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How to Avoid a W-Shaped Recession

Summary:
As policymakers plan their COVID-19 responses, policymakers should remember a simple rule of thumb: let “W” stand for premature "withdrawal" of public-health or economic-stimulus measures. As previous crises have shown, such proposals should be avoided like the plague. CAMBRIDGE – “Those who cannot remember the past are condemned to repeat it,” George Santayana famously quipped in 1905. It is a phrase that has been repeated for over a century, but rarely heeded. As COVID-19 decimates the global economy, our understanding of history could be the difference between a V- or U-shaped recession and a W-shaped one, in which incipient recovery is followed by successive relapses. How Will the Great

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As policymakers plan their COVID-19 responses, policymakers should remember a simple rule of thumb: let “W” stand for premature "withdrawal" of public-health or economic-stimulus measures. As previous crises have shown, such proposals should be avoided like the plague.

CAMBRIDGE – “Those who cannot remember the past are condemned to repeat it,” George Santayana famously quipped in 1905. It is a phrase that has been repeated for over a century, but rarely heeded. As COVID-19 decimates the global economy, our understanding of history could be the difference between a V- or U-shaped recession and a W-shaped one, in which incipient recovery is followed by successive relapses.

As recently as March, V-shaped recoveries in individual economies seemed plausible. Once infections and deaths had peaked and begun to decline, the logic went, people would eagerly return to work. Economic activity might even get an extra boost, as consumers released pent-up demand.

This is in line with the pattern of recovery from natural disasters, such as earthquakes and hurricanes, as well as the epidemic of severe acute respiratory syndrome in 2003. Though output in China – the outbreak’s epicenter – did suffer as a result of SARS, it recovered so fast that annual GDP was hardly affected.

Today, China reports that industrial production rebounded in March from its plunge in February. But, overall, it seems clear that forecasts of a V-shaped global recovery from COVID-19 are too optimistic.

Policymakers may, however, be able to engineer a U-shaped recovery. In such a scenario, certain segments of the economy would be reopened, with employees separated physically and, if possible, temporally (in shifts). This would keep the economy going until the health crisis is under control, at which point all sectors could be restarted and a full economic recovery could begin.

This scenario would require countries to ensure frequent, free testing on a massive scale. That is technically feasible, at least in high-income countries, though governance failures in many – such as the United Kingdom and the United States – have impeded its implementation. If effective tests for antibodies are developed, and the relationship between antibodies and immunity to COVID-19 is confirmed, a return of economic activity would be all the more achievable. Contact tracing – which has helped to limit the spread of the virus in parts of Asia, such as Singapore and South Korea – should also be considered.

Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

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