Richest nations face $17tn government debt burden from coronavirus

Fall in tax revenues set to push average debt-to-GDP ratio to 137%, warns OECD

Chris Giles in London and Robin Harding in Tokyo

A passerby wearing a face mask walks past shuttered shops in Tokyo, Japan
A passer-by wearing a face mask walks past shuttered shops in Tokyo, Japan. Now many other countries face a debt dilemma that Japan has confronted for decades © REUTERS

Rich countries are set to take on at least $17tn of extra public debt as they battle the economic consequences of the pandemic, according to the OECD, as sharp drops in tax revenues are expected to dwarf the stimulus measures put in place to battle the disease.

Across the OECD club of rich countries, average government financial liabilities are expected to rise from 109 per cent of gross domestic product to more than 137 per cent this year, leaving many with public debt burdens similar to the current level in Italy.

Additional debt of that scale would amount to a minimum of $13,000 per person across the 1.3bn people that live in OECD member countries. Debt levels could rise even further if economic recovery from the pandemic is slower than many economists hope for.

Randall Kroszner, of the Chicago Booth School of Business and a former Federal Reserve governor, said the situation raised questions about the long-term sustainability of high levels of public and private debt.

“We have to face the hard reality we’re not going to have a V-shaped recovery,” he said.

Chart showing general government gross financial liabilities in OECD countries, as % of GDP

The OECD said that public debt among its members rose by 28 percentage points of GDP in the financial crisis of 2008-09, totalling $17tn. “For 2020, the economic impact of the Covid-19 pandemic is expected to be worse than the great financial crisis,” it said.

Although many governments have introduced additional fiscal measures this year ranging from 1 per cent of GDP in France and Spain to 6 per cent in the US, they are likely to be outpaced by the rise in public debt because tax revenues tend to fall even faster than economic activity in a deep recession, according to the OECD.

A decade ago, fashionable economic thinking suggested that beyond 90 per cent of GDP, government debt levels became unsustainable. Although most economists do not now believe there is such a clear limit, many still believe that allowing public debt to build up ever higher would threaten to undermine private sector spending, creating a drag on growth.

Rising debt levels will become a problem in future, Angel Gurría, OECD secretary-general, has warned, although he said that countries should not worry about their fiscal positions now in the middle of the crisis.

“We are going to be heavy on the wing because we are trying to fly and we were already carrying a lot of debt and now we are adding more,” he said.

Bar chart showing net general government interest payments (% of GDP)

As a result, many more countries are set to face a similar economic environment to that experienced by Japan since its financial bubble burst in the early 1990s.

Concern about government debt and deficits has been a defining feature of Japan’s political economy ever since, with debt eventually stabilising at about 240 per cent of GDP under current prime minister Shinzo Abe.

Many politicians and business leaders are alarmed by the fresh spending packages to tackle the pandemic in Japan.“Our economic strategy is using a considerable amount of money, and honestly speaking it’s going to be a big fiscal problem in the future,” said Hiroaki Nakanishi, executive chairman of Hitachi and head of the Keidanren business lobby, in a recent interview with the Financial Times. “I have no good plan. Until the economy is properly back on its feet, I don’t think there is any sensible answer.”

Central banks’ purchases of government debt can help to lighten the load by ensuring the private sector does not have to soak up public assets to finance government budget deficits and helping to keep interest costs low. Bond yields fall as prices rise.

Advanced economies already benefit from extremely low interest costs on their borrowing as central banks have stepped up programmes to purchase assets in huge quantities in an attempt to keep inflation from falling far below their targets, and bond yields have fallen further in recent weeks. The UK raised debt at negative yields for the first time this week, joining other countries including Germany and France, whose bond yields are also in negative territory.

But, writing in the FT recently, Willem Buiter, a visiting professor at Columbia University, said there were limits to the deficits governments could run while being financed by central banks without resulting in inflation.

Governments could tackle debt by raising taxes or cutting public spending, but few want to go down that route after almost a decade of tightening public spending. And economists warn the negative consequences for growth could easily outweigh the benefits.

Again, there are lessons from Japan.

