A post pandemic recovery will have its ‘uses’

If what the world is experiencing is a self-inflicted economic downturn due to the pandemic — why did the global movers and shakers especially in the industrialized world create such conditions?

Inequality is the one-word answer

Inequality was reaching such unhealthy levels due to the deflationary conditions that prevailed in industrialized rich countries, that there was a surge in populism — often referred to as right-wing populism disparagingly — that the wealthy were becoming uncomfortable that things were becoming rife for upheaval, who knows even revolution?

With the setting in of conditions in January 2020 in USA for instance in which there was full employment of the sort that there had not been for a long time, the rich had got extremely rich while the deflationary reality meant that much of the jobs that existed for the poorer were somewhat low-income gigs. This meant that the disparity between the rich and the poor was becoming something of an obscenity.

So, when there is little or no inflation and in effect deflation is the reality there is no healthy market demand for goods which in a situation of full-employment means that for the rich owning classes in the industrialized world, there is absolutely no need to increase wages and pay labour more. But they keep amassing money even though people do not spend money for big ticket items in a deflationary economic climate because they think prices of such items would go down further.

Public investment

Public investment is at a minimum and so in this low-tax regime there is no room for movement of the economy at all. The rich are getting richer in relative terms, and the poor are getting poorer.

Then comes the pandemic, and now the much-needed inflation in the industrialized economies is finally a reality of sorts. Somebody said he would not bet his shirt on it because there is technology and the economy carries on despite the pandemic, but there is inflation and it inevitably means that the wage share of the workers would have to increase.

US Treasury Secretary Janet Yellen

World’s richest man Jeff Bezos, pictured here with his Blue Origin space rocket, has got richer.

With goods more in demand and the owning classes clamouring to cater to it, they would pump more money into new products and those who were in the fringes of the economy doing low-paying work would be brought into the mainstream workforce to produce the goods that are new on the production line.

 The wage share increases. This would mean that the massive disparities that were the woeful story of the economy facing deflationary conditions would have mitigated somewhat at least in terms of perception. It would be as if the rich are having it hard too — they are spending on new production, cutting into the stash of cash they had earlier splurged on for yachts and what not. 

Hallelujah. The revolution would have been averted. 

However, does that mean that people’s lives would drastically improve? It seems the answer of the industrialized nations is to drive interest rates down even further to ultra-low levels as a response to the necessity to cater to new demand under inflationary conditions.

 This would mean a low interest rate regime would discourage savings and consequently though with slightly better jobs, workers would not have an excess of spending money with no interest generated incomes.

 Industrialized economies 

We see therefore that an economic recovery from the pandemic would benefit the rich in industrialized economies, and not the average middle-income earner or the poorer new entrant to a newly created job market.

In other words, capitalism would continue with the further triumph of the capitalist class. The apotheosis of capitalism continues these days with adjustments that would avert calamity that would entail the tearing apart of the social fabric.

These outcomes do not apply to us in countries such as Sri Lanka because we were a growing economy before the pandemic and were in a recovery phase of sorts then too. We never had full employment and as result a situation of deflation, i.e., we had somewhat unhealthy levels of inflation anyway.

But the further our economies are in difficulty the easier it is for the owning classes in the industrialized nations to stave off inflation; countries such as ours will be producing low-cost goods even if the Chinese economy is unable to manufacture at optimum capacity due to Covid.

Of course, it would be a calamity if the US Government defaults on its debt for the first time, but even without Republican support the Democrats want to ram through measures that would lift the debt ceiling that would enable the US Treasury to settle US Government debt. But while the energies of the political class are focused on that task, the one constant is that nobody wants to raise interest rates.

Janet Yellen, the US Treasury Secretary, more than any other factor stresses the consequences on interest rates that a debt default would have. So this post pandemic recovery would favour the rich because interest rates are bound to stay low no matter what happens.

Basically the US financial analysts have come to the conclusion that savings would not work, be it for the old or the younger. But nevertheless interest rates are not going up anytime soon and this means shared prosperity (due to a healthy interest on people’s bank deposits) is only a figment of people’s imagination.

Shared prosperity has not happened for a very long time in the industrialized world and though the pandemic theoretically would have been a ‘portal’ for that, it would not happen. Let us just say the writing is not on the wall for that.

The idea of the pandemic as a ‘portal’ was apparently mooted by Arundathi Roy, the Indian writer. She suggested that the global Covid-19 contagion would be a launching pad or ‘portal’ for a new economy.

It certainly has become a portal for new technologies for instance, but as far as being a portal it certainly does not seem to have been one for transformation of the economic conditions particularly of the inhabitants of the rich nations.

It should have been — and kudos is due to the myriad of intellectuals and economists in the USA for instance who are making a case for a raise in interest rates as soon as some of the inflationary pressures subside.

 Good Judgement

The US economy has always shown promise of reinventing itself and even at this stage perhaps the people of that country could expect good judgement to be forthcoming from among the policymaking elite.

In Europe, even when there is inflation the policymakers have not been inclined to increase wages. “Is labour in Europe strong enough to demand wage hikes? …. there is considerable untapped potential in some European labour markets. But even in supposedly tight labour markets such as Germany’s, wage increases have, so far at least, mostly been below three percent a year in recent years,” writes Christian Odendhal in the website cer.eu.

So there. The policymakers in rich countries in Europe do not seem to want to make the pandemic a ‘portal’ for improving lives. The US has done much better in this regard, with a huge stimulus of public spending, though the outcomes remain to be seen.

There has been a global downward pressure on inflation and interest rates for years now, and its primary cause is inequality. The rich have got richer and they save more. This decreases money supply and therefore economies are forever keeping interest rates low to spur growth. Inflation is kept down but with interest rates low the inequality increases. It is a cycle that likely will not be broken by the pandemic — certainly not in Europe. Chances are much better in the USA but no specific outcomes can be guaranteed.


– Daily News Sri Lanka

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