The International Monetary Fund (IMF) is calling the coronavirus-induced economic crisis “the Great Lockdown”. However, this is misleading, suggesting that the root cause of the current economic depression lies in the negative impact of the pandemic. The state of the economy cannot be attributed solely to the coronavirus.
What have we learnt from previous recessions?
The 2008 financial crisis resulted in the worst global recession since World War II. The collapse of US investment bank Lehman Brothers in September 2008 caused a meltdown of the global financial system. De-regulation and excessive risk-taking by bankers were also to blame. The current recession is not caused by a broken link within the system, but from an external threat, a worldwide pandemic. In order to keep the disease from spreading, many governments forced non-essential businesses to close and brought in lockdown orders, bringing many industries to a grinding halt. Luckily, the overall financial system is in much better shape this time around – in part due to some of the policy changes made in response to the 2008 recession.
It’s still too early to say with accuracy, but it seems as though politicians may have learned from some of the lessons in 2008.
- Interest Rates
Previously, it took time for the banks to reduce the level of interest rate to zero (or close to). This time around, the Bank of England decreased interest rates (currently standing at 0.1%) within a few days. A lower interest rate makes it cheaper to borrow, therefore consumers are encouraged to borrow money, injecting it into the economy, encouraging spending and investment. This leads to higher demand and therefore higher economic growth due to the cyclical nature of spending. This can lead to increased inflationary pressures.
2. Insuring banks have enough cash reserve
The way we look after the financial system has now changed. To reduce the chances of a crisis occurring, it is now the Bank of England’s job to ensure that individual banks have sufficient financial resources at all times and scan the entire financial system as a whole for risks. By having this extra level of protection, the issue of the banks collapsing as seen in 2008 is far less likely. The Bank also carries out “stress tests” to see if the banks can cope with a sudden downturn in economic conditions. This preparation means that there is no need for a UK government to bail out a failing bank at the expense of the taxpayer.
The government response to the 2008 recession had some unintended consequences. It seems as though this is not a lesson that has been learnt. Although the Great Depression went on for far longer than the Great Recession, the decades following the Great Depression substantially reduced the wealth of the rich and improved the economic security of many workers. In contrast, the Great Recession saw low interest rates and easy to access capital, making those who were already wealthy even wealthier, driving up asset prices, and failing to stimulate the economy in a way that benefitted everyone. Whether this was due to a radicalised right-wing, or the dominance of the financial sector is disputed.
Although the policies such as the furlough scheme has helped keep an income for many who have lost their jobs due to lockdown, it is often those working in the hospitality and entertainment sector that are seeing the biggest impact. Those high-paid office jobs aren’t affected as much – working from home culture has been hugely welcomed to maintain some sense of normality. The Government has also recently announced a reduction in contributions to the furlough scheme and an increased contribution from employers, leading to many being made redundant as venues have yet to reopen. How the Government plans to support these workers and ensure higher equality is yet to be seen.
Yet, the rise of remote working due to lockdown could reduce the pull of London and other major cities, meaning that access to higher-paid jobs could increase for residents of other areas, which would help narrow income and wealth gaps as property prices adjust. Although this is possible, it depends on whether firms decide to keep remote working or whether they will reopen offices as soon as they can. We have seen a slight shift already, with law firms such as Dentons shutting two of its UK offices to cater for full-time remote working.
A new economic way of thinking
The record rates of unemployment and the dramatic decline in economic growth are direct outcomes of policy choices promoted by the dominant economic paradigm the world has had since the 1980s – one that says free markets are the best way to organise our economic lives. The coronavirus recovery ahead requires a new way of economic thinking – one that puts the wellbeing of society over individual success and fundamentally challenges what is valued and financially rewarded by the economy.
Just like the Great Recession of 2008, the coronavirus pandemic has exposed the contradictions of our advanced economies that lead to crises. Private-sector indebtedness, persistent income and wealth inequalities, the dependence of the labour market on insecure forms of employment, the prevalence of oligopolies where a limited few control markets – coronavirus is not the root cause of our economic problems, but merely a catalyst. Will this pandemic provoke a new way of economic thinking?
Coronavirus seemingly fits the narrative of crises being caused by an “external shock”, unrelated to the structure and functioning of the economy itself. But the underlying causes make the crisis so serve – those such as inequality, insecure employment, and market concentration. But what could this new way of thinking consist of?
Heterodox economics believe in more government spending on public investment projects and public services as well as greater oversight of how market activity influences society. This must be the focus moving forward. To build back better economies after the pandemic, we must put social and environmental wellbeing to the forefront. Yes, private profit is necessary for a functioning economy, but different approaches to public debt, taxation, green monetary policy, and managing inflation must also be considered. Tackling inequality of opportunity will help move the social and economic factors that help build a robust country forward. Do you believe this is the right way forward? Let us know what you think in the comments section below.