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April 7, 2021

Why governments can’t rely on the ‘magic of the markets’ during the Covid pandemic

By Paul Dennis

7 April

Dina D Pomeranz, economist and assistant professor of applied economics at the University of Zurich, retweeted an article on how a year ago, economists had published a kind of Covid-19 economic policy manifesto that has stood the test of time, and calls for more generosity by governments than for the magic of markets.

As large parts of the world economy have been put on hold by government fiat because of the Covid-19 health crisis, experts argue that the state should generously support not only labour but also capital costs – the latter through corona loans.

In addition, the exact criteria for reimbursement of these loans can be determined based on the sectors’ severity of lockdown-induced income losses.

This temporary state of Covid-induced economic coma has caused the collapse of sales in many industries, with most companies being unable to pay wages and other fixed costs.

The real challenge for  governments is to avoid a severe recession or bankruptcies in the fight to stop the virus spread.

Experts, however, do not advocate 100% compensation packages, despite agreeing that the state should bear the bulk of the coronavirus costs for workers and companies.

The primary reason for this is the suspicion that full wage replacement would eliminate the incentive to take on jobs that have been expanding during the lockdown, such as in healthcare and logistics.

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