Fiscal firepower: governments’ covid-19 aid

Hello and welcome to The Intelligence on Economist Radio. I'm your host, Jason Palmer. Every weekday, we provide a fresh perspective on the events shaping your world. As China first responded to the COVID-19 crisis, thoughts quickly turned to agriculture. Farmers needed to get the spring planting season underway. What the country did to ensure the flow of food could serve as a lesson to other countries in lockdown. And for generations, people have hunted crocodiles in the Congo River Basin. But overhunting and the rising price of croc meat is driving the hunters to bigger and bigger prey that's more likely to prey on them. First up, though— Early this morning, American lawmakers agreed to a $2 trillion relief plan meant to shield the country's economy from the worst of the coronavirus pandemic. It's the largest rescue package in America's history.

This is a wartime level of investment into our nation. The men and women of the greatest country on Earth We are going to defeat this coronavirus and reclaim our future.

Much like European approaches to this kind of stimulus, the plan offers aid to hospitals, provides direct payments to the newly unemployed, and sets aside $500 billion to bail out struggling businesses. After days of fraught negotiations in Congress, the prospect of a deal cheered investors, driving the Dow Index yesterday to its biggest daily gain since 1933. Even as a plan was being worked out for a nation ground to a halt, President Donald Trump said he hoped businesses would soon reopen.

Ultimately, the goal is to ease the guidelines and open things up to very large sections of our country as we near the end of our historic battle with the invisible enemy. I hope we can do this by Easter.

With the pandemic continuing to spread, that timeline seems unlikely.

At the moment, economic policy goals are running in conflict with public health policy goals.

Duncan Weldon is The Economist's Britain economics correspondent.

To try and contain the spread of this disease, governments are being forced to shut down huge parts of their economies.

And do we have a sense yet what economic effects that has already had, or a sense for how bad it could get?

I mean, the short answer is it could get very bad very quickly. So we've seen out of Europe now and out of the United States, some purchasing managers surveys, which are sort of the first indication you tend to get of how business are feeling. People call them soft economic data. And the news from those surveys is not good. In Europe in particular, I mean, the service sector and across economies as a whole, prospects drop to record lows, lower than they were in 2008, lower than they were at the height of the euro crisis. So it looks like we're going to see quite a steep decline in GDP towards the end of Q1 and into the second quarter of this year.

And so governments have been seeing this decline coming. What have they done to kind of stem the tide at the outset?

So we've seen sort of two sorts of response. We've seen central banks around the world cutting interest rates, restarting quantitative easing, you know, trying to keep financial conditions as easy as they can. But financial markets are very stressed. More directly, though, the heavy lifting is going to have to be done by governments through fiscal policy. And what they're trying to do is support businesses. In one sense, they're trying to sort of freeze the economy in place. We're going to have to shut down large bits of the economy for at least weeks, possibly for months. And what government is trying to do is provide a bridge to support firms and keep people in work. Now, in terms of support for firms, we're seeing slightly different approaches across the different developed economies. In general, there's been a lot of emphasis on loans, on providing government-backed cheap lending to firms so they can borrow, you know, while their demand, while their turnover is down. Yeah, mixed signals across the world so far on how well that's working.

And the second response you mentioned, what has that been?

More directly, what governments are doing is providing direct cash to the worst-hit businesses. Again, the levels of that are varying around the world. What we've seen starting in Europe recently, starting in Germany and the Nordic countries, now copied by Britain, is the government do something almost unprecedented—step in and offer to basically pay the wage bills of firms. So in the UK example, the government has now said, if you're a firm and you're seeing a big drop in demand, rather than laying people off, put them onto this retention scheme. The government will pay 80% of their wages. And we can just ride it out with the government picking up large parts of the nation's wage bill.

So you say that kind of policy started in Germany and is spreading. I mean, do you get the sense that governments are kind of following something of a playbook, following each other's leads, anything that could count as coordinated efforts?

I'm not sure it's quite as coordinated as it could be, but governments are certainly looking for best practice and trying to put it in place. I think the problem we've realized is we're going to be shutting down huge parts of the economy for weeks or months. The aim of policy has to be to get cash to households so they can keep paying their bills, they can pay their rent, they can pay their mortgages. Now, getting cash directly from governments to households is quite hard. So what governments have sort of almost stumbled into in some cases is the best way to get cash to households is through their regular pay packets. So this isn't so much just about backstopping firms. This is about helping households by ensuring that payrolls continue to be made.

