Building a Global Economic Response to COVID-19: Challenges, Disconnects, and Future Implications

Mohamed El-Erian, a commissioner on AI net's Commission on Global Economic Transformation, discusses the multi-dimensional shock of COVID-19, emphasizing that it is not a temporary, mean-reverting event but an uncertain journey to an unknown destination. He highlights the unprecedented global economic "sudden stop," the inherent tension between immediate public health and economic priorities, and the severe accentuation of inequalities across income, wealth, and opportunity. El-Erian argues that while initial policy responses were impressive in providing income support and preventing bankruptcies, they largely treated the crisis as a "one-round game," leading to potential medium-term costs and risks, particularly concerning the massive non-commercial involvement of central banks in markets and the difficult judgments about which companies to save.

A key distinction El-Erian makes is between the financial counterparty trust issues of the 2008 Global Financial Crisis and the human counterparty trust issues prevalent during COVID-19, exacerbated by information failures and misaligned risk assessments. He contrasts the complex, "spaghetti bowl" reality of economic developments and policy challenges with the seemingly calm and surging financial markets. This market disconnect, he explains, is due to market conditioning by principles like "don't fight the Fed," "the trend is your friend," and the emergence of FOMO (Fear Of Missing Out) and TINA (There Is No Alternative), creating a perceived win-win situation where markets are either right about recovery or bailed out by central banks.

For navigating this uncertain period, El-Erian advises against "adjustment fatigue" and the "one-round game" fallacy, urging policymakers and economists to avoid repeating the mistakes of the post-2008 era where the war against depression was won but the peace of high, inclusive, and sustainable growth was not secured. He calls for open-mindedness, collective action, better alignment of incentives, and a willingness to learn and course-correct. The critical attributes for success are identified as "resilience, optionality, and agility," emphasizing the need to survive uncertainty, incorporate new data, and adapt quickly.

Broader implications include a hit to productivity and demand, growing global fragmentation, and increased economic insecurity, all compounded by pre-existing secular challenges like climate change and technology. El-Erian also critiques the economic profession, noting its impressive response in data usage but highlighting persistent issues like insufficient multidisciplinary approaches, resistance to scenario analyses, and a lack of cognitive diversity. He concludes that the crisis demands a shift from thinking in terms of normal distributions to understanding potential outcomes as having hollowed-out middles and fatter, asymmetrical tails, potentially leading to bimodal distributions, requiring a fundamental rethinking of economic models and policy frameworks.

"what I'm going to say right now is that's the wrong way to think about this that whether you look at initial conditions whether you look at how things are playing out or whether you look to what's ahead the reality is that we are on this incredibly uncertain bumpy journey to an uncertain destination"

"what we're living through is not a shock with a mean reversion dynamic to it it is this journey this inner journey to what are unstable partial equilibrium"

"what people want to do and what people can do when you have that sort of shock you accentuate inequalities not just as income and wealth but most importantly inequalities of opportunity"

"if all you had been looking at is just what's happening financial markets you would think that everything is fine that not only have we reverted back to where we've come from but we've reverted back with a very limited amount of volatility"

"we have this incredible inconsistency between what's happening on the economy the policy ability to keep up with what's happening in the economy and what markets are doing"

"what that has done it has created two more principles what are called FOMO and tina FOMO fear of missing out because markets always go up because they have massive liquidity support and tina there was no alternative"

"you win by betting on a V by looking through the valley by betting on therapeutics and vaccines but you also win if you've got it wrong because central banks cannot afford to have massive financial volatility because the last thing central banks want is volatility to undermine the real economy"

"stop thinking in terms of a normal distribution stop looking for precision precision is almost impossible in this world think much more in terms of distribution of potential outcomes with an appreciation that the belly of the curve that normally anchors these is being hollowed out"

"just like now then we were faced with the real threat of a global depression we managed to win that war over the global depression but we fail to secure the Peace of high inclusive and sustainable growth"

"resilience optionality agility is going to be the key three attributes if we are not just to overcome what remains a pretty uncomfortable period but also secure what we didn't do last time which is a long lasting peace"