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The coming recession will be different
This recession is not like any of its predecessors. Why is that? And what consequences will the recession have? While some people are fortunate to have financial buffers, others have lost their income.
Coronavirus has also caused an oil crisis. Good news for the climate, but tens of thousands of jobs are at stake In: New York Times (22 April)Since the coronavirus outbreak, the oil platforms in the North Sea have been running at less than half capacity. Various drilling workers have already caught the virus, and physical distancing is almost impossible in the cramped living conditions at sea. The crisis has also caused an oil crisis: the price per barrel of a popular US oil variant even dipped into negative figures towards the end of April.
As a result of the energy crisis, tens of thousands of people have found their jobs at stake, for example in the Scottish port city of Aberdeen. Drilling workers are relocating to Brazil and Angola, or retraining to work in renewable energy sectors, such as solar and wind power.
Oil analysts are openly speculating about a future in which demand for oil will be permanently lowered. The sustainability director of the lobby group for the North Sea oil industry even thinks that we may have already passed peak oil consumption. Coronavirus appeared, and these people’s incomes instantly disappeared In: University of Manchester (3 April)
Globally, physical or social distancing defines the new normal. For some, the economic impact of this change has been immediate and devastating. Some of the world’s poorest urbanites saw their incomes flatline within 24 hours of lockdown. The coronavirus is deadly, but what about instantly increasing poverty? For policymakers, relief measures to ensure food and income security should be top priorities. Rich people stay at home more often than people with lower wages – because they can afford it In: New York Times (3 April)
People with high incomes are more likely to be able to work from home than people with relatively lower wages, such as nurses, parcel delivery staff, plumbers, and supermarket stockers. A location analysis of the smartphones of 15 million US Americans revealed this disparity.
The data showed that rich people stayed home three days earlier, on average, to avoid infection and stop the spread of the virus. Low-income earners have little choice: many of them don’t have the option of working from home, and even when they do go to work, hundreds of thousands of workers in the US have no health insurance. How much money is a life really worth? In: FiveThirtyEight (27 March)
You can’t put a monetary value on a human life. But economists have figured out a way to calculate what the average person is willing to pay to reduce the risk of death – and in doing so put a price tag on the collective value of saving one life. (Spoiler: in the US, it’s $9-10mn for a life.)
It’s called the "value of statistical life" and it’s used to make all kinds of high-stakes decisions, including the US Senate’s recent unanimous decision to pass a $2tn coronavirus relief bill. This article explains how economists calculate the cost, the (many) kinds of moral dilemmas they run into, and how the fear of a certain death can raise the the price tag on human life. A pandemic is not a ‘great leveler’. Instead, it enlarges the class divide In: Global Policy Journal (20 March)
Economically speaking, the coronavirus is causing two pandemics, argues Brazilian researcher Rodrigo Fracalossi de Moraes: one in the rich, mostly western countries, and one in the relatively poorer global south (encompassing most of South America, Africa and Asia).
For the hundreds of millions of people living in those regions, most of whom work off the books, staying home is not an option. And staying at home can put their lives in jeopardy as well: generally, people living in poverty live in close proximity to many others. The risk of infection is very high in such circumstances.
At the same time, poor countries also profit from rich countries during this pandemic. They reap the benefits of countries that are developing a vaccine, exchanging medical knowledge, and sharing learning experiences about quarantines and social distancing. However, this is offset by an alarming lack of safe sanitation, reliable information, functioning healthcare and the enticing distractions of culture and the arts. It’s not hard to project which of these two pandemics will ultimately cause more victims, De Moraes writes. A unique recession is coming In: VoxEU (13 March)
An economic recession is coming. This one will be unique. In an economy, there’s demand (people want to buy products) and supply (companies offer products). These combined determine the state of the economy.
The last recession was caused by a shortage of demand (people stopped consuming), but the next recession will be mainly caused by a supply shortage. People want to consume, but that’s just not possible (think of, say, the hospitality industry). When businesses go bankrupt, the economy takes a long time to recover. So economic policy must make sure at all costs that short-term supply shortages do not become long-term supply failures.
Innovative policy responses can mitigate the economic damage
A basic income, helicopter money, a wealth tax. These and other ideas previously considered viable by – at best – a small group of policy wonks and researchers, are now being widely considered in the wake of coronavirus as potential means to alleviate the crisis.
