Posts Tagged ‘Economy and Society’

COVID-19: how the UK’s economic model contributes towards a mismanagement of the crisis

Carolina Alves and Farwa Sial discuss the efficiency of the UK’s economic response to the COVID-19 crisis and explain why it does not directly support households but companies.

The global market gyrations since February 2020 have fed on a simultaneous supply and demand shock as well as crude oil price war. This is not a 2007-8 style financial crisis and there is no doubt that its impact is directly linked to disturbances in the circulation of capital: the stock market crash, rise in corporate debt, decline of the aviation and tourism industries, and the blow to the retail industry being some manifestations. However, the morbidity is not simply linked to the virus and the forced break in economies around 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 regarding production and distribution of value. Despite different and often contested approaches looking into these changes, a more prominent role for capital gains, fee incomes and, more broadly, rent-seeking behaviour is hardly denied. This shift has been described through various dimensions including heightened speculation in the finance, insurance, and real estate sectors, financialisation of non-financial spheres, and the emergence of new rentier classes. At the heart of this process we saw predatory value extraction and increase in inequality, which in turn has been enabled by the reinforcement of market fundamentalism and mechanisms that have led to the hollowing of states and institutions.

Although many regulations were implemented and redesigned since the 2007-8 crisis, aggressive risk-taking and moral hazard, which marked the foundations of the crisis, did not simply evaporate but have been extended and socialised in many different ways. Late capitalism rests on the ease to transcend institutions because the checks and balances which regulated profit accumulation during the post-WWII era are no longer in place. The hollowing of state has been accompanied by both allegedly neutral ‘technocratic bureaucracies’ and an absence of development indicators such as class mobility and welfarism.

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

Let’s consider, for example, the surge in demand for some products due to reasons including hoarding on an individual and corporate level. The supply side of this story may be facing input price rise, like pharmaceutical companies raising prices on essential drugs citing a halt in the import of raw materials from India and China. However, the current context may also give rise to exploitative practices. Either way, the most financially vulnerable will feel this cost in a time of illness, and their perception may exacerbate surges in demand (including hoarding) – especially in a system which is not prepared to challenge unexpected increases in production costs.

The Competition and Markets Authority issued a statement to ensure that companies should not engage in exploitative practices at the expense of customers. Yet this statement is effectively no better than a non-legally binding code of conduct, with no punitive consequences for unscrupulous market participants. This state of affairs is representative of a wider trend across UK regulatory and supervisory authorities, which short of litigation, have tended to merely deal with failures in consumer protections with toothless platitudes.

Rescue economic packages: how efficient?

The gravity of the current crisis has led governments to implement ambitious stimulus packages to revive the economy. Economists and policymakers have intensely scrutinised these packages. A very peculiar point cutting across some of these criticisms, however, lies within the need to focus on households and workers. In the case of the UK, the rescue package does not empower or directly support households but companies. Its measure for the most part expressly targets businesses with VAT and other tax holidays or deferrals, interest rates cuts, and various other kinds of operational assistance. Even when the approach deals with the workforce – for example, the scheme offering up to 80% of an employee’s wage – it has been geared towards the objective of business continuity, with no focus or conditionalities aiming at precluding a class of zero-hours contract employees to follow, keeping employed as many workers as possible, and enabling them to make productive contributions.

Part of the intention behind this scheme, recently extended to the self-employed, is both to prevent a lapse in consumption and stave off the attendant insolvencies, company voluntary arrangements, and business failures that might originate thereof. In this respect, this scheme is comparable to an extent with the approaches following the 2008 crisis, where a number of financial innovations and measures were introduced with the specific aim to improve the supply of credit to the real economy. But, as history showed us, the availability of such credit did not translate to the expected ‘trickle down’ to either consumers or businesses, as the recipient institutions remained averse to lending (even to each other), protecting themselves. With a faith on businesses rather than financial institutions, in the current case, the wage scheme is to be sought from the government by the employer rather than by the employee, with no explicit mechanism to either avoid firms acting solely for their own benefit (for example, Virgin Atlantic upon seeking a £7.5bn bailout from the government are simultaneously demanding that their employees should forego remuneration for eight weeks) or ensure binding regulation to guarantee employment (see, for example, Wetherspoons which laid off 43,000 workers).

