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Jakarta Post

COVID-19: Rationality maintains macroeconomic immunity

  • Kristianus Pramudito Isyunanda


Jakarta   /   Tue, March 24, 2020   /   08:53 am
COVID-19: Rationality maintains macroeconomic immunity People buy staples daily in anticipation of the Corona COVID-19 virus outbreak at Carrefour ITC Permata Hijau, South Jakarta, on Monday, March 2, 2020. (JP/Donny Fernando)

It is rather utopic to say that economies would be remote from the coronavirus disease 2019 (COVID-19). Since the World Health Organization announced the pandemic on March 11, the tension about the virus has increased significantly. The financial market and the economy are reacting cyclically with the outbreak.

Do we need to panic? There is so much data to digest and information is often asymmetrically distributed. Yet “panic” implies a wild reaction of humans. As John M. Keynes, a well-known macroeconomist, suggested in 1933, human’s “animal spirit” is the source of market volatility. “Prudence”, as United Nations chief António Guterres earlier counseled, might be a better measure than panic.

COVID-19 is having a doublehit impact on the economy. On the demand side, people have become alarmists and start panic buying. On the supply side, scarcity becomes the result of productivity disruption due to the pandemic. Despite those effects on the “real market” economy, the financial market suffers from panic selling, which has an adversary effect equivalent to a bank rush, i.e., the market runs dry.

The virus outbreak has driven households to rush their buying for even not-so-related items, as we see Western-world citizens rush for toilet paper. In the financial market, participants are selling their stocks. Both households and stockholders are locked into the same rationale. They hope to get out of uncertain circumstances as quickly as possible before they are left “empty-handed”. When the situation escalates, everyone seems to forget that uncertainty is always haunting the economy, even in the most stable conditions.

There are similarities between COVID-19 and panic response. When COVID-19 is contagiously transmitted human-to-human, panic is also contagion through human-to-human transmission.

Both are highly dangerous.

The virus is dangerous to human health, just as a panic response is for macroeconomic stability. The former is an invisible microorganism yet the latter is purely intangible. When COVID-19 is transmitted through droplets, panic arises from human thoughts and emotions like a “snowball effect”. Even worst, panic is often justified as an individual rational decision; to preemptively avoid loss.

COVID-19 is not the first global-scale pandemic. There was the Spanish influenza in 1918 and Middle Eastern Respiratory Syndrome (MERS) in 2012, for example. However, COVID-19 is the first pandemic in the social media era. Markets are digesting information and anticipating it faster. People make assumptions and hence make decisions within the reach of scrolling their phones. Everyone can do so simultaneously thanks to the internet and therefore accelerate the crisis to become real.

Economics more or less focuses on human rationality. In the macroeconomics branch, it is about collective rationality across the economic sectors. However, one should understand that macro is not the sum of micro.

Macroeconomics has its dynamics. This emphasizes a point that individual rationality, without any coordination, will result in an irrational collective outcome. Robert C. Hockett, professor of law at Cornell University, called it as a “recursive collective action problem”. From the macroeconomic side, it is somewhat true that panic, something that comes “from our head”, destroys the economy.

There is always a dilemma about whether to “follow the curve” or otherwise be pushed over the edge by other community members. Individuals are trapped to execute their rational decisions and try hard to outwork anyone else in the economy, although somewhat aware of the irrational collective result that might follow. The following typical questions always comes up: if I was to delay my decision to buy groceries, would there be any items left? Could I survive?

The solution relies on the credibility and capability of the sovereign, the one with mandates to manage and administer public good. The government has effective access to manage the end-toend economic cycle efficiently. In the current situation, it at least needs to ensure the adequate supply of basic goods.

The same goes for the financial sector. Sovereign states can also provide an emergency backstop to the financial sector through monopoly power of legal tender, thereby effectively giving them meaningful measure in their power to build up market confidence, only by mentioning their “standby position”.

The United States Federal Reserve cut its policy rate to near zero. In Indonesia, Bank Indonesia has gradually lowered the seven-day reverse repo rate to 4.75 percent and is working on the adjustment of reserve requirements to signal relaxation in monetary policy. By the same token, the Finance Ministry has announced various fiscal incentives to inflate businesses and industries.

Those are just some evidence that the sovereign authorities are and will always be in place no matter what happens. They would be willing to do all that is necessary to save the economy. It is not just normative but rather a reality.

Understanding how sovereign power works and its nature should itself place confidence in finance and the economy. Sovereignty as a system holds all armslength measures to keep the economy immune from the pandemic. Step away from any political pressure therein, the public can be confident, even in a difficult situation.

To conclude, common rationality is important. The government needs to be in “whateverit-takes-mode” while the public has to support it. Although it is undeniably difficult to preserve confidence in hard times, there should be an exuberant spirit of “all-for-all”.

As the title suggests, the common rationality as a joint product of state and the people is important to build “immunity” for the economy. Public confidence is essential for a nation’s wealth, whereas mere individual rationality will never save us from the grave dangers of the crisis. There should now be less reason to panic.


Staff member in the legal affairs department, Bank Indonesia. The views expressed are his own.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.