The $16 trillion dollar wipeout in global stock markets over the past month highlights the serious vulnerabilities of our economic system to shocks. Around the world, millions became unemployed practically overnight and millions lost a huge portion of their savings. These events will have catastrophic consequences for people’s well-being and will shape economic and political trends for years if not decades. This doesn’t even account for the impacts of the COVID-19 pandemic on human health and the tragic situation currently unfolding in hospitals around the world.
Much will be written about this historical event as society takes stock of what just occurred, but one thing is clear. Resilience must be a driving force in the policy response. As investors of last resort, governments have the key role to play. The central bank playbook in 2008 and 2020 is similar, as liquidity evaporated and financial contagion spread, central banks had to step in as buyers of last resort with increasingly larger rescue packages. At the same time, governments are working desperately on the fiscal front to provide economic stimulus to the real economy and prevent an economic depression. Estimates of bailout packages are in the order of $10 trillion globally and growing.
So where does this leave us?
Governments and taxpayers bear the ultimate risk and thus have the mandate and responsibility to reduce these risks. There will be a cost but as we clearly see with the COVID-19 pandemic, the cost of prevention pales in comparison. The same could be said about climate change. A working paper from the US National Bureau of Economic Research found that by 2100, the costs of climate change would reduce global GDP by 7.22 percent while the costs of prevention – by meeting the goals of the Paris Agreement are substantially less, around 1.07 percent of GDP. For the US, costs are even higher at 10.5% of GDP. To put things into perspective, this is roughly in line with the costs of a COVID-19 pandemic every year.
As we move forward past this crisis, policymakers should have resilience in the front of their minds. Below are some practical steps that can be taken in our policy response not only to enable us to boost green growth and reduce greenhouse gas emissions but also to create a more resilient financial system.
Rebalance incentives for publicly traded companies to reward long-term sustainability over short-term profits. Companies are too focused on the next quarter at the expense of their long-term financial viability. Fiscal and monetary policies need to reward long-term investment and risk reduction. Executives should not be compensated based on stock performance but broader metrics. Company Boards should emphasize long-term stability and survivability. Inherent in this is the need to address climate risk. Stock buybacks financed with debt should be forbidden.
Better safety nets – our world is moving towards greater disruptions from climate change, but also other types of crises driven by greater interconnectedness which generates systemic risk. As we see with COVID-19, a crisis in one place, can quickly spread to the rest of the world and this is not limited to communicable diseases. Financial crises in one corner of the globe can impact our supply chains, and our financial markets as trading in various financial products is linked in incredibly complex arrangements, generating systemic risk. A world with more risks needs better safety nets and more resilient systems. There is a need to improve safety nets for all citizens whether these are economic, health and climate-related shocks.
Eliminate fossil fuel subsidies – An estimated US$5.2 trillion is spent annually on fossil fuel subsidies. This is wasteful and damaging to the environment, leading to inefficient use and unnecessary GHG emissions, creates rent-seeking in the economy and presents a huge opportunity cost for taxpayers. Trillions should instead be invested in industries of the future which have the potential to provide for our energy needs while eliminating the risk of climate change. With the barrel of oil at around $25 per barrel, consumer subsidies could be eliminated now with very little consequence.
Embrace the telework trends that have emerged from the COVID emergency. As companies and consumers race to adapt to the massive disruptions from COVID-induced shutdowns, we have seen how millions of workers have adapted to working from home and used new technologies to collaborate in ways that were unimaginable a decade ago. A distributed workforce can increase the resilience of business operations, can massively reduce transport related GHG emissions from commuting and work-related travel and can even increase the affordability of cities and generate distributional effects as there is less need to concentrate workers in one place.
Embrace the public sector not as an investor of last resort but as the leader shaping future investment trends in a way that is aligned with societal goals. Public investment shapes markets and creates benefits to society that the private sector cannot provide. Through publicly-funded R&D programs, scientists developed the core technologies behind the Internet and of modern medicine. Similarly, the revolutions taking place in renewable energy production, electric storage and electrified transportation would not have been possible without the early-stage investments made by the public sector. Investments for public benefit in areas like new energy technologies, public health, urban infrastructure are critical to reducing long-term risks and ultimately can lower public outlays when disasters strike.
While there is still hope for this public health threat to be minimized and hopefully, eventually eliminated, our economic response will have repercussions for decades. It’s the right time to focus on a vision for a resilient, inclusive, and sustainable economy.