THE coronavirus has unleashed an economic crisis of a kind never seen before. In just one month, from March to April, the US unemployment rate tripled to almost 15 per cent, and remains uncomfortably high. Elsewhere, only state intervention on a scale virtually unknown outside wartime has staved off the direst consequences. In the UK, gross domestic product (GDP), a measure of economic activity, fell by 20 per cent in the three months to June. To find another fall of that order, you must go back about 300 years.
The events of the past six months have brought to the boil arguments about the economy that have simmered since at least the 2008-09 financial crisis. While the size of the world’s economy has quadrupled since 1970, improving the material well-being of billions, the past decade has seen many people’s income stagnate and inequality rise (see “Failing system?”). During the covid-19 pandemic, it has become clear some of the most crucial jobs are being done by some of the lowest paid – people who are also among the most likely to die from the virus.
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Meanwhile, the focus of conventional economics on growth at all costs is blamed for the ravaging of ecosystems that both made the pandemic more likely and its impact worse. All of this raises two questions: are our economic systems fit for the post-covid-19 era, and, if not, how must they change? New Scientist asked six leading economic thinkers for their take on how we got to where we are now, and how we might choose to do things differently.
PROFILES
Diane Coyle is an economist at the University of Cambridge
Andy Haldane is the chief economist at the Bank of England
Tim Jackson is an economist at the University of Surrey, UK
Cameron Hepburn is the director of the University of Oxford’s Smith School of Enterprise and the Environment
Sandile Hlatshwayo is an economist at the International Monetary Fund
Keston Perry is an economist at the University of the West of England
New Scientist: Does the impact of covid-19 on societies show that economics is broken?
Andy Haldane: Like all disciplines, economics evolves by trial and error. At times of crisis, when both trial and error are in plentiful supply, this tends to accelerate. The covid crisis, like the global financial crisis before it, is rightly causing us to rethink things. As one example, we have seen a raft of new economic data being developed and used in the light of the covid crisis to improve our monitoring of the economy in close to real time and at greater levels of granularity, from payments data to Google searches, from road traffic data to energy usage.
Tim Jackson: Economics is broken, but it wasn’t covid-19 that broke it. Long before the pandemic, there was a growing recognition that the economy had run into difficulties. Capitalism has left too many people behind. Its impacts on the planet have gone unaccounted for. The causes of the malaise have been variously attributed to debt overhangs, the 2008 financial crisis, political populism. But the truth is that capitalism itself is responsible for its deficiencies.
Sandile Hlatshwayo: Economics is very much alive. As the crisis emerged, many of us immediately put projects on hold and began seeing what contribution we could make. We’ve seen researchers looking at the economic effects of containment efforts, quantifying the impact of lockdowns on voting behaviour and measuring the increase in mental health concerns. It is also inspiring to see economists like Lisa Cook at Michigan State University, Valerie Wilson at the Economic Policy Institute think tank and Damon Jones at the University of Chicago draw attention to how covid-19 has amplified racial, gender and class inequities.
The goal of economic policies is often thought of as increasing GDP. What should the objective be as we recover from the pandemic?
Andy Haldane: In a word, jobs. The risk I fear most is a return to the high and long-duration unemployment of the 1980s. This blighted the careers and lives of millions of people and their families. The economic policy response to the covid crisis has in part been about seeking to avoid that.
Diane Coyle: It should be to make people better off, where that is broadly understood not only as income, but anything that contributes to people’s sense of how well things are going for them. When policies are geared toward increasing GDP growth as the only measure of success, they will deliver distorted outcomes. We need to add a true balance sheet for the economy by measuring the assets we use to produce and consume, particularly natural resources.
Tim Jackson: Pursuing GDP growth for the past 50 years has justified policies that lionise short-term productivity goals and prioritise the interests of capital over those of workers, creating huge social inequalities and preventing long-term investment in people and planet. The last financial crisis exposed the financial and monetary flaws in this system. The global pandemic has exposed the social and human flaws. There have been some attempts to shift to more holistic measures of economic success, such as the UN’s Human Development Index and the Stiglitz-Sen-Fitoussi commission set up by former French president Nicolas Sarkozy. But these haven’t yet had the impact needed.
