term paper on recovery strategy for a bad economy

Saving our livelihoods from COVID-19: Toward an economic recovery

We are now living through the most uncertain moment of our times. Many countries have been in lockdown since early March 2020. Even Japan, once a beacon of hope for controlling COVID-19, is now moving toward total isolation. Many political leaders realize that physical distancing might be the norm for at least several months. They wonder how—or if—they can maintain indefinite lockdowns without compromising the livelihoods of their people.

Political leaders aren’t alone in their fears. As the pandemic continues its exponential course, workers in most countries wonder what will become of their jobs when the lockdowns end. Businesses struggling to pay their employees and cover operational costs wonder if they will have clients or customers when they reopen. Banks and investors realize that many companies, especially small and midsize ones, will default and are trying to protect both financial stability and public savings. Meanwhile, governments are working to calculate the magnitude of the shock and sharpening their tools to save economies from collapse. They know that history will judge them by the decisions they make now.

This daunting scenario poses several basic questions. How can we save both lives and livelihoods? Which decisions are best managed by governments? How can they evaluate the risks that experts predict from a prolonged lockdown, such as starvation, domestic violence, and chronic depression—as well as protect jobs, income security, food supplies, and the general welfare of the most vulnerable people among us? How and to what extent should they try to save banks, prevent fiscal ruin, and safeguard future generations?

Governments could address all these questions strategically. In effect, they are caring for two patients who react to the same medicine—physical distancing—in very different ways. The first patient is the public-health system. Physical distancing might cure or alleviate its symptoms but could exacerbate those of the second patient, the economy. This trade-off suggests a physical-distancing strategy for governments: ensuring the health system’s ability to deal with COVID-19 and protecting the economy.

Exhibit 1 shows how different levels of physical isolation affect economic conditions. A recession could occur if faltering demand, restricted supply, and lost income reach critical levels. The differences between scenarios could be tenfold: a country that applies physical distancing in a lax way and ends it too soon could face zero GDP growth, but if the same country imposed a very strict and prolonged quarantine, GDP might plunge by 20 percent. In some Western economies, the latter scenario might increase government control of strategic sectors.

Countries can avoid the worst scenarios if they work quickly along three principal lines of action: first, minimizing the impact of physical distancing on the economy; second, spending deeply to keep it afloat; and third, spending even more to accelerate the crisis recovery and to close historical gaps.

Minimize the economic impact of physical distancing

In a recent article , we showed how different isolation strategies can have different effects on the ability of countries to save both lives and livelihoods. Policies for localized physical distancing at the regional, sectoral, or individual level might have better results than blanket lockdowns of entire countries. The time has therefore come to quantify the impact of lockdowns on people’s livelihoods.

Advanced analytics could help countries estimate—with a high level of confidence—the shock to the economy by aggregating data on power consumption, debit- and credit-card spending, applications for unemployment insurance, default rates, and tax collections. Exhibit 2 estimates the changes in demand for goods and services by using visits to Google services as a proxy. We calculate that the number of these visits in several countries fell by as much as 95 percent during the first two weeks of the lockdowns.

Individual countries that implement localized physical distancing might be able to keep track of how many people are in the streets at any given time and how much economic activity those people generate. But approaches to physical distancing will probably vary a good deal from country to country, depending on how they balance public-health issues with privacy concerns. Countries could plan prolonged lockdowns for the elderly and children and estimate their levels of consumption. They could quantify the number of employees in essential sectors that continue to operate (health, security, food and beverages, agriculture, utilities, and transportation). They could determine which regions or states should remain under complete lockdown and which sectors are operating under strict health protocols in other places. And they could track how many people are working from home in each sector and their contributions to the economy.

Analyzing a granular level of information might help countries quantify the weekly impact of physical distancing on various key indicators by region and by economic sector.

This granular level of information might help countries quantify the weekly impact of physical distancing on GDP, productivity, aggregated demand, income loss, unemployment, poverty, and fiscal-deficit levels by region and by economic sector (Exhibit 3). If countries knew all that information, they would know the cost of the lockdowns on the livelihoods of their people.

Spend deeply to keep the economy afloat

Armed with information on the economic impact of physical-distancing strategies, governments can prepare their next moves (Exhibit 4).

To recover from the pandemic’s health and economic consequences, we must uphold the social contract—the implicit relationship between individuals and institutions. The market economy and the social fabric that holds it together will be deeply compromised, or perhaps undermined, if massive numbers of jobs are lost, vendors can’t fulfill their contracts, tenants can’t make their rent, borrowers default at scale, and taxes go unpaid. Governments could therefore quantify the minimum level of income that households need to cover their basic necessities, the minimum level of liquidity that companies need to cover their costs (including payrolls) and to protect their long-term solvency, the minimum liquidity levels that banks need to support defaults, and the minimum amount of money that governments need to supply all those requirements. Let’s examine each of them.

Formal, informal, or independent workers will all have their own particular financial needs. So will vulnerable populations, such as people at higher risk of infection, which might not be able to return to work for some time. Leaders in the public sector should determine the level of support that each population segment requires and the appropriate distribution channels for fast delivery. Familias en Acción in Colombia and Janani Suraksha Yojana (JSY) in India, for example, are conditional-cash-transfer (CCT) programs that support millions of vulnerable people. Such programs could temporarily expand to cover other segments of the population, such as informal and independent workers. It might also be necessary to consolidate databases and information systems and to digitize all payments.

Since revenues have plummeted, many companies require help to safeguard employment. Their needs vary widely among sectors of the economy; professional-service firms, for example, usually have twice as many working-capital days as restaurants do. What’s more, physical distancing will affect different kinds of companies in different ways. As a first move to help them, several countries have already frozen short-term fiscal, parafiscal, and social-security payments. Some are using innovative instruments to irrigate money—for instance, capitalizing national reinsurance agencies to cover most of the expected losses from the new loans required to bridge payroll payments and working capital.

Banks can play a meaningful role during the crisis in two fundamental ways: lending money to companies in distress and recognizing that some companies simply can’t survive. If default rates on current loan portfolios skyrocket, the expected shock to incomes and to supply and demand could compromise the solvency of some banking systems. Besides thinking about loosening solvency and warranty regulations, governments might consider creative solutions, such as distinguishing among banks according to their credit portfolios to strengthen financial institutions’ balance sheets and injecting government-backed convertible loans against their long-term warrants and restructuring targets. (Governments implemented these mechanisms successfully in other financial emergencies, such as the 1997 Asian market crisis, the 1999 Latin American crisis, and, most recently, the 2008 crisis in Europe and the United States.)