Although Mr Abe is known for economic stimulus, his term has involved two large rises in consumption tax, from 5 per cent to 8 per cent in 2014 and then to 10 per cent in October last year. In both cases the tax increase drove the economy into recession.

Adam Posen, head of the Peterson Institute for International Economics, told UK parliamentarians this week that it was vital to avoid such actions. “The most important thing is to get the economy so that it is growing faster than the debt is growing,” he said.

With no simple way out for advanced economies facing very high levels of public and private debt, Prof Kroszner said the best policy was the “delicate” art of debt forgiveness and restructuring.

Done properly, it could also be in the interests of debt holders who would still lose, but not as much as they would if they clung on to the hope that the debts would ultimately be repaid, he said.

The Wrong Way to Ramp Up COVID-19 Testing

Robust testing is key to safely reopening the economy. But a new model shows that if testing is not paired with “smart containment,” it could backfire.

Based on the research of Martin Eichenbaum, Sergio Rebelo, Mathias Trabandt

“Smart containment” offers better health and economic outcomes than quarantines alone.
Lisa Röper

Many policymakers, including President Trump, are banking on widespread Covid-19 testing as the key to resuming economic activity without exacerbating the spread of the virus.

But will testing have the desired effect? And what would the ideal testing policy look like? In a new study, Kellogg’s Sergio Rebelo, together with Northwestern economics professor Martin S. Eichenbaum and Mathias Trabandt of Freie Universität Berlin, develops an economic model to answer these questions.

Their surprising finding is that COVID-19 testing by itself will not allow the economy to reopen safely. The researchers conclude that if the U.S. increases testing without requiring the infected to quarantine, the country will experience a more severe recession—and thousands more deaths—than if it did no testing at all.

The reason: once someone knows they are infected, they no longer need to worry about catching the virus, so infected people with mild symptoms may feel emboldened to go work and shop freely. “I don’t pay a price for it,” Rebelo explains, “so I end up going out and infect other people.” While this behavior may seem cold-hearted, Rebelo says it’s likely a realistic reflection of how people may act, especially as financial pressures make many people eager to return to work.

However, when robust testing is paired with quarantining of those infected, outcomes improve drastically. The researchers simulate what would happen under a “smart containment” policy in which larger and larger swaths of the country are tested every week, and the government provides the infected with income and basic necessities, so that they can stop working and shopping.

Such a policy results in huge benefits: assuming that every week an additional 2 percent of the U.S. population was tested, and that the infected were then put into quarantine, a quarter of a million lives would be saved compared to a baseline where the government didn’t intervene. The resulting recession would also be much smaller.

This outcome would be a major improvement over the results of blunt containment measures like lockdowns currently being used, which force policymakers to choose between saving lives and keeping the economy going. “With smart containment, you can get better health outcomes and a smaller recession,” Rebelo explains.

No doubt, ramping up testing so dramatically would present an enormous logistical challenge.

And the authors acknowledge that providing money and supplies to infected people so that they don’t need to venture out—a key component of smart containment—would be expensive.

But Rebelo stresses that once you account for the reduction in the severity of the recession and the lives saved, the net benefits of the policy drastically exceed its costs. “It will cost billions, but it will save trillions.”

Why Ramping Up Testing Can Lead to More Deaths and a Worse Recession

The study builds on earlier research that Rebelo, a professor of finance, conducted with the same collaborators. In the earlier study, the researchers concluded that government interventions to reduce the spread of the virus would save millions of lives but lead to a worse recession. “And that’s what we’ve seen happening all over the world,” Rebelo says.

However, those predictions did not account for the possibility that people may get tested for the virus and adjust their behavior depending on the results. In the present study, the researchers simulate what would happen under different scenarios involving large-scale COVID-19 testing.

The optimal containment policy “will cost billions, but it will save trillions.”

In the first scenario, everyone in the population gets tested. They find that this would lead to more deaths, less consumption, and a larger drop in employment than had there been no testing at all.

What explains this counterintuitive finding? As Rebelo explains, in a society without testing, nobody knows their health status for certain, so everyone reduces their work and shopping dramatically in order to limit their exposure, just in case they’re susceptible to infection. However, once people know their health status, they react differently. Infected individuals who know that they are already infected now have little to lose by going out to work or shop. Thus, they go out more often, spreading the virus as they do so, and causing more infections and deaths. As a result, working or shopping becomes more risky for those who are not yet infected. So these individuals decide to work and shop even less, which exacerbates the recession.

