A critical COVID-19 economic policy tool: Retrospective insurance

The Covid-19 pandemic is a major economic shock. With no comparable event having occurred since the 1918 Spanish Flu, and a rapidly changing public health situation, economic policy makers are largely having to improvise their responses. This note assesses the scale of this large shock, suggesting that it is about 10% of global GDP so around five times as large as the credit and liquidity problems that created the global financial crisis of 2007-2008. It then examines the economic policy response, suggesting that to be as effective as possible the response must address two distinct objectives: offset the deflationary economic shock and provide targeted support to those most directly affected and avoiding corporate bankruptcies. It proposes a surprisingly inexpensive framework – “retrospective insurance” at a net additional cost only 2% of GDP – that can guide the allocation of public resources to ensure no business goes under as a result of the pandemic and all who merit protection get support.