Strengthening the balance sheets of banks might not be enough to deal with the aftermath of COVID-19; governments might have to use monetary expansion through debt and equity emissions backed by central banks. Countries with deeper capital markets could not only securitize loans and new instruments but also use the financial strength and long-term view of pension funds and other institutional investors to ease short-term crisis-related pressures on public finance.

Governments shouldn’t be shy about using such instruments extensively if that’s needed to keep economies running. Since such stimuli would have a cost, additional fiscal requirements could complement them in the medium term. To preserve national solvency, governments might also reexamine historical exemptions from taxation.

Spend more to accelerate the crisis recovery and close historical gaps

After countries estimate the size of the stimulus packages needed to help households, companies, and financial systems, they can start designing additional, customized programs to restore demand and accelerate recovery. People who receive direct subsidies to stay at home could gradually return to work as each sector of the economy introduced new health and behavioral practices. Meanwhile, as many workers as possible should receive new job opportunities. To provide them, governments could introduce innovative labor regulations and help companies operate 24/7 under flexible schemes. They might also turn old-fashioned CCT programs into universal-income alternatives linked to new jobs in ambitious, government-led programs for infrastructure, housing, and industrial reconversion. Each country could find its equivalent of Franklin Roosevelt’s New Deal.

Governments may also find it advisable to relax their regulatory regimes to help businesses not only reopen but also grow. Most countries have national, local, and sectoral regulations that were perfectly appropriate before the coming of COVID-19 but will be extremely expensive in the next normal. National programs to eliminate red tape at scale will help a good deal. Speed and flexibility are essential.

Businesses in sectors facing strict physical-distancing policies might need additional long-term capital. Governments could use innovative special-purpose vehicles to inject fresh equity and provide fiscal incentives to attract long-term investors. Businesses receiving that sort of aid should expect to commit themselves to restructuring: rescue packages could promote leaner operations, digital and industrial reconversions, the introduction of new channels, agile organizational structures, and innovative learning techniques. Governments could also ensure that such aid programs encourage competition—poorly designed policies that strengthen oligopolies and threaten the interests of consumers will be costly in the long run.

Although governments should carefully weigh the impact of their aggressive programs against long-term fiscal sustainability, they can play a significant role in restoring demand for goods and services and in fostering investment in new business models. Many initiatives—for instance, accelerating infrastructure projects; fast-tracking private investment to build hospitals, schools, and other social projects; encouraging urban renewal and very large housing projects; sponsoring the development of digital clusters to digitize government services; easing investment conditions to take advantage of global supply chains; capturing near-shore production opportunities; promoting large agribusiness developments; and stimulating exporting—could promote those goals. It is time to spend—but wisely.

The COVID-19 pandemic is a global tragedy. But that shouldn’t—and needn’t—prevent us from finding innovative ways to accelerate progress. It would not be the first disaster to do so. This may be the right time to introduce fiscal, labor, pension, social, environmental, and economic reforms to speed up progress toward sustainable development. Ameliorating poverty, diminishing inequality, and protecting the environment could figure prominently in global and national agendas. Governments, companies, and social organizations could act quickly to promote full financial inclusion, the transition to cashless economies, and the provision of better and more efficient social and public services. Political leaders might condition access to massive economic-stimulus programs on efforts to reduce informality, rethink healthcare systems, digitize entire sectors of the economy to accelerate productivity, and encourage digital innovation—especially high-quality public education with universal internet access.

Governments ought to act quickly. The first step is to understand the economic impact of the crisis in both the short and medium terms. Second, governments could inject the minimum viable liquidity to keep markets alive. Finally, they could expedite ambitious fiscal and monetary policies to accelerate recovery. In most economies and markets—national and international alike—ratios of debt to GDP will likely rise. Confidence that tax frameworks will gradually support next-normal debt levels will be necessary.

Once the pandemic ends, countries around the world will probably find themselves more in debt than ever. If they restructure and innovate, attract investment, and increase their productivity, a new era of human development will begin . But if they spend haphazardly and imprudently, economic and social development might falter for decades to come. The societies, governments, institutions, companies, and people of the Earth now face basic choices. Let’s hope they think about them seriously.

Andres Cadena and Fernando Ferrari-Haines are senior partners in McKinsey’s Bogotá office.

The authors wish to thank Andres Arboleda, Clara Gianola, Juan Martinez, and Sebastian Riomalo for their contributions to this article.

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As the COVID-19 pandemic continues to worsen, finance experts say the global economy is spiraling towards a recession at best. Some also warn that a depression may be right around the corner with unemployment levels we have not seen for 90 years.

“This is 100% unprecedented,” says Matt Garrett , CEO of TGG Accounting , who has spoken to more than 600 Vistage groups about finance best practices for small and midsize firms. “We’re going to lose years and years of productivity. It’s going to present a massive unemployment problem…and a massive problem for the business community at large.”

RELATED VIDEO: Accounting and finance tactics to survive and thrive

Having led businesses through the 2008 recession, Garrett offers candid advice for CEOs trying to prepare their firms for today’s tumultuous environment. “Run your business by the numbers,” he says. “Get the numbers right and then make decisions based on those numbers.”

From a tactical point of view, Garrett says, this means taking seven steps.

1. Assemble a disaster planning team.

Your disaster planning team should include an attorney, insurance agent, insurance expert, HR lead and accountant. Working together, the team should forecast what might happen if your business revenues decrease by 25%, 50% or 75%.

2. Use scenario planning to improve your cash flow.

This is a critical step, involving several parts:

• Forecast your 13-week cash flow . After you’ve made this forecast, review how your business is tracking each day.
• Do collections planning . To assess the risk level of your customers, segment them into A, AA and AAA categories based on their payment history. Determine which customers you should focus on and which customers you shouldn’t, due to risk of nonpayment. 
• Review and revise payment terms for all contracts . For example, ask for payment via  Automated Clearing House (ACH) within 10 days of invoicing. Where appropriate, increase deposit terms, add personal guarantees, put in late fees and interest, and have a strong stop-work plan. 
• Develop relationships with the right people . Get to know the accounting departments that pay you. 
• Send invoices faster . Work with a good collections attorney to fine-tune your process. Accept alternative or digital forms of payment.
• Revisit your supply chain . For both upstream and downstream supply chains, make sure you’re working with companies that are viable and likely to stay in business. If you’re a strong company, consider renegotiating those contracts for cost savings.
• Tighten your inventory planning . Excess inventory is going to soak up your cash — or put you in a bad position if your sales start to fall.

RELATED WEBINAR – Living by the Numbers: Accounting and Finance Strategies to Keep your Business Safe with Matt Garrett of TGG

3. Scrutinize every contract.

Team up with your attorneys and accountants to review contracts, paying special attention to force majeure clauses. Review termination rights, termination risks, renegotiation rights, personal guarantees and other contract provisions, and consider whether you need to renegotiate any of these terms.

