Dr Luke Martinelli is a Research Associate at the Institute for Policy Research (IPR), University of Bath.
‘Paradigm shifts’ have typically followed seismic global events. They have highlighted latent tensions and underscored the profound failings of existing policies and institutions; for example, consensus around Keynesianism demand management, the expansion of the modern welfare state, and the subsequent ascension of monetarist economics and the neoliberal “backlash,” closely followed the Great Depression, the Second World War and the global oil crises of the 1970s respectively.
The COVID-19 crisis has caused an abrupt end to austerity and brought once-radical economic policies into the mainstream. Some countries are already disbursing unconditional cash payments as a temporary emergency response measure, while others have called for universal basic income as a long-term structural reform. Are these developments indicative of an on-going paradigm shift? How radical are these proposals in reality? And, to the extent that they are, will they get off the ground or be side-lined in favour of mainstream alternatives?
With initial supply shocks imposed by shutdowns and layoffs likely to trigger even more substantial and long-lasting contractions in aggregate demand, the International Monetary Fund (IMF) has called the economic crisis the worst since the Great Depression. The ensuing economic challenges presented by COVID-19 have called for a range of public policy levers to be manipulated in unprecedented ways. Beyond bolstering struggling health services and mitigating the spread of the virus, there is the urgent need to keep individuals, households, and firms afloat, to prepare the ground for recovery, and to kick-start the stagnating global economy once the immediate public health crisis has subsided.
Governments and central banks around the world have committed to massive programmes of fiscal and monetary expansion aimed at supporting individuals and firms. Specific reforms are too numerous to mention – the IMF and the Organisation for Economic Co-operation and Development (OECD) provide useful trackers of the main developments – but standard pillars include:
- expansion of social welfare programmes (in terms of generosity, coverage, and conditions of access), including provisions for self-employed and non-standard workers;
- subsidisation of salaries and incentives for employee retention;
- suspension of utilities and mortgage repayments;
- deferrals and exemptions on tax liabilities;
- provision of favourable loans and guarantees, and suspension of loan repayments, for struggling businesses;
- relaxation of capital and liquidity ratios for the financial sector.
In Europe, there are already signs that the crisis has eroded any remaining appetite for austerity that has characterised the past decade, in favour of more permissive fiscal and macro-prudential regulation. The EU’s total fiscal response to the crisis reportedly amounts to €3.2 trillion. Last week, EU finance ministers agreed a €540 billion recovery package, following the European Central Bank’s (ECB) funding of a €750 billion Pandemic Emergency Purchase Programme (PEPP). Coming after a run on Italian bonds that threatened to trigger another round of sovereign debt crises, the PEPP promises to shore up purchases of public sector bonds until the end of the crisis, suggesting that the ECB has shelved self-imposed limits on the proportions of countries’ sovereign debt they would purchase. These actions are seen to have cemented the ECB’s character as a “more interventionist institution, fully committed to defending the single currency.” ECB governor Christine Lagarde tweeted that there were there were “no limits” to the scope of the central bank’s potential interventions.
The €540 billion joint fiscal stimulus was finally agreed after a prolonged deadlock between fiscally-conservative Northern European countries – including Austria, Finland, Germany and the Netherlands – and a larger group including France, Italy and Spain. The so-called “Frugal Four” opposed the relaxation of strict conditionalities attached to recovery funds, following the design of the European Stability Mechanism. In the end, a compromise was achieved, but the negotiation has exposed deep fault lines between the Eurozone’s major economies. Importantly, the controversial “Coronabonds” proposal – the issuance of mutualised debt – was shelved. This would have been a powerful statement of solidarity, in the absence of which the EU’s very survival is at stake. There are concerns that the existing package is inadequate, and that it will serve to exacerbate divisions within the EU, with the worst-affected nations falling more heavily into debt. The mutualisation – or even cancellation – of sovereign debt would represent a real paradigm shift, but these options remain remote.
