The severity of the economic consequences arising due to the COVID-19 pandemic is likely to persist throughout the next few years. But the after-effects of different stimulus policies will affect us throughout the next few decades. We must recognize and understand how our future economic and social prospects are influenced by measures currently in place. They may help us scale the ladder to heaven, or bury us alive.
No matter the polarities economists share in their debate regarding the benefits of a free market versus government intervention, we have all concluded this concept in observing its application to the coronavirus pandemic. Government spending is needed. To what extent, however, may be a question that economists will squabble over in the years to come, but it is certainly necessary.
Each country’s stimulus measures differ based on factors such as the extent of their economic downturn and spending capacity against current debt, however, the major difference is quite clear; some focus on preserving incomes, whilst others focus on preserving jobs.
It would be myopic to conclude which policy is the best because they will produce different long and short term effects on the labour economy and the general public, however, some general analysis will help increase awareness and aid in forming opinions. After all, is our country helping us or unintentionally stunting our growth?
The UK Approach
Within days of his appointment, the Chancellor of the Exchequer Rishi Sunak found himself working past bedtime to construct economic policies to help the UK’s economy recover from the supply and demand shocks brought on by the pandemic. After much of a wait, the following policies were implemented:
- Coronavirus Job Retention Scheme – Between April and July, furloughed workers would be paid 80% of their wages up to a maximum of £2,500 per month. The newly flexible scheme has recently been extended till March 2021.
- Bounce Back Loan Scheme – Intended for smaller businesses, they can borrow up to 25% of their annual turnover up to a maximum of £50,000.
- Coronavirus Business Interruption Scheme – Intended for larger businesses, they can borrow up to a maximum of £200 million.
The US Approach
The US passed on a $2 trillion stimulus package under the name of Coronavirus Aid, Relief and Economic Security (CARES) which is composed of the following schemes:
- Paycheck Protection Programme – A targeted support system for businesses with less than 500 employees will receive access to loans more than twice the size of the average monthly payroll
- Pandemic Unemployment Assistance – Between April and July, a household would receive $600 a week and then an additional $400 a week from August if they are unemployed.
- Stimulus Check – Anyone earning under $75,000 will receive $1,200 along with $500 for every child under 17.
Given the precarious nature of the pandemic, the recovery will be a precarious one too. Normally, economics and government measures work hand in hand with the public to prop up spending. Unfortunately, the need to stay at home inhibits the spending and fund circulations that would have otherwise occurred, hence slowing the recovery period.
Both the US and the UK have a stark difference in their daily case rises of 157 thousand versus 21 thousand respectively. Therefore, comparing the change in GDP growth and attributing it to policies would be an incredibly short-sighted thought process. Instead, we should perhaps consider the thoughts being applied.
The UK’s objective is clear: preserve jobs and keep unemployment at a minimum. This not only looks good politically, but it essentially puts the economy on a pause. The 2 main advantages are as follows:
Stopping firms that would otherwise go bankrupt puts an end to the process of new firms starting, rehiring new workers and rebuilding new business relationships which all come at a cost. Therefore the breakdown of relationships built across decades with a lot of perseverance is avoided. This keeps economic confidence high but also provides continuous hope to employees, customers and owners that economic activity will continue soon.
If workers had been laid off, it would be very difficult to find new jobs. This happening during a 4-month lockdown could have spelt disaster for them. Those who had spent months without work would have seen themselves deskilled and their economic labour value to businesses greatly depreciated. Retraining these workers would come to an expensive final bill to the government who has already crossed the 100% GDP to debt ratio.
The expensive short term cost was avoided. But did the UK succumb to the present bias and ignore the truly much more expensive long term cost?
Placed forward by the Austrian political economist Joseph Schumpeter, the Theory of Creative Destruction states that the process of industrial mutation incessantly revolutionizes the economic structure from within, destroying the old one and incessantly creating a new one. It is an organic and dynamic process that is best not meddled with. The pandemic would have forced firms to become more productively efficient to survive; if any firms didn’t, they would be rendered uncompetitive and would likely die out. Their unemployed workers would simply join the booming industries. Given the increasing reliance on technological advancements, there could have been a lot of potential for further innovation had the market been left free after the first few months of uncertainty. The theory explains the true natural phenomenon which keeps the capitalist system moving profitably and keeps its working components healthy. By furloughing staff till March 2021, the government keeps obsolete jobs. Sooner or later, these jobs will be made redundant; this could have been (and still is) the perfect opportunity to replace old technology with automated newer technology. Whilst there would have been many unemployed citizens, they would have likely been trained and worked in better jobs in the future. This cost of training would have been a worthy and ultimately, a profitably reapable one.
Contrastingly, the US government focused on preserving the income of individuals, and in many cases, by providing a lot more. Dispensing more in unemployment and COVID-19 related benefits than the income of that of up to 70% of Americans would have received, a whole host of the following benefits emerged.
Having already been provided with a financial safety net, many saw the opportunity of being at home and still earning a basic income as a way to invest their time elsewhere. Whether this was by attempting to generate new income streams(via new small start-ups) or by educating themselves and obtaining training certifications, the average worker would have drastically improved their productivity and value to their future boss. This is likely to have spurred true innovation. Besides, the government could distribute funds directly to households to ensure that families have a financial cushion and that there is adequate purchasing power in the economy
The American government supported both workers and businesses. It essentially tried a UK approach and its own combined. By providing a safety net for those working, it is reaping the same benefits as the UK, as well as other benefits arising from the freedom of unemployed Americans who have caused a boom in the number of newly registered startups as the economy has opened. It can be argued that the new jobs created by the startups are simply representing the jobs that were lost earlier in the stages of the pandemic. Either way, economic growth and innovation are still developing and this keeps confidence high – something essential for a faster recovery.
It is still too early to conclusively hold one policy over another but the economic analysis does provide us with an estimated outlook into the future of the labour economies of both the US and the UK.
In the UK, those who would have lost their obsolete jobs have kept them. This may feel like a boon now, but really, it is a poison in disguise. As more and more time passes, the vulnerability of such jobs will increase until they just cannot be provided at which point many will suddenly find themselves unemployed and skill-strapped. Perhaps it would have been better for the British government to forego its status quo and to take a hard hit now than take the final blow a few years later.
In the US, a lot of workers are unemployed but are being provided with a generous income every month. Their future is one with mixed prospects. If Americans used their extra time well, they will find themselves in a much better position in the competition for jobs as startups begin booming. If not, then they could be much worse than before.
No matter the future, this pandemic will teach us a lot. But the fact that our best learnings come from failures forebodes a grim outlook for the next few years. Whilst it is a pessimistic perspective, it is, unfortunately, a true one.