This is how governments can assist freelancers and self-employed people financially In: Economics for Inclusive Prosperity (16 April)The measures adopted by many governments to prevent an economic disaster resulting from the Covid-19 pandemic only work in developed countries. In most countries, companies are getting government money to keep employees on the payroll. People who lose their jobs anyway can claim unemployment benefits. But these measures often don’t apply to freelancers, independent contractors and people who are theoretically self-employed, but only have one client.
In richer countries (like the OECD nations), 15% of the working population fall into these categories. But that figure is twice as high in many Latin American countries, and as much as 50% in some areas. That includes cleaners and construction workers who live from project to project, and micro-enterprises like small shops. They don’t get any employee benefits, and their income is often more strongly influenced by economic fluctuations.
Argentine economists Eduardo Levy Yeyati and Luca Sartorio advocate a model that also benefits the self-employed. Their model is based on Austria, where employers save a percentage of the wages they pay to both employees and freelancers, holding it in reserve. Everyone can take along their personal accrual to their next employer or commissioning client, and use those funds if work dries up or vanishes altogether. In this moment of European solidarity, it’s time for a wealth tax on the rich In: VoxEU (3 April)
A wealth tax for rich Europeans could pay for the corona crisis. There are various plans being developed that tout “economic solidarity between EU countries” as a way of keeping the costs of the coronavirus crisis affordable for all the member states.
All these proposals cost money, which will eventually have to be paid back. Three leading economists argue that we should take advantage of this moment of solidarity to introduce a wealth tax for the wealthiest Europeans.
The tax must be specifically used to cover the costs of the coronavirus crisis and will be levied on the 1% most prosperous people (whose assets are worth at least €2 million). The wealth tax should be imposed at the European level to reduce tax evasion, and would be expected to last about 10 years. Has the time for universal basic income finally come? In: The Correspondent (2 April)
Now that millions of people around the world are losing their jobs due to the coronavirus, calls for a universal basic income are louder than ever. Even the US is taking steps in that direction: millions of US Americans will be receiving government support in the form of a $1,200 cheque. Not nearly enough to live on, but this crisis is showing that ideas that would have been radical just a few months ago now seem very logical.
To make real change happen, a basic income should be provided after the pandemic as well. It works, as evidenced by a major experiment in Canada in the 1970s. People hardly work any less. Hospital visits go down. People who receive a basic income can finally choose the job that makes them happy. And the whole bureaucratic rigmarole of tax credits and reductions can be abandoned entirely. How to make sure poor nations don’t go bankrupt In: The Nation (23 March)
Poor people are hit hardest by any crisis, and poor nations are equally vulnerable. Now that investors are retreating en masse from “emerging markets” (like Vietnam, Ecuador or South Africa), these countries are finding it difficult to meet their basic needs. They pay dollars to import medical goods and food, but their own currency is depreciating steadily compared to the “modern gold standard”.
To rescue these countries, the US central bank (the Federal Reserve, or “the Fed”), can use “swap lines” to exchange local currencies for dollars, with a promise to swap back later, with interest. But not all countries are allowed to use this option. That gives the Fed a perverse form of power: it can decide which countries will survive, and which won’t.
But there is a way out, public administration experts David Adler and Andres Arauz explain in an article for The Nation. The International Monetary Fund (IMF) can distribute Special Drawing Rights (SDRs) to economies around the globe. These SDRs allow nations to act independently from the value of their own currency. Why the Federal Reserve should give China a break in pandemic times In: New York Times (20 March)
The last financial crisis was a heart attack, but the current situation looks more like total paralysis from the neck down. No wonder financial markets are seeking safe havens – and they’re still reading safety in dollar signs. But not every country has equal access to dollars. The Federal Reserve – the US central bank – exchanges dollars for euros and dollars for Japanese yen, but not dollars for Chinese renminbi. The British historian Adam Tooze suggests that this crisis requires the Federal Reserve to be more flexible about which countries it’s willing to finance.
Guide
Coronavirus in context
The coronavirus pandemic will have far-reaching and long-lasting consequences. We want to help you understand developments around the world by providing context for the news in a carefully considered, factual and constructive way. This guide gives you the most important insights to help you understand the coronavirus pandemic.