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Professor Eric Maskin won the Nobel Prize in Economics Sciences in 2007 for laying the foundations of mechanism design theory. Maskin is the Adams University Professor and Professor of Economics and Mathematics at Harvard University. He is an expert in the field of microeconomics and has made contributions to game theory, contract theory, social choice theory and other areas of economics. He joined Evan Brown, Head of Multi-Asset Strategy in the Investment Solutions team at UBS Asset Management, in a webinar to discuss the implications of the COVID-19 pandemic on vaccine rollout, inequality, climate change and the broader global economy.
Key webinar takeaways
- Fiscal stimulus is essential for rebuilding the economy but it would be most effective if deployed after lockdown restrictions have been lifted
- Mechanism design is a powerful tool for creating a market where a shortage of products exist
- The key to reducing income inequality caused by the digital acceleration is to improve education and retrain less-skilled workers
- We can learn from the past where international coordination solved environmental and social issues
- To address climate change we need to design an international treaty where countries are required to reduce carbon emissions with the imposition of penalties and sanctions
- We are now in a better position to prevent a financial crisis because regulatory frameworks have limited bank leverage
The world in the grasp of COVID-19
Mechanism design is valuable where markets do not function efficiently on their own. Suppose that suppliers are reluctant to produce some new good (say, a vaccine test) because the price they’ll be able to charge for that good is not yet known. And let’s imagine that government can’t even predict in advance how much of the good should be produced, since that will depend on production costs, which the government doesn’t yet know. Mechanism design can come to the rescue here: potential suppliers are given the incentive to provide their cost information to government, which then uses that information to calculate the optimal quantity of the good and the prices that will induce suppliers to produce that quantity. Thus, mechanism design is a valuable tool for quickly creating a market where one didn’t exist before. It is especially powerful for critical goods---virus tests, protective equipment, vaccines---that are brand new and in short supply.
Mechanism design is a powerful tool for creating markets where a shortage of products exist such as virus testing equipment or vaccines.
First, we would need to establish the amount of people who need a vaccine from the vaccines available. Then we could provide a financial incentive to encourage people to have the vaccine they may not have originally chosen or offer a family member the vaccine at the same time. Mechanism design uses incentives to reward citizens to make choices which benefit the broader society and not necessarily just themselves.
There is no doubt that stimulus is essential to not only provide financial relief to those in need, but also to stimulate the economy. In order to avoid low output for a long time, we need to stimulate consumer demand which leads producers to hire more employees and moves the economy closer to full employment. This crisis is different from the Global Financial Crisis (GFC) of 2008/9. Lockdown or partial lockdown is preventing consumers from purchasing goods and services such as travel and leisure. Stimulus needs to be deployed gradually over time, when restrictions have been relaxed to encourage more spending and move employment back to full capacity.
When we are in a recession, it is perfectly appropriate to spend more in order to stimulate the economy. During the recovery phase, raise tax revenues in order to pay the debt back.
The pandemic has accelerated the inequality challenge. Huge advances in technology have changed the way producers operate by improving efficiency with automation and computer assisted production. While highly skilled workers’ income has increased, those less skilled have seen incomes declineor have been displaced by technology. The key to reducing income inequality is to improve education and retrain workers to prepare them for a modern workforce. Governments could provide subsidies and tools to help workers find jobs.
The key themes of the century
we need to design an international treaty where countries are required to reduce carbon emissions with the imposition of penalties and sanctions.
Climate change is another issue that markets cannot solve on their own. Economists are in favor of a carbon tax because not only will it help to reduce carbon emissions but it will also incentivize companies to produce alternative energy sources with lower costs. Further, we need to design an international treaty where countries are required to reduce carbon emissions with the imposition of penalties and sanctions.
In the past, an international treaty successfully solved the depletion of the ozone layer but we need the political support to act now on climate change.
I am optimistic because of the success of forward-looking programs which were implemented in the past. After World War II, The US government enacted the Marshall Plan which was an enormous economic aid program to help rebuild Europe, which in the long run resulted in greater productivity as well as a stronger United States.
Another long-term investment initiative run by the US government that was very effective was the G.I. Bill: soldiers returning from war could receive a free university education. This had a huge effect on the diversity of workers entering the US labor force and helped to reduce exclusion of some segments of the workforce into certain professions. Leaders need to support long-term investment in education, climate change and infrastructure.
The ESG wave is valuable, but relying on private initiatives is not enough to solve the climate change challenge. Public intervention is necessary for companies to feel encouraged by the fact that every other company is contributing to solve the issue too.
An international body could coordinate a program to address this. In the past, a modified version of the pneumococcal vaccine produced in Europe and the US was needed for a new strain of the infection present in African countries. Pharmaceutical companies did not view the production as profitable. The World Bank initiated a consortium of donor countries who subsidized the production of a pneumococcal vaccine by the pharmaceutical companies. Companies received a bonus when supplying the vaccine to underserved countries. We could apply this incentive to help countries tackle COVID-19 that would otherwise be underserved.
We are now in a better position than previously to prevent a financial crisis because the regulatory system has improved, due to tightening of the US Dodd-Frank Act and European Basal regulatory frameworks around how much banks can leverage or lend.
Many wealthy countries became rich long ago by emitting as much carbon as they desired. Poorer countries today can rightly say that it would be unfair to levy sanctions on them for emitting carbon when all those rich countries got away with it for so long. However, we can address this with provisions in the agreement which would allow financial relief to poorer countries in exchange for emission reduction.
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