4. Hoard cash.

Work with your accountants to decide which invoices are mandatory pay, slow pay or no pay. In addition, work with your attorneys to use stop-pay options on liabilities that don’t have personal guarantees. Then, consider a strategy that large companies such as Ford and HP employ: Withdraw your entire line of credit, and put those funds in a separate bank account. “This gives you a cash parachute in case something really bad happens, which I think it’s going to,” says Garrett.

5. Cut costs ruthlessly.

Partner with a good tenant broker or large real estate firm to renegotiate your lease. Monitor federal guidelines for evictions and the moratorium on evictions. Ask for discounts on proactive purchasing or cash purchases for costs related to office supplies or technology contracts. Look for ways to reduce the little things that can add up to big costs, such as credit card fees, lease and loan fees, bank fees, insurance costs and payroll taxes. Work with bankers to review the latest rules for small business loans and repayment options.

6. Use your biggest expense wisely.

Most likely, people are your biggest business expense. To manage them better, start reviewing utilization on a daily basis, rather than a monthly basis, and take measures to increase your employees’ accountability. At the same time, look for outsourcing alternatives in accounting, IT, HR and other areas where you might not need a full-time employee. Finally, make a conscious decision about furloughs or layoffs for employees that may become necessary if the business reaches a certain level.

7. Engage in succession planning.

During a recession or depression, turnover is inevitable, so if those events occur, it’s important to develop a plan for getting new workers up and running. If your business only has one or two signers — as many do — think about planning for alternative signers or alternative points of contact.

RELATED VIDEO PODCAST: Succession planning for your company’s future

To be clear, these steps are not short-term fixes. They’re strategies for surviving what may become a long-term struggle.

“This [crisis] is not a temporary thing,” says Garrett. “We aren’t going to bounce back three weeks from now.”

That’s not to say that businesses won’t bounce back at some point. They will. “This is survivable,” Garrett says.

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General election latest: Tory tactic on Starmer age may backfire, poll suggests; Farage changes tune on Tory deal

Sir Keir Starmer has faced accusations of a left-wing cull in the Labour Party, including from predecessor Jeremy Corbyn. In better news for the party leader, another Tory - Mark Logan - has defected.

Thursday 30 May 2024 23:04, UK

• General Election 2024

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Election news

• 'How can we trust you?' Voter challenges PM
• Tory defects to Labour | 'The right thing for country'
• Dropped Labour candidate accuses some in party of racism
• Corbyn claims Starmer 'clearly intervening' in 'purge'
• Tory tactic on Labour leader's age may backfire, poll suggests
• Farage changes tune on Tory deal
• Live reporting by Tim Baker

Expert analysis

• Jon Craig: Latest Tory defector not an obvious fit for Labour
• Gurpreet Narwan: Reform unfussed by impact of 'immigration tax'
• Darren McCaffrey: Partygate clearly still an issue for Tories
• Beth Rigby: Massive distraction gives Starmer questions to answer

Election essentials

• Trackers: Who's leading polls? | Is PM keeping promises?
• Campaign Heritage: Memorable moments from elections gone by
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• Read more: What happens next? | Who is standing down? | Key seats to watch | How to register to vote | What counts as voter ID? | Check if your constituency's changing | Your essential guide to election lingo | Sky's election night plans

Things have wrapped up for the night here, so we'll be seeing you tomorrow for the next day in the General Election 2024 campaign.

Thanks for joining us!

By Beth Rigby , political editor

When I asked Sir Keir Starmer a couple of weeks back if he was ruthless, he said he was - but qualified it.

His ruthlessness was trained firmly on trying to get a Labour government that "could change this country for the better".

He was "not ruthless for [his] own ambition" - nor was it ruthlessness for the Labour Party, he said.

"I'm ruthless for the country," said Sir Keir. "The only way we'll bring about change in the country is if we are ruthless about wining the general election."

But that ruthlessness is now blowing up and knocking the party's election campaign off course.

After a slick first week, Labour is having its first crisis, as the row over whether to de-select Diane Abbott has seized the headlines and muddied the message.

It has prompted, not just open splits at the top of the party, but wider questions about whether Starmer is purging the Labour Party as left-wing candidates are blocked from standing and loyalists are being drafted into safe seats.

Ms Abbott herself has called it a purge, while Andrew Fisher, who worked in Jeremy Corbyn's team, asked: "Is it racism, sexism, factionalism or a combination of all? Either way, it looks appalling."

After previously iron-tight discipline, the party is beginning to fray at the edges.

Read Beth's full analysis below:

Prime Minister Rishi Sunak is well known for his abstemious diet - saying that he engages in intermittent fasting while also enjoying Coca-Cola as a treat.

The campaign trail, however, is known to be a hard place to keep to a nutritionally optimal lifestyle - even if you are the PM.

Speaking to journalists today, Mr Sunak says he is eating "far too much chocolate" and enjoying "too many pieces of cake".

He went on: "My normal fitness has taken a bit of knock, but I am walking a lot, if nothing else, but eating far too much chocolate on the road.

"Because we are getting out and about talking to lots of people, that is keeping me fit, just running around the country trying to talk to as many people as possible."

It's 10pm and another busy day in the general election campaign is wrapping up.

All the parties have been on the campaign trail as we remain more than a month out from election day.

Labour's row over a so-called "purge" of candidates from the left of the party has continued to dominate.

However, there was some good news for Labour as the Conservative former MP Mark Logan announced he was defecting.

