WASHINGTON — Predicting economic changes in a pandemic was never easy. Omicron, the latest COVID-19 variant, makes it more difficult. After all, economists and policymakers have never had to deal with the economic consequences of a global pandemic. The unexpectedly strong rebound in the United States and other wealthy nations was due to massive government spending. A surprise surge in demand overtook factories and ports, leading to an increase in inflation. Megan Greene is chief economist at Kroll Institute, and a Harvard Kennedy School scholar. The Associated Press interviewed her to learn more about the economic consequences of omicron. This interview was edited to be more concise and clear.
Q: What’s the greatest worry about omicron? Is it the impact on growth or inflation?
A: The demand side was studied by Chad Syverson and Austan Goolsbee at the University of Chicago. They looked at whether people respond more to regulations or fear. It was fear that was driving things and not restrictions. Even without restrictions, I believe we could see people actually sheltering at home. That would reduce demand and should help to keep inflation under control.
We’ve also seen Chinese factories close due to outbreaks. This could lead to supply disruptions. It’s not the demand surge. It’s the demand surge. During the pandemic, the composition of what we buy has changed from services to goods. If everyone is worried that going to a restaurant or bar will land them in the hospital they might continue to purchase goods. This could increase inflation and worsen the trend.
Q: Is it possible that we end up with stagflation? A scenario where growth slows but inflation is still high?
A: Yes. However, if growth is actually slowed down, this should keep inflation at bay. In six months, I believe the conversation about growth in America will be very different. China is slowing down tremendously. We will experience a significant fiscal drag as we don’t have the same fiscal stimulus we had. One scenario could be that we have stagflation. However, it’s not my base case scenario.
Q: Is there just too much uncertainty?
A: Unfortunately, we don’t have enough data. If (omicron), proves to be highly transmissible, but hospitalizations don’t really rise — this could be a worst-case scenario in which everyone gets it but everyone is fine. This could have turned into something like the flu or a common cold. It could also be because more people get it.
