How people re-engage in the economy matters
There's much debate and disagreement on what lies ahead for national and global economies as country after country reopens from health-imposed lockdowns. With so many uncertainties, calm conversations about potential outcomes tend to get hijacked by pre-existing narratives, personal biases and political considerations. Only well-documented actual experiences or, before they're established, solid analytical constructs will reduce public confusion and differences among experts.In a wide-ranging conversation on "The David Rubenstein Show" last week, Eric Schmidt, the former executive chairman of Alphabet's Google, put forward two simple yet extremely powerful concepts to think about the distribution of potential outcomes in what's fast becoming the dominant paradigm of "living with covid-19." I think of them as centering on overcoming information failures and reducing segmentation. Combined with economic considerations, they shed light on what lies ahead as nations and, within the U.S., different states reopen at varying speeds and with diverse guidelines.
Schmidt encourages thinking in terms of health information signaling as one of the most important factors influencing human interactions at the moment. In a perfect world, each of us would be able to credibly flag our infection status: whether we have the virus, don't have it, or carry strong antibodies. If we can't, mistrust and disengagement will persist, amplified by lack of reliable third-party processes for verification and validation.
Schmidt sees populations evolving into three broad segments over the short term: people who are willing to engage, believing they don't have the virus; those who don't have it but are reluctant to engage due to personal risk aversion or other considerations; and those who shouldn't and aren't engaging because they either know they have the virus or are highly vulnerable due to pre-existing conditions and age. Governments and businesses, as both employers and suppliers, will need to adapt to these groups.
Linking his concepts to a system that's fundamentally wired for intense human interaction and mobility gives us greater clarity on the shape of outcomes for public health and the macro-economy - that is, lives and livelihoods. These will be underpinned by households and businesses making a micro-set of information and risk-taking calculations, combined with self-identification and signaling.
Testing, tracing and vaccines will be crucial. Without them, there would be considerable mistrust, high risk aversion and low engagement. No trustworthy way exists to entice a sufficiently large number of genuinely healthy people to re-engage in the economy. Internal and external mobility will remain disrupted. The much-expected and hoped-for economic rebound would be weak and inherently vulnerable. More of an L and U/W than a sharp V.
In a world of credible testing, tracing and agile health responses supported by credible verification and validation processes, we would live a lot better with the virus and return more rapidly to some level of normal functioning. Economies would rebound, though fail to fully and quickly recover from the big hit they've suffered. More of a swoosh, if you like.
An effective vaccine taken by a big majority of the population would decisively overcome information failures. Risk aversion would decline. The three population segments set out by Schmidt would converge into two, with the previously reluctant now confident to engage. The biggest portion would be the healthy and immune participating in the economy, with a small share consisting mainly of those without a vaccine and ill. Widespread mobility and trust would be restored, quickly and decisively. Economies - at the national, regional and global levels - would return to a better level of normality. That is, the much-desired V.
As much as we want to be, we're not at the point of a sharp and sustainable recovery yet. Reopening economies mostly fall between the first and second categories - just a muted recovery, and one able to sustain momentum while gradually overcoming information failures and over-segmentation. Responsible social behaviors and the ongoing health learning process would accelerate the transition, though it's unlikely to be a linear process. Mobility will be slowly restored but remain far from complete for a while. Businesses that reopen will, as employers and suppliers, have to accommodate different population segments and take health precautions to reduce the consequences from those willing to re-engage more fully but perhaps prematurely.
This tentative economy will be managing the risk of partial lockdowns due to infection outbreaks. Only part of the problems will be relieved, and not enough to decisively lift the considerable pain, suffering and inequality in our society. More relief measures will be needed, and the policy emphasis will start to shift to reducing the long-term challenges to inclusive prosperity.
With solid data gathering and analysis underpinning decision-making - and, critically, assuming responsible behaviors by the population at large - we can learn to live a lot better with the virus. That will be a foundation for the more determined rebound that comes with the vaccine, though one with a different longer-term equilibrium for productivity, debt and globalization.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
El-Erian is a Bloomberg Opinion columnist and the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton.