Just over a week ago, the Australian Prime Minister, Scott
Morrison, said that he wants small businesses in Australia suffering from the
impact of COVID-19 to go to sleep, possibly for six months or longer, until the
pandemic has passed. Pundits and the media immediately picked up on the term
‘hibernation’ and comparisons were made with bears in winter, of course.
Officials almost everywhere have affirmed their desire to protect
employment so that the economy can swing back to normal after the pandemic is over.
On Monday 06 April, Singapore’s Finance Minister, Heng Swee Keat, said that
their latest round of financial stimulus “would help workers keep their jobs
and enable businesses to resume operations quickly after the pandemic subsides.”
On Tuesday, the Japanese Prime Minister, Shinzo Abe, in unveiling almost a
trillion dollars of stimulus – equal to 20% of Japan’s economic output –
declared, “We will protect the employment and life at all costs.” Indeed, there
are almost as many expressions of this sentiment as there are countries on the
planet.
With steely resolve, President Trump told Sean Hannity of
Fox News on Tuesday night, “We’re looking at the concept where we open sections
of the country and we’re also looking at the concept where you open up
everything.” Earlier that evening, Larry Kudlow, Director of the National
Economic Council, declared, “Once we can reopen this thing, I think it’s
going to be very successful.”
However, one of the problems in going to sleep for a
protracted period is that the world can be a different place when you come back
down from the mountain. Remember Irving Washington’s story of poor old Rip Van
Winkle? He wandered off in New York’s Catskill Mountains to escape from his
nagging wife.
As an aside, this story was very likely on the minds of the
Malaysian Ministry of Women and Family Development last week when they advised that
in order to preserve harmony with their husband during the COVID-19 lockdown
women should wear makeup, speak in a coquettish voice and avoid nagging! Perhaps
unsurprisingly they later apologised to enraged Malaysian women.
Nevertheless, as one does when avoiding a termagant partner,
Rip met up with some ghostly fellows and had a few too many ales. He crawled
away to sleep it off for a while and woke up 20 years later. When he returned
to the village, he discovered that he had completely missed the American
Revolutionary War and more than a few things had changed, “everything was
strange”.
A Rip Van Winkle economy is one that changes significantly,
both in scale and nature, while businesses are dormant. It’s never happened
before and hopefully will never again, but it is happening now all around the
world.
The Australian Prime Minister elaborated, saying, “We want
these businesses to effectively go into a hibernation, which means on the other
side, the employees come back, the opportunities come back, the economy comes
back.” Such reassurance helps to calm markets and the citizenry but is it
likely to be the way this unfolds? Will everything just pick up from where we
were, or should we prepare for the possibility that a revolution takes place in
the economy while businesses sleep? The economist Larry Summers reminds us that,
“economic time has stopped, but financial time has not been stopped.”
There are fuels for revolutionary change in our economy and,
as a consequence, our society. I will talk about three of them.
Firstly, it’s been a while since almost every aspect of the
global economy shut down for several months and we lost more than three
trillion dollars of global GDP in a matter of weeks. That hasn’t happened at
this pace since, well… never. As noted in The
Guardian, “Not even during the Great Depression and the second world war
did the bulk of economic activity literally shut down, as it has in China, the
US and Europe today.” At a WHO press conference last week, the Chairwoman and
Managing Director of IMF, Kristalina Georgieva, warned that, “This is a crisis
like no other… Never in the history of the IMF have we witnessed the world
economy coming to a standstill. It is way worse than the global financial
crisis.” On 02 April, Bank of America Global Research reported that it expects
the COVID-19 recession in the U.S. to be the “deepest recession on record,” nearly
five times worse than the postwar average with U.S. jobless claims already rising
by 6.6 million in the last week, bringing total job losses in the last three
weeks to around 16 million. Is it possible that this crash in economic activity
might detrimentally affect those opportunities that are expected to be there
when business wakes up again?
Secondly, this is happening when we were already in the
midst of revolutionary change brought about by the Fourth Industrial
Revolution. For some years, around the world, relative silence in public policy
on how to respond to the disruptive impact of this particular revolution has been
remarkable and eerie.
And finally, the demonstrable need for expertise, competence, resilience, capacity and strength in government and the public sector during this time of crisis will render past clarion calls for the privatization of all social services including public health; an unfettered private financial sector; laissez faire, free-market dominance in economic management and a conception of ‘value’ determined solely by price, to all look rather silly.
At this point, I am reminded of Sir Ken Robinson quoting the
comedian George Carlin who said, “Just when I found out the meaning of life,
they changed it.”
Storm Damage
A popular analogy for the economic impact of this pandemic
is that it is like a storm. It will blow over and life for most will return to
normal. This belief underpins the Australian Prime Minister’s six-month
hibernation theory. On 01 April, The New
York Times summarised this view as, “Once the virus is contained, enabling
people to return to offices and shopping malls, life will snap back to normal.
Jets will fill with families going on merely deferred vacations. Factories will
resume, fulfilling saved up orders.” We hope that this is correct, how
wonderful that would be for so many people, but the odds are not favourable.
Disconcertingly, that summary of the optimistic perspective was published on
April Fools’ Day.
Let’s recall again what Rip Van Winkle experienced when he
woke and returned to his village, “He found the house gone to decay—the roof
fallen in, the windows shattered, and the doors off the hinges… It was empty,
forlorn, and apparently abandoned.” The
New York Times continues, “But even after the virus is tamed — and no one
really knows when that will be — the world that emerges is likely to be choked
with trouble, challenging the recovery. Mass joblessness exacts societal costs.
Widespread bankruptcy could leave industry in a weakened state, depleted of
investment and innovation. Households may remain agitated and risk averse,
making them prone to thrift. Some social distancing measures could remain
indefinitely. Consumer spending amounts to roughly two-thirds of economic
activity worldwide. If anxiety endures and people are reluctant to spend,
expansion will be limited — especially as continued vigilance against the
coronavirus may be required for years.”
The economist Satyajit Das notes that a barber without
customers for three months has lost revenue that is gone forever, it doesn’t
come back. The barber’s income for that year is potentially less by around a
quarter. Das also recalls that a study by the U.S. Federal Reserve undertaken
before the pandemic identified that most Americans would struggle to raise $400
in the case of an emergency. And if that sounds dire, he notes that research by
the Grattan Institute reveals that 10% of Australian households have less than
$90 to cater to an emergency and less than 50% have access to $7,000. The
Khazanah Research Institute has published a report on ‘The State of Households’
in Malaysia in which they note, “Findings from the latest UNDP Human
Development Report for Malaysia suggest that many Malaysian households have
limited savings. Their low levels of precautionary savings mean that most
families would be in trouble in the event of a shock – such as a reduction in
income, unemployment, or other emergencies.”
So, how much damage is this storm likely to cause?
In February, the New York Federal Reserve announced that
2019 saw the largest surge in U.S. household debt since 2007, which of course
was just before the Great Financial Crisis (GFC). Total household debt balances
increased by $601 billion in 2019 exceeding $14 trillion for the first time
ever. Most of that growth, $433 billion, was in household mortgage debt, again
the largest rise since 2007. In that context, with U.S. unemployment now already
at 16% or more, there is strong likelihood of increased mortgage and other
credit stress, leading to foreclosures. Exacerbating this, rising stock prices
in recent years have spurred spending but this source of funds disappeared with
stock markets plummeting over the past six weeks. Even in good times, such
trends in the United States have potentially detrimental consequences for the
global economy.
And are global finances positioned well to cope with severe
disruption?
Although there have been some important regulatory reforms since the
GFC especially to improve transparency in over-the-counter (OTC) derivative
trades, in November 2019, the Bank for International Settlements reported that
the notional amounts of OTC derivatives – which determine contractual payments
- rose to $640 trillion in June 2019 marking continuation of an upward trend
evident since the end of 2016 and taking the total higher than it was at the
end of 2007. The value of global GDP at present is around $88 trillion, which
means that the notional amount of OTC derivatives is 7.25 times larger than the
total of all the world’s economies combined. If the downturn caused by social
distancing and lockdowns extends for several months, as mooted by numerous
governments, ‘working from home’ for many will become ‘being unemployed at home’.
Such a trend if continued even remotely near the scale already seen will
inevitably place strain on the financial sector.