This model relies on the assumption that people act selfishly and will choose to go work and shop even when they know that they are shedding the virus. “We use that assumption not because we like it, but because we think it’s a better description of the world than assuming that people are very altruistic,” Rebelo explains. While some infected people would surely stay home, he thinks it’s realistic to assume that many would resume their normal shopping and work behaviors as soon as possible—especially given how many households are struggling financially due to the crisis.

“If my income was cut to zero, I’m now living from my meager savings and perhaps some help from my family,” he says. “So at some point, even though I might still be sick, I probably feel like I have to go to work.”

A Smart Containment Policy Saves Lives and Reduces Economic Costs

Next, the researchers consider what would happen under a “smart containment” policy.

Under this policy, some percentage of the population—2 percent, in the scenario they model—is tested in the first week. In the second week, that same 2 percent are tested again, plus an additional 2 percent of those not yet tested—and so on. “So this scheme ramps up to a very large number of tests,” Rebelo says, with 38 percent of the population being regularly tested by the end of the first year. (People who recover or die no longer need to be tested, which is why this figure is less than 100 percent.)

However, smart containment doesn’t stop with testing: those who test positive for the virus are also forced to stay home and avoid shopping (although they may continue noneconomic social interactions, such as walking outside or visiting friends). So in the model, the government steps in to provide infected individuals with the goods and income they cannot procure themselves, financed through taxes.

The researchers find that this policy would not only result in fewer infections and deaths, but also lead to a smaller economic downturn. “Because the risk of infection is smaller, uninfected people are more likely to go to work, they’re more likely to go shopping, they’re more likely to go to restaurants, and so forth,” Rebelo explains.

Smart containment would be expensive, since the government would have to finance hundreds of millions of tests, and also pay sick people to stay home. But given the benefits, the researchers expect that the policy would more than pay for itself.

Compared to no testing, smart containment reduces the size of the resulting recession by half, and saves some 0.07 percent of the population from dying—in the U.S., that would be roughly a quarter million people. The federal government pegs the statistical cost of a lost life at $9.3 million, a number derived from extensive economic research looking at how much additional compensation people demand to take on potentially life-threatening jobs (under the assumption that that difference is the economic value we place on a lost life).

Once you account for the reduced recession and the value of so many lives saved, the benefits exceed even the high costs of the policy.

“This is a war with the virus, but we don’t have an army to fight it. So I think this is a very good strategy for the next campaign, until we get a vaccine.”

And since this policy allows the virus to keep spreading at low rates, it would eventually lead to herd immunity, meaning that enough of the population achieves immunity that the disease ceases to spread. The researchers predict that herd immunity would be achieved after a year of smart containment. “And that means you can stop testing,” Rebelo says.

Yet the researchers find that large positive benefits of smart containment persist even if those exposed to COVID-19 don’t acquire permanent immunity, which some evidence suggests may be the case. Without any enforced quarantines, the lack of permanent immunity would lead to resurgences or “echoes” of the virus, as formerly immune people contract it again.

But so long as governments continue robust testing and quarantines, these echoes will remain very small. “A great benefit of smart containment is that it shrinks the initial burst of infections and also eliminates the echoes,” Rebelo says.

Stricter Containment Leads to Better Outcomes, But No Herd Immunity

Smart containment would curtail social interaction for the infected, but not eliminate it entirely. “With smart containment, if I’m infected I cannot go to work or go shopping but I can still ride in elevators or go to the park, for example,” Rebelo explains.

So would an even more intensive quarantine for the infected produce even larger benefits?

When disease is rampant, knowing your health status can lead you to choose more intensive tasks, and increase your productivity.

In their final scenario, the researchers consider a more stringent type of quarantine, referred to as “strict containment,” wherein the infected are prohibited from any social interaction. “With strict containment, if I’m infected, I go to a special place as long as I’m sick, and cannot leave,” Rebelo explains. “I don’t go to the park. I don’t touch elevator buttons.”

