This transcript is taken from an interview conducted April 3, 2020.
Could the COVID-19 crisis lead to less regulation?
What US policy makers have done right is gotten liquidity into the financial system quickly. The Federal Reserve has done a fast and wise job with the decisions they’ve made. The relief payments coming to households and the expansion of the unemployment-insurance program are good moves, and they were done in reasonably quick order. Those are encouraging signs.
Belatedly, some of the regulatory barriers to innovation have started to come down, or be revised, although this would have made a greater difference if it could have been done earlier. Obviously, testing was not widely available early, in part because of a reluctance to allow decentralized testing. That restriction has been loosened, but too late.
New York, Massachusetts, and other states have allowed doctors who are licensed elsewhere in the US to practice in their states. In other words, to make their licensing portable. They’ve actually graduated medical students a few months early. These things have helped to bring additional medical personnel into the field, who of course are desperately needed.
As to the regulations regarding production of medical equipment, such as respirators, we’re starting to see movement along those lines as well.
One of the good things that might come out of this is that people will realize some of the regulatory barriers that were making it hard for workers to work, or companies to produce what people wanted them to make, were sort of, on net, more trouble than they were worth. Going forward, I think we’re going to have more flexibility in the regulatory system, so that if something like this happens again, we’ll be able to address it more seamlessly.
How fast will the economy bounce back?
The economic effects in the short run are enormous, but they’re necessary. You cannot have people interacting and carrying on with normal economic activity without the threat of the virus spreading at an incredible rate.
There has to be some temporary decline in economic activity. We can’t get back to our original level until we solve the medical problem. This notion that there is some trade-off that exists right now between having a full economy and solving the medical problem is a false trade-off.
You are not going to have a normal economy until we don’t have a pandemic. Given the death rates, the hospitalization rates that we’ve seen, it’s just not going to happen. You have to first solve the medical problem. Then you can bring the economy back.
The question is, how long is it going to take for the economy to come back after you’ve solved the medical problem? It can come back quickly, or it can take longer. The issue is that it will take longer if a bunch of capital is destroyed during the slowdown. Now, we’re not out there destroying physical capital. We’re not tearing factories down. We’re not getting rid of the machines and equipment that make things. The kind of capital you would lose is intangible capital such as organizational effectiveness, trust, financial intermediation, relationships, things like that. If those are destroyed at a high level during the slowdown, it’s going to take longer for the economy to recover afterward.
I don’t have a good sense of how likely that is, or how large the destruction of intangible capital will be, but this is the key question you have to answer if you want to figure out how long it’s going to take after the short-term decline for the economy to return to its long-term growth.