Let us get you up to speed on everything you may have missed today…

• Sir Keir Starmer   launched his party's election campaign in Wales , alongside the embattled first minister , where he reiterated his message of "change" and "national renewal" - and said Rishi Sunak didn't catch them out with the early election call;
• But the accusation that he is blocking left-wing candidates from standing for the party is overshadowing the party's messaging, with his predecessor Jeremy Corbyn telling Sky News he is "clearly intervening" in a "purge" ;
• The Labour leader denied that he is doing so , however, insisting the party wants "the highest quality candidates";
• He also praised Diane Abbott - who claims she has been blocked from standing - as a "trailblazer", but added: "No decision has been taken to bar her";
• And his deputy, Angela Rayner, told Sky News there was no reason Ms Abbott can't stand;
• Our political editor Beth Rigby says the issue has turned into a "massive distraction" - and leaves Sir Keir with questions to answer ;
• And Faiza Shaheen, who was blocked by Labour from being their candidate in Chingford and Woodford Green, told Sky News she has evidence to back up claims she suffered racism, Islamophobia and bullying.
• Rishi Sunak had a tough afternoon at a voter Q&A in Milton Keynes, where a man who lost his mother during the pandemic challenged him over his partygate fine ;
• Our  political correspondent Darren McCaffrey  says this shows the scandal that brought down Boris Johnson  is still relevant in this year's election ;
• And it got worse when Tory Mark Logan defected to Labour ;
• Meanwhile,  the Conservative Party  has been hitting Labour on its tax pledges today, with Chancellor Jeremy Hunt accusing the opposition of "flip-flopping" ;
• He accused his opposite number, Rachel Reeves, of "buckling under pressure" to rule out raising VAT in the next parliament, having "carefully and deliberately" avoided doing so all week -  including in an interview with Sky News' Sam Coates ;
• Speaking to Sky News, he  defended the PM's assertion that interest rates would fall under a government led by him, saying although the Bank of England is "independently" responsible for interest rates, he claimed Labour would fund spending through borrowing, which would see higher interest rates;
• But Mr Hunt also refused to commit to lowering prices amid this cost of living crisis by cutting VAT, saying prices are "decided in a market economy".
• Elsewhere, the  Green Party  has launched its election campaign , saying they want to win at least four seats in parliament to ensure Labour are "pushed beyond the timid change they are offering".
• The  Lib Dems  have been unveiling their plans for a mental health professional to work in every school - and Sir Ed Davey went down a waterslide .
• The SNP leader, John Swinney, has been out campaigning in Edinburgh.
• Plaid Cymru  has launched its campaign in Bangor, declaring it's "time to kick the Conservatives out of power".
• And  Reform UK  has launched its legal immigration policy , which consists primarily of an "employer immigration tax" to incentivise businesses to employ British workers;
• Nigel Farage also took the time to rule out a deal with the Tories .

Here are a couple of other stories that may interest you:

Our essential political podcast,  Politics At Jack And Sam's , is going daily through the election campaign to bring a short burst of everything you need to know about the day ahead as this election unfolds.

Click here to listen to this morning's episode - and tap here to follow Politics At Jack At Sam's wherever you get your podcasts .

Stick with us for all the latest throughout the evening.

As we reported earlier, Faiza Shaheen was previously running to be Labour's MP in Chingford and Woodford Green.

However, the party withdrew their support yesterday, and there are now accusations this is part of a "purge" of left-wing candidates.

Ms Shaheen stood in the seat in 2019, losing to incumbent Conservative Iain Duncan Smith.

Now, Labour has announced who will be standing for them in the seat instead.

Shama Tatler has been chosen to contest Chingford and Woodford Green.

Ms Tatler is a Labour councillor in Brent.

The full list of candidates for Chingford and Woodford Green is:

• Chris Brody, Green Party;
• Josh Hadley, Liberal Democrats;
• Yousaff Khan, Workers Party of Britain;
• Paul Luggeri, Reform UK;
• Shama Tatler, Labour;
• Iain Duncan Smith, Conservative Party.

As we reported earlier, the former Conservative MP Mark Logan has defected to Labour.

He is not standing to be an MP again.

In a statement, Labour leader Sir Keir Starmer said: "Voters across the country are looking to Labour for change. I am pleased Mark Logan has taken the decision to vote for Labour at this upcoming general election.

"After 14 years of Tory failure, voters are returning to Labour because they can see that we are a changed party and back in service of working people. 

"It's time to stop the chaos, turn the page and rebuild Britain."

No major party had much of a TikTok presence before the general election was called. 

Now, they're racing to build them on the fly.

But it's not all about follower count - while Reform leads in that field, it's Labour who are making the most of this key digital battleground. 

Our  online campaign correspondent  Tom Cheshire   explains...

Until voters go to the polls on 4 July, the Politics Hub will be looking back at some memorable moments from previous general election campaigns.

We have the perfect follow-on from our previous post...

New Labour's time in power often saw stories about an apparently fractious relationship between Tony Blair and Gordon Brown.

But the pair put on the truest form of friendship imaginable on the 2005 campaign trail: enjoying some delectable 99 Flakes together.

The photo op was designed as a rebuttal to reports they did not much like each other, and nothing brings people together like a good ice cream.

And they probably really did cost 99p back then.

Previous entry:  'Nothing has changed'

One of the Tories' favourite attacks on Labour leader Sir Keir Starmer has been to label him "Sir Softy" for an allegedly weak stance on crime.

Well, he somewhat lived up to that moniker today - for very different reasons.

He was in South Wales today on the campaign trail, where he served ice cream to day trippers on Barry seafront.

Faiza Shaheen, who was until yesterday set to be the Labour candidate for Chingford and Woodford Green, has released a statement and spoken to Sky News in the wake of the row.

Writing on X, she said the central Labour Party withdrawing their backing comes at "the end of a systematic campaign of racism, Islamophobia and bullying from some within the party when I first announced that I wanted to run for Labour again".

Sky News has contacted Labour for comment.

Ms Shaheen previously stood for the seat in 2019, and enjoyed visits from the then shadow minister Sir Keir Starmer.

Speaking to Sky presenter Gillian Joseph , Ms Shaheen says she was suspended because of 14 posts on X over 10 years.

However, she played down the fact she "liked" a post from US comedian Jon Stewart in 2014 in which he criticised Israel - saying she was not "pressed particularly on that".

Asked about the claims of racism, Islamophobia and bullying, Ms Shaheen says she will "put out" evidence.

She says she made a complaint in October or November about something posted in a WhatsApp chat.

"It took six months for them to come back to me and even then they were like, we consider... it is closed," Ms Shaheen says.

She adds that she "really upset" when Sir Keir Starmer said Labour was searching for the "best" candidates.

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8 steps towards a sustainable economic recovery

How to build a bright new future for all Image:  REUTERS/Yiannis Kourtoglou

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Clay nesler, christina lampe-onnerud, claudia vergueiro massei.

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Stay up to date:, decarbonizing energy.

• A successful transition to a sustainable future will depend on international collaboration and transformations across multiple sectors.
• Here are eight recommendations for policy-makers to hasten the green revolution.

There has been much discussion over the past few years about the 'energy transition'. The underlying premise is that the transition to lower and zero-carbon energy sources should be accelerated to mitigate the impact of global warming. The current pandemic is shining additional light on global interconnectivity and the need to collaborate and share best practices.

Much of the focus today is on decarbonizing electric power production via renewables, but only about one quarter of global GHG emissions are from electricity . The industrial sector (refining, petrochemicals, fertilizers, cement and steel production) together generates about 21% of GHG emissions. At present, only 15% of industrial energy use is derived from electricity. Shifting the world’s transport sector, which accounts for circa 15% of global emissions , from oil-based to low carbon fuels will also require a diverse set of technologies.