While this type of quarantine may seem impractical, Rebelo notes that a similar policy has already been enacted in parts of Asia, with some governments forcing infected individuals—even those with mild symptoms—to quarantine in designated facilities where they can be monitored.

The researchers find that such a strict policy should lead to better health and economic outcomes than smart containment. “With strict containment, we have a very mild recession and a very low death toll,” Rebelo says.

Yet this best-case scenario comes at a cost: because the virus is so well-contained, much of the population never has exposure to the virus, meaning that herd immunity is never attained.

“So you just have to keep doing this mega-testing until a vaccine can be produced,” Rebelo explains.

A Powerful Strategy in the Fight Against the Virus

What do these findings suggest about the optimal way to combat coronavirus?

First, Rebelo notes that smart containment would mark a major improvement over the blunt containment measures like lockdowns currently being used, which incur severe economic costs in order to save lives. After all, the moment these costly measures are lifted, there will be a second round of infections. “And then if the healthcare system looks like it’s going to be overwhelmed, we’re going to have a second clampdown,” he says.

Smart containment, on the other hand, would limit the spread and the costs of the virus while still producing herd immunity, meaning that the policy could eventually be safely lifted.

Second, “the results are much better if you start early on,” Rebelo says, so governments would be wise to implement smart containment soon.

Of course, this policy would require a great deal of testing. The 2 percent scenario that the researchers examine would mean testing an additional 7 million people per week in the U.S. This would surely pose a challenge, given that states are struggling to increase their testing capacity. But once such intensive testing becomes possible, it will not need to go on indefinitely, since herd immunity would be achieved after a year.

Despite its cost and ambitious testing regime, Rebelo argues that smart containment may still be policymakers’ best option.

“This is a war with the virus, but we don’t have an army to fight it,” he says. “So I think this is a very good strategy for the next campaign, until we get a vaccine.”


The vulnerability of African Americans to the coronavirus is a national emergency

It is past time to fix a glaring disparity

“THE MOST difficult social problem in the matter of Negro health”, wrote the sociologist W.E.B. Du Bois in 1899, was to understand why so few white Americans were bothered by it.

The poor black lives Du Bois described in his pioneering study, “The Philadelphia Negro”, were spent “in the most unhealthy parts of the city and in the worst houses”, with minimal medical attention. They tended to be sickly and short. Yet he could think of “few other cases in the history of civilised peoples where human suffering has been viewed with such peculiar indifference.”

Modern medicine has since transformed the life expectancy of all Americans. But many of the disparities Du Bois observed remain.

African-Americans are still the country’s poorest, poorest- housed and unhealthiest large group, with high incidences of asthma, diabetes, hypertension, cancer and obesity. In 1899 infant mortality was almost twice as high among blacks as among whites; now it is 2.2 times higher.

If anything, African-American diets are unhealthier now than the rations of milk, bread and fried pork Du Bois described. So-called “food deserts” are a modern phenomenon.

The 160,000 people who live in the District of Columbia’s two poorest and overwhelmingly black wards, 7 and 8, east of the polluted Anacostia river, have only three supermarkets. They also have the sparsest health care in the city, with no major hospital.

Little wonder blacks have been so stricken by covid-19. The disease kills in tandem with the ailments they suffer from the most. The latest data suggest one in 2,000 African-Americans has died of it, even though the southern states, where over half live, have been relatively spared.

Partly for that reason, black Americans are not unusually likely to catch the virus. Yet those who do are 2.4 times likelier to die than whites and 2.2 times likelier than Asians and Latinos.

In Washington, DC, blacks are less than 47% of the population, but account for 80% of its 445 coronavirus deaths.

A visit to a makeshift testing facility in Ward 7, across the river from the Washington Redskins’ crumbling and abandoned former stadium, provides a snapshot of this calamity.

Bertina, a 64-year-old teacher wearing sweatpants and a Redskins’ bandanna (“Don’t photograph me, I look like a bum”) said her aunt had died of the virus in Atlanta after three hospitals had refused to admit her.

Seventeen-year-old M’Kya said she had heard her brother, incarcerated in New York, had the virus. Overweight and sweating heavily, she was visibly unwell; she hoped it might be her allergies.

