[Note: The following article is a rejected sample sent to The New York Times on oct 23, 2020]
Large disasters might’ve been averted in many countries due to the economic stimulus, but another large disaster might’ve been created in many countries due to the economic stimulus. The coronavirus pandemic has forced the neoliberal establishment into changing their tunes and adopt measures unseen since the great recession. However, were the neoliberal establishment to revert back to their reckless antics after the coronavirus pandemic then, the outcome will be unlike anything seen since the great depression.
Governments all around the world have embraced economic stimuli as a means of combatting Covid-19. Be it the United States with 6 trillion dollars, Germany with 815 billion dollars (with more 150 billion dollars on the way) or Japan with over a trillion dollars, nation-states are injecting large sums of money into their respective economies. Whilst such fiscal measures are not unprecedented, the exact extent to which these measures have been exercised are. To put the recent policies into perspective, the Bush administration in response to the great recession had spent around 700 billion dollars, a hefty sum for sure but, it can’t hold a candle to Trump’s 6 trillion dollars.
However, not unlike a lot of Trump’s other plans, there seems to be no game plan on how exactly the administration plans to recoup the costs in the long term. As many might know, whenever the US Congress instructs the Federal Reserve to execute an expenditure bill like the economic stimulus, it basically instructs them to add money to certain bank accounts but also, simultaneously to deduct money from certain bank accounts in order to maintain fiscal equilibrium and avoid incrementing the fiscal deficit. That latter part, the act of deducting money from certain bank accounts is what Congress normally calls “paying for a bill”. However, this is not what is happening for the Coronavirus stimulus bill. For the stimulus package, the US congress has instructed the fed to add 6 trillion dollars to various bank accounts without deducting in any considerable amount from other bank accounts. Now, because the fed hasn’t offsetted the costs of the economic stimulus, the recent policies have effectively contributed to a 6 trillion dollar increase in the fiscal deficit of the United States.
Were the white house to ignore offsetting these costs, then the Debt-to-GDP ratio of the US would soar up to 136% at the very least. Again, to put that number into perspective, when Greece underwent the 2009 debt crisis, it had a Debt-to-GDP ratio of 126%. Not to mention the fact that the highest Debt-to-GDP ratio the US has ever had was during 1946 following the end of World War 2 when it was 119%.
Coronavirus and Neoliberal austerity:
However, combatting the coronavirus required taking drastic measures and it would be misleading to say that the economic stimulus was an unsound decision. There is no doubt that the economic stimulus has played a key role in helping countries around the world face a major health crisis. Without it, millions – maybe even billions – more around the globe would be at risk of being infected with Covid-19.
What is worrying rather, is the political establishment which has been implementing these massive fiscal policies. That neoliberalism has been the dominant ideology in most developed countries around the globe is a universal truism. But in order to combat the Covid-19 outbreak, even the most adamant followers of the ideology have swiftly yet silently abandoned it both in policy and in rhetoric. Both the Republicans in the US and the Conservatives in the UK for example, have traditionally opposed market regulation and argued for smaller government. In the wake of the Covid-19 though, they have taken a complete 180 with both parties leading nationalization efforts and expanding social welfare. Despite the surprising turn that the neoliberal establishment is taking at the moment, there is no doubt that the current ideological shift is simply a temporary one and that both the parties will return to their usual antics at the first chance they can.
When that happens, it isn’t going to be pretty. Since production was essentially minimal during the lockdown, the GDP of countries around the globe will certainly be hit hard. The IMF for example, is predicting that global GDP will decrease by 4.9% in 2020 and the GDP of the US in particular, is expected to shrink by 8% in 2020. Add to this, the burden of the large economic stimulus packages to the fiscal deficit and one has a situation where there’s a substantial decrease in GDP accompanied by a substantial increase in Debt which would completely bloat the Debt-to-GDP ratio around the world. Head of States have been comparing the pandemic to a war and in fact, the post-coronavirus economy would in many aspects resemble the post-war economies of the 1920s characterized by high public sector debt alongside an underperforming private sector. And whilst that is bad enough, the pairing of a post-war country in economic recession with political establishments which have a tendency to flirt with austerity is nothing short of a match made in hell.
