Economics Is All About Disruption

Since the first caveman sharpened a stone into a tool, economics has involved disruption. New technologies create innovative ways of doing business and displace old ones. The Austrian economist Joseph Schumpeter coined a phrase for this: “creative destruction.” The term encompasses both the benign and harmful dimensions of economic disruption: when the forest burns, many trees are destroyed, but new growth is enabled. The key to progress is ensuring that there are more winners than losers from disruptive change and that the latter benefit from the broader gains in prosperity.

The Covid-19 pandemic feels more destructive than creative at the moment. That is certainly true when it comes to the toll in human lives: over 5 million cases and 350,000 deaths worldwide as of this writing. And the economic devastation is also profound, whether measured by the expected sharp drop in global gross domestic product (GDP) in 2020 or the nearly 40 million Americans who have lost their jobs since mid-March.

The longer-term implications of the pandemic for society, international relations, and the global economy are less certain. Change is likely in all these areas, but past crises suggest we are exaggerating certain effects and underestimating others. The changes in air travel following 9/11 turned out to be inconveniences rather than fundamental breaks; on the other hand, it is only in hindsight that we can see how much the terrorist attacks prompted a 20-year shift in America’s engagement in the world.

In this crisis as well, both benign and harmful forces will be at play, and it is not clear which will dominate where. In some cases, the pandemic will accelerate harmful trends already underway; in others, it will create new opportunities not imagined before the crisis. How individual countries respond to this moment may very well determine their place in the post-Covid-19 global economy.

Government policy choices tilt the balance between benefits and costs. Intervene too much, and the disruption could be amplified or new problems created; not enough, and the pain will be prolonged and opportunities missed. For U.S. international economic policymakers, getting the balance right is likely to be especially important in a few key areas:

  • Debt: Governments around the world have been forced to open the fiscal floodgates to compensate for lost economic activity and employment. The consequence has been a spike in already-rising debt: in the advanced world alone, the Organisation for Economic Co-operation and Development (OECD) projects that government financial liabilities will rise to an average of 137 percent of GDP in 2020 from 109 percent last year. The burden is likely to weigh more heavily on lower-income countries, which have yet to feel the full impact of the health crisis and have less capacity to finance their debt. How, and how fast, to stem this tide of red ink—especially when demands for government spending are only likely to grow—will bedevil policymakers for years to come.

  • Trade: Long before the pandemic, growth of world trade had fallen behind that of global GDP, and the trend toward globalization of supply chains had slowed or reversed. Calls to “re-shore” medical and pharmaceutical production in the wake of the pandemic could accelerate these trends. The trick for policymakers will be to avoid economic protectionism and encourage resilience where needed through redundant, trusted sources of truly essential supplies rather than through a move to autarky—a hugely expensive undertaking if it were seriously tried. Meanwhile, broader trade policy aimed at opening markets and creating new rules of the road is likely to be made more difficult by heightened domestic political concerns about globalization.

  • Technology: Whether through a “Zoom effect” reshaping the workplace or in response to demands for new health-surveillance methods, technology—always the great disruptor—is likely to play an even more central role in shaping the economy and society. This has profound implications for policy. What is the right balance between collecting and sharing health data on one hand and protecting personal privacy on the other? To the extent the pandemic accelerates the move toward automation and artificial intelligence, how should government support the jobs and incomes of displaced workers? Should the public sector do more targeted investments in critical sectors and technologies that make us less dependent on others, especially adversaries? Again, policymakers were grappling with these issues long before the pandemic, but the crisis has added a new urgency to these debates.

  • China: The return of the Middle Kingdom to global prominence over the past few decades has been one of the most disruptive forces in modern history, not least to the global economy. In many ways this has been the most positive form of disruption, whether for the 850 million Chinese citizens who have risen from abject poverty into the middle class or for the billions of consumers around the world who have enjoyed affordable products made in China. But China’s integration into the global economy has also come with costs, including dislocation of millions of manufactured jobs in the advanced world, distortion of competitive markets due to heavy-handed Chinese industrial policies, and threats to international rules and norms from Beijing’s non-transparent and coercive economic statecraft. Concerns about the early handling of the coronavirus in Wuhan will only add to the challenge for U.S. policymakers of finding the right balance between engaging with Beijing and pushing back against it.

  • Climate change: This is one of the few areas in which the pandemic has reversed unhealthy trends in the global economy. Since the start of the year, global carbon dioxide emissions have dropped an estimated 8.6 percent as factories have shut down, planes have been grounded, and commuters in advanced countries have abandoned their cars. But as the global economy returns to something like normal, these gains are unlikely to be sustained. The question is whether policymakers can seize on the temporary reprieve to institute policies that bend the arc of emissions in a more sustained way.

  • Inequality: There is clear evidence that the costs of the pandemic—whether measured by Covid-19 cases and deaths or lost jobs and incomes—are falling far more heavily on already disadvantaged groups. This has exacerbated the growing gap between rich and poor within both advanced and low-income countries. Why is this on a list of priorities for U.S. international economic policymakers? For one thing, because inequality is a drag on global growth, a point that the International Monetary Fund (IMF) has been stressing over the past few years. Moreover, until Washington addresses the sources of inequality at home, it is unlikely to rebuild the domestic political support for U.S. engagement in the world, no matter how broad its benefits.

These and other disruptive forces will be among the topics explored in a new biweekly series of live webcasts at CSIS called “Economy Disrupted.” In each episode, my colleague Stephanie Segal and I will talk to a prominent economic thinker about one of these challenges and try to make sense of it for non-economists. The web series, kicking off on June 1, will be a marquee offering of the new Economics Program at CSIS. Building on four decades of work in the Simon Chair in Political Economy and including the same strong team, the Economics Program will seek to illuminate the role of economics in international affairs and offer practical policy ideas to enhance U.S. and global prosperity and security. We’re excited to set out on this new journey and hope you will join us.

Matthew P. Goodman is senior vice president and runs the economics program at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2020 by the Center for Strategic and International Studies. All rights reserved.

Matthew P. Goodman

Matthew P. Goodman

Former Senior Vice President for Economics