Already, on Friday 03 April,
the U.S. Federal Deposit Insurance Corporation (FDIC) announced that West
Virginia's First State Bank had failed. This bank was 115 years old and although
it did have long-standing financial woes, it was the first to fail in the
United States since outbreak of the pandemic. Nevertheless, there is high
probability of a large increase in U.S. loan defaults and these will place
increased demands on the FDIC, the Treasury and the Federal Reserve to minimize
bank failures.
Just to make sure that humanity maximises the challenge,
because nobody likes to do things by half measure, last month, in response to
falling global demand resulting from the coronavirus pandemic, Saudi Arabia and
Russia decided not to agree on oil production cuts. On 08 March, Saudi Arabia
unilaterally offered price discounts of up to $8 per barrel to certain
customers and announced that it would increase production to 12.3 million
barrels a day in April. As demand continued to fall dramatically, the price of
Brent crude oil reached its lowest level in 18 years on 30 March at $22.58 barrel
and West Texas Intermediate below $20 barrel. The price bounced back somewhat
in the first days of April after early signs of a cut in production but even
so, markets have taken advantage of the low prices and are probably going to be
oversupplied for several months at least. Recently, a Citibank research report
said that any potential agreement by Saudi Arabia, Russia and America “looks
like it is too little too late.”
Why? Estimates are that global daily consumption of oil in
April will fall by 15 million to 20 million barrels a day against what it is
was a year ago. On Monday last week, Goldman Sachs Group analysts were quoted
in The Straits Times to observe,
"It is impossible to shut down that much demand without large and
persistent ramifications to supply." Although China is reported to be
buying oil for its national reserve, this is unlikely to diminish global
over-supply. Citing a forecast by the Paris-based International Energy Agency,
Morgan Stanley cautions, "Oil prices failed to keep pace, with growing
(coronavirus) lock-down measures and reports that this could drive global
demand down 20%, potentially pushing the world to run out of storage capacity."
Russia needs a Brent crude price of around $40 to balance its budget but by 02
April Brent crude was only $26 barrel. On 20 March Russia had $551 billion in
foreign-currency reserves; within one week that had fallen by $30 billion.
Radio Free Europe has reported that Saudi Arabia needs a Brent crude price of
$80 to balance its budget and that it has already spent $13 billion of its $480
billion of foreign-currency reserves.
All of this matters to every country because in the 1970s, the
world abandoned the Bretton Woods gold standard. The United States and Saudi
Arabia agreed to standardize the price of oil in U.S. dollar terms. Saudi
Arabia pressured OPEC countries to agree to this arrangement, which created the
‘petrodollar’. The petrodollar system
underpins the U.S. dollar as the global reserve currency, which benefits United
States’ financial markets as a source of liquidity and foreign capital inflows.
Essentially, dollars from oil exports are ‘recycled’ back to buy investments in
the United States, which has allowed the U.S. to issue dollar denominated
assets – including Treasury Bills – at low rates of interest and thus promote
growth without inflationary pressure. In 2018, the U.S. Energy Information
Association reported that the global net export revenue from OPEC members was
$710 billion.
If the flow of recycled petrodollars evaporates for
sustained duration in the face of depressed prices caused by extremely low
demand, coupled with the drying up of a Chinese surplus of dollars caused by
depressed exports, there could be a sharp reduction of liquidity for American
capital markets just when the United States needs to spend in order to prop up
its economy. Note that all this is potentially coming off of an already
exploding U.S. fiscal deficit that exceeded one trillion dollars in 2019, and a
national debt of $23.2 trillion before any coronavirus stimulus package. Is it
any wonder that President Trump is Tweeting up the oil price and declaring improbably
that the economy will “re-open” in a matter of weeks?
Faced with insuperable economic problems and crises of
unprecedented nature and scale, we can perhaps be forgiven in doubting Morrison’s
plan that businesses will wake in a few months from now to discover that “the
employees come back, the opportunities come back,(and) the economy comes back.”
Come the Revolution
Over the next few years and accelerating into the future, the
impact of artificial intelligence, machine learning, big data and analytics,
the internet-of-things, block-chain technology, and our need to transition to a
post-carbon economy and adapt to climate change will present both opportunities
and significant challenges for all industries, especially in technologically
developed economies. Even without the forced change in work practices arising
from the coronavirus pandemic, over the coming decade, many service-sector
skills traditionally associated with middle-income positions in engineering,
banking, project management, procurement, law, health care, mathematics and
accounting etc. were destined to be replaced increasingly by self-learning
algorithms.
This transition has already begun but ‘business as usual’ and societal inertia
allowed us all to note the wonder of it while plodding along with an
understanding that it’s probably all a bit overstated and will work itself out
in the long run. Of course, there is also the dismissive mantra that technology
never really destroys jobs, it just changes them. For example, we witnessed how
agricultural workers in the 18th and 19th centuries all moved
into manufacturing jobs in the cities, and then how manufacturing workers in
the mid-20th century substantially moved into the services sector.
However, this time around, technology is impacting on all these sectors at
once; not just for physical work but decision-making, planning, investigating,
diagnosing, arguing a legal case, communicating, entertaining and practically
anything else we can think of using our slower, lower-data-empowered brain.
The importance to our society of such unprecedented change, commonly
called the Fourth Industrial Revolution, is reflected in the high percentage of
people in advanced economies working as professionals, clerical and
administrative workers and managers, many of whom are likely to find their jobs
challenged by technology. Moreover, automation of physical processes associated
with trades and labour will continue to develop at an accelerating pace. For
example, by 2019, over $100 billion had been invested into the autonomous vehicle
industry. Volkswagen led the pack with an investment of $54.2 billion in
driverless cars, followed in diminishing order by Samsung, Ford, Toyota and
others.
The nature of the challenges and extent of opportunities before us cut
across all sectors of the economy. For this reason, the past will not be an
accurate predictor of the future. And yet, remarkably, this systemic disruption
to every aspect of our society and economy has hardly been talked about outside
of thought-provoking books and documentaries, TED talks by Ferrari-driving
Silicon Valley techno-geeks, the occasional rousing speech by an academic or
politician, and corporate planners in behind-closed-door Board meetings.
Nevertheless, sneakily, those companies that were supposed to be asleep
over the next six months might just notice whilst dozing that there could be
opportunities to deploy smart technology rather than rehiring previous
employees. That algorithm that was going to require several thousand
redundancies can now be rolled out without all the industrial-relations angst.
They might also learn how to undertake processes that used to involve moving
people around the country, indeed the world, using far fewer staff working remotely
with video-conferencing and SCADA control systems.
As early as 03 Feb, as companies were closing their offices in China in
response to the coronavirus outbreak in Wuhan, a smiling CEO of ‘Zoom’ the “video
remote work tool company” said that their stock price had grown 15% in a day
and that demand for the technology was booming, “Ultimately, almost every company, they need to have a tool like this.
I think that based on IDC estimates by 2023 that’s a $43 billion market.”
Just think about it
for a moment; how often does almost every company in the world, at the same
time, stop, send all their employees home for at least a couple of months, step
back and take a look at where they are, where they have been, what they have
been doing, how they have been doing it, how best to move forward and with what
technology and processes? Never before, and perhaps never again but we can be
fairly confident that quite a lot of them will implement changes. And those
changes will almost certainly maximise the technology now on offer through the
Fourth Industrial Revolution, which has just been put on steroids.
If companies stay in
hibernation for months, our Rip Van Winkle economy is most unlikely to look
much like it did before the coronavirus pandemic. We might do well to explore
further the conditions Rip Van Winkle discovered upon waking and returning to
the village, “The very character of the people seemed changed. There was a busy,
bustling, disputatious tone about it, instead of the accustomed phlegm and
drowsy tranquillity.”
Rather than deluding ourselves that companies will wake up, that employees
and opportunities will come back and the economy will tick along just like
before, to avoid significant social disruption and continue to grow our economy,
governments will need to recognise and get ahead of a process of tumultuous
change that will very likely unfold in 2020.
Rediscovering Value
Remember the neo-conservative, laissez faire world of
austerity when ‘big government’, ‘economic stimulus’ and ‘bail outs’ were dirty
words? You know, about five weeks ago.
The northern States of Europe are showing us now that this
thinking has not completely faded as they resist helping southern European
countries in critical economic peril, but cracks in the neo-liberal narrative are
showing in domestic politics. In many countries citizens look in vain – possibly
later to become anger – towards hollowed-out and weakened institutions that too
often are failing to respond effectively to the coronavirus pandemic. In many
places, incompetent government authorities have been overly slow to impose
social-distancing restrictions, and have not anticipated and responded with
adequate medical facilities, testing, critical-care equipment and personal
protection equipment. Despite some statistical anomalies arising from
restricted testing, these failures all too often manifest as COVID-19 case numbers
and deaths.
Increasingly over the past 25 years or so, right-wing
populism has argued that ‘Deep State’ elites, bureaucrats and technocrats have ‘politically
correct’ agendas that hold back hard-working capitalist risk-takers, who in
turn deserve to pay less tax, enjoy their riches and eventually benefit us all
through trickle-down mechanisms. The problems of widening wealth inequality,
environmental pollution, rising atmospheric carbon dioxide concentration, mass
destruction of biodiversity, poor quality public education, lack of access to
public health services, etc. are all ‘liberal’ or ‘left-wing’ conspiracies
getting in the way of a strong country.
The United States under Republican influence, and especially
during the Trump presidency, is a notable example of a country governed by such
populist political ideology but it is by no means the only one. Variations of this
narrative have been evident in Jair Bolsonaro’s Brazil, Viktor Orban’s Hungary,
and in populist political parties throughout Western Europe and elsewhere. In
spite of his dogged pursuit of Brexit, the UK under a seemingly more pragmatic –
COVID-19 infected – Boris Johnson does not yet consistently fit this mould.
Rachel Sylvester in Prospect magazine
notes that his ideology resembles that of Groucho Marx, “These are my
principles and if you don’t like them… well I have others.”
However, according to the economist Satyajit Das, “in times
of crisis everyone is Keynesian”. He may well be right. In early March, the
conservative Australian Government announced a $A17.6 billion stimulus program
in response to the economic impact of the COVID-19 pandemic. It followed ten
days later with an increase in the package to $A189 billion, and a week after
that with another $A130 billion making the total stimulus to date $A320 billion
(approx. USD193 billion), representing 16.4% of GDP!
On 27 March, the Republican President of the United States
signed into law a $2 trillion stimulus package, the biggest in U.S history.
This follows $3 trillion in loans and asset purchases by the Federal Reserve in
recent weeks, which some commentators argue will still not be enough. Reuters
reports that Scott Minerd, Chief Investment Officer at Guggenheim Partners, has
calculated that funds allocated to bolster the Federal Reserve are insufficient
, “That is just a fraction of the roughly $9.5 trillion in outstanding U.S.
corporate debt, much of which is either in the lowest-tier investment grade
rating or already rated as junk, with a higher risk of default. Other areas
that need support - such as the commercial paper market where borrowers go for
short-term funding or the municipal market that local governments use to raise
money for roads and schools – total trillions of dollars more.”
On Monday, 06 April, Singapore announced a third stimulus
package of $3.6 billion, taking its total stimulus to $41.7 billion, which is
12% of the country’s GDP. And so we could continue through an ever expanding
list of countries.
Eventually, governments will need to raise taxes to pay for
all of this, but will they be free to do so without considering wealth
inequalities and the importance of maintaining a sound public sector? Will the
memory of under-performance by hollowed-out public institutions in many countries
allow future governments to again disparage bureaucrats, scientists and
technical experts as unnecessary elites? Trust in the ability of laissez-faire
capitalism to deliver a just, caring and equitable society is likely to be
broken irreparably by images of refrigerator trucks lined up as temporary
morgues in New York City.
Be that as it may, Professor Alex Millmow speaking on ABC radio
last week provided the ironic anecdote that Melbourne-based Marxists who meet every
Easter for a conference to discuss the demise of laissez-faire capitalism are
unable to gather this year, not because of ideological differences but because
of restrictions on too many people gathering in one place during the
coronavirus pandemic. With the evident discrediting of unbridled capitalism
flowering all around the world in response to the pandemic, “Their moment has
come! But it has been snatched away by regulations put in place by the
Government”.
Professor Mariana Mazzucato has long argued that we need to
ask questions about the difference between value creation and value extraction,
between productive and unproductive activities. We might do well to start
listening to her. The economic crisis of the coronavirus pandemic is hitting
every country in the world at roughly the same time; every business, every
organisation, every government and every person will be impacted upon, mostly
negatively. As we move forward into a world in which every government is
saddled with enormous debt and technology is changing so many traditional assumptions
about the use of employment as a means of wealth distribution, we cannot afford
the luxury of lazy thinking and policies based on ‘business as usual’.
