For the last 40 years, economic policy has been built around the principle that the welfare state should provide insurance to individuals – and not to firms – against economic fluctuations. The rule of thumb has been “protect workers, not jobs”. Active industrial policy, such as state aid targeting struggling firms or industries, has been considered a relic from the 70s. Since the beginning of the 1980s, advanced countries’ economic policy directed towards the business sector has in general been based on a principle of efficiency and competition rather than on intervention. Policy makers have focused on providing sound macro-economic conditions and ensuring the well-functioning of markets.
In the ongoing Covid19 crisis, however, these principles were to a large extent disbanded. Instead, this crisis has been met by a comprehensive policy response, which included direct support to struggling firms.
Against this backdrop, at two broad questions are pressing: Is the Covid19 crisis different from other crises such that the policy-shift is warranted? This is about the source and extent of the crisis. What were the effects of compensating economic policy measures? How did the measures help firms to survive? Did they promote or hinder economic activity during the crisis? Did they prevent bankruptcies – or just delay firm closures that would happen anyway? Crises trigger changes in the structure of the society and the economy. Did the policy initiatives enhance or hamper reallocation and a swift recovery?
This research project grows out of an ambition to contribute to improved crisis policy in the future. Specifically, we set out to provide new knowledge on the nature of economic crises, and on which lessons that can be transferred from one crisis to another. We aim to provide new knowledge on the effects of crisis policies and investigate the scope for improved policy-design.
For the last 40 years, economic policy has been built around the principle that the welfare state should provide insurance to individuals – and not to firms – also in the time of recession. Since the beginning of the 1980s, advanced countries’ economic policy directed towards the business sector has in general been based on a principle of efficiency and competition rather than on intervention. Facing the Covid19 crisis these principles were largely disbanded.
Against this backdrop, we set out to address two important questions:
1. Is the Covid19 crisis different from other crises such that the policy-shift is warranted?
2. What were the effects of compensating economic policy measures?
Our research project grows out of an ambition that its’ insights will improve governmental capacity to handle future crises. While crises may differ, they have crucial aspects in common. They are often triggered by factors beyond the control of governments, but where government actions will determine how it evolves. While appropriate policies may mitigate a crisis, policy missteps may exacerbate it.
The two broad questions are assessed through seven work packages (WPs). The basis for the fundamental policy shift is addressed in WPs 1, 3, 5 and 6, whereas the second broad question, regarding effects the implemented policies, will be studied in WP 2, 3 and 4. Potential gains from improved information for decision making during a crisis will be studied in WP7. All WPs build on extensive use of detailed, linkable, micro data.
WP1: Covid19 - A Unicorn or just another slump? Firm dynamics and reallocation
WP2: The dilemmas of temporary layoff-schemes
WP3: Saving the right firms from bankruptcy? Targeted firm support schemes
WP4: Human capital investments during unemployment
WP5: Markets, price-setting and adaption to policy
WP6: Covid19 and the drop in sales: Regulations or adaptations, compliance and trust
WP7: Basis for decision making: Feasible vs actual information in real time