COVID-19: How the UK’s economic model is contributing to mismanagement of the crisis

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Caroline alves and Farwa Sial discuss the effectiveness of the UK’s economic response to the COVID-19 crisis and explain why it is not directly supporting households but businesses.

The global market gyrations since February 2020 have been fueled by a simultaneous supply and demand shock as well as the crude oil price war. This is not a 2007-2008 financial crisis and there is no doubt that its impact is directly linked to disruptions in the movement of capital: stock market crash, increase in corporate debt, decline of industries. aeronautics and tourism, blow to the retail industry being a few events. However, the morbidity is not simply linked to the virus and the forced breakdown of economies across the world, but to a multifaceted and contradictory historical process of how regulation escaped capitalism in the 21st century.

Since the 1970s, capitalism has undergone significant changes in the production and distribution of value. Despite different and often contested approaches to examining these changes, a greater role for capital gains, commission income and, more broadly, rent-seeking behavior is hardly denied. This change has been described through various dimensions, including increased speculation in the finance, insurance and real estate sectors, the financialization of non-financial spheres and the emergence of new classes of rentiers. At the heart of this process, we have seen the extraction of predatory value and the increase in inequalities, which in turn have been made possible by the strengthening of market fundamentalism and the mechanisms that have led to the collapse of states and institutions.

Although many regulations have been implemented and redesigned since the 2007-2008 crisis, the aggressive risk-taking and moral hazard, which marked the foundations of the crisis, have not simply evaporated but have been extended. and socialized in different ways. Late capitalism relies on the ease of transcending institutions because the checks and balances that regulated the accumulation of profits during the post-war era are no longer in place. The collapse of the state was accompanied both by supposedly neutral “technocratic bureaucracies” and an absence of development indicators such as class mobility and welfarism.

In this context, the expertise of epidemiologists to contain the virus may be more effective if accompanied by systemic reforms to address the imbalances resulting from the current structure of rentier extraction which, explicitly or implicitly, hamper policies aimed at the good. common.

Consider, for example, the sharp increase in demand for certain products for reasons such as hoarding at the individual and corporate level. The supply side of this story may be facing an increase in input prices, as pharmaceutical companies raising prices for essential drugs citing halting imports of raw materials from India and China. However, the current context can also give rise to exploitation practices. Either way, the most financially vulnerable will feel this cost in times of illness, and their perception can exacerbate demand surges (including hoarding) – especially in a system that is not prepared to cope. unexpected increases in production costs.

The Competition and Markets Authority issued a statement to ensure that companies should not engage in operating practices to the detriment of customers. Yet this statement is effectively no better than a non-legally binding code of conduct, without punitive consequences for unscrupulous market participants. This state of affairs is representative of a larger trend within UK regulatory and supervisory authorities, which, barring litigation, have tended to simply treat lapses in consumer protection with toothless platitudes. .

Economic rescue packages: how effective?

The gravity of the current crisis has led governments to implement ambitious stimulus plans to revive the economy. Economists and policymakers have scrutinized these packages. A very particular point which overlaps some of these criticisms, however, is the need to focus on households and workers. In the case of the UK, the bailout does not directly empower or support households but businesses. Most of its measure specifically targets businesses benefiting from VAT and other tax exemptions or deferrals, interest rate cuts and various other types of operational assistance. Even when the approach focuses on the workforce – for example, the plan offering up to 80% of an employee’s salary – it has been geared towards the objective of business continuity, without any objective or conditionality. aimed at excluding a zero hour contract class. employees to follow, keeping as many workers as possible and allowing them to make productive contributions.

Part of the intention behind this scheme, which was recently extended to the self-employed, is both to prevent a drop in consumption and to avoid insolvencies, voluntary company agreements and company failures that could result. result. In this regard, this scheme is to some extent comparable to the post-crisis approaches of 2008, where a number of innovations and financial measures were introduced with the specific aim of improving the supply of credit to the consumer. real economy. But, as history has shown us, the availability of such credit has not translated into the expected ‘runoff’ for consumers or businesses, as recipient institutions have remained reluctant to lend (even between them), protecting themselves. Trusting companies rather than financial institutions, in this case, the wage system is to be sought from the government by the employer rather than the employee, without an explicit mechanism or to prevent companies from acting solely for their own benefit (e.g. Virgin Atlantic, by seeking a £ 7.5 billion government bailout, simultaneously demands that its employees forgo their pay for eight weeks) or ensure binding regulations to ensure employment (see, for example, Wetherspoons which laid off 43,000 workers).

It cannot be stressed enough that the current pandemic is not simply a crisis in supply or demand, but a disruption in the supply of labor followed by an unusual shock slowing the demand for certain services. and property even when most people still hold their jobs or be financially compensated for not being at work. For this reason, although households in economic analysis are generally understood from the point of view of consumption, it seems that now stimulus or reform plans must be adapted not only to stimulate demand (at the right time) and keep businesses alive, but also ensure that a complete collapse of the system due to the need to “demobilize” the economy is preventable.

In this sense, much remains to be done in assuming a more central role in the economic analysis of households. We should include measures that look at issues ranging from child and elderly care, direct and rapid cash transfers to debt levels and job insecurity. This emphasis is particularly important given that the weakening of the state in the UK has been accompanied by austerity policies and misallocation of resources resulting from the privatization of health care.

While alternative measures such as universal income and helicopter money have been criticized on the basis of the amount of money transfers and the length of the uncertainty associated with the crisis, the effectiveness of the two proposals lies in household protection. This protection, whatever its format, is what we need now, and it should be followed by radical changes in the way we see, understand and perceive inequality, vulnerability and class – in the same way as implementation of the welfare state in the 1940s followed both a radical change in the way poverty was perceived after World War II and the recognition of the need for a comprehensive social protection system as a duty of the state. If we use the war analogy to understand and resolve the COVID-19 crisis, this is certainly the main (and perhaps the only) reason for doing so.

What next?

As others have advocated, a reform / stimulus package must be a comprehensive intervention that ensures the protection of ordinary people. Without a vaccine, the “economic contagion” needed to keep the economy afloat can only work if people are both locked in and financially secure. The current model of capitalism and its response to the crisis are not only inadequate, but they continue to fail to protect the most vulnerable and keep households safe. Systematic transformation, which leaves institutions better prepared to cope with crises, can only begin by addressing the fundamental issue of unequal distribution and reorienting economic policy from a perspective of the common good. The United Kingdom has a historic opportunity to rethink its economic model: regulation must be strengthened and transformed in favor of the public.

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Note: The authors thank Ingrid Harvold Kvangraven and Ilias Alami for their helpful comments.

about the authors

Caroline alves (@cacrisalves) is Joan Robinson Research Fellow in Heterodox Economics at Girton College, University of Cambridge.

Farwa Sial (@farwasial) is a post-doctoral researcher working on the ESID project at the Global Development Institute at the University of Manchester.

All articles published on this blog represent the point of view of the author (s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science. Featured Image Credit: by BRUNO CERVERA on Unsplash.

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