By Alan O’Connor
Less than two months into the Pandemic, the government of Mexico is imposing austerity measures (David Agren, The Guardian, April 24, 2020). In Ireland it is reported that: “There is growing concern in the Department of Finance that the current unprecedented State supports are unsustainable in the medium term.” (Irish Times, April 23, 2020.) In Britain, the Bank of England is keeping “a close eye on the long-term implications of the additional debt being accumulated by the government, businesses and households. We have to watch that very carefully” (Larry Elliot, The Guardian, April 17, 2020). Although the bulk of the IMF Economic Outlook (April, 2020) advocates government spending to deal with the Pandemic, the report does go on to say that: “Once the pandemic abates and containment measures are lifted, the policy focus will need to shift to rapidly moving to recovery, while scaling back special targeted measures deployed during the shutdown and ensuring debt overhangs do not weigh on economic activity” (p. 13).
Why are we already seeing resistance to government fiscal policies to prevent economies from collapsing during the Pandemic?
Robert Skidelsky, describes this as a political argument dressed up in economic theory. Keynesian economics is oriented to full employment, and genuine full-employment rather than discouraged workers who give up, part-time and precarious work for people who would prefer decent jobs, and over-qualified workers taking whatever is available. To achieve full employment, Keynes recommends government spending when necessary to stimulate the economy. The government recovers this investment when the economy expands again.
Against this, the economic theory of Milton Friedman views government intervention in the economy as the start of a slippery slope to totalitarian government. For Friedman, the free market and not government takes the best decisions. Therefore, Friedman recommends monetary policies by Central Banks that are independent of governments, and the manipulation of the supply of money to achieve policy goals.
Skidelsky points out that beneath the complicated models used to prove the validity of monetarism is a political calculation: “In reality, the only deficits the deficit-hawks really mind about are deficits incurred to protect the poor. The wealthy have never been against tax cuts for themselves, even if this widens the deficit” (p. 245). Nobody disputes that there has been a sharp rise in inequality since the 1970s. Some economists argue that fueling demand growth by making credit easily available benefits the rich at the expense of middle-class households (Butler, 2016; Skidelsky, Ch. 10).
In the Pandemic we have seen wealthy individuals and corporations requesting bailouts. They have also sometimes donated large sums of money to food banks (Jeff Bezos) and even supplies of medical masks (Google). (See Nicole Aschoff’s critical analysis of philanthropy by the super-rich.) The assumption is that Bill Gates is better at managing public health than (say) the World Health Organization, and that Jeff Bezos manages social assistance better than any government. The more fundamental issue is why corporations (such as Google) and individuals (such as Mark Zuckerberg) have been allowed to pay very little tax by comparison with ordinary individuals.
Keynesian economics was the expression in the field of economic theory of the egalitarian values of the Second World War. The Pandemic is exposing the injustices of our society in the same way as a war. The “front line workers” are poorly paid (delivery truck drivers and grocery store cashiers), often women workers (nurses), and immigrants (farm workers). When the pandemic is over are these people expected to return to poorly paid, part-time and precarious work? Like the nursing home workers, poorly paid and kept on part-time hours to save on benefits, who now become heroes, and are temporarily helped out by the Canadian armed forces. Will we have learned nothing from the Pandemic, except to bang pots and pans at 7pm?
The Fed’s chairman, Jerome (Jay) Powell, said that “economic activity will likely drop at an unprecedented rate” in the second quarter of the year, and he said the jobless rate could leap to double figures when the April employment figures are released, next week. Even as Powell noted that the Fed’s emergency actions, which have involved pumping more than $2.3 trillion into the financial system, have “helped market conditions substantially,” he deferred from making any specific longer-term predictions about a broader economic rebound.
Responding to a question about some Republicans raising concerns that the federal government is spending too much money, and federal debt levels are rising too fast, he went on, “This is not the time to act on those concerns. This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible.”
John Cassidy, writing in The New Yorker, April 30, 2020
In Canada we have seen both fiscal policies and monetarist policies. Each day, our Prime Minister makes announcements about emergency funding. These measures are paid for with money that the government borrows, and in 2020 interest rates are very low. The Central Bank has also been active in making cash available so that banks can loan money to companies that need to borrow right now. By buying bonds held by banks and similar institutions, the Central Bank signals to corporations that interest rates will be held low for some time to come. Keeping interest rates low signals to corporations that they can invest and move forward.
But this whole structure of ideas seems to imply that Bill Gates, Jeff Bezos, Mark Zuckerberg (and Sheryl Sandberg) take better decisions than all elected politicians. This is a really strange idea. That government spending, necessary to get ordinary people through the Pandemic emergency, may be be quickly withdrawn in order to win the confidence of tax-dodging billionaires like Gates, Bezos and Zuckerberg.
Update: Speaking on the Jacobin Magazine series of talks “Stay at Home” — Leo Panitch suggested that every country is in the same fiscal condition and this may reduce pressures to cut back government spending in the post-Pandemic period. This is an interesting idea. However, what we see with tax haven countries is individual countries seeking advantage by taking decisions that benefit their own country and do damage to other economies. If Ireland and Mexico opt for “open for business” policies this may put pressure on other economies to follow, in a race to the bottom. Leo Panitch video here: https://www.youtube.com/watch?v=oBJR3xfmgA4
References:
David Agren, He’s Mr Scrooge: Mexican president unveils severe cuts amid coronavirus, The Guardian, April 24, 2020
Nicole Aschoff, The New Prophets of Capital, 2015.
John Butler, Quantitative easing has pernicious effects that favour the wealthy, The Guardian, Sept 28, 2016.
Larry Elliot, Bank of England tells lenders to get on with Covid-19 business loans, The Guardian, April 17, 2020).
Larry Elliot, Wealth tax rise could raise £174bn to tackle Covid-19, expert says, The Guardian, April 22, 2020.
International Monetary Fund, World Economic Outlook (April 2020)
Kieran McQuinn and others, Quarterly Economic Commentary (Dublin: Economic and Social Research Institute, Spring 2020).
Rupert Neate, Richard Branson facing backlash over plea for UK bailout of Virgin, The Guardian, April 12, 2020.
Office for Budget Responsibility, Commentary on the OBR coronavirus scenario (London, April 14, 2020).
Robert Skidelsky, Money and Government: A Challenge to Mainstream Economics (2018)
Kaufmann and Stutzle, Thomas Piketty’s Capitalism the Twenty-First Century: An Introduction (Verso, 2017).
Adam Tooze, Should we be scared of the coronavirus debt mountain? The Guardian, April 27, 2020. https://www.theguardian.com/commentisfree/2020/apr/27/economy-recover-coronavirus-debt-austerity
Trent Research Group on the Pandemic 