The facility, where both women had come to have their nostrils swabbed for the virus, is another symptom of a general failure. It was launched three weeks ago as a philanthropic endeavour by Howard University—America’s first black medical school—to address a shortage of testing in the part of Washington that needs it most.

“You can tell things are bad when a dermatologist is running covid-19 tests!” said Ginette Okoye, a Howard professor wrapped in a mask, goggles and layers of protective clothing.

Though there are many causes of black ill-health, the solution probably starts with improving blacks’ access to health care. There have been three significant efforts to do so since slavery, which all to varying degrees spluttered in the face of a backlash from whites.
The first, during Reconstruction, was a decade-long effort on behalf of freed slaves, which constituted the first government intervention in health care. The second, in 1964-65, was a bundle of laws and edicts, including the passage of the civil-rights and Medicaid acts and court rulings to desegregate hospitals. It gave African-Americans access to the regular health-care system for the first time.

Yet the legacy of Jim Crow remained, as Wards 7 and 8 illustrate, in a patchy extension of services to black areas—and sometimes worse. Doctors in Macon County, Alabama, continued their 40-year “study of untreated syphilis in the Negro male” until 1972. (They didn’t tell the 400 sharecroppers under observation that they had syphilis. They told them they had “bad blood”.)

The advances of the civil-rights period led to a big improvement in black health, which by the mid-70s had levelled off. Barack Obama’s Affordable Care Act, which followed the example of Medicaid in trying to improve the health care of all poor Americans, can be viewed as the third major effort to correct the disparity. The 20m Americans who received health insurance under the act were likeliest to be black or Latino.

Yet the fury this elicited among some whites—fuelled by a vague feeling that their tax dollars were being squandered on the undeserving—helped get Donald Trump elected. Having failed to repeal the act, as he had promised to, the president has since sought to shrink it through technical changes.

Some dare hope the pandemic may lead to a fourth push to close the gap. “I’m always optimistic—especially when there are trillions of dollars circulating,” said Muriel Bowser, Washington’s mayor. African-Americans’ electoral heft might help. Even Mr Trump has been courting their votes; Joe Biden’s health-care plan was aimed at blacks even before the pandemic struck.

Never again

Covid-19 has also made clear that such an intervention should not be considered ideological. Perhaps government action is not the best way to raise blacks economically, as conservatives argue; but their poor health cannot be improved otherwise. The virus afflicts the industrious and work-shy alike—a point made by Mr Trump’s trim African-American surgeon-general, Jerome Adams, when he acknowledged his own asthma, high blood pressure and heart disease.

Indeed the most industrious blacks—such as Bertina’s son, labouring in harm’s way at Costco—are likeliest to expose themselves and succumb to the virus. Poor black health is a disincentive to work that work alone cannot fix.

It only remains to be seen, to revert to Du Bois’s difficult problem, whether a majority of Americans can be mobilised behind the issue. That must surely be possible, after the vulnerability of millions has been so cruelly exposed. If not now, indeed, when?

Cooperate with China or Suffer

Neither confronting a threat that doesn’t respect borders nor safeguarding an economy that is deeply integrated with the rest of the world can be done alone. Yet it remains far from clear that the US will subordinate its geopolitical rivalry with China to these vital objectives.

Andrew Sheng, Xiao Geng

sheng101_THOMAS PETERAFP via Getty Images_trumpchinalikeqiang

HONG KONG – As governments worldwide confront the terrible choice between saving lives from COVID-19 and protecting people’s livelihoods, economic indicators highlight the intensity of the dilemma. Unemployment has skyrocketed, trade has plunged, and the global economy is facing its worst downturn since the Great Depression. There is only one way to limit the pandemic’s economic fallout: Sino-American cooperation.

It is no secret that China and the United States have been at odds lately. Since entering the White House, US President Donald Trump’s administration has pursued an aggressive containment strategy, wielding trade barriers as its favorite weapon.

