COVID-19 in 2021
Governments will have to fund enterprise and innovation
Here in London, it is tempting to resort to black humour with headlines such as ‘Fog in UK-rest of world isolated’just as financial markets at last appear, after nine insouciant months, to be taking COVID-19 a bit more seriously again. One simply cannot ignore all the misery and loss over the last year, nor dismiss the economic damage as temporary. Humans do not behave in accordance with economic models or algorithmic trading programmes that rely on historic patterns repeating themselves. There have been too many deaths, too many afflicted by ‘long COVID’, too much bereavement and other mental stress. Too many have become unemployed, suffered loss of income or had their education disrupted. Things really will have to be done differently and social values will surely become increasingly influential in politics, economics and financial markets. Nevertheless, COVID-19 should still be regarded as a catalyst as much as the origin of developments that would have happened anyway. Many will take a lot longer than the next 12 months to gather momentum and all human developments take unexpected twists as they unfold.
Figure 1 Lest we forget!
COVID-19 is turning out to be even more contagious and pernicious than was first flagged by medical staff in China and Italy as they battled heroically to save lives in January and February. Figure 1 touches on the human cost and Figure 3 on the economic cost so far, with both set to carry on rising well into 2021. There have been multiple mistakes made by most governments around the world and many seem likely to pay a high political price, with Mr Trump as the first and most prominent casualty. None has found it easy to cope and even many of those with initial relative success have subsequently suffered severe setbacks in easing restrictions too quickly. Taiwan and New Zealand still seem to be setting an example in both containing the contagion while keeping their economies turning over, even as others sneer that it is easy for islands to ‘isolate’ and that they are unimportant in a global context. In fact, what they are doing next is also exemplary: mass vaccinations to mitigate the absence of herd immunity that they deliberately prevented. Perhaps surprising is that so many governments that have been prioritising economic activity are planning to vaccinate older people first instead of those who carry out essential jobs away from their homes and/or are the parents of children at school. Indeed, any recovery will be held back until most 20-40 year olds are vaccinated.
Figure 2 Handling COVID-19: bring on the blues!
Public health, of course, is not only about coping with pandemics, although scientists expect them to occur more frequently. In fact, COVID-19 has cruelly exposed the widespread incidence of ‘underlying’ coronary, respiratory and metabolic conditions as well as the inadequacy for many of mental health and age care provision. Compassion is important but it also makes economic sense to keep people in work and out of hospitals and other institutions. Also recognised at last, as a threat to public health is air pollution, which in a landmark case was last week ruled to be the cause of a London child’s death. To be effective public health policy must win people’s trust so that they comply with any personal restrictions and respect others who need help and protection. Medical workers around the world have responded selflessly to the pandemic and communities have drawn closer together, albeit some more than others. The challenge now is that a lot more public investment is required to avoid in the future the worst of both worlds that so many countries are currently experiencing. A new focus on wellbeing would actually create a healthier workforce and boost employment and consumption.
Figure 3 Economic damage: only the start
GDP may still be the most publicised way of quantifying economic activity but governments are under increasing pressure to take account of qualitative factors such as wellbeing (as discussed above) and environmental protection. However, even the quantification is based on assumptions and methodologies that differ in reliability from country to country and, in some cases, political priorities can affect the compilation as well as the presentation of official data. At some stage of 2021 we shall get a better understanding of the extent to which GDP numbers (actuals and even more the current forecasts) are underestimating the damage from the pandemic. In particular, Unemployment appears to have been remarkably contained in many countries but the numbers are likely to have been distorted by official support programmes as well as by not fully capturing underemployment or those leaving the workforce to care for family members and/or because they have simply given up looking for a job. The impact on the self-employed and small employee-owned businesses is unlikely to have been fully determined yet but will loom large in the worst-affected sectors in Figure 4 (which covers Europe but with a large enough sample to be applicable elsewhere). Other factors yet to work through include the failure of larger ‘Zombie’ corporate employers, debt forbearance and delayed evictions of private and corporate borrowers and tenants. In contrast, the productivity of people working from home (the least affected sectors in Figure 4) may well have increased thanks to less time and effort spent on commuting while many low paid service workers have been laid off. Furthermore, retail sales in advanced economies seem to have been boosted over recent months by a combination of welfare payments to the less well-off and restricted spending opportunities (travel, entertainment, eating out) for the better off.
In the meantime, the GDP data that we do have for 2020 still shows that only China, Vietnam and Taiwan will achieve net growth while the weakest economies will include those with the highest number of COVID-19 cases and deaths: Argentina, Brazil, France, Iran, Italy, Mexico, Peru, South Africa, Spain and the UK. While most enjoyed a bounce in Q3 none are expected to achieve met growth over Q4 2019 until 2022 at the earliest. In contrast, among the major G20 economies the more dynamic US, India and Indonesia are expected to recover during next year, albeit with the benefit of substantial fiscal and monetary stimuli.
Figure 4 Below the GDP headlines
The fiscal stimulus in advanced economies has so far mainly consisted of benefit payments and job subsidies, which have been welcome enough but are expensive and palliative rather than tackling fundamental problems that the pandemic is exacerbating such as under-investment and inequality. Public protests are springing up at the drop of a hat (despite or because of social distancing rules), divisions on even everyday topics are getting deeper and populist politicians are stepping up their rancorous rhetoric.
A lot more needs to be done and national governments will be forced to step up. The solutions required go far beyond just the ‘digging holes and filling them up again’ that is misleadingly attributed to Keynes as justification for any public spending. In hisGeneral TheoryKeynes did, of course, advocate state intervention to stabilise the economy and 84 years later it is neither contradictory nor radical for the state to support directly private enterprise and innovation. At oneextreme, China may now be risking too much central control but the US has long provided seed capital and other financial assistance to pioneering companies. Indeed, this was a priority of the UK government until chief adviser Dominic Cummings fell from grace and ‘other matters’ have since overwhelmed policy-making. Harnessing the energies of ordinary people is probably best managed on a local basis with Barcelona a shining example of initiatives from around the world. Under the banner ‘Barcelona never stops’the city is responding to the pandemic by reinforcing its promotion of‘socio-economic initiatives’ including worker-owned enterprises, housing and education cooperatives, consumer groups, skills exchanges and ethical finance organisations. Anecdotal evidence again suggests similar initiatives are under way in the UK, particularly in the North and Midlands.
Figure 5 Let’s not get too technical about what the economic cycle!
Although the scale, timing and content of the necessary initiatives will vary between and within countries, there can little doubt that they will happen. There will be endless carping over the cost but one does not need to be an adherent of Modern Monetary Theory to realise that the money can be found through a combination of tax increases, bond issues and (preferably in the form of a one-off COVID rescue plan) direct monetary financing by central banks. Countries with weaker currencies will have to rely more heavily on their central banks and risk higher inflation. It will not be straightforward and will require political courage and commercial imagination but there is more than enough global liquidity available for funding.
Governments need to get going as soon as possible, especially if they want to stand a chance of being re-elected. In 2021 there are national elections in Iran, Chile, Japan, Russia, Norway, Iceland, Germany, Bulgaria, Netherlands and the Czech Republic and in 2022 in France, Sweden and the mid-term US elections. In the UK in 2021 there will be bitterly fought electionsin Scotland, Wales, London and throughout England, including those postponed this year due to the pandemic. Heads seem certain to roll!