Have you read?

These countries are leading the transition to sustainable energy, a 'system value' approach can accelerate the energy transition. here's how, here's what we know and don't know about the energy transition.

As governments across the world consider implementing fiscal incentives to combat the economic downside from COVID-19 and to offset the threats posed by climate change, there are many opportunities to benefit from the sustainable revolution. Here are eight recommendations to consider for immediate implementation:

1. Ensure stimulus packages shape a sustainable future

When clean economy jobs are put at the centre of stimulus programmes, both a long and short-term jobs-boost across a diverse workforce is achieved. After the great recession in 2008, hundreds of thousands of jobs were created across the world as countries rolled out wind, solar and grid projects. Going forward, government stimulus could be used to support labour-intensive work such as energy-efficiency projects in buildings and industry. In addition, any support for carbon-intensive industries should include a commitment to carbon reduction.

2. Invest in the future

Rather than bail out the ‘past’, the better response is to enable businesses to become leaders in the future by enabling investments in technologies such as batteries, hydrogen, electric transportation, and AI, and in areas as diverse as sustainable agriculture, clean environment and clean food. It is also critical to invest in under-capitalised developing countries which are the growth markets of the future, and which are critical to meeting climate goals. Long-term government policy has traditionally inspired private capital and would potentially super-charge a global sustainable revolution.

3. Empower the consumer!

The more engaged the consumer, the greater the likelihood that stimulus packages will make positive impacts. Transparency is important and product efficiency standards for household goods or automobiles help provide this to consumers. Incentives and fees can also shape consumer behaviour and drive clean investment. One example is a ‘cash for clunkers’ programme which incentivises the purchase of cleaner vehicles, improving the climate and reducing air pollution.

4. Create a level playing field for clean energy

Across the world there are subsidies or taxes in place which benefit the incumbent fossil fuels industry at the expense of low-cost clean energy. In Germany, for instance, retail consumers pay up to 30 euros cents per kWh for electricity while gas or oil for heating purposes is only 7 cents . The introduction of a carbon fee would motivate badly needed investments in clean infrastructure, provide regulatory certainty to investors and businesses, and create a wave of entrepreneurship that can quickly stimulate the economy and benefit the environment.

5. Modernize existing infrastructure

Over many years, facility infrastructure has been allowed to deteriorate and many now lack modern technology and physical infrastructure to maintain safe, efficient, resilient and flexible operations under emergency and new normal conditions. The guiding principle for infrastructure renewal should be to build back better. Renewed facilities must meet modern standards for energy efficiency and air and water quality, and minimize long-term operational costs. Facilities should also have resilient, decentralized energy systems and be able to adapt to public health or emergency situations.

6. Simplify government bureaucracy

One big obstacle to investments in clean energy is complex and burdensome regulation. For example, rooftop solar installations in most of the United States are twice as expensive as they are in Germany and take three times as long due to complex permitting regulations and cumbersome installation laws. These types of barriers exist in multiple countries across the entire energy sector, illustrating the need for simplified accreditation and permitting processes.

7. Encourage state-of-the-art electricity system installations

Electricity companies across the world have done a very good job of maintaining electricity reliability despite the coronavirus. The crisis has also shown that our power system can operate with greater amounts of intermittent renewables than previously thought. However, negative prices and increasing price volatility showed us that there is a limit to what the current system can do. Going forward, the electrification of transport and buildings (acting as “prosumers”) is the next big opportunity and challenge for power systems, driving the need to strengthen and digitalize the 21st century distribution grids.

8. Incentivise energy sector restructuring

The fossil fuel industry, from shale oil drillers in Texas to coal miners in China, is in economic distress. Much of the industry will have to go through significant restructuring, causing local economic impacts. Financial incentives need to fund the transition to the clean energy economy and convert shuttered fossil fuel plants to alternative uses such as data centres.

Moving to clean energy is key to combating climate change, yet in the past five years, the energy transition has stagnated.

Energy consumption and production contribute to two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago. Plus, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018 energy intensity improved by 1.2%, the slowest rate since 2010.

Effective policies, private-sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.

Benchmarking progress is essential to a successful transition. The World Economic Forum’s Energy Transition Index , which ranks 115 economies on how well they balance energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing energy transition is the lack of readiness among the world’s largest emitters, including US, China, India and Russia. The 10 countries that score the highest in terms of readiness account for only 2.6% of global annual emissions.

To future-proof the global energy system, the Forum’s Centre for Energy & Materials is working on initiatives including Clean Power and Electrification , Energy and Industry Transition Intelligence, Industrial Ecosystems Transformation , and Transition Enablers to encourage and enable innovative energy investments, technologies and solutions.

Additionally, the Mission Possible Partnership (MPP) is working to assemble public and private partners to further the industry transition to set heavy industry and mobility sectors on the pathway towards net-zero emissions. MPP is an initiative created by the World Economic Forum and the Energy Transitions Commission.

Is your organisation interested in working with the World Economic Forum? Find out more here .

Building momentum

In summary, these eight recommendations can help lead the way towards a low-carbon, clean energy future. By using the momentum prompted by the global pandemic, a “can do” attitude from our political leaders, global businesses and local communities, provide awesome opportunities to build a sustainable future globally now. It is, perhaps our biggest opportunity to do good across the world.

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License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

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A weekly update of the most important issues driving the global agenda

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Economic Recovery: Options and Challenges

Subscribe to the economic studies bulletin, martin neil baily martin neil baily senior fellow emeritus - economic studies , center on regulation and markets.

October 20, 2008

• 23 min read

Key Points in this Testimony

• The steps now being taken to ease the financial crisis are the right ones and I expect to see credit conditions easing gradually.
• The Main Street economy of jobs and production is now very weak and the housing market has not yet stabilized. We are in a recession and the only question is how deep it will be.
• Policymakers are debating a fiscal stimulus package of between $150 billion and $300 billion and that is the right range to be thinking about.
• According to the Blue Chip forecast, GDP declined in the third quarter and there will be a mild recession with a further decline in the fourth quarter. With a mild recession scenario like this, a stimulus package of $150 billion would be enough to get the economy back on a growth path.
• The Blue Chip is too optimistic, however, and the chances for a severe recession are pretty high, in which GDP would decline at a 4 percent annual rate in both the fourth quarter of 2008 and the first quarter of 2009, with continuing but smaller declines until late in 2009. Under this scenario a stimulus package of $300 billion would be enough to ameliorate the recession substantially, although it would not eliminate it.
• Given the uncertainty involved, I recommend an immediate stimulus package of $200 billion and the preparation of an additional stimulus of $100 billion that is triggered if unemployment goes over 7.5 percent.
• It is vital to stabilize the housing market. Some of the funds in the financial rescue package should be used to help households directly. If more funds are needed, a portion of the stimulus package should be used for this purpose. Enabling families to move into 30-year fixed rate mortgages through Fannie and Freddie at a rate of interest between 5 and 6 percent is an attractive approach to providing this assistance.
• It is vital that a stimulus work quickly and provide as much boost to spending as possible. A further round of tax rebates to be distributed this fall would get help to the economy quickly.
• Other possible approaches include assistance for unemployment insurance, and aid to states and localities. The latter could include funds for infrastructure, provided this does not slow down disbursement. Increased maintenance of our existing infrastructure is vital and would add to jobs quickly.
• The explosion of federal debt is very troubling and must be addressed by Congress once the crisis is past. Concerns about the marketability of Treasury securities and about inflation are real but not great enough to counter the urgent need for a new fiscal stimulus.