Keston Perry: The objective has to be multifaceted. It’s about enhancing the well-being of workers, especially women and black and ethnic minority people. It’s about improving the life chances of more unemployed people, especially in the global south. It’s about addressing extreme wealth and income inequality, improving welfare systems, ensuring that women have a fair stake in the future. And doing all this in a way that doesn’t threaten our planet’s habitability or create disproportionate suffering for some groups – as we have seen in the past few months. We cannot simply have unimpeded growth as the end goal; we need to reimagine the global economic architecture.
“Economics is broken, but it wasn’t covid-19 that broke it”
Another measure economists like to see rise is productivity, often described as output per worker. But that has flatlined lately. Must we keep getting more efficient?
Diane Coyle: Getting more benefit while using the same or fewer resources is how humanity escaped the Malthusian trap, the idea that population growth would inevitably hit the limit of available resources. Productivity drives up living standards and means longer lives, better health, lower infant mortality, more leisure. So it’s fundamental. Productivity increases, delivered through innovation, will be essential to sustaining current living standards and increasing them without bursting planetary boundaries or causing catastrophic environmental crises. However, the way we define and measure productivity needs a complete rethink. There are no “products” for 80 per cent of the economy. What is the productivity of a management consultant or an accountant?
Andy Haldane: Productivity improvement is one of the key determinants of income, living standards and well-being over the medium term. So it would be a grave mistake to abandon that as an objective of public policy. That isn’t the same, however, as having productivity as a singular objective. There are a range of other factors relevant to our future livelihoods which need also to be weighed. As the covid crisis has revealed, that includes improving the resilience of our economies when providing the goods and services critical to its citizens, including health and social care. It also includes purposeful work, an inclusive society and a clean environment.
Some people say we need an entirely new economic system. What sort has the best chance of delivering sustainable prosperity? Should the state be more involved?
Keston Perry: We have lots of evidence that the market-led paradigm has terribly failed our societies. What we need is an alternative that is based on equality and sustainability and one that affords populations in the global south the ability to determine their own futures. The fragments left behind by neoliberalism are of no use for this purpose. But we don’t yet know what the replacement may be, what might emerge from the ruins of the past 40 years. It really depends on how different groups organise to challenge the status quo.
Diane Coyle: The state has always had a role in the economy – this is widely recognised by economists. In the UK, for instance, we have had a long-standing, but unspoken, industrial policy in support of the City of London, from a favourable regulatory environment to building the train lines and airports to service it. The challenge is to make sure the state’s role is strategic and avoids obvious traps, such as political lobbying by big businesses to get subsidies. Assistance to companies after the pandemic should go to those most likely to survive long term, not those best able to get access to cabinet ministers now.
Many are calling for a Green New Deal, where states create jobs that would help us transition to net-zero carbon. Should this happen?
Tim Jackson: We need a Green and Social New Deal, a systematic programme of large-scale social investment to: deliver a “just transition” towards a resilient, fair and sustainable economy; create the social infrastructure of net-zero-carbon lifestyles; and invest in the ecological assets on which tomorrow’s prosperity depends.
Andy Haldane: The UK has set itself an ambitious target of reaching net-zero carbon emissions by 2050. This has provided a kick-start to various initiatives to reshape our energy, transport and housing systems. Through reduced travel and energy use, the covid crisis has provided a down payment on meeting the net-zero objective. But this is only the start. Looking ahead, it will be important to embed the net-zero objective in every policy measure taken.
Cameron Hepburn: The world has a unique opportunity to “build back better” after this pandemic has passed. Together with several colleagues, I recently and asked which policies would offer a green route out of the crisis and be workable and highly economically effective. We identified five key policies. For example, investing in clean energy infrastructure construction will create more jobs in the short term than investing in fossil fuels. Other good options would include retrofitting buildings for better heat efficiency and restoring natural capital such as forests. Decisions made in the coming months about how to guide the economic recovery may determine whether we can avoid the worst impacts of climate change.
