With the current number of infections, there is no choice but to tighten the measures, says economist Gabriel Felbermayr. Nonetheless, the state should not fall back into ad hoc measures when it comes to aid.
Mr Felbermayr, so far you have spoken out against a more stringent lockdown. How do you assess the situation today?
We as economists are also driven by the infection process. Since the lockdown light does not affect the numbers as you would like, you have to draw conclusions. I am still in favor of the lockdown measures being as gentle as possible. But we are now in a situation where there is no choice but to tighten the existing lockdown again.
My concerns are also smaller today because we are entering a time when people are already on vacation and many businesses are closed. The lockdown fits in well. It would be different if the measures were tightened in a normal working month. The damage would be greater.
In addition, due to the already effective restrictions in the affected industries, we are not falling from 100 to 20 percent, but rather from 60 to 20 percent. The tightening is less severe than if we were to go into lockdown from a normal state.
When would be a suitable time for a lockdown?
With the numbers as they are now, you have to act immediately and not wait for an adjustment reaction to take place. Only then can the measures be efficient. One should act immediately now in the hope that if one closes five days earlier, one can loosen up five days earlier and that economic activity rises again sooner.
We have learned that once the measures are relaxed again, economic activity comes back quite quickly. We saw that in the third quarter. There was a strong compensation movement there after the slump in the spring. That should encourage us to act with all consistency now.
Would the lockdown have been avoidable?
To answer that, we know too little about how official measures actually work. We cannot control the private area. We can’t put a camera or a cop in every living room. That is the great unknown.
The question is what could have been done differently? Communicate differently? Should harsher sentences have been imposed? We will only know that in retrospect, if at all.
But it would probably have been better to react earlier than a plateau could be seen in the infection numbers. It really is a frustrating and annoying business. Experience in France shows that the numbers can go up again after the easing. We’ll have to be prepared for this roller coaster ride to go on for a while.
What are the economic consequences of the stricter measures for the economy?
The lockdown is ruining the retail trade’s holiday season. This time is an important time for retail. This includes not only the business before Christmas, but also the business between the years and the first days of the new year, when gifts are exchanged and vouchers are redeemed. We’ll break that with the lockdown.
It will particularly affect the textile and toy sectors, where sales have already been lower than usual. There would have been a peak in sales there in the next ten days. That is now shifting to online trading. However, not completely either, the delivery services lack the infrastructure to do this.
What does that mean for the final quarter of this year?
So far we have assumed that the economy will stagnate in the final quarter. After all, we got off to a good start into the quarter, carried by the Sommerelan. Now it is more likely to be a little cloudy. However, this has hardly any influence on the annual financial statements.
Will the second corona wave also ruin the start of the year 2021?
We will probably have a first quarter in which economic output will at best stagnate – still below pre-crisis levels. After January 10th, we will probably be able to switch back to a more moderate regime from lockdown. However, it is not foreseeable when the catering or social service providers in the sports and event sector will be able to reopen.
How should the state help the affected companies?
It is now high time that we did not fall back into ad hoc measures, as was the case this year: first there was bridging aid, then November and December aid, and now bridging aid again. This means that companies do not know where they are and it makes the application unnecessarily expensive.
A concept must now be drawn up that does not start with fixed costs or sales, but with operating surpluses. These are the sales minus the variable costs such as cost of goods or personnel costs. This benchmark is more appropriate because it does not discriminate between companies of different sizes. Nor does it discriminate between debt and equity, as is the case with bridging aid. Finally, it does not discriminate between companies with different proportions of variable costs. It always depends on how much the entrepreneur can ultimately keep to himself. We don’t have such a concept yet.
We made a corresponding proposal in April and will now explain it in more detail. It envisages starting with the operating result and compensating for the loss proportionately in the amount of around 85 percent. It would be nice if this finally met with serious interest.
Gabriel Felbermayr has been President of the Institute for the World Economy since March 2019. At the same time he holds a professorship for economics, in particular economic policy, at the Christian-Albrechts-Universität zu Kiel.