Covid-19 and the Displacement Effect: Three Scenarios for the Future of Public Intervention
There is a common wisdom that medical crisis (Covid-19) precipitates a global economic disaster. Although this was initially seen as a Chinese problem, the American and European economies were situated at the verge of ‘sudden stop’, particularly during the initial chaos of the pandemic. The primary impact of COVID-19 on the Chinese economy appeared in commercial manufacturing facilities, which embodied a massive disruption for global supply chains. Without any doubt, this quagmire in the economic structure of countries poses a huge challenge in particular to the central governments. Accordingly, people seem to be impatient to receive satisfactory level of service from the governments to sort out the detrimental consequences of the Covid-19, which can be observed as numerical figures including the growth rates, unemployment rates and the real income levels.
The central motivation of this piece is to speculate on the future of government intervention on our lives based on the displacement effect put forward in the following paragraphs. Besides, three scenarios are discussed concerning the level of public intervention in particular.
Let’s assume that government is an ordinary type of good that can be traded in the market (time to refer a basic supply-demand diagram from ECON 101 class). When a globally-effected disaster such as Covid-19 occurs, citizens are expected to demand more government initiative which would result in the demand curve of the government shifts to the right-hand side. Therefore, the level of government intervention in the lives of the citizens increases (from Q1 to Q2) as shown in the figure below. (We are also assuming here that the government plays the chief role to overcome the pandemic in a determined way)
Figure-1 above goes hand in hand with the notion of displacement effect that is commonly used in the literature of inter-temporal fiscal policy analysis. Dr Gabrille Legrenzi from Keele Business School, Keele University, UK figures out the displacement effect as follows:
In a similar vein, during a global crisis including the medical ones, citizens expect more initiative taken by governments to alleviate the repercussions coming out of the crisis itself. Thus, public intervention to the social and economic lives heightens at the course of the crisis. Covid-19 is not an exception to this. Almost whole nations on the globe, demand governmental bodies to overcome this trouble by investing more to the medical research to search for the vaccine and/or treatment of this illness. Henceforth, we may expect a similar increase at the level of public intervention as the history of humankind had already seen during the natural disasters, pandemics and wars.
If ‘the idea of public intervention is expected to rise’ reaches a level of consensus, it is now the correct moment to talk about the scenarios that lie ahead of us concerning the magnitude of public intervention:
Scenario A
In the initial scenario, increase in the public intervention may resemble to the heyday of welfare state throughout the post-WWII era when the displacement effect was observed clearly. At the course of that era, each and every European state invested huge amount of money to the provision of public services to erase the bad memories of the war days. Consequently, insurmountable governmental expenditures ended up with higher inflation as well as stagnation in the economic activities as seen in the 1970s. Within this scenario, it is highly probable that the efforts to tackle the Covid-19 and its economic effects may be derailed and become the primary excuse of the tomorrow’s discretionary public spendings.
Scenario B
In this scenario, governments behave more responsibly than the scenario A. Public budget allocated to the fight on Covid-19 is used by the relevant bodies as efficient as possible and the level of budget expenditures reverses back to its initial position. Hence, the displacement effect will not be observed in this case. Although this scenario seems not to fit well into the real-world experiences, one may prefer being hopeful to the upcoming months and years.
Scenario C
This scenario situates between the above-mentioned scenarios (Scenario A and B). In this case, policy-makers find a moderate way to overcome the Covid-19 (and its economic impact) by leveling up the public expenditures in a reasonable amount. That is to say, governmental expenses grows due to the Covid-19, yet this expansion may be far lower than the Scenario A. Thanks to this, both the adverse effects of Covid-19 are eliminated and the level of public expenditures are kept lower than the alarming levels.
Societies over the world are experiencing highly challenging times. And they claim their basic rights from the ruling governments that their lives must be saved from this pandemic and kept on track again. However, if governments opt for the scenario A while providing the solution to their citizens, then ‘post-Covid-19’ days would bring them lower income, higher taxes and soaring prices in the shops of Wal-Mart, Aldi and Tesco. Yes, the world utterly needs a way out from this crisis, nevertheless, the policies devised to overcome it must be under strict surveillance by the citizens.