The Outlook for the U.S. Economy [1]

The U.S. and global economies have been severely stressed by the crisis in financial markets. The drying up of lending has adversely impacted both the business and consumer sectors. Many economists at Brookings, along with others, have advocated the use of direct capital injection into financial institutions to recapitalize them and allow the resumption of bank lending and thanks to the actions of Congress, the Treasury has both the funds and the authority to accomplish this and has now started the process of recapitalization. It would have been better had this process started earlier, but I am cautiously optimistic that the steps now being taken here in the United States as well as by other countries will be enough to stabilize the financial sector. Given that this crisis has repeatedly turned out to be worse than expected, however, that may not be the case and Congress and the Administration must stand ready to do whatever is needed to restore an effective financial sector. A strong financial sector is essential to overall economic growth and the recovery of Main Street. It is reasonable to expect that taxpayers be protected as far as possible and share in any future capital gains that result from the rescue, but it would be a terrible mistake to let this sector go under, even though Wall Street has caused many of its own problems.

Even though the financial sector is likely on the right track, the housing market remains very depressed and home prices are still falling. The most important factor determining whether homeowners default is whether or not they are under water, with outstanding mortgage debt exceeding the value of the house. However, with a recession underway, families that face unemployment or loss of income for other reasons will find that it is impossible for them to pay their mortgages or credit card bills and they lose their homes. Policies have been put in place already to help homeowners, but they may not be enough. If the American economy is to move to a sustainable recovery, the housing market has to stabilize.

The economy of Main Street is headed in the wrong direction, with employment falling, unemployment rising and monthly data that suggest that GDP has been declining since mid year. GDP growth will likely turn negative when the data for the third quarter are tabulated, and the decline will be much larger in the fourth quarter of this year. GDP can be expected to fall for one or two more quarters in 2009. The biggest weight pulling the economy down has been the residential housing sector and, so far, there is no clear evidence that this has turned a corner. The data on housing starts released October 17 continue to show a pace of rapid decline and I expect to see further reductions in residential construction for the rest of this year and perhaps into 2009. The numbers on retail sales released last week were very weak especially since the figures for earlier months were revised down, auto sales are low, and industrial production is falling. Consumption is being adversely affected by the huge loss of wealth from the decline in home prices and equity prices and can be expected to decline at about a 3 percent annual rate in the second half of this year. Business investment held up well in the early stages of the crisis, but is now falling also. The U.S. economy is in a recession and the only question is how deep it will be. Unemployment tends to lag behind the business cycle and often continues to rise even after a recovery is underway. Based on the economic trends now at work, it is very probable that unemployment will hit the range of 7 to 8 percent and a deeper recession is quite possible. Unemployment hit 10 percent in the 1982 recession and, while I do not think we will reach that level in this recession, we cannot rule it out. It takes GDP growth at a rate between 2½ and 2¾ percent to keep unemployment from rising, and a higher growth rate to bring unemployment down. We may see a solid bounce back in growth in the second half of 2009, but it is more likely that it will take until 2010 before unemployment declines again.

One of the bright spots this year has been the performance of U.S. exports. After adjusting for inflation, exports grew at over 12 percent at an annual rate in the second quarter and are likely to match that pace or more in the third. In addition, inflation-adjusted imports are weak as a result of the fall in the dollar that began in 2002 and the weakening U.S. economy. Domestic demand actually remained flat in the second quarter and all of the GDP growth was accounted for by the improvement in net exports. Exports have been keeping us out of the graveyard. Looking ahead, I expect that exports will remain a positive and that imports will still be weak, but the effects of trade will not be large enough to offset falling consumption and investment. Currently, both Europe and Japan are weakening and likely will head into their own recessions, making for a slowing of U.S. export growth. The dollar has recovered some ground against the euro also, which will trim U.S. export gains.

One economic factor that is clearly helping and is likely to remain a positive is commodity prices. The price of oil fell below $70 a barrel on October 16 th , less than half of the peak price it hit earlier this year. Commodity prices fluctuate greatly and it is hard to tell exactly where they are headed, but a weakening global economy can be expected to depress commodity prices, so it is unlikely that they will return to anything close to their peak levels. The United States, of course, is a producer of commodities as well as a consumer, so there are companies and workers that are hurt when commodity prices fall. On balance, however, U.S. economic growth benefits from a fall in commodity prices, especially oil and food prices which very quickly affect the wallets of consumers. There is nothing like seeing oil at $140 a barrel to make oil at $70 a barrel look good.

In the early stages of the financial crisis it was notable that jobs and GDP were holding up rather well; in fact there was 2.8 percent growth in the second quarter. That good news about growth was deceptive, however. The financial crisis has set in motion the dynamics of an economic downturn. Even though the financial sector is probably on the road to recovery, its negative impact on growth will remain with us for a while yet.

This recession was not inevitable. Almost everyone was caught up in the belief that housing prices would keep rising and this encouraged speculation and over-borrowing by households, lax lending standards by mortgage providers and a failure to supervise and regulate banks effectively. Wall Street banks as well as foreign banks became overleveraged and took on excessive risks, credit rating agencies failed to do their job. [2] There is plenty of blame to go around. Congress, the Administration and the Federal Reserve should have done more to help and so should the economics profession. Given what has happened, there is nothing that Congress can do now that will allow us to avoid a recession, and so the goal now is damage control, avoiding a deep recession and putting in place the basis for a solid recovery.

What Can Policymakers Do to Ameliorate the Recession?

