Normalcy and The Economic Aftermath of Covid19

By Norman Clark

This paper has been prompted by a newspaper article written by a well-known US journalist [Josh Marshall] who argues that it’s incorrect to suggest we shall return to the status quo ante once the pandemic is over. On the contrary a return to a life “as it was” is highly unlikely since many of the same issues will continue to prevail.

For example, people returning to workplaces where mingling is necessary [as in large proportions of the service economy] will face exactly the same issues of social distancing. Children at school will continue to act as vehicles for contagion. Public transportation will be [almost] as crowded etc. Unless and until the spread of the virus is totally checked [and that looks a long way off] any such measures will allow contamination to continue unabated, or nearly so. The context will not have changed. What we have to expect is a “new normal” where practically all of our activities will take on a shape hitherto unknown. And this must be anticipated and planned for.

But people are still in denial. Many of the claims that are now being made liken the crisis to the 2008 financial crash. We recovered from that, they say, and we will recover from this. But the analogy with the 2008 crash is faulty. Many of the problems created by that crash are still very much with us. The greed of much of the financial community is still present. Levels of private debt [both household and corporate] continue to be enormously high and by the looks of it liable to grow even more. Income distribution and poverty levels will not only remain unequal but are likely to continue to deteriorate. Similarly, the state of the world economy will continue to be characterised by gross inequality by incomes and assets within countries and by regions and countries internationally as emphasised for example, by Robert Reich in a recent US newspaper article. In short, the attempt to portray the current pandemic as a temporary blip on the normal running of economic conditions is misconceived,

Historic Lessons

Conversely, in my view, the correct year of reference is not 2008. It is 1929 and what then followed in the ensuing decade. As we learned then [and have evidently forgotten] the prevailing, so-called neo-classical, economic model was both fundamentally wrong and profoundly damaging. Dramatic losses of production and incomes fed upon themselves throughout economic systems. The correct analysis of the situation for John Maynard Keynes was very clear. Falling incomes create reduction in demand for goods and services, thus creating further falls in production in a vicious cycle ending up with what he named as a “low level equilibrium trap”. The system balanced out at a level where resources were not utilised and millions of workers remained unemployed.

And this took place internationally as trade suffered accordingly. Governments became inward-looking as a beggar-thy-neighbour attitude prevailed.

We are already starting to see this from the statements of political leaders in response to Covid19, while in the UK the saga of Brexit simply adds to the picture. At this stage we have no real idea of what eventual macroeconomic equilibrium in the UK is likely to be but guesstimates from the mass media are talking about GDP sinking to around 70% of pre Covid19 levels. And so the issue now is very much like what it was in the 1930s; viz., how to preserve aggregate demand at levels where production and income levels are maintained as far as possible in the short term so as to maximize possibilities to deal with a new post-Covid19 world that has yet to be created.

But it won’t be a world like that obtaining in the 1930s. At that time governments insisted in treating their economic systems as if they were households living beyond their means. Austerity policies were widely promulgated and unemployment levels rocketed. At that time counter measures surfaced [like those of Roosevelt’s New Deal] but were bitterly fought and recovery was only really achieved through necessities forced by the 2nd World War. Here in the UK the current approach has clearly learned some lessons from that period but in my view continues to display a similar mind set. Witness the austerity policies adopted by many nations following the 2008 crash. My suggestion is it would make more sense to turn the focus around and to set out an agenda for transformation using fiscal policy as the main vehicle.

Keynes pointed out that the main components of aggregate demand are consumption, private investment, exports and government expenditure. The most immediate need then [and now] is consumption, since impact occurs as soon as incomes begin to drop. Hence what we have begun to see are a raft of emergency policies that are being instituted on the hoof, so to speak, at great expense and at enormous short term cost. The UK government, like many others, has put forward a series of measures to deal with this. These include lending to businesses to enable incomes to be paid, fast tracking social security relief and making arrangements to delay interest on some types of debt repayment like those for mortgages.

However, in the UK for example, many of the relief measures like those of subsidised bank lending, for example, are proving hard to put into operation. Banks are concerned with possibilities of fraud and in any case don’t have the structures needed to put such measures widely into practice. Attempts to preserve employment like those of furlough schemes are encountering a range of bureaucratic obstacles associated with the difficulties associated with inefficient administration.

In addition, there are still huge gaps in the proffered assistance. Small businesses are still only receiving patchy help and the mass of workers in the informal [gig] economy have been largely hung out to dry. Every business has its own peculiar needs and it is well-nigh impossible to establish rules that are universally adequate. And the shortage of suitable administrative structures is becoming daily more evident. The result is that many well-established businesses will certainly go under when promised financial help does not appear. Aside from all this, people and families in low-income poverty are suffering very badly since the UK social security system is new and still not functioning at all well. In short deficiency in consumption demand is certain to continue and worsen.

On the part of both private investment and exports, demand is now very weak. In the UK for example, strong austerity policies over the past ten years or so have provided little incentive for productive investment to take place. As a result, innovation and technology development have suffered. British productivity levels in many sectors are now some of the poorest in Western Europe. In the current climate we really can’t see this improving. Probably to the contrary. Similarly with exports, since global contraction is certain to have parallel impacts. In addition the UK is faced with the looming prospect of Brexit. The widely canvassed “new trade deals” seem now far away in the distance while a so-called “hard Brexit” seems increasingly likely with all the attendant barriers to export trade.

So we are left with government investment expenditures to carry the load and from the looks of things one really wonders whether it is up the task. My suggestion is that rather than continue on the path of “back to what it was before” it would be better to focus economic management on helping to creating a “new normal”, one where a start could be made on working and living patterns that fit with a more balanced economy where poverty is minimized, income and wealth distribution more equal, progress towards climate change more rapid and privilege more fairly won. It would also be a world in tune with the information economy where everyone, especially those in formal education, learned how to access and handle IT.

A Strategy for the Future

And we have more than a few pointers to guide us. For example, management of current UK rescue plans is clearly more than a little clunky. Would it not be much simpler, for example, to treat lack of employment income by simply issuing grants rather than loans, if necessary raising taxes to pay for this at least in the short term? Banks would then basically act as conduits for finance since clumsy pressures to control misuse of funds would be reduced. More generally, the mass media is full of examples where promised help does not materialise, leading to premature foreclosures and worsening economic conditions. A system of grant finance would get around a lot of the problem. Money would quickly flow to where it is most needed and my feeling is that this then becomes an opportunity to create a radically different context, one where many of our current problems of insecurity, inequality and poverty can begin to be remedied.

The strategy would be to use the pandemic as an opportunity to reposition economic systems totally. For example, for those most affected at the bottom, instead of spending massive resources ensuring that recipients of social security do not “cheat the system” let us introduce a form of universal basic income [UBI] that does away with sections of social security management. In this way, much precautionary bureaucracy could be done away with along with most of the current delay in meeting pressing financial need. Encouragement could be provided for small entrepreneurial business and new forms of home working instituted including measures to make greater use of the Internet [e.g. video conferencing]. At the same time attempts could made to discourage excessive private road transport and to focus national economic activity away from crowded regions such as the South East of England. Finally, new forms of educational activity could be promoted such as for example the Agora scheme now operational in the Netherlands where focus is placed on learning how to access and use information.

These suggestions may well be hard to formulate and execute in practice. There would undoubtedly be some misuse and mistakes made. But at least the opportunity would be there to create a new context where many of the constraints of the old can be progressively removed. And really we have little to lose. We have a golden opportunity. Let us use it carefully and wisely. The mantra should be one of social, political and personal innovation. We have a great chance. Let us not throw it away by hankering after a return to old ways [and old problems!].