A Conversation with Michael Spence, Sam Palmisano and Erik Brynjolfsson
Economists outline four imperatives for the economy to emerge from the global crisis
By Paula Klein
Roll up your sleeves and get ready to dig out. Emerging from the global economic crisis was top-of-mind during a conversation at MIT IDE’s Annual Conference on May 20, and speakers were frank about the huge hurdles we face. Michael Spence, NYU Professor of Economics and a 2001 Nobel Laureate, said the magnitude of economic decline in the first half of the year “is nothing that we have ever seen.” He expects “a very long, very deep” drop in GDP, income, and unemployment followed by a protracted recovery period. It will be a time of “difficult trade-offs for policymakers,” he said.
Global business leaders are distraught, as well, said Sam Palmisano, former IBM CEO, now Chairman of the Center for Global Enterprise which studies global economic trends and their impact on society. As a worldwide crisis, the impact “is everywhere and on everyone,” making the recovery much more complicated.
“We never thought the fourth quarter was going to bounce right back and it was going to be business as usual. Now we know that this will be a long haul.”
Introducing the session on “Globalization and the Multi-stakeholder Model” at the IDE’s day-long virtual event, moderator and IDE Director, Erik Brynjolfsson, said that the 20 million U.S. jobs lost in April represent “the highest unemployment since the great depression.” The panel discussed the magnitude of the pandemic’s effects and then probed solutions to lift the economy and begin the recovery process.
Palmisano said rebuilding will require governments to “shift from stabilization to stimulation,” while Spence said that “the current balance sheet damage…of increased debt and reduced assets are hitting the lower income share of our economy more than the upper. Whether we redistribute that [wealth] remains to be seen.”
The speed and difficulty of the recovery “will depend on how long we go on with policies that essentially cripple large chunks of the economy,” according to Spence. And that’s where tradeoffs have to be made.
The conversation highlighted four areas where actions need to be taken, as follows:
Four ‘Musts’ to Emerge from the Global Economic Shutdown
· Spur consumer spending/ Jump-start the supply chain
· Accelerate investments in digital technology
· Share knowledge and results
· Create safe environments
1. Spur consumer spending/ jump-start the supply chain. Spurring spending across sectors is key, Spence said. In Italy, the debt-to–GDP ratio rose from 135% to 160%. It’s about 100% in the U.S. “That’s not pretty,” he said, but we must spread the burden not only to financial markets, but to corporations and consumers. “If we don’t, the financial system will stop lending, or the corporate sector will go bankrupt or stop investing, or households will stop consuming.”
For the business world, the first U.S. stimulus bill stabilized financial markets, Palmisano said, but didn’t jumpstart the production side of the economy. “Many of us are examining how to jump-start the supply chain for small businesses, how do you help those areas stimulate growth and build for the future?”
For example, “If you could free up inventory on car lots, the big automotive companies would start placing orders to their supply chain, which goes through thousands of suppliers around the world.” Other sectors, such as apparel, will be tougher. The seasonal nature of that inventory means that summer clothes are languishing while manufacturers should be preparing for the winter season. It points out the need for multiple options, suppliers, and resiliency. There will be short-term costs to making these adjustments, Palmisano said, but tough measures could stave off bankruptcy of more retailers.
Brynjolfsson noted that closing restaurants caused some farmers to have to dump food instead of delivering it to supermarkets or food pantries. The reason? It takes time to reconfigure the complex supply chains that undergird a modern economy.
To facilitate these types of changes, Palmisano believes “governments should shift from stabilization to stimulation mode.” Financial incentives are needed.
2. Invest in digital technology. Private and public investments in digital technology have already accelerated since the pandemic hit and will continue to fuel new waves of information sharing and connectivity, panelists said. Crises often necessitate new measures — such as additional security requirements post- 9–11, and a boost in financial technology after the 2008 recession, Palmisano said. “The same thing is happening now.”
For example, the telemedicine infrastructure is finally making strides due to “behavioral changes and medical insurance reimbursements that will adapt to the need,” Palmisano said. While it’s not perfect for every case — privacy and security improvements are needed — telemedicine, like e-learning, works well in many cases. Similarly, contactless payments, remote work, and new entertainment models are all seen as vital digital solutions to current business problems and may remain long term.
Referring to the pre-pandemic “tech-lash,” where high-tech firms were maligned and hit with voluminous regulations around the world, Palmisano said we’re “now seeing technology as a welcomed answer in the pandemic.”
Not every business will survive, however: Corporations with weak balance sheets or those that are highly leveraged will struggle.
“But if you’ve started a digital journey and were financially prudent, you should accelerate down this path because there will be winners and losers,” Palmisano said. Winners understand the application of technology to their core business.
Spence said many corporate digital efforts were slowed by inertia. When things are going well, there’s little appetite for change. “When you go through a crisis, however, you have no choice: you conduct the experiment and see what happens.” Moreover, he said, “Your digital footprint proves resilience: If you’re out of the game on digital, you’re out of the game.”
Higher education may be at a watershed moment when students and universities examine the value they receive for their investments. As a result, a shakeout in the sector is looming.
3. Share the knowledge and the results. Members of Palmisano’s Global Enterprise –including CEOs from Nike, Under Armor, General Motors, Facebook, and Microsoft — “learn from one another; those ‘born digital’ and not, so they can move more along this digital path.” Information sharing leads to productivity and interconnectedness, and it’s enabled by technology.
There will be new ways to operate post-pandemic as a result of less travel, staggered office schedules, and more work from home. We won’t return to the old world. “Adjacent businesses will also rise,” Palmisano said. “Since the crisis, for instance, over-the-counter drug purchases at Amazon increased nine-fold! Are people going to go back to walking into drug stores once we reopen the economy? We’ll see.”
Spence, hopes to see the public and private sectors come together more in Europe. Globally, however, “nationalism and a reluctance to collaborate seem to be winning out. I’d love to see an about-face, but the only good news is in the medical community where biomedical scientists and doctors seem to have ignored nationalism completely and to share everything with each other all the time.”
4. Create safe environments. Although Spence acknowledged some conflicts of interest between stockholder needs for quick gains and public health concerns, “we have to make this a win-win. If you want people back at work, they have to feel safe.” For their part, employers have to ensure that employees are healthy. If you knew that the driver tested negative for coronavirus, you’d get back in an Uber or Lyft vehicle, Palmisano said. “Achieving this is a huge data problem where we can use contact tracing, biometrics, and testing to ensure health and safety.” Similar programs can also help to safely re-open theaters, restaurants, and sports events. “We can’t have indefinite lockdowns,” he said.
Spence said that people underestimate or ignore what economists call externalities. For example, “if you hang out with friends and then visit grandma, it will cause problems. We’re all stakeholders in this and it’s atrocious that we have not used the data that we have to better deal with this huge challenge.”