Given the economic weakness, there is a strong case for a new fiscal stimulus package that would boost spending and offset the chain reaction of declining spending and employment. Historically, the use of fiscal policy to smooth the business cycle has had a mixed record. It is hard to assess where the economy stands, so that fiscal stimulus can sometimes have an impact when the economy is already recovering and does not need the help. That problem does not apply to the current situation. It is clear that the economy is trending down and needs help to sustain aggregate demand and private sector employment. The more serious objection to a stimulus package is that it will contribute to the budget deficit and that is indeed a valid argument, but it does not carry the day. If the economy goes into a severe recession, tax revenues will fall sharply and the impact on the budget deficit will likely be even worse than the impact of the fiscal stimulus. Even if a stimulus package creates a net cost to the deficit, that cost is worthwhile to avoid the damage of a severe recession.

How large should the stimulus package be? Assume that there is a stimulus passed this fall that injects $100 billion into the economy in the first quarter of 2009, and that around 80 percent of this amount is spent over the first three quarters of 2009—$40 billion in the first quarter and $20 billion in each of the subsequent two quarters. (I have used $100 billion as a round number to make the arithmetic easier to follow. There is a good case for a larger stimulus package than this.) Such a package would add about 1.1 percent to GDP growth in that quarter about O.75 percent to the GDP growth rate in the second and third quarters of 2009. The overall, the increment to GDP growth in 2009 would be a little under 0.7 to the growth rate for the year (averaging the quarterly effects of 1.1, 0.75, 0.75 and 0.15). A larger stimulus package, I assume, would scale up the impact proportionately, with a package of $150 billion being 50 percent larger and a package of $300 billion having three times the impact. [3]

The current Blue Chip consensus forecast says that GDP declined 0.3 percent in the third quarter of this year and will decline 1.1 percent in the fourth quarter. The Blue Chip then says that GDP will decline by only 0.1 percent in the first quarter of 2009 and will resume positive growth after that. If this Blue Chip forecast is correct, a package of $150 billion would boost growth to 1 percent in the first quarter of 2009, and as high as 2.9 percent in the second quarter. Under this scenario, a stimulus of $150 billion seems plenty.

The Blue Chip consensus is too optimistic and many of the forecasters who contribute to this consensus have been revising down their forecasts. Consider a pessimistic scenario where there is about a 4 percent GDP decline in the fourth quarter of this year, about the same in the first quarter of 2009, about a 1.5 percent decline in the second quarter of 2009, about a 1 percent decline in the third quarter and a small positive growth rate in the fourth quarter. I do not think we will see a recession quite that bad, but that scenario is not out of the bounds of possibility. There is about a 25 percent probability that we will see a recession of this severity in the absence of offsetting policy actions. Suppose Congress were to enact a stimulus package of $300 billion—a number that is around the high end of the current debate. This would boost growth but even so there would be a GDP decline of 0.7 percent in the first quarter of 2009, followed by positive growth of about 0.75 in the second quarter and growth of just over 2 percent in the third quarter. The fourth quarter of 2009 would remain sluggish unless the stimulus had succeeded in reviving consumption. Under this scenario, a $300 billion stimulus would not result in buoyant growth in 2009, but it would substantially offset the severe recession.

What are the uncertainties around these estimates? I have assumed that 40 cents of each dollar of stimulus is spent in the quarter in which the money is received by families and 80 cents is spent over three quarters. Some economists will judge these numbers are too high and point to the impact of the first stimulus package in 2008 where consumption fell in the second quarter and is expected to fall in the third, despite the rebate checks. The difficulty with that view is that we do not know the counterfactual, what the situation would have been without the tax rebates. Very likely, consumption would have been significantly lower. Given that American consumers on average have been spending nearly all of their disposable income for many years, I find it hard to believe that they will save a huge fraction of any additional income from a new stimulus package for more than a few quarters. Initially, the 2008 tax rebates went into savings accounts or to pay off debts, but this strengthening of consumer balance sheets is allowing them to weather the economic conditions of today with smaller cutbacks in spending.

It is quite possible, however, that the lags will be longer than specified in this example. A stimulus package passed this fall might not get money into people’s hands until the second quarter of next year and the impact of that on spending might be lagged into the latter half of 2009 or into 2010. If the Blue Chip forecast turned out to be correct and, in addition, it took a while for the stimulus to work, we could find that the policy had over-stimulated an economy that was already well into recovery. My own judgment is that this recession is likely to be prolonged, so I am not too worried about that possibility. In addition, monetary policy could act to slow the economy if it turns out that it is overheating.

Given the dangers the economy is facing, I view $150 billion as being about the minimum amount that will have a serious impact on economic growth in 2009. Given the concerns about the budget deficit that I articulate shortly in this testimony, I would not exceed a $300 billion package. My specific proposal within this range of numbers is therefore to prepare a stimulus package in two tranches. The first to be enacted immediately would be for $200 billion. The second tranche for an additional $100 billion would be ready to go and would be enacted on the basis of a trigger. One possible trigger would be that if the unemployment rate moves over 7.5 percent, the second tranche is released.

What Form Should the Stimulus Package Take?

The important factors to consider are well-known to this committee and I recommend the analysis of stimulus design provided this spring by the Congressional Budget Office. In order to alleviate a recession that is already underway, it is important to get the money into the hands of Americans quickly and that this addition to income translates into additional spending as close to dollar for dollar as possible. Given the problem of the exploding budget deficit, it is important that the changes be temporary and do not contribute unduly to the worsening of the deficit in the long run.

