price for a safer car for our children; and political preferences suggest many are not willing to consume substantially less in exchange for a safer world.

We ought not to banish these troublesome thoughts. As unpleasant and disturbing as cold calculations about alternative health outcomes are, we cannot elude the rationalization of existing healthcare budgets. But that does not prevent us from rethinking our allocation of resources between ordinary consumption goods on one side and health and education on the other. And perhaps the reconsideration of life goals will make us realize that action on climate change is everybody’s responsibility.

We must take advantage of the pandemic to act on social norms and incentives together. A less individualistic, more compassionate society goes hand in hand with more accountability for our actions. We need to move beyond short-term thinking, for our own benefit as well as future generations. Such a reckoning would be a giant step toward remaking a world unmade by Covid-19.

The worst is yet to come, but this pandemic will end. Our future depends on learning its lessons.