Below is a copy of this week’s issue of Econ Extra Credit. Sign up to receive Econ Extra Credit in your inbox weekly.
In the face of the uncertainties and dislocations caused by COVID-19, what would you pay to travel through time, say, 12 to 18 months into the future? Scientists suggest there’s a decent chance we’ll have a vaccine by then. The latest chapter in our book is about time travel — which has extra resonance today. Call it “Back to the (Economic) Future.”
We learned about debt this week. Borrowing, the book explains, lets us shift our assets from one time period to another. And the federal government is now doing this on a scale never seen before. In an effort to keep the economy afloat during this pandemic emergency, it’s borrowing money to dole out to you and me — harnessing an asset from the future, when the economy presumably emerges from from the crisis, and transferring that wealth back in time so people and businesses can pay the bills this month.
Chatting after class: I spoke about just that this week with Nobel laureate Joseph Stiglitz. His latest book, “People, Power, and Profits,” points out how the economy was failing large parts of society, even before the pandemic hit. Stiglitz proposes that we rethink all the debt that has been crushing people. He said he’s encouraged by provisions of the new $2 trillion stimulus law, which allows some student loan borrowers to delay payment for six months, and he wants this to prompt a wider policy discussion about driving down interest rates for credit card users.
There’s been renewed debate about global debt forgiveness for poor countries who could be relieved of needing to pay what they owe international lenders during this crisis. Stiglitz, a former chief economist of the World Bank, has called for large-scale international aid, noting that if a low-income country doesn’t have the resources to fight the virus, it could come back.
Inside this week's theme: Credit markets
Borrowing, lending, investing and saving helps people to “rearrange the timing of their spending,” as we learned in this week’s chapter. For example, we might take out a loan or charge some items on a credit card today based on the expectation that we’ll have a higher income later — to both pay back that debt and cover whatever expenses we’ll have at that future date.
But borrowing isn’t free. Lenders charge interest, which “raises the price of bringing buying power forward.” And while the credit market can provide mutual gains for borrowers and lenders, it can also perpetuate inequality. As the book puts it: “Rich people lend on terms that make them rich, while poor people borrow on terms that make them poor.”
The $2 trillion federal stimulus package, signed last week, includes $350 billion for loans of up to $10 million to small- and medium-sized businesses. Former Federal Reserve Chairman Ben Bernanke told Kai Ryssdal last week that it’s critical to keep credit flowing economywide.
The Small Business Administration will be backing the loans and it’s waiving some of the usual provisions, public policy expert Andrew Stettner explained on “Make Me Smart” this week. But small businesses could still be at a significant disadvantage. “I don’t think the package was quite as generous to them as big businesses, and they have less bandwidth to deal with it,” Stettner said. “Retailers large and small were already having a hard time, and some of them will not recover from this.”
Next week, in Chapter 10 of Core Econ’s “Economy, Society, and Public Policy”: risk and return, something on the minds of many in this COVID-19 economy.