Our world is highly interconnected and this helped the virus spread quickly. Do we need to curb globalisation?
Tim Jackson: The pandemic was a creature of exchange. It probably emerged from an exchange between bats, or possibly pangolins, and humans. It passed from person to person in the ordinary everyday social exchange that creates society. It spread so rapidly because of highly globalised economic exchange. And its immediate effect was to stop much of that exchange in its tracks. It’s hard to conceive how fundamental that is. Exchange is supposed to be an irreducible virtue; the foundation for markets. We must now ask ourselves searching questions about the kinds of exchange that matter most. Globalisation as an unequivocal good is over. More sophisticated models of global connectivity are still possible, but will require greater attention to these dangers.
Sandile Hlatshwayo: This is a truly global crisis and so now is exactly the moment for enhanced global cooperation. Take vaccines – we have scores of them under development, but only a select group of countries have the resources to mass-produce them. This means we’ll need a Herculean collective effort to manufacture and distribute vaccines around the world. There is much to be gained for everyone from this kind of cooperation because many countries will depend on the removal of travel restrictions and a rebound in global demand to get their economies going again. Plus, if collaboration on vaccines is carefully navigated, it could reignite global cooperation in other important spheres, such as climate change and trade. Globalisation should not look the way it did in prior eras – it must look far better.
“Globalisation should not look the way it did in prior eras – it must look far better”
There are unorthodox economic ideas around at the moment, including negative interest rates, universal basic income and modern monetary theory (see “Exotic economics”). Should any of these be rolled out now?
Andy Haldane: It is important that nothing is ruled out. That has certainly been our stance at the Bank of England. We continue to review the costs and benefits of all our potential tools, including quantitative easing, credit easing and interest rates. All of these are different means of achieving the same end: monetary and financial conditions sufficient to return inflation to its target, while supporting jobs and the economy.
But I am sceptical of the case for so-called modern monetary theory – permanent expansions of the central bank balance sheet to finance government deficits. If pursued at scale, they run a serious risk of destabilising inflation, as has been found at times in the past.
Keston Perry: Negative interest rates have already helped some advanced economies in the wake of the 2009 crash. But we must acknowledge that less-developed economies don’t have the same capacity to use them. We need to allow central banks and institutions in the global south leeway to manage their own recovery. The challenge is that we are relying on ideas that are past their sell-by date, such as quantitative easing.
I am not quite convinced about the merits of modern monetary theory, especially in developing countries. This idea has a particular intellectual and empirical context and may be useful in one situation and not others.
Tim Jackson: As we emerge from the pandemic, the protection of people’s livelihoods is paramount. Mechanisms such as a universal basic income and a reduction in working hours are legitimate instruments in this task. But we should also have job guarantee schemes in vital sectors such as care, education, renovation and the arts. The inevitable pushback against such proposals will be the question: who pays for them? This is where the insights of modern monetary theory become crucial. It argues that governments that issue sovereign currency can spend directly into the economy without raising taxes or issuing debt. The ability to finance interventions such as furlough schemes at the height of the pandemic effectively proves this point.
Cameron Hepburn: We already have negative real interest rates in many countries. When this is the case, governments are being paid to borrow and it is a complete no-brainer for them to invest in natural capital.
There is a saying about modern monetary theory: the bit that is modern doesn’t work and the bit that does work isn’t modern. Part of the theory is about central banks printing money for the government to spend. There is nothing unusual about this. But if too much money is printed too quickly, the result will be inflation.
What future developments do you envisage upending prevailing economic models?
Diane Coyle: Much more data. Our current statistical models were developed before enough fine-grained economic data became available. They are improving, but we are still like weather forecasters a century ago.
Andy Haldane: Now, if I knew the answer to that… One thing that can be said with confidence is that some of the pre-covid megatrends, including climate and biodiversity issues and AI and automation, are likely to be accelerated by covid. These will reshape economies fundamentally.
