The Case for Post-Pandemic Pessimism

Last week I argued that the right focus for fiscal stimulus was to support businesses unable to operate during the pandemic in order to protect jobs. In several European countries, aid of that kind has so far amounted to around 10% of GDP. But as restrictions gradually ease, the need for fiscal support will diminish.

Attention should now turn to reallocating capital and labor. For over a decade, an extraordinary degree of monetary stimulus failed to generate growth in the industrialized economies. Excess capacity has built up in some sectors, creating a growing number of zombie companies. Overall, investment has been insufficient to absorb global savings. This “secular stagnation” did not respond to massive monetary and fiscal stimulus. What’s required instead is a reallocation of resources to eliminate excess capacity in sectors that expanded too much and to encourage investment in sectors with unexploited investment opportunities.