I think that Roubini makes a number of interesting and no doubt valid points, but a good deal of the points he makes are nothing new. To illustrate, I give an argument against each of his arguments.
“The policy response to the COVID-19 crisis entails a massive increase in fiscal deficits – on the order of 10% of GDP or more – at a time when public debt levels in many countries were already high, if not unsustainable.”: Yes, it’s true that public debts are rising. But there is evidence from history (Japan for one) that public debts can be very high and yet sustainable.
“The COVID-19 crisis shows that much more public spending must be allocated to health systems, and that universal health care and other relevant public goods are necessities, not luxuries. Yet, because most developed countries have aging societies, funding such outlays in the future will make the implicit debts from today’s unfunded health-care and social-security systems even larger.” Structural issues require more public spending and, implicitly, more borrowing. See point #1 above.
“In addition to causing a deep recession, the crisis is also creating a massive slack in goods (unused machines and capacity) and labor markets (mass unemployment), as well as driving a price collapse in commodities such as oil and industrial metals. That makes debt deflation likely, increasing the risk of insolvency.” Deflation can be counteracted by monetary policy. Central banks are printing money to buy all kinds of assets right now. Deflation will be fought aggressively. The lesson of the great depression was not lost on the Fed and others in 2008 and they seem to be responding appropriately today. See Abenomics.
“In the short run, governments will need to run monetized fiscal deficits to avoid depression and deflation. Yet, over time, the permanent negative supply shocks from accelerated de-globalization and renewed protectionism will make stagflation all but inevitable.” Roubini recognizes that #3 needs to be addressed with monetization. Is stagflation inevitable? I don’t see why it has to be inevitable when you factor in the potential for innovation. Industries aren’t standing still. They are rapidly retooling supply chains. I think something he ignores here is the extraordinary amount of computational power being applied to fix supply chain issues along with innovations like 3D printing, both of which are receiving extraordinary investment right now.
“To guard against future supply-chain shocks, companies in advanced economies will re-shore production from low-cost regions to higher-cost domestic markets. But rather than helping workers at home, this trend will accelerate the pace of automation, putting downward pressure on wages and further fanning the flames of populism, nationalism, and xenophobia.” Sure, re-shoring work via automation will displace workers. In every case throughout history when technology has replaced workers, within a period of time those workers have found new jobs in industries that never before existed. Why should this time be different?
“The United States and China will decouple faster, and most countries will respond by adopting still more protectionist policies to shield domestic firms and workers from global disruptions. The post-pandemic world will be marked by tighter restrictions on the movement of goods, services, capital, labor, technology, data, and information. This is already happening in the pharmaceutical, medical-equipment, and food sectors, where governments are imposing export restrictions and other protectionist measures in response to the crisis.” Some decoupling of China and the United State is probably helpful at the moment. A race toward onshoring via automation will relieve trade tension in the medium term and rebalance power away from China in a helpful way.
“The backlash against democracy will reinforce this trend. Populist leaders often benefit from economic weakness, mass unemployment, and rising inequality. Under conditions of heightened economic insecurity, there will be a strong impulse to scapegoat foreigners for the crisis. Blue-collar workers and broad cohorts of the middle class will become more susceptible to populist rhetoric, particularly proposals to restrict migration and trade.” Somewhat true, but not a fait-accompli. The post-2008 era brought in some tyrants and nationalists, but also rationalists like Trudeau and Macron, who came in during a second wave as a reaction to the first wave of nationalist/populists. Populations may be temporarily persuaded by nationalist rhetoric, but in the long term, I don’t see this as sticking around.
“This points to an eighth factor: the geostrategic standoff between the US and China. With the Trump administration making every effort to blame China for the pandemic, Chinese President Xi Jinping’s regime will double down on its claim that the US is conspiring to prevent China’s peaceful rise. The Sino-American decoupling in trade, technology, investment, data, and monetary arrangements will intensify.” They will no doubt do that. What else is new?
“Worse, this diplomatic breakup will set the stage for a new cold war between the US and its rivals – not just China, but also Russia, Iran, and North Korea. With a US presidential election approaching, there is every reason to expect an upsurge in clandestine cyber warfare, potentially leading even to conventional military clashes. And because technology is the key weapon in the fight for control of the industries of the future and in combating pandemics, the US private tech sector will become increasingly integrated into the national-security-industrial complex.” There has been an ongoing cyberwar for the past decade. There is nothing new here. Private industry has been ramping up on security and that trend will continue. Many good firms will make a lot of money assisting with that effort.
“A final risk that cannot be ignored is environmental disruption, which, as the COVID-19 crisis has shown, can wreak far more economic havoc than a financial crisis. Recurring epidemics (HIV since the 1980s, SARS in 2003, H1N1 in 2009, MERS in 2011, Ebola in 2014-16) are, like climate change, essentially man-made disasters, born of poor health and sanitary standards, the abuse of natural systems, and the growing interconnectivity of a globalized world. Pandemics and the many morbid symptoms of climate change will become more frequent, severe, and costly in the years ahead.” True, but that risk was already inherent. And the present pandemic will force a political response that empowers public health as it has never before been empowered. We will have new and more robust structures in place that epidemiologists have never dreamed of.