Nevertheless, there is undoubtedly greater acceptance of the State’s role in absorbing private sector losses, and greater tolerance of rising debt, in the post-COVID-19 environment. After all, as the former president of the European Central Bank, Mario Draghi, observed, the private sector “did not cause” the shock and “cannot absorb” it. As Robert Chote, chairman of the UK’s Office for Budget Responsibility, put it: “This is not a time to be squeamish about one-off additions to the public debt.” Outside the EU, the UK and US have announced €400 billion and $2 trillion (€1.8 trillion) stimulus packages, respectively.
Beyond the significant shift in sentiment – once again, “we are all Keynesians now” – a number of countries are experimenting with more radical policy instruments.
The crisis has led growing numbers to reflect on the possible advantages of universal basic income (UBI). It has exposed the profound failures of existing systems to provide income security in the context of precarious and non-standard labour relations, including self-employment. Where previously welfare has been viewed as unproductive and distortionary, recent events have highlighted its role as a macroeconomic stabiliser and consumption smoothing device, as enhancing the efficiency of the market economy.
The idea that safety nets must be conditional to exclude the work-shy has been similarly challenged. How can individuals be held responsible for forces beyond their control? The scandal is not that people won’t work, but that many of those who work are not paid an adequate wage to do so. The crisis has laid bare our vulnerability to distant economic forces, in a system geared towards ever-increasing productivity and growth, and to the detriment of communities and the natural environment. UBI fits neatly with such a “post-productivist” world view.
As well as its promise as a long-term structural reform – as a response to labour market dysfunction, rising inequality, a crisis of care, and the demands of the knowledge economy with respect to lifelong learning and labour market transitions – the basic income proposal appears consistent with Keynesian stimulus policies required to kick-start the economy.
However, as Philippe Van Parijs has cautioned, it is important to distinguish UBI as a permanent policy instrument from temporary, emergency versions. These come under various designations, including “emergency UBI” and “helicopter money.” “Emergency UBI” conforms to the standard definition but is only paid for a temporary period; details of funding are not specified.
In contrast, “helicopter money” describes the financing mechanism of the instrument; while universal and unconditional payments may be implied, they are arguably not essential attributes. Specifically, “helicopter money” involves a “direct, unrepayable funding by the central bank of fiscal transfers.” The purpose is to restart a stagnant economy, whereas “emergency UBI” is intended to mitigate against the immediate adverse effects on individual incomes, so their ideal timing may differ.
Although Hong Kong and the US have both implemented cash disbursements termed “helicopter money” by the media, they are not in fact so. In the case of Hong Kong, the handouts are funded via a “substantial fiscal reserve,” and in the case of the US, via increased borrowing. The closest we come to genuine “helicopter money” might be the UK’s decision to resort to monetary financing of fiscal expenditures in the short-term. But the UK has gone for a very different approach to income replacement, subsidising 80% of employees’ salaries or self-employed workers’ previous earnings.
Furthermore, there is no appetite for UBI as a permanent structural policy. In the case of the US measures, payments are restricted to low and middle earners, so are not universal. It is simply that unconditional cash payments adhere to two important criteria: they act as an effective demand stimulus besides shoring up household finances, and they can be disbursed as quickly and efficiently as possible (with minimal bureaucratic effort).
The increased interest in universal basic income “proper” appears to most pronounced in countries with highly dualistic and rather dysfunctional welfare systems, such as Italy and Spain which have also experienced the worst effects of the crisis. However, it is likely that widespread calls for universal basic income will be translated into an expansion of patchy (in some places, non-existent) social safety nets. In Italy, flat-rate payments for self-employed workers and other unprotected workers have already been introduced – but they are far from a universal basic income. Spanish proposals to implement a basic income are, on inspection, a targeted, not universal, handout. Even so, Social Security Minister Jose Luis Escriva intends that the policy will become a permanent structural instrument beyond the immediate crisis.
Whether the COVID-19 crisis represents a genuine paradigm shift in economic thinking remains open to debate. Ultimately, the outcome will be determined by political struggles in Europe and beyond.
This blog was originally posted via euronews on 17 April 2020.
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