Exotic economics
Negative interest rates
When a bank lends money to people, it charges them and when it stores their savings it pays them. That’s the familiar concept of interest. The amount of interest paid varies according to market conditions, but it is usually a small percentage of the amount lent or saved – and, historically at least, is always a positive figure.
Since the aftermath of the 2009 financial crash, however, several countries, including Denmark, Japan and Sweden, have used negative interest rates, which means storing money incurs a cost. The way it works is that central banks charge commercial banks for storing their financial reserves. In theory, this prods those banks to lend as much money as they can, and so stimulate the wider economy. Exactly how this plays out in different contexts isn’t clear though, which makes some economists nervous about the strategy.
Universal basic income
Proponents argue that this idea – essentially that states should pay all their citizens a no-strings-attached basic amount to live on – would have all sorts of benefits. It might, for instance, improve societies by giving people more of an incentive to do useful, but poorly paid, activities such as community work or caring for elderly relatives away from care homes. Detractors, meanwhile, argue that it is too expensive and disincentivises normal paid work.
As yet, there is no agreement about how universal basic income should best be implemented or how much people should get. But recent rigorous trials in Finland saw 2000 unemployed people have their welfare payments replaced with a guaranteed basic income. The results showed that people were happier – and they didn’t work any less than a control group.
Modern monetary theory
Thanks to the general economic malaise and backing from the likes of US congresswoman Alexandria Ocasio-Cortez, this once-niche idea is getting a wider hearing.
Governments get their money by taxing citizens and issuing bonds. Government bonds are generally bought by big banks, and are effectively a way for the state to borrow. For a given government, the more bonds it wants to sell, the higher the cost of that debt will be. This increases interest rates for everyone. If governments carry on borrowing, their currency will eventually be worthless – not a good look.
Modern monetary theory says that conventional view is just wrong. Governments can issue their own sovereign currency and there is no straightforward relationship between how much they do this and interest rates. In this view, high levels of government debt are unproblematic – an attractive prospect for those who would like to see nations spend their way out of the covid-19 crisis.
Well-being economy
Maybe the goal of economics shouldn’t be to make us richer, but happier? It is an idea several countries have toyed with over the years. Now it is gaining greater renown after New Zealand’s government pledged to make its spending decisions on the basis of what has the most potential to boost citizens’ well-being.
Doing this depends on being able to define and measure well-being. How to do this isn’t universally agreed, but it inevitably involves a range of factors including people’s mental and physical health, the environment and equality. Policies can then be judged against their potential to improve these measures. There is now , including the Scottish government, working to normalise these practices. Joshua Howgego
GLOSSARY
GLOBALISATION is the process of the world’s increasing interconnection. International travel and trade have risen hugely in the past 50 years and this has changed the sorts of work people do in different countries.
THE GREEN NEW DEAL is a proposed scheme in which governments create jobs in sectors that would help in the fight against climate change, such as renewable energy. It takes its name from a set of financial reforms called the New Deal that were introduced in the US in 1933.
GROSS DOMESTIC PRODUCT (GDP) is the value of all the goods and services produced in a country. This figure is often quoted for a specific time period.
INFLATION refers to the increase in the price of goods and services – anything from a house to a back massage. Gradually rising prices aren’t a problem, unless earnings fail to keep up.
MONETARY AND FISCAL POLICIES both help to shape a country’s economy but they are controlled differently. Monetary policy means the actions taken by central banks, such as setting base interest rates. Fiscal policy is about taxes and spending on public services, which is a government’s purview.
NEOLIBERALISM is the term for the economic world view that has been dominant in developed nations for the past 50 years. It broadly means a deregulation of markets, limited state spending and global free trade.
PRODUCTIVITY refers to the amount of effort and money required to produce a given product or service.
QUANTITATIVE EASING is when a central bank creates money and effectively loans it to the government, increasing the amount it has to spend. This also tends to encourage spending in the wider economy.