And the idea there is to go for every business under the sun? I mean, some businesses will clearly be hurt more than others by this.

Yes, we've got to be very, very clear there. You know, the impact of this is not universal. It's not universal on people, it's not universal on countries, and it's not universal on business. I think there are two important distinctions we can draw. Firstly, about the type of business. So retail, leisure, hospitality, transport, these are the kind of firms directly hit by the government's putting in place these social distancing measures, telling people not to go to pubs or restaurants or travel. So it's those firms who are bearing the immediate brunt of this, and more help needs to be targeted on them. Secondly, though, there's a wider issue as well, the difference between large firms and sort of small and medium-sized businesses, SMEs as we call them in economic wonkland. And big businesses tend to have more direct access to capital markets. You know, they can borrow from bond markets. They can get much more direct help from central banks. And central banks around the world are looking for ways to lend directly through short-term credit facilities to big firms. But getting support to small businesses is a bit harder. Governments are looking at various loan schemes, but getting this money out of the door is quite hard. I've been speaking to a lot of small business advisors, small business people over the last couple of weeks. And although they appreciate the support and they understand these are guaranteed loans with low interest rates, they are very reluctant in many cases at this time to be taking on debt.

I mean, does that mop up everybody though? If it's employees, if it's big businesses, small and medium businesses, what about the self-employed, the gig economy workers, the informal workers?

This is the really hard bit. Governments have stumbled into this solution of getting money to people by paying employees through corporate payrolls. Obviously, the self-employed risk falling through the gaps there. In Britain, the Treasury is still sort of trying to come up with a solution, but this is administratively hard. We have much less information on the self-employed, much less information about how they're being impacted by these social distancing measures and the public health response. So in Norway, they've agreed to look at the previous few years' tax records and pay self-employed people 80% of the average of their last few years of salary. Even if governments, though, go down that route, the more recently self-employed or those that haven't been earning enough to file any taxes could still fall through the gap. So this is a tricky area which governments around the world are still trying to solve. One thing governments can do, and we've seen this across Europe, is defer the payment of taxes for small businesses and for self-employed people. So rather than saying taxes that are due in July have to be paid, say, forget about that for the next few months. Just do anything to keep money in these people's pockets where possible.

But that makes it sound even more expensive than it did before. I mean, do governments actually have the fiscal firepower to keep this kind of enormous effort up over a potentially very long run?

Of course, it's partially going to depend on how long this runs on. But on the other hand, the silver lining in this crisis at the moment is that across the developed world, government borrowing costs are very, very low. I mean, often negative in real terms and at historic lows. Borrowing for governments has often never been cheaper. And they're really going to have to take on a lot of that borrowing. I mean, we're not there yet, but governments around the world have been comparing this this fight against the virus to the kind of total wars we saw in the 20th century. I would just say, if you look at what fiscal deficits were in Britain and the United States in World War II, we're talking 20-25% of GDP. So if this really is a total war, those are the kind of deficits we ran in the last total war.

Duncan, thank you very much for your time. Thank you for having me. To get a lot more analysis like this, subscribe to The Economist, trusted source of information and, well, intelligence for 175 years. Just go to economist.com/radiooffer. 12 issues for $12 or £12.

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China's response to COVID-19 was the kind of lockdown that the rest of the world has now either enacted or considered. It came during the Spring Festival, a time for thinking about feeding the country in the months to come. Authorities put up roadblocks, closed the borders of an entire region, and barred millions upon millions of migrant workers from traveling, workers crucial to the farming industry.

The worry in the middle of February was that in the midst of extreme lockdown and epidemic control measures, that spring planting would not be able to get underway.

Ted Plafker is The Economist's China correspondent. He went to meet farmers in Zhaoqinyang, a village near Beijing.

Once you miss the spring planting season, you have a lost year of agriculture, a lost season anyway. With grave consequences for rural incomes, 40% or so of the population, and grave consequences for the national food supply. Other sectors of the economy, as much damage as they're suffering, stand half a chance of recouping some of their losses. Things return to normal, people eventually pop out and buy that iPhone or that refrigerator or that car, and other sectors could look forward to some pent-up demand. In contrast, agriculture really needed to hit the mark and get spring planting done on time. And that looked like a real challenge in the midst of very extreme lockdown measures that were taken all across the country.

