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Pandemic Economics

The COVID-19 pandemic has now reached over three million confirmed cases, with almost two hundred and twenty thousand deaths. For the United States, which has shown a not-unexpected failure of policy, there are now more American deaths than the Vietnam war, keeping in mind that the United States had fewer than sixty cases and zero deaths as late as February 28. Whilst some countries - such as Australia, New Zealand, and even China - have had a high degree of success in significantly "flattening the curve" of new cases, the sickness opens up new fronts - now we see the numbers climb in Russia, Brazil, Turkey.

The pandemic still represents an existential risk for much of the world, and of course, that comes with a particular and special priority. But there is also a secondary battle that is being fought; and that is not just to save lives, but also to save livelihoods, with around half the world's workers at risk. That reified abstract noun, the economy, is also subject to critical care attention. As the best form of protection has been the graduated levels of social isolation, to restricted movements, to partial lockdowns, economies have come under enormous strain. Let us consider a report from the respected Grattan Institute in Australia:

Researcher Brendan Coates said the institute's analysis found between 14 and 26 per cent of the entire Australian workforce will lose their job, if they haven't already, as a result of government shutdowns and physical distancing rules... This week, Federal Treasury forecast unemployment would rise to 10 per cent in the June quarter - a figure which hasn't reached double digits since 1994.

Challenges often provide opportunities, and this is no exception. Revolutionary situations, as the name implies, a return to reconsider fundamentals, and in this case, the way that we protect and enhance our economic welfare and security. It is obvious that under our shared radical circumstances that continuing as were did not provide sufficient protection against the shocks that are being experienced. Some new thinking is required, even if this is disruptive to existing vested interests who will inevitably move to protect their power and privilege. The opportunity is taken here to explore some of the approaches being used or advocated around the world; (a) stimulus packages, (b) Universal Basic Income (UBI), and (c) a Job Guarantee (JG).

Stimulus Packages

The use of "stimulus packages", a massive injection of funds into the economy by a government are, without a doubt, the most common response to an economic crisis and of which various models were offered during the period of the Global Financial Crisis, which we can now look upon in retrospect. As then, the strategy is essentially neo-Keynesian, as aggregate demand falls governments want to prevent rising unemployment causing an even further fall in demand as incomes decline, thus causing what would be a recession to turn into a depression. There are, of course, different ways of introducing a stimulus package which have varying effects on employment and productivity. Unfortunately, the implementation of what is known to the best actions is challenged by the influence of vested interests.

The provision of additional welfare payments and wage subsidies, for example, should not be mistaken for benevolence. After all such governments have long been in favour of creating the conditions where welfare recipients are treated as if they were morally culpable for their situation, and that the path to business profits is to keep wages low. There is a well-recognised economic fact that the provision of additional income to those on the lowest levels will result in increased expenditure; their marginal propensity to consume is higher (often 100%), and the expenditure from this group ensures, at least temporarily, that the economy does not fall into a deflationary death spiral; a rather dangerous situation when real interest rates are already low.

The other approach is business bailout. Instead of dedicating welfare to flesh-and-blood visceral people, it is business welfare, public payments to the fiction of "legal persons", were even directed money is simply taken. When fiscally conservative newspapers like the Financial Times are even suggesting that there should be some strings attached to these payments. In circumstances like this, it is not unreasonable for public funds to be loaned to private activities - but where they default, it should convert to ownership. The institutional system should exist for the people, rather than the people having to be servile to the system.

Universal Basic Income

It is unsurprising to see the enhanced promotion of the concept of a Universal Basic Income (UBI) being promoted during this downtown. The images of queues of people lining up - with an infectious virus present no less - to apply for additional monies illustrates a strong argument in favour of replacing the bureaucratically administrated welfare state in favour of a system where a basic level of income is provided for all, automatically. The proposal is, of course, by no means new, with variations. Thomas Paine, for example, argued that at an age of maturity that every citizen should receive a lump sum, and annual income in older age "for the loss of his or her natural inheritance, by the introduction of the system of landed property" (Agrarian Justice, 1796).

As further examples Bertrand Russell argued in favour of universal basic income "a certain small income, sufficient for necessaries, should be secured to all", as a combination of the advantages of anarchism and socialism (Roads to Freedom. Socialism, Anarchism and Syndicalism, 1918). The pro-capitalist Milton Freidman offered yet another variation through a negative income tax (Capitalism and Freedom, 1962). More recently, many UBI advocates argue that it is a form of social credit and insurance as a technological dividend; the proposals of Andrew Yang certainly fall into this category.

