Covid Exacerbates Existing Fault Lines
The actual economic policy debate suffers from a basic (perceived?) conflict between structural future needs and their short-term impact. Already before the Covid crisis which plunged the world economy into a 5 percent loss in GDP and a significant inrease in unemployment, trouble was there: ever-widening income and wealth distribution with long-term falling wages, threatening the loss of social cohesion and impoverishment; the urgent need to adjust economies and societies to climate change and biodiversity loss, and the looming disruptive effects on labor markets via digitalization are only the most visible ones.
Corona has exacerbated these problems and elevated the pandemic public health problems into a priority policy agenda. The effects of the climate crisis are suddenly felt the world over in the form of droughts, floods, forest fires; income and wealth distribution has become more severe, as asset owners heaped additional wealth on their portfolios, while low-income workers lost their jobs, income and job security, and digitalization disrupted more and more areas of life, be it as labor-evaluating algorithms, as algorithmic stock market trading or as the rise of cryptocurrencies, but also as replacing more and more routine jobs, and the pernicious effects of unbridled „social media“ content. Underlying these effects were the immense extensions of central bank balance sheets by various forms of quantitative easing, leading to heretofore unimaginable increases in government, business and household debt. Clearly, new policy agendas are necessary to deal with these structural, long-term threats to our future.
Media Attention Favors the Short Term
But media and politicians are myopically looking at the short term. They are celebrating the most recent GDP growth rates, especially in industrial countries, as a „complete recovery“ from the Corona-induced falls in GDP. They ignore that Corona raises its ugly head once more and is not over yet; they conveniently forget that annual growth rates in 2021 build on the recessionary low GDP data from one year ago, and that even the forecasts that some countries have already reached or surpassed GDP levels of before the crisis, still omit that the loss in wellbeing is still severe, since a „correct“ comparison would be with the growth path expected before the crisis. This short-term „recovery“ ignores the deep disruption Corona has caused to the affected enterprises and the functioning of labor markets, which cannot be switched on just like that. In addition, the recent disruption in supply chanins, exacerbated by the East-West separation efforts engineered by the US and China, will require additional major adjustments to the globalized business models.
Similarly, there is a sudden fear in media and some central bank governors that the most recent increases in inflation rates (to between 2% and 3%) might signal a return to high inflation or the stagflation of the 1970s. These are the same persons who recently deplored the undershooting of central banks‘ 2% inflation targets during the past years as leading to eternal deflation. They conveniently forget that most central banks have adjusted their strategies and targets, moving away from point targets („2 percent or lower“) to more average ones over several years, including other than inflation objectives. Central banks have changes strategies but also warn that recovery is still incomplete, thus monetary policy still needs to be supportive.
The renowned financial thinktank IIF (International Institute of Finance) in its recent monitor has calculated that gobal debt this summer hit unprecedented 296 trillion $ (355% of global GDP), nearly 10% more than a year ago. According to IIF, governments contributed 86 tn $, the financial sector 69 tn $, the non-financial corporates 86 tn $, and households 55 tn $. According to the Financial Times, after the financial crisis of more than ten years ago, the debt ratio was around 300% of GDP. A large part of the increase comes from two sources: one, unprecedented government expenditures to help business weather the crisis, including wage subsidies for workers; the other stems from increases in China. Such high debt levels (much higher increases than even during World War 2) lead to two worries: increases in interest rates when debt maturities are short (however, Austria among other recently issued 100-year bonds thus reducing short-term vulnerability); but also a general increase in firm, household and government vulnerability when such large sums slosh around the world, subject to the „perceptions“ of financial markets. However, central banks may have learned to deal with these problems, having developed a number of new instruments.
The potential policy dilemma is clear: to address the long-term, structural danger signs of our economies, high debt, hyped „high“ inflation rates, low wages (the wage ratios in the OECD countries have fallen for the last more than 20 years), and the climate crisis will have short-term growth-reducing effects. Most politicians shy away from long-term policy measures which might threaten their future election results, thus avoiding to „govern for the future“. They leave most of the structural policies to mainly symbolic Sunday or election speeches.
To get average wage levels up to „comfortable living wages“, to improve working conditions and adjust them to a positive work-life balance might increase inflation rates, leading to the often cited and hyped „wage-price spirals“. Recent evidence points to the contrary, higher wages might solve the price-inducing labor shortages.
To combat the climate crisis we need effect significant behavioral changes by businesses and households: going on as before will not get the world out of this mess. Combating climate change also requires to finance large investments, both in the private sector, but also where no financial returns are possible (biodiversity, long-term green infrastructure) from public coffers. If politicians keep promising „no new taxes“, these funds can only come from even more borrowing, raising debt levels even further.
Similarly, if we want to prepare for the next pandemic, significant additional public funds will have to go into the health sector, apart from private investments (also aided by public ones) from pharma firms.
If we want to lower the high debt ratios, either we will have to foster high GDP growth, damaging environment and climate even more, or engage in severe austerity, endangering the cohesion of society by cutting social expenditures.
A number of other conflict zones, euphemistically called trade-offs, lurk in the shadows. Our politicians rarely talk about them (one exception is the US president Biden who encounters, however, stiff opposition from both parties in Congress). Some of these tradeoffs can be mitigated by smart political packages, but some will remain.
New Decision Strategies
What we need are open discussions in our societies whichshort-term costs are „acceptable“ to large parts of the populations, in order to create a better society and economy of the future. We have to realize that this involves severe political battles, since vested interests who have profited from the present „system“ and have gotten us into this predicament, will fight back. And they have very strong lobbying power and political influence. But also aside from these vested interests, very different preferences and points of view exist in our diversified societies with respect to the desirable future. It is an illusion to think that rational argument will convince everybody of the path to take, see e.g. the difficulties our governments have in convincing around 30% of the populations to accept anti-Covid inoculations.
Decision mechanisms which respect different viewpoints need to be found. A promising way has been to engage in discussions including as wide parts of the populations as possible, aided by expert testimony, and to accept that „elegant“ (corner) solutions will not find wide acceptance, thus bearing the seed of being circumvented, shunned, evaded. More promising is to aim for compromises which comprise the least common denominator among opintion, with the aim to come to conclusions which are „acceptable“ to wide parts of the population, if not preferred. Unconventional solutions (e.g. debt forgiveness; imaginative zoning to reduce mobility needs; flexible working times chosen by workers; banning socially damaging or useless activities, especially in financial markets and crypto; etc.) need to enter the discussion space, if we want to avoid and repair the damages of the present system and give citizens a promise of a positive future.
The challenges to our future are clearly visible to all who want to see: to continue on the trodden paths, maybe with little tweaks here or there, will not do. This would threaten society by ever wider divisions, leading to possible violent protestations; it would threaten the viability of our planet and thus the wellbeing of large populations. We need to confront the requirements of a different, better future and convince our populations that short-term costs need to be borne (equitably!!) in order to assure a viable and better future for all. We need politicians who are brave enough to set policy frameworks in this direction.