Economics is and will be a hot topic once again in the coming months and years as policymakers come together to decide exactly how we avoid another Great Depression from the fallout of the disastrous impact of COVID -19.
Economic depressions are characterised by massive job losses and extended unemployment. The Great Depression began with the stock market crash in the USA in 1929 and continued on through most of the first half of the 1930s worldwide. It is regarded as the worst downturn in modern economic history and was a contributing factor to the outbreak of the second world war. However the job losses and unemployment numbers we are witnessing throughout the world as a result of the impact of the coronavirus are on pace to outstrip what was seen in that period. Governments reacted to fight the fire by taking massive loans from central banks in order to aid those affected. However, we must begin to consider the long term impacts on society of these debts that are being created. There are two main schools of thought on how the debt should be dealt with.
The first we will examine is a phrase you may be familiar with- austerity. Austerity is derived from the word ‘austere” which means something harsh or severe. Austerity is characterised by a decrease in public spending on vital services, usually with a simultaneous increase in taxation. In effect governments try to repay their debts by decreasing their outgoing payments and increasing their incoming payments. This method makes intuitive sense to many because, as individuals, this would be the exact way in which we would get ourselves out of debt.
However unfortunately, what works for individuals may not necessarily work in the economy as a whole. This is because in an economy, one person’s spending is another person’s income. If a government cuts public spending on social services such as healthcare or child support while also increasing taxation, this leaves people with less money to spend on goods and services. When businesses receive less demand because people do not have money to spend, this leads to them cutting further jobs or closing down, leading to more unemployment. This simultaneously leads to an increase in the government’s costs due to increased social security payments and also a decrease in tax revenue.
The most famous anti-austerity economist is undoubtedly John Maynard Keynes. Keynes was an Eton-educated English economist who lived during The Great Depression. He strongly believed that austere government policies made conditions worse than they ought to have been during this time. Keynes theorised that when economic downturns happened, governments should react by in fact increasing public spending, not decreasing it. The main way to do this was to invest in the infrastructure of the economy, creating massive public works of road and bridge building to create jobs for the unemployed. This would keep the number of unemployment claims down. Crucially it would also mean that people would have more money to spend on goods and services. This would mean that there would be less business closures and job cuts which would maintain tax revenue for the government.
Keynes also wrote of ‘the multiplier effect”. This was his theory that money injected into the economy actually multiplies in value as individuals use it in creative ways. This harks back to the essential strength of the decentralised capitalist economy over the government controlled socialist economy; that allowing the sum total of individuals in the economy to freely think and create is far more powerful than anything a small government group could match. The multiplier effect also works in reverse. Meaning that every bit of money taken out of the economy by austerity would do a multiple of that damage due to the lack of availability of funds to people who would have innovated and created jobs and further tax revenue.
A key argument against this policy though is that it would massively increase government debt. Debt requires interest payments. These payments would then suck the money created by the economically stimulating policy proposed by Keynes back out of the economy. Government may be left with a still weakened economy, but with more debt and interest payments to be paid than before. Long term this could lead to a debt spiral, as governments continued to borrow more and more as they attempted to get out of debt.
Economically have a decision to make. Do we tighten our belts and suck up the economic misery in order to avoid creating more debt? Or do we double down and spend money we don’t have in order to stimulate the economy and support the inherent creative strengths of capitalism? Neither are perfect options and this is why the argument around austerity has raged for close to 100 years.. One thing however cannot be denied: Which side of the fence government falls on over the next few years will have a massive impact on the quality of life of countless people in the decade ahead.