It is common knowledge that the great depression was ended by large-scale government measures such as the New Deal which created social security, guaranteed the right to unionize and provided unemployment insurance as well as the massive expenditures on military production during World War 2 which, for a while, almost eliminated unemployment and poverty. Setting the stage for the post-war economic boom of the late 1940s, nowadays termed as the “Golden age of capitalism”. It was not trickle-down economics but good-ole Keynesianism which shouldered the weight of the world economy during those hard times and paved the path towards a more sumptuous future.
Of course, the neoliberal establishment has tended to ignore this piece of common knowledge as is evident by the course of action it took during the 2008 financial crisis and the 2010 Eurozone crisis. During these times, large government measures were used to support the large banks and other financial institutions in a manner similar to the current pandemic. But then, the actual financial burden of these measures were however, passed on to the general taxpayer in the form of austerity measures despite the fact that the biggest beneficiaries of these measures were the wealthy elite. In Italy for example, following the Eurozone crisis the government increased taxes on households to 44.7% of gross income. These taxes, which included an increased VAT rate and a re-introduced property tax on houses hit the middle and working classes much harder than their wealthier counterparts.
So, the wealthy elite, whose mismanagement was the root cause behind both the crises of 2008 and 2010, got off relatively unscathed whilst the poor Italians, who were the ones being hit hardest by the crisis, had to bear the weight of the incompetent elite. This truly was socialism for the rich and rugged individualism for the poor. And there remains a lingering fear that similar austerity measures may be adopted by governments around the globe post-coronavirus. Now, let’s be clear: Austerity, is a means to an end and not an end-in-itself i.e. Austerity is simply any fiscal policy designed to reduce government deficits through spending cuts and tax increases and isn’t necessarily always bad. When it comes to austerity therefore, the devil lies in the details.
Increasing taxes on the wealthy and cutting the amount of money spent on large corporate tax rebates for example, is an austerity policy which would decrease both the wealth inequality and government deficits at the same time. Sadly however, such progressive policies are almost non-existent among the developed countries. This is possibly because of the symbiotic relationship between the corporate and political establishments where the corporations put money into the pockets of politicians through lobbying and campaign donations and the government puts money into the pockets of business owners through looser regulation and tax rebates. As such, most of the countries favor neoliberal austerity policies such as the ones adopted in Italy instead of the aforementioned more progressive ones.
Whilst there is hope that we may avoid derogatory austerity policies post-coronavirus, such hope is few and far between. In fact, hope for such a future is further reduced by the decision of the Trump administration to withhold funding from the WHO and initiate cost-cutting measures on the US postal service amidst the most dangerous pandemic in the last century. Therefore, taking into consideration the current political environment it seems almost certain that we’re heading into an age of austerity. This is even truer in the United States, where both Donald Trump as well as Joe Biden have expressed a desire for the neoliberal Austerity policies described above. Be it Trump’s unrelenting war against Obamacare or Biden’s repeated attempts at cutting Medicare, Social security and Veteran’s programs. Biden in particular, seems to be practicing some form of doublespeak where he publically calls for large New-deal style policies while privately proclaiming austerity measures.
The era of austerity
We already know that unemployment levels in the US hit record highs during the coronavirus crisis with over 16 million people being unemployed at one point in time. Even if the economy returns back to normal – which in itself is a highly improbable scenario – the large amounts of money that have been injected into the economy to provide unemployment benefits to the millions of newly unemployed need to be paid back. So, how will it be paid? No matter who wins in November, it is clear that this money isn’t going to come from the pockets of the upper classes. Rather, it is a safe bet that these policies will be paid at the expense of the lower and middle classes similar to Italy. The only problem, just like how neoliberal austerity failed in Italy, similarly they will fail in America creating fertile soil for political polarization and populism. Potentially culminating in a repeat of 2016.
The libertarian economist Milton Friedman once said “Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken' depend on the ideas that are laying around”. Perhaps in a similar fashion, the austerity measures taken during the crisis created by an increase in unemployment and poverty alongside an exorbitant Debt-to-GDP ratio could actually produce real change. For it could change the world by leading it into a long-term downward economic spiral and trigger another global economic depression.
To paraphrase once again, large disasters might’ve been averted in many countries due to the economic stimulus, but a larger disaster might’ve been created in many countries due to the economic stimulus.
Regards
Articuano