And so have food supplies been affected already?

Food prices have been affected. There's been no crisis of supply. The government has prioritized it. A group of very senior agronomists and economists published a paper, a very alarming paper, in mid-February warning about what could happen if, if agriculture does not get on track. And the government prioritized it. [SPEAKING CHINESE] The top leader, Xi Jinping, issued public instructions to do whatever is necessary. The prime minister, Li Keqiang, attached his name to these same instructions. A few of the measures they took fall under what they're calling the agricultural green channel for the movement across the country of various inputs. This is pesticide, fertilizer, seed, equipment. They've ordered local officials to not delay these shipments at checkpoints. They've reduced toll road, road fees, road tolls. They've prioritized shipping of agricultural inputs over other commodities. A very important element of that was telling governors that their performance on this metric would be directly factored into their employment, their work evaluation, and their promotion prospects, which is extremely important to any Chinese official. They've incentivized factories to produce farm equipment. They have given subsidies and loans. They've reduced the fees that farmers have to pay for their land. They've done everything they could to get farmers up to speed in time to make the spring planting happen.

And so does it seem to you that that forward thinking worked? Does it seem to you that the sector will be able to keep things ticking over?

Yeah, the consensus is that they have more or less done the job. They made it a priority. One expert compared it to the highly publicized campaign— China built 2 hospitals in a matter of a week or so, 8 or 10 days. They built 2 hospitals from the ground up. They decided they were going to do it, they marshaled the resources, they made it happen. And they've made a similar effort in the case of agriculture. They decided this was something that absolutely had to happen, and they made it happen, more or less. It will not be a bumper year. They expect grain output to more or less reach last year's levels. Most years, grain output grows significantly. They might have to cut some corners. They'll do double planting this year if they need to in order to make quotas and make the grain supply more or less what it was last year, about 650 million tons.

What if they come up short?

Another important element of this is that if China doesn't meet its own demand, it enters the international markets, which are also quite tight. China, if it adds to international demand even a little bit, stretches very tight markets. It affects prices around the world. Somebody said it's Trump's trade war. This isn't my trade war. This is a trade war that should have taken place a long time ago by a lot of other presidents. This also ties into the US trade dispute with China, the trade war. China has stopped relying on the significant amount of imports, especially soya for animal feed that it had been getting from the US. They had reached a tentative agreement to import more as part of a de-escalation of the trade war. It's not clear now that that will happen. But international markets have been very worried about what would happen if China fell short of its own production and needed to enter international markets in a big way.

So do you think the way this has played out in China forms a bit of a cautionary tale for other countries that are reckoning with their own logistics of lockdown?

It does. China has a higher percentage of its population that's depending on agriculture for its livelihood. That dynamic does not really play out in very many other countries, Western industrialized countries. 40%, give or take, of the Chinese population makes its livelihood in the countryside working in agriculture. And that includes not just grain farming, but vegetable farming, animal farming, Chicken, poultry, dairy, all of it. So that was one reason that China needed to prioritize it, apart from the impact on the food supply.

So do you think China was simply better equipped in some ways to respond to a pandemic like this?

It's one of the advantages of the Chinese system. When someone at the top, at the center, decides something needs to happen, they are much better equipped than most of their Western counterparts to make things happen. We see the U.S. now disputing what it's going to do in response to fight the epidemic. When the Chinese central government decides something has to happen, they have ways of making it happen more or less. In the case of agriculture, they are still hung up a little. The labor supply is not where it needs to be. The people I spoke to at some farms in the outskirts of Beijing were concerned that some of their colleagues were not yet back, and it's very unclear when they will get back. People are trickling in. The point is, when China decides to make something happen, they make it more or less happen in ways that a lot of other governments can't. So there are a lot of downsides to the Chinese system, but this is certainly an upside.

Ted, thank you very much for joining us.

My pleasure.