Far from spurring a change of heart, the COVID-19 crisis seems to have deepened the Trump administration’s commitment to antagonism, to the point that blaming China for the outbreak appears to have taken precedence over protecting Americans. In its latest “Strategic Approach to the People’s Republic of China,” the Trump administration reiterated its reasoning: a supposedly “clear-eyed” assessment has confirmed China as a strategic competitor in economic, ideological, and national-security terms.3

The US does not, the document claims, “seek to contain China’s development,” and “welcomes cooperation by China to expand and work toward shared objectives.” But US engagement with China will be “selective and results-oriented,” always advancing US national interests.

As the US COVID-19 death toll climbs above 100,000, America has no greater interest than containing the coronavirus. And with more than 38 million unemployment claims having been filed in just nine weeks, limiting the pandemic’s economic costs must also be worthy of cooperation.

Make no mistake: neither confronting a threat that doesn’t respect borders nor safeguarding an economy that is deeply integrated with the rest of the world can be done alone. Yet it remains far from clear that the US will subordinate geopolitical rivalry to these vital objectives.

On the contrary, just in the last month, the US Commerce Department implemented new tech restrictions targeting the Chinese giant Huawei, and the Senate passed a bill that could delist some Chinese firms traded on US exchanges. And, while acknowledging the “wide scientific consensus that the virus was not man-made or genetically modified,” US Secretary of State Mike Pompeo recently declared that “enormous evidence” showed that it originated in a lab in China.

Amid acute emotional and economic trauma, the desire to identify and punish a culprit can certainly be tempting. For Trump, it has emerged as a central feature of his reelection campaign – and a useful way to avoid blame for his administration’s own failures in responding to the pandemic. But history shows the folly of this approach: policies intended to punish the losers of World War I set the stage for the Great Depression and eventually led to another world war.

The stakes are just as high today. The pandemic has turbocharged dangerous political and economic trends, from nationalism to a digital divide among workers and businesses. Rising unemployment, together with the climate change-related natural disasters and disease outbreaks, will only exacerbate discontent.

Many governments hope that large-scale monetary and fiscal stimulus will be enough to save their economies. The International Monetary Fund estimates that developed countries have already committed to provide $9 trillion worth of fiscal support, with the US and Europe in the lead. In the US, the Congressional Budget Office projects a fiscal deficit of $3.7 trillion – 17.9% of GDP – in 2020.

China, too, is relying on fiscal stimulus, though to a much lesser extent. Its efforts – centered on more than CN¥2.5 trillion ($350 billion) in cuts to taxes and fees faced by businesses and households – would raise its fiscal deficit only slightly, to 3.6% of GDP.

Likewise, whereas the US Federal Reserve has unleashed unprecedented monetary loosening – expanding its balance sheet by nearly $3 trillion as of mid-May – the People’s Bank of China has not followed suit, preferring to press commercial banks to issue credit to businesses and local governments. In the first four months of this year, total renminbi-denominated loans rose by 10.7%, year on year. The sale of coronavirus bonds worth CN¥1 trillion should help to sustain local-government budgets.

Despite these massive stimulus measures, America’s real GDP is expected to decline by 39.6% in the second quarter of 2020, and 5.6% for the year. This reflects an inconvenient truth: most monetary and fiscal policies address only temporary cash-flow problems. What the world needs is to re-tool the business and employment models for the post-pandemic era – and that will require massive investments at local, national, and global levels.

Unlike the US, China seems to recognize this. At the recent opening of the third session of the 13th National People’s Congress, Premier Li Keqiang set no GDP target for the year, indicating that the government will uphold its people-first approach. Li also vowed to work with the US to implement the “phase one” trade deal that was signed in January.

The US needs to recognize that its escalating geopolitical rivalry with China makes little strategic sense. The last several decades have shown that global cooperation – especially on trade – is a viable win-win strategy, while trade wars and zero-sum geopolitical competition undermine prosperity for all.

Beyond the bilateral strategic game, the US – as a longtime global leader – has a moral obligation to help the rest of the world avoid the COVID-19 depression trap, which is more dangerous and urgent even than the so-called Thucydides Trap. Judging by recent signals, we should not hold our breath.

Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance, is a former chairman of the Hong Kong Securities and Futures Commission. His latest book is From Asian to Global Financial Crisis.

Xiao Geng, President of the Hong Kong Institution for International Finance, is a professor and Director of the Research Institute of Maritime Silk-Road at Peking University HSBC Business School.