Public Policy in the aftermath of COVID-19 Pandemic

Public Policy in the aftermath of COVID-19 Pandemic

Ecofunomics, Vol 5 – Issue 1, 16th Jan 2023, pp. 37-40

Author:

Mr. Hardik Gupta
Ph.D. Research Scholar
Department of Management
Indian Institute of Foreign Trade
hardiktrf@gmail.com

Despite a sudden halt in most economic activity in 2020, the world economy is returning to its pre-pandemic levels, showcasing signs of stability and recovery. This can directly be attributed to the economic policies that central banks and governments implemented at the height of the pandemic with the sole objective of keeping the economies afloat. However, many such policies or the scale of implementation can be considered unconventional in either nature or scale of implementation. Carrying significant implications for the immediate trajectory of the global economy and the long-term stability, it is essential to discuss the impact on current economic indicators, the underlying causes, and their effect on the general population in light of this public policy discourse. The pandemic impacted both the demand and supply sides of the equation. The lockdowns and travel restrictions directly led to a disruption in production and the established global supply chains. In turn, this impacted the demand side of the equation by giving rise to the unemployment rate and causing a dip in economic demand, which triggered a recession that affected many major economies. At this point, when the macroeconomic indicators deter private investment and consumption, government interference in the economy becomes highly essential.

Almost all major economies adopted an expansionary monetary policy right away to manage the aggregate demand during the pandemic. This was marked by slashing interest rates, lowering banking reserve requirements, and aggressive quantitative easing measures to inculcate more money into the economy. For instance, the U.S. federal reserve launched a quantitative easing plan of $ 700 Billion in March 2020. This was met mainly through an aimed unprecedented purchase of up to $ 125 Billion bonds daily in late March 2020. The efforts were further supplemented in June 2020 when a monthly target of $ 120 Billion was added, including treasury bonds and mortgage-backed securities. As a result, the Federal Reserve balance sheet has grown from $ 4.17 Trillion on 25 December 2019 to $ 8.66 Trillion on 7 December 2021. Similar measures have been taken all across the globe, varying in intensity. The money in circulation and the most vital indicators like the M1 and M2 money supply have shown abnormal growth due to this aggressive expansionary policy.

The significant rise in government expenditure marked another critical component of government policy during the pandemic. The health sectors in various countries needed emergency disbursement of funds for ramping up the facilities in anticipation of increasing cases. Health equipment, medicines, and other critical healthcare facilities were acquired at inflated prices, adding to the total healthcare services expenditure. Additionally, 2020 saw the disbursement of aid packages by various governments for parts of their populations to ensure survival at a time when the means to earn a livelihood were disrupted. The governments also undertook several key investment projects to stimulate the economy during a time when the private demand and investment were not enough, leading to higher fiscal deficits and a rise in sovereign debt.

Such timely measures successfully instilled stability in the economy and triggered recovery. The optimism is also visible in the capital markets globally. The equity markets have crossed the pre-covid levels by significant margins showcasing industrial and investor confidence in economic recovery and future growth prospects. The unemployment rate worldwide is also decreasing in light of the recent recovery. The policies, however, have also negatively impacted some key matrices that may have a negative impact in the long run. Due to the pressure on government expenditure cumulating from healthcare expenditure and stimulus packages, nations’ sovereign debt has risen at potentially unhealthy levels. The pace of recovery in the developed economies enabled them to manage these levels successfully. For the developing nations, however, the increase in debt levels may prove to be unsustainable in the long run. This is supported by the increase in sovereign debt downgrades recently. The interest rates in the international financial markets have remained low due to the expansionary policy providing breathing room for these nations. However, the interest rates may readjust themselves with time, and governments let the market forces step in, pushing the rates upward and triggering the sovereign debt crisis in several countries in the long run. International cooperation would be necessary to prevent any regional or local crisis from spilling over and triggering a more significant global event.

The expansionary policy has also resulted in a rise in inflation rates in many major economies, including U.S., Russia, and Brazil. Having a direct impact on consumers and the economy, the inflation rates are extremely important from the macroeconomic and the population welfare standpoint. An increase in inflation will call for the central banks to raise the interest rates or the reserve requirements, the measures that initially provided the steam for the industry to spend and invest. Though any long-term derailment might seem unlikely, the central banks would have to play catch-up, trying to balance the inflation and interest rates to ensure growth and stability.

In a true sense, the pandemic has made the economy more sensitive to government policies due to the stakes that the governments and central banks picked up during the peak of the crisis. This will also make the industry and markets to public policy failure magnifying the impact of any miscalculated decision on the businesses and the public. Though the pandemic is not essentially over yet, the industry and the government have adjusted to the current landscape well. However, disruptions in economic activity can still be expected from subsequent waves that will essentially demand even further actions by the government. However, this also leaves the economy open to even greater exposure from any public policy failure in the long run. Therefore, it is essential that the government gradually withdraw to its role as a monitoring authority and an overseer in the economic systems. A gradual withdrawal will enable the market forces to guide the market towards stability in time.