A tremendous shock like that of the coronavirus totally unbalances new demand for four different types of labor. The category policymakers should be focused on is workers producing physical goods, preserving as much as possible of their income while encouraging them not to work.
In a recent article published in Foreign Affairs, I wrote that the attention of policymakers, and indeed of the public, is wrongly directed at the preservation of some fictitious parameters (like stock market quotes) or, equally wrongly, on the financial viability of companies. It is not that these are unimportant. But in conditions of severe disruption of economic activity, of a crisis which is akin to a war, focusing on financial indicators is distractive. The focus should be (as indeed it has been in all wars, including in the US during World War II) on physical quantities.
Consider today’s problem from the point of view of labor allocation. Assume that there are four types of labor: (A) doctors and medical personnel, (B) online retail workers, (C) people producing physical goods (factory workers), and (D) professionals (teachers, engineers, designers, etc.). Their numbers stand at the beginning of the crisis in some relationship that has been established by economic demand, as well by the supply of these professions.
What a tremendous shock like that of the pandemic does is to totally unbalance new demand for these four types of labor. Their current allocation becomes entirely out of the whack with the desired allocation under the new conditions. The shock exponentially increases demand for As, similarly increases the demand for Bs as people move to online shopping and retailing, decreases the demand for Cs, and more or less leaves the demand for Ds unchanged.
There is a further element, specific to epidemics. If the activities of types B, C, and D continue as before, we are likely to have more infected people (assuming that most infections take place as people interact at work) and more overburdened and overwhelmed As, so much so that the death rate will rise. To see that, assume simply that types B, C, and D stop working and producing. New infections will surely decline as people are made to stay at home in enforced idleness. This is indeed what the quarantine is supposed to achieve.
The problem, though, is that if all work ceases, people will soon starve. Thus, the trade-off between continued production and the spread of the diseases cannot be pushed to its extreme point of 0 production. We have to find a position along the trade-off curve that would allow economic activity to continue at a modest pace until the epidemic is under some kind of control.
Let’s get back to our nomenclature of laborers: The supply of As (which we would like to increase) is more or less fixed in the short run (the days, weeks, or months in which we deal with the virus). Thus, there is not much to do, short of calling all the retired nurses and doctors back to work, as New York City has just done. Type Bs should be fine in terms of their income, as the demand for their services is on the rise. Note, however, that some of their additional work may produce additional coronavirus cases. But about this too we can do very little, unless we want to stop all life.
The key category is the type Cs. Their incomes will be severely impacted by the epidemic. They are likely to lose their jobs, and many will be left without any resources. Do you want them to be impoverished and let loose to roam the streets in search of jobs? No, policymakers’ interest should be to preserve as much as possible of their income while encouraging them not to work. In other words, these are the people who should be the main focus of policymaking: you do not want them to fall below some income threshold (both for humanitarian reasons and the broader social interest), and you also do not want them to work in order to slow the rate of new infections.
The last category (Ds) are workers whose income may be relatively unaffected, at least in the short-run, because the demand for their services may neither decrease nor increase much and they can perform these services remotely. So from the point of view of the policymaker, they are not the key constituency to worry about.
In this way we can formulate, I think, a much more reasonable direction for economic policy during the epidemic: try (to the extent possible) to increase the supply of As, limit the work performed by all others (again, to the extent that this is possible), and keep workers of type C economically afloat (and unconditionally so) for the duration of the crisis. And, of course, change the entire focus of policy from financial indicators to household incomes.
Branko Milanovic is the author of Global Inequality: A New Approach for the Age of Globalization and Capitalism, Alone, both published by Harvard University Press. He is a senior scholar at the Stone Center on Socio-Economic Inequality at the Graduate Center, City University of New York. An earlier version of this post has previously appeared in Milanovic’s blog.