Evidence suggests that many of the common assumptions about UBI are incorrect. The review of some thirty studies showed that recipients of cash transfers did not spend it on "temptation goods". The argument that people will not be encouraged to work is under dispute; old studies show a slight reduction in work hours, but more recent studies indicate an steady state of employment, using data from the Alaska Permanent Fund.

Job Guarantees

In the 2020 Democrat primaries for the US presidential elections, the position of a Job Guarantee (JG) was advocated by Bernie Sanders as an alternative to the basic income proposal of Andrew Yang. In contrast to a UBI, a Job Guarantee has a policy of full employment (that is, minus transitional or frictional unemployment) and establishes a government as an "employer of last resort", or through using mechanisms in the central bank to ensure a "Non-Accelerating Inflation Rate of Unemployment" (NAIRU), as developed by the economists Franco Modigliani and Jame Tobin. Much of the impetus for JGs can be found following the experiences of the first half of the twentieth century and was advocated by William Beveridge (Full Employment in a Free Society, 1944) and Franklin D. Roosevelt (Second Bill of Rights: State of the Union Address, January 11, 1944). In both cases, the objective is to abolish involuntary unemployment - and in the current economic situation, we are certainly seeing a great deal of unemployment of that type.

As should be evident, a UBI and a JG are not necessarily in contradiction. Indeed, the two are quite complementary, with the former providing a base income that can be extended by the latter. Such JG programmes usually target large infrastructure needs; for example the roads, bridges, schools, post-offices, dams, and waterworks built under the Works Progress Administration of the United States, taking up almost 7% of the country's GDP in 1935 (see: Nick Taylor, American-Made: The Enduring Legacy of the WPA, 2008). The WPA also however funded culture; artists, writers, performers, musicians, historians - employing some forty thousand people in the culture industry through Federal Project Number One, often expressing their talents in community centres and schools. Whatever criticism was leveled at the WPA is insignificant compared to its overwhelming successes; contemporary governments, faced with a similar economic crisis, could do a lot worse than to emulate the WPA, especially with a view to developing environmental infrastructure, the Green New Deal.

Paying The Way

The Works Progress Administration was abandoned as unemployment declined during the Second World War, and the infrastructure provided by the program certainly contributed significantly to the US war effort. Any workable JG program must follow a similar sort of approach; when unemployment is low, the programmes ought to be scaled back as the non-government sector is providing for sufficient employment, when the unemployment is high, expansionary policies should dominate. In other words, the "reserve body of labour", which unemployment usually represents with all its downward pressure on wages and accompanying financial insecurity by households, is replaced by financially stable and productive work. Indirectly, it must be recognised that this represents a change to political economy as well. The working class, with additional security, will be able to pursue claims of better wages and conditions. In all cases however, the JG program must be targetted as a short-term cost to improve long-term productivity; "bridges to nowhere" are an inefficient allocation of resources.

A similar situation applies with regard to Basic Income and stimulus packages. The money must come from somewhere, and the most common method is simply a cash transfer. Simply "printing" additional money is an obvious inflation risk but borne from a commonly overlooked principle in economic reasoning (often by economists themselves) that the virtual representation of the value of capital, expressed as money, is connected to the real value of capital, expressed as goods. It is possible to make everyone in a country a millionaire by simply creating and distributing such funds; very shortly afterward, prices will match, and the only losers will be those who had savings to begin with.

There is, however, one very rich source of economic wealth that governments can take advantage of which actually improves productivity rather than transferring capital (with its attendant administrative costs and deadweight losses), and that is to target economic rents, defined as income earned over and above the income that would be received in a competitive market through productive effort. This includes the classic example of increases in the site-rent of land and other natural resource holdings, but can also include the monopoly profits derived from various forms of intellectual property, although a distinction is drawn between the "Ricardian rents", which provide no productivity benefit and "Schumpeterian rents" where some benefit has been initially provided. Either way, but targetting the sources of "rentier capitalism", productive investments are encouraged and a source of income becomes available to fund a UBI and other social programmes.

There is no doubt that the world will be facing a great deal of economic pain in the coming months as the COVID-19 pandemic continues to cause massive negative disruptions to lives and livelihoods. But there are positive policies that can be put in place that save both lives and incomes, even if they come with some challenges in implementation. The biggest challenge of all, however, will be overcoming the class-based vested interests of the powerful who have benefited for a very long time now by their position of advantage within the system. Whether the people can force the system to work for their benefit, or whether they will be forced to work for the system and its rulers is yet to be seen.

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