Talking Finance
The coronavirus crisis
Afew weeks ago, I received a comment from a friend about the coronavirus crisis. It read: “If capitalism is so great, how come it has to be bailed out by socialism every ten years?” Amusing — and close to the truth. There are many lessons to be learned from the crisis, but one stands out. The private sector, for all its power of innovation and wealth creation, cannot solve serious economic crises. Without a strong and well-functioning state, everything collapses. (Even in the good times, the state plays a much bigger role in wealth creation than free-market extremists believe. See The Entrepreneurial State: Debunking Public vs. Private Sector Myths by economist Mariana Mazzucato.)
As during the global financial crisis (GFC) of 2007–8, governments and central banks have stepped in to stop their economies from going into freefall. There is a key difference, however. The GFC began as a financial crisis, which then caused a collapse in demand in the real economy. The current situation is a health crisis, which first hit the economy’s supply side. Supply chains were disrupted, workers were off sick and large sectors of the economy were shut down by governments in an attempt to contain the coronavirus.
This supply-side shock quickly became a demand-side problem. Companies cut their investment and hiring plans, and consumers reduced their spending because their incomes had been cut through losing their jobs or being put on unpaid leave (“furloughed”) or short-time work.
The key challenge has been to maintain liquidity in the personal sector, the corporate sector and the banking sector. Cash flow is king. This explains policies such as higher sickness and unemployment benefits, grants and loans to individuals and firms, deferred tax payments, “mortgage holidays”, tax cuts, and short-time work programmes that subsidize wages and salaries.
As governments do “whatever it takes” to avoid a depression, borrowing restrictions are (rightly) thrown out the window, including Germany’s “black zero” (see Business Spotlight 2/2020). Spending and borrowing (rightly) go through the roof. And the money supply is (rightly) increased as if there were no tomorrow. As The Economist wrote: “This is no time to fret about government debt.” That time will come later.
There’s another important insight from the current crisis. Those doing some of the most critical jobs — healthcare workers, cleaners, supermarket workers and so on — often have the lowest pay and status. One can only hope that this will be remembered and acted on once the acute crisis is past. I have my doubts.