The COVID-19 pandemic is bringing immense uncertainty to citizens, governments, and the global economy. Economist Radio is drawing on the expertise of our international network of correspondents to report on the crisis, on the science, The more you understand about the mechanism of a virus, the more places that there are that you can glue it up. On the economics.

The banks are in a really interesting position for this crisis because last time they were maybe the cause of turmoil, and this time they could be one of the arms through which the impact of the crisis is dulled.

And on the politics of COVID-19.

Some worst-case scenarios have a very large number of people dying. That is going to trigger very, very grave conversations about whose fault this is.

For the latest on the pandemic and more, join us on Economist Radio. Listen wherever you get your podcasts. In the Congo Basin rainforest, you can find gorillas, bonobos, cobras, antelopes, elephants, and if you look closely, crocodiles. For generations, Congolese have hunted the scaly reptiles for food. But now that outside demand has pushed up the price of crocodile meat, the profession is becoming increasingly dangerous.

A crocodile fetches a good price. So a live crocodile fetches more than a dead crocodile.

Olivia Ackland writes about Central Africa for The Economist.

Hunters tend to take the crocodile, they sort of bind its jaws together, and they take it in a wooden canoe down to Bandaka, which is the biggest city in the region. And if it's alive, it proves that the meat is fresh.

And what is life like for the people who do this for a living?

Relatively quite good in terms that they can make a reasonable amount of money. Most people in Congo are very poor. 77% of the population live on less than $2 a day. So if you're making between $150 and $200 per crocodile, which is the going rate for a live crocodile, you're doing quite well. The only thing is that, of course, it's very risky. A lot of people are killed hunting crocodiles. [FOREIGN LANGUAGE] I spoke to a guy called Ciceron, who was the son of a crocodile hunter, and his father's father was also a crocodile hunter, and all of his male ancestors. And he said that he reckons about one person a month from his village is killed in the pursuit of deadly crocodiles.

These things must be hard to catch, in particular if they're big.

How is it done? Well, so there are three different ways to catch crocodiles, and it depends on the type of crocodile. So there's a small crocodile, which is known as the dwarf croc, and it's been so overhunted that it's becoming increasingly rare. But they're quite easy to catch. They bask on the banks of the river. And then there are other crocodiles that they leave the water and they go and hide in the swamp, and you can see their eyes sort of sticking out of the swamp, or their nose, or their tail. The most dangerous variety of croc is the Nile crocodile. They're enormous. I mean, their sort of scaly bodies stretch to up to 6 metres long. And in order to hunt one of those, you have to go out in a wooden canoe at night. My interviewee, Cicero, told me that his father and his colleagues will sort of slip out into the middle of the Congo River at night, and somebody moves the water while another person shines a torch into it. And he said the crocodile doesn't like that. And so as the crocodile pounces, so do the hunters, who then spear the crocodile.

And you said that Cicerone's father and father before him were also croc hunters. This goes far back in the history of that part of the Congo Basin? Yes, it does.

The difference now is that more people, sort of in recent years, people are hunting crocodile and bushmeat in general more and more to take to market and to sell commercially rather than just to eat themselves. There was a study led by Gherti University which showed that parts of the Congo Basin rainforest are being so overhunted that they're sort of at risk of being totally emptied. 39% of the Congo Basin rainforest are at risk.

So now that people are forced to catch the more ferocious crocs, are some people like Ciceron considering other professions?

So Ciceron's parents were upset that he decided not to become a crocodile hunter. He had gone to the city of Bandaka to enroll at a teacher's training college. Part of the reason they were upset by this, other than the fact that he's not following in the footsteps of his forefathers, was that he'd actually probably make more money as a crocodile hunter. If you're working as a teacher at a state school in Bandaka, you'd be making $170 a month. And that's if the government remembers to pay you. Sure.

But at least as a teacher, you're not at risk of being eaten on the job.

Yes, this is true. The occupational hazards of a teacher are minimal compared to those of a crocodile hunter. I did talk to Cicerone about risk-taking, though.

He said that, you know, people take risks in all walks of life.

If his father were somebody who gathered coconuts, then he would be at risk of falling down. That there are always risks, but you have to do what you need to survive.

Olivia, thank you very much for your time.

Thanks very much, Jason.

That's all for this episode of The Intelligence. If you like us, give us a rating on Apple Podcasts, and we'll see you back here tomorrow.