To illustrate how the term ‘value’ has been captured in
mainstream economics by consideration solely of price, Mazzucato quotes a
former CEO of Goldman Sachs investment bank, Lloyd Blankfein. In 2009, just
after the GFC of 2008 that was caused primarily by investment bankers – including
those at Goldman Sachs – Lloyd Blankfein, with no cheeky wink to the gallery at
all, said: “The people at Goldman Sachs are among the most productive in the
world.” Mazzucato questions whether the 8.8 million people in the United States
who lost their jobs between 2007-2010 and the thousands of people who lost
their homes as a result of that crisis – 120,000 in the month of September 2010
alone – would agree. She also notes that Goldman Sachs had to be bailed out in
the GFC with $10 billion of taxpayers’ funds.
The problem she argues is that in neo-classical economics,
which emerged around the beginning of the 20th century, the equation
shifted from deliberations on the nature of value, how it is determined and
what the productive potential of the economy might be, giving rise to a theory
of price, to the reverse, “a theory of price and exchange which reveals value.”
Obviously, this can lead to perverse outcomes, such as ignoring or
under-appreciating value-creating activities that are not priced and, of
course, recognising harmful investment banking practices as being productive
even if they destroy value.
Mazzucato reminds us that up until 1970, most of the
financial sector, specifically net difference in interest, was not even
included in GDP. This changed by giving these earnings a name and including them
in GDP calculations; however, as the calculation of their ‘value’ increased
each year, people began to notice that what they were mostly doing was
financing themselves, that is the financing of finance, insurance and real
estate (FIRE). She notes that in the UK, only 10-20% of finance goes to
industry and the rest into FIRE. “Similarly, in the real economy, in industry
itself, what was happening? This focus on prices and particularly share prices
has created a huge problem of re-investment… What we have today is an
ultra-financialized industrial sector where increasingly a share of the profits
and net income are not actually going back into production, into human capital
training, into research and development but (are) just being syphoned out in
terms of buying back your own shares, which boosts stock options, which is in
fact the way that many executives are paid… In the last ten years, 466 S&P
500 companies have spent over $4 trillion just on buying back their shares.”
In the heavily indebted, hesitant and uncertain world we
will find ourselves in as we come out of the hibernation of social distancing
and lock-downs, will we be able to afford the continued misallocation of
resources that has nurtured unprecedented inequalities in wealth simply because
we lazily and unquestioningly accept value as defined by price? And in a world
of the Fourth Industrial Revolution where the production of material goods will
increasingly be less dependent on human labour, will we need to re-think our
understanding of value?
Professor Bruno Frey, who heads up the Centre for Research
on Economics and Wellbeing at the University of Basel, agrees with Mazzucato
that we do need to re-think our understanding of value. He suggests that we do
so based on the extent to which activities and resources are directed toward the
creation of happiness. He identifies five determinants of societal happiness,
most of which are not measured with a focus only on GDP: material wellbeing;
friends, acquaintances and family life; physical health; political conditions,
such as the absence of tensions and war; and a sense of equality, especially
the absence of gross inequalities in wealth and opportunity. Frey eschews the
notion of a national indicator of happiness on the grounds that it is too easily
manipulated by governments. Instead, he argues the importance of a healthy
plurality of organisations assessing and reporting on government and society’s
performance against the five determinants that his research has identified are
important for happiness.
So, there are good reasons to believe that we need to
prepare for a Rip Van Winkle economy when we finally awake. The opportunities,
employees and economy as we knew them
may no longer be there but this need not be cause for despair; recall again the
fate of Rip Van Winkle, “Having nothing to do at home, and being arrived at
that happy age when a man can be idle with impunity, he took his place once
more on the bench at the inn door, and was reverenced as one of the patriarchs
of the village, and a chronicle of the old times ‘before the war.’ It was some
time before he could get into the regular track of gossip, or could be made to comprehend
the strange events that had taken place during his torpor.” Rip Van Winkle may
not have understood fully what happened while he was asleep but he went on to
live a happy life, as might we all if we prepare for the reality of what lies
before us.
