Today, a decade after the onset of austerity, we are paying the price for this ideological crusade. Our health systems are sorely under-resourced and our public institutions are ill-equipped to respond to the challenges we face.
Of course, it is welcome that governments are now loosening the purse strings to help individuals and businesses through this crisis. Human lives must always come before economic dogma.
But we have to be careful not to fall into the trap of assuming that central banks can solve all our problems. As with any political intervention, it is essential to ask: cui bono?
A good place to start is to look at the impact of the coronavirus pandemic on the flow of money in the economy. As the economist and former trader and Gary Stevenson have described in detail, this exercise helps reveal who stands to gain from the current course of action.
In normal times, the economy is driven by household spending. Some of this spending is on essentials like housing, utility bills, and food, while the rest is discretionary spending on things like entertainment, recreation, and travel. It is important to note that the richest households spend proportionately much more on discretionary spending than the poorest households.
These expenses generate revenue for the companies, which in turn use part of these funds to pay the salaries of their workers. In countries like the UK and the US, where capitalists and landlords have much more bargaining power than the workers, most of the money the workers earn ends up going to the landlord class in the form of rents, mortgage payments and bills. In normal times, these income streams would fund lavish discretionary spending habits, and then the cycle would continue.
How has the coronavirus impacted this flow of money? While spending on essential goods has been maintained, discretionary spending has collapsed. Restaurants, bars, theatres, cinemas and cafes have all closed, while domestic and international travel has come to a halt. This collapse in discretionary spending has led to a collapse in business revenues, which means that many companies can no longer afford to pay their workers’ wages.
It is worth wondering what would happen here if governments did not intervene in some way. Landlords would soon find that many of their tenants could not afford to pay their rent; banks would witness large-scale defaults; and businesses would see their revenues and profits drop sharply. The landlord class would suffer a serious economic blow.
That’s not to say that workers wouldn’t suffer as well: the shock would likely lead to large-scale layoffs, an unprecedented spike in unemployment, and a dramatic increase in general hardship. This is not a desirable result.
In order to prevent this from happening, governments and central banks have stepped in to fill the income gap, and they are filling that gap with newly created money.
Who wins and who loses in this general classification? Even in countries with the most generous employee compensation schemes, workers are only compensated up to 80% of their salary. But most of that spending will be needed to pay for essential expenses, which means that overall most workers will be worse off.
The other side of the coin is that the income streams of the owner class – rents, interest and corporate income – are protected. More importantly, because the wealthy’s discretionary spending has collapsed (they no longer go to good restaurants or spend money on vacations), they will now have a lot more money left over each month. So while the bank balances of many working people will decline over the next few months, the bank balances of the wealthy will swell dramatically. This is the key to understanding where all the new money that is injected into the economy will end up. It’s not gross income that counts, it’s net income (ie how much money people have left after their essential expenses have been paid).
As Stevenson notes: “The government created new money to replace the lost spending of the rich, so that working people could continue to pay their bills to the rich.
What is presented as a bailout for workers is, in practice, a bailout for the rich. Who will pay for this? When the crisis finally subsides, governments – now saddled with higher debts than at any time in peacetime history – will inevitably face calls to implement austerity to repay the debt burden. Once again, the burden will fall on ordinary people.
Like Christine Berry writing“The costs of the crisis are therefore still largely borne by workers and small businesses – although subsidized by the state, and therefore by future citizens – it is just that some of these costs are deferred. So far, no sacrifice has been demanded of banks, landlords or profitable businesses.
None of this should be surprising. After all, we live in an economic system that produces unequal results by design. Injecting more money through this system will simply result in more money flowing to those who are already at the top.
What makes things different this time is the scale of the sums at stake. Governments are pumping unprecedented amounts of money into the economy, often for good reasons. But unless some action is taken to prevent it, it will just be picked up by the owning class.
What can be done to prevent this? According to Stevenson and a growing number of economists, the most effective policy would be an emergency wealth tax. This would ensure that those with the broadest shoulders contribute to resolving the crisis and would also provide a mechanism to recover any wealth accumulated through the government’s response to the crisis. Policies such as rent freezes, debt jubilees and the imposition of strong conditions on any corporate bailouts could also help spread the burden more evenly.
Whatever the precise solution, the lesson is clear: injecting new money into the economy without changing power relations will only exacerbate existing inequalities. We made this mistake in 2008, it is essential that we do not do it again.