• Stabilizing the Housing Market. The economy will not return to sustained economic growth while the housing market continues to fall. And there is a two-way interaction between these two factors because supporting economic growth will help stabilize the housing market. Congress has already agreed to a substantial investment of capital into the GSEs to support the mortgage market. And the terms of the $700 rescue package allow for the purchase of mortgages as well as mortgage-backed assets. Since I do not know how much money it will take to recapitalize the banking system, so I am not sure how much is available for direct support of the housing market. If there is not enough money already approved, then I would urge the Committee to support additional funds for families facing default. It is very hard to do this without rewarding past misbehavior by either lenders or borrowers, but I find attractive the proposal from both Republican and Democratic economists to allow households to roll existing mortgages into new 30-year fixed rate mortgages available through Fannie and Freddie at an interest rate between 5 and 6 percent. These would particularly be valuable to families caught in interest rate re-sets to high levels, and the pre-payment penalties could be adjusted and rolled into the new mortgage, or eliminated altogether. The program would be restricted to owner-occupied properties.
• Tax rebates . I urge the committee to pass quickly a new tax rebate package. If this were done very quickly, the IRS could use the same taxpayer list that was used earlier this year and the money would be released this fall. Having the rebates be refundable ensures that low and moderate income families get a benefit. The IRS got the rebate checks out quickly earlier this year and using this approach is simple and quick.
• Unemployment Insurance. This program has traditionally been a backstop for the economy, serving as an important automatic stabilizer. With the job situation deteriorating there are many workers reaching the point where benefits are exhausted and it would make sense to extend the duration. Over the years, the fraction of the unemployed receiving benefits has declined and women seem particularly disadvantaged because they often work part-time. In 1975 Special Unemployment Assistance was enacted by a Democratic Congress and signed by President Ford to help persons that were not eligible under the usual rules. I would support such a program again now, particularly to help single mothers or fathers who have lost jobs but are not eligible for standard UI benefits and who will find it difficult to qualify for welfare. This program should be funded by the federal government and not by the states (the program was federally funded in 1975).
• Infrastructure. Many House members are concerned about the deplorable state of the nation’s infrastructure and would like to devote some fraction of the stimulus package to infrastructure investment. I share the concerns about the state of our roads and bridges, but I am also aware of the objection to using infrastructure investment as a stabilization policy because it can be too slow to work. There are two ways in which this problem could be overcome: First, there is great need for improved maintenance of the infrastructure, including crumbling roads that need repair and bridges that may age prematurely or even collapse because they have not been looked after. Looking after the existing infrastructure is not as exciting as cutting ribbons on new projects, but it could generate jobs quickly and meet an important need. Second, there are state and local projects that are being cancelled because of the short term budget pressures. Sustaining such projects would avoid layoffs that would otherwise take place.
• Aid for States and Localities. There are many states and localities that are feeling tremendous budget pressures because of the weak economy and the decline in property tax revenue. Providing assistance to them would prevent or ameliorate the cutbacks in spending that would otherwise occur.

General budget assistance, targeted perhaps to states with high unemployment and mortgage default rates Assistance to sustain Medicaid spending. Some states are finding it difficult or impossible to sustain support for health care because of budget pressures.

• Business Tax Changes. The marginal rate of corporate tax is higher in the United States than in many other countries with whom we compete internationally. At the same time, corporations do not pay a lot of tax—the average rate of taxation is pretty low. As part of a long run package of tax reforms I support the idea of broadening the base of corporate tax and lowering the rate. In my judgment, however, adjusting business taxes now is not attractive as a response to the recession. Capital gains taxes are already low. Investors are staying on the sidelines of the stock market because they are concerned about market risk and volatility, not because of concerns about the taxes they might pay on capital gains. In the past several years, non-financial corporations have improved their balance sheets and added to their cash holdings. It is much more important to get the balance sheets of the financial sector into better shape and free up lending to businesses and consumers. The fiscal stimulus package is sufficiently important, however, that if business tax changes are necessary to obtain bipartisan support for the package, I would support them on that basis.

The Threat of Inflation and the Fiscal Challenge: $700 billion here, $300 billion there and pretty soon we are talking about real money A year or so ago, when the economy was still growing it was clear that the problem of chronic budget deficits was real and urgent. We have known for years that the population is aging and living longer and that Medicare, Medicaid and, to a lesser extent, Social Security were going put pressure on the budget for years to come. I support fiscal discipline and believe that the federal budget should be balanced on average over a period of years. Can we really afford to pay for a fiscal stimulus package over and above the $700 billion for the rescue package together with the funds for Fannie, Freddie, AIG, and Bear Stearns? There are two possible economic arguments for why we might find it unwise to expand the deficit for a stimulus package. The first would be that it caused a flight from U.S. Treasury securities and perhaps a run on the dollar. The second is that it would result in inflation. It would take more space than is available to go into these issues in depth, but the simple answer is that neither concern is large enough to prevent passage of a fiscal stimulus.

Investors here in the U.S. and around the globe know the fiscal situation of the federal government and anticipate the likely expansion of the national debt. Despite that, there is no shortage of buyers for U.S. Treasuries. The interest rate on 10-year notes is under 4 percent and the U.S. dollar has appreciated against the euro in the past year and stands now at about $1.34. There has been a “flight to quality” recently as a result of the crisis and the benchmark of quality remains U.S. Treasury securities. I am deeply troubled by the persistence of federal deficits, the over dependence on foreign borrowing and the lack of a national debate about how to pay for federal spending and how to moderate its growth. But letting the economy go into a deep recession is not going to solve the long run fiscal challenge facing America. Global financial markets will let us borrow to pay for the stimulus package and we should go ahead and do that.

There is a working model of inflation that has guided policymakers over the years and its first ingredient is that inflation will increase when commodity prices go up and will decrease when these prices decline. Commodity prices are set in global markets and are only partly under the influence of the state of our own economy or our monetary policy. The second ingredient is that inflation will increase when there is excess demand in the economy, production capacity is strained and labor is in short supply. It will fall when there is slack in the economy. The third ingredient is linked by most economists to inflation expectations, so that when higher inflation is expected it can actually cause higher actual inflation. Of these three ingredients, the first two are pointing to an easing of inflationary pressures: commodity prices have come down and seem likely to stay well below their peak. The U.S. economy already has slack capacity and will have much more in the year ahead. For the third ingredient, there have been signs of an upward adjustment of inflation expectations, something that has troubled the FED in the past year. That seems to be fading, however, as the other drivers of inflation ease off. Adding huge amounts to federal borrowing is not a good thing for inflation, but that concern is not enough to change the case for the stimulus. I am old-fashioned enough to think about wage-price spirals as much as expectations, and on this score, there is little sign of the kind of wage price spiral that was so difficult to deal with in the 1970s. With good productivity growth, businesses are not facing an upward push of labor costs.

The American economy is in trouble and the balance of risks strongly favor a substantial fiscal stimulus. I urge Congress to act on this proposal as soon as possible.

[1] The discussion in this section has benefitted from my work as an advisor to the McKinsey Global Institute. I have also benefited from the analysis of Macroeconomic Advisers and other forecasters. The views are the author’s own.

[2] See the Brookings website for links to recent papers on the financial crisis and what to do about it.

[3] The U.S. economy produces and spends about $14 trillion a year or $3.5 trillion in each quarter. The first round effect of an additional $40 billion in spending, therefore, is to add 1.1 percentage points to the GDP growth rate in the first quarter of 2009. That increment to growth would drop to 0.55 percentage points in the second and third quarters. In a slack economy, a positive increment to consumer spending is likely to have a second round effect, as the increase in retail sales or other spending puts more money into the hands of the workers and businesses that provide the goods and services. I assume there would be the equivalent of about another $50 billion as a secondary effect for each $100 billion of initial stimulus. It is hard to know the timing of this secondary effect—it would likely be spread over 12 to 18 months after the passage of the stimulus package. To get a rough magnitude, I assume that the secondary impact would add 0.2 percent to growth in the second quarter of 2009, another 0.2 percent in the third quarter, 0.15 in the fourth quarter and the rest spread further into the future.

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