VoxEU Column COVID-19 Macroeconomic policy

A triumph of economics… but a lot of challenges ahead

As with Bretton Woods and with the Beveridge Report during WWII, the crisis generated by the Covid pandemic creates an opportunity to rethink our economic system. This column introduces a new book, “Capitalism after COVID: Conversations with 21 Economists”, which offers the thoughts of 21 top economists representing most of the different fields of economics on the key challenges the world faces after the pandemic.

While developed countries experienced an unprecedented economic shock between March 2020 and the spring of 2021, none of them suffered a financial crisis, nor did their citizens have to endure widespread poverty or their firms have to go through waves of bankruptcies. The bulk of the shock was absorbed by the public sector budget. 

That the world could produce such a massive, coherent, and rapid economic response to the pandemic had a lot to do with the consensus that quickly emerged among economists on how best to respond to the unprecedented shock. Within days of the declaration of a pandemic by the World Health Organization on 11 March 2020, economists formulated the empirical and theoretical case for a set of unprecedented measures in a series of influential articles and books (e.g. Baldwin and Weder di Mauro 2020a, 2020b), as well as in dozens of discussions and presentations in a myriad of online webinars. Unlike during the Great Financial Crisis, when there was an often-acrimonious debate between economists arguing for austerity and those arguing for stimulus, the priorities were clear: 

  1. Central banks should be concerned with maintaining financial stability and providing limitless liquidity to debt markets. 
  2. Governments should prioritise the maintenance of household incomes through generous support for workers’ incomes, albeit with different approaches in the US and Europe: significant expansions of unemployment insurance in the US and the general deployment of ‘Kurzarbeit’ in Europe.  
  3. Governments should provide ample liquidity facilities to firms, making it possible for them to emerge as undamaged as possible by the lockdowns. 
  4. Finally, large, debt-financed public investments would be needed to support the recovery. 

That intellectual effort succeeded, and governments took all these steps rapidly. A new CEPR book moves from the emergency to the medium-term response to the crisis. During the first 12 months of the pandemic, I interviewed a wide range of economists to reflect on the challenges the world would face after the crisis. Originally published on Spotify, Apple Podcasts, and YouTube, I have now transcribed them and have worked with CEPR to publish them as an eBook (Garicano 2021).

Download Capitalism after Covid: Conversations with 21 Economists here

A crisis of this calibre generates new knowledge and information as well as technological advances, and potentially changes people’s preferences. It thus provides us with an opportunity to take stock and to rethink our societal arrangements. Should we reform the welfare state? Do we need to simplify or even repatriate global value chains? Should we encourage workers to work from home a few days each week? In the words of one of our interviewees, Daron Acemoglu, the pandemic has created a “critical juncture”, a moment in which large changes are possible.

Looking over the entire set of interviews in the book, economists see six big challenges on which we must concentrate our efforts after the crisis: 

  1. Managing the economy under a large debt overhang.  The first challenge is the impact on stability and growth of the enormous levels of debt countries shoulder coming out of the crisis.  Markus Brunnermeier explains in his interview the complications of policymaking under the multiple equilibria motivated by high levels of debt: any mistake or accident can make the economy jump from the low rates and sustainable debt service equilibrium to an equilibrium with high rates and financial instability. All it takes – as John Cochrane points out, using Greece’s euro crisis experience as an example – is an accounting scandal. Furthermore, Cochrane worries that once policymakers believe the government budget constraint is not binding, the temptation to simply shovel money at problems is irresistible, further undermining credibility and increasing the chances of a crisis. Jesús Fernández-Villaverde argues that this is particularly likely to be the case where political polarisation and populism is more present, and in countries with older populations. Agnes Benassy-Quéré suggests that, in this context, ensuring credibility requires careful coordination of monetary and fiscal policies. 
  2. Tackling inequality. Over the last few decades, inequality in household income and wealth has increased dramatically in the West.  The pandemic aggravated these problems, as it hurt differentially those whose jobs require physical contact relative to knowledge workers, who could work from home. Several interviewees explain the progress economists are making in tackling these problems. Atif Mian argues that to reduce inequality, policies must focus on achieving more equitable growth through a significant increase in public investment, and second, on addressing some of the legacies of the imbalances, particularly through an increase in the progressivity of taxation. Stefanie Stantcheva discusses how to design better taxes and how to improve people´s understanding of those issues. Oriana Bandiera highlights a significant shift in our understanding of poverty that implies that social assistance programmes, that traditionally were designed to subsidise consumption, should shift to being geared towards investment. Esteban Rossi-Hansberg discusses the concentration of talent and economic activity in cities and the extent to which the ‘Zoom revolution’ will upend this concentration and wonders whether that would be desirable, given the potential loss of positive externalities of physical proximity.
  3. A more balanced globalisation. Addressing inequality within countries helps us to address the corresponding savings gluts and international (trade and financial) imbalances, since they are the result of internal demand imbalances, as Atif Mian and Michael Pettis argue. Pol Antràs defends a broadly positive view of the future of globalisation, as long as we are able to implement better domestic policies that truly compensate those who lose from outsourcing and automation. Dani Rodrik proposes to correct our globalisation model as, in his view, it has gone too far in areas that benefited large corporations, while not gone far enough in other areas – such as climate or migration. 
  4. Containing the new leviathan. It is quite likely that, after the unprecedented policy response to the pandemic, governments will grow permanently larger, leading to an increase in interventionism and, potentially, crony capitalism, as Daron Acemoglu argues. Different countries will sharply diverge in their response to this “critical juncture”. The ones who better succeed will introduce stronger democratic institutions to keep governments in check, as both Acemoglu and Lucrezia Reichlin argue. We also need to improve the way public organisations are managed, a focus of the interviews with Raffaela Sadun and Carol Propper.  Wendy Carlin explains how balancing this larger role for the state requires building a stronger and more resilient civil society – strengthening the ‘third pole’.                                               
  5. Promoting innovation and curbing the power of the digital giants. Fiona Scott Morton lays out in her interview the main ways in which Big Tech’s market power hurts consumers and stifles investment. John Van Reenen explains how and why innovation is declining and argues for investment in generating innovators.  Philippe Aghion defends an industrial policy that focuses on a few key sectors (digital, health, climate), without placing obstacles to competition or globalisation. 
  6. Tackling climate change. Like fighting the pandemic, where our protection against a new virus is as strong as the weakest link, stopping climate change is a pure global public good: no country or group of countries can succeed on its own; all inevitably benefit from the efforts of the others. Reducing carbon emissions, as Michael Greenstone explains in his interview, must be the only priority – not to be confused with delivering the goodies to voters. Yet, after the pandemic, as Nick Stern argues, investing in tackling climate change is the best way to invest for the post-pandemic recovery. 

I hope you enjoy the discussions. I have always thought of Arjo Klamer’s (1984) book, Conversations with Economists, as a must-read for any student of economics. In it, he paints a picture of the economics profession grappling with problems such as economic growth, inflation, or unemployment, and dealing with the intellectual challenges associated with them. Hopefully, readers of these new Conversations will learn about how economists tackle the big problems of today, such as debt, inequality or the climate. I also hope the transcripts capture how much fun it was for me to have these conversations with so many bright and thoughtful colleagues. My thanks go to them.


Baldwin, R E and B Weder di Mauro (2020a), Economics in the Time of COVID-19, CEPR Press.

Baldwin, R E and B Weder di Mauro (2020a), Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, CEPR Press.

Garicano, L (2021), Capitalism after Covid: Conversations with 21 Economists, CEPR Press. 

Klamer, A (1984), Conversations with Economists, Wheatsheaf.

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