How did governments suddenly find the money for a huge coronavirus stimulus?
As the world wrestles with the coronavirus, some of the economic figures are eye-watering: in the US, there will be $2 trillion of fiscal stimulus, and the monetary stimulus will be uncapped. Low-income households can justifiably wonder: after years of austerity and rejecting demands for higher levels of social support because they are “unaffordable”, how did governments suddenly summon so much spending power?
The answer is part politics, part economics. On the politics side, governments have been able to overcome political dissent because virtually everyone acknowledges the existential threat to the economy posed by the coronavirus.
If people can’t go to work to produce goods and services, can’t go to school to learn how to produce goods and services, and can’t buy goods and services for a long enough period of time, the foundations of the economy will be destroyed, leaving no businesses or jobs to return to.
Imagine a scenario of a husband and wife, heavily in debt, disagreeing on whether or not to take a loan out to buy a new car, even though the current one works fine. Now, imagine an alternative scenario where the current car permanently breaks down, meaning that they can no longer go to work and earn a living. They have no choice but to incur the debt and buy the new car, no matter how painful the future lifestyle adjustments will be.
When low-income groups seek greater funding during normal times, they are in a weak position politically. But businesses suffering under the coronavirus can easily convince elites and plutocrats that if the support isn’t forthcoming, the economy will experience a meltdown. By contrast, low-income groups in normal times can be nonchalantly dismissed by policymakers because the immiseration of the poor does not pose an existential threat to the livelihoods of political elites. In fact, it may even contribute to higher living standards for some of the superrich.
In terms of economics, an optimistic assessment of the coronavirus pandemic is that it is a one-off event (the last comparable pandemic in terms of economic havoc was in 1918), and that the global economy will resume its previous positive trajectory after it ends, as we socially “de-distance”. Under this scenario, two factors work in policymakers’ favor regarding the stimulus.
The first is that the parts of the stimulus that are financed by borrowing can be repaid at an all-time low cost, because interest rate are close (or equal) to zero in many advanced economies. This allows governments to spread this repayment over a long period of time, necessitating only a mild increase in taxation. By contrast, supporting low-income groups is a large, recurrent expenditure, which may require a restructuring of the economy.
The second is that a significant part of the stimulus is being funded by the 21st century equivalent of a central bank printing money (this process is now electronic). In principle, creating money and using it to fund purchases of real goods and services will eventually lead to consumer price inflation, implying a redistribution of income from those who have currency savings (usually the poor) to those who own physical assets, and to the recipients of government spending.
However, similar expectations were present when policymakers deliberated over the bailout after the 2008 global financial crisis, and yet the much-feared hyperinflation never materialized. More precisely, there was no consumer hyperinflation, but the excess liquidity found its way to stock markets, contributing to a massive bubble: the S&P 500 went from 685 points in 2009, to over 3200 in 2020, an annual growth rate of 13 percent! A similar occurrence on this occasion is certainly a tolerable risk. Again, the bad news for low-income households is that their demands require recurring actions, in contrast to the huge, supposedly one-off money-printing exercises used post-2008 and now.
An important qualifier is the absence of these favorable circumstances in emerging economies. First, their currencies are weak, and so their central banks’ capacity to print money is massively impaired. Second, they are unable to maintain interest rates as low as OECD economies, making borrowing expensive. Third, as Stephen Davies argued recently on this platform, the coronavirus is likely to accelerate the rise of economic nationalism in western economies, and deglobalization, representing a huge threat to the ability of emerging economies to grow sustainably. Consequently, they face a genuine risk of eventual default, bringing with it years of economic pain and political instability. Yet they have little choice, because the coronavirus still poses an existential threat.
Returning to advanced economies, much of the generally upbeat assessment hinges on the coronavirus crisis being a one-off. Public health experts may be less sanguine. The one thing that will surely persist, however, is the political process’s failure to serve the interests of society’s least fortunate.
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.