It can’t be emphasised enough that the current pandemic is neither simply a crisis of supply or demand, but a disruption of labour supply followed by unusual shock slowing down demand for some services and goods even when most of the people are still holding their jobs or being monetarily compensated for not being at work. For this reason, although households within economic analysis are usually understood from the lenses of consumption, it seems that now stimulus or reform packages have to be tailored to not only spur demand (at the right moment) and keep businesses alive, but ensure that a complete breakdown of the system due to the need to ‘de-mobilise’ the economy is avoidable.

In this sense, much more needs to be done assuming a more central role in the economic analysis for households. We ought to include measures that look into issues ranging from childcare and elderly care, direct and quick monetary transfers to levels of debt and precarity of employment. This focus is particularly important considering that the weakening of the state in the UK has been accompanied by the austerity policies and misallocation of resources resulting from the privatisation of healthcare.

While alternative measures such as universal income and ‘helicopter money‘ have been criticised on the basis of the amount of money transfer and duration of uncertainty linked to the crisis, the efficacy of both proposals lies in protecting households. This protection, whatever its format, is what we need now, and it should be followed by radical changes in a way we see, understand, and perceive inequality, vulnerability, and class – in the same way that the implementation of the welfare state in the 1940s followed both a radical change in how poverty was perceived after WWII and the acknowledgment of the need for a comprehensive welfare system as a duty of the state. If we will use the war analogy to understand and solve the COVID-19 crisis, this is definitely the main (and perhaps the only) reason to do so.

So, what next?

As others have advocated, a reform/stimulus package has to be a comprehensive intervention which ensures protection for ordinary people. In the absence of a vaccine, the ‘economic contagion’ needed to keep the economy afloat can only work if people are both immobilized and financially secure. The current model of capitalism and its response to crisis is not only inadequate, it continues to fail in protecting the most vulnerable and assuring safety for households. A systematic transformation, which leaves institutions better prepared to deal with crises, can only start with addressing the basic question of unequal distribution and reorienting economic policy from a common good perspective. The UK has a historic opportunity to rethink its economic model: regulation must be strengthened and transformed in favour of the public.

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Note: the authors are grateful to Ingrid Harvold Kvangraven and Ilias Alami for helpful comments.

About the Authors

Carolina 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, University of Manchester.

 

 

All articles posted on this blog give the views 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.

COVID-19: Time to reduce the prison population in England and Wales

Nasrul Ismail writes that the poor health of prisoners, together with the poor living conditions found in prisons, put this population at an increased risk of COVID-19. He argues that suspending short sentences and providing for the early release of certain prisoners will allow the government to manage the potential magnitude of the issue.

The turn of the new decade saw global society enter what has been described as the “worst public health crisis for a generation”. The novel coronavirus pandemic has pushed governments into rapidly developing unprecedented measures in order to contain the spread of the virus. These responses all have something in common: prioritising the protection of vulnerable individuals with underlying health conditions. Yet although meeting the ‘vulnerable’ criterion, the prison population appears to have been side-lined from mainstream discussions.

Prisons as coronavirus incubators

Prisons, by their very nature, are isolated and contained. However, once they enter these institutions, infectious diseases spread rapidly. To date, at least nine prisons across England and Wales have registered confirmed cases of COVID-19, although the number is suspected to be higher; epidemiologists have predicted that six in ten detainees could become infected, with a death rate of 1% across the prison population being forecast.

Prisons are particularly susceptible to this coronavirus due to the poor health of their inhabitants. They are a prime target because of prisoners’ risky behaviours (e.g. smoking and drug-taking), being immunocompromised, and the presence of bloodborne viruses and tuberculosis. Environmental factors further intensify these problems. Even prior to COVID-19, overcrowded prisons had been detrimental to prisoners’ health. The latest statistics show that approximately 98% of adult prison places were in use and with prisoners living in close proximity to one another, the risk of transmitting pathogens is very high. Whilst suspected coronavirus cases were isolated, some individuals can spread infection even prior to developing symptoms. As such, outbreaks can spread easily – and rapidly – in overcrowded prisons.

The capability of prisons to fight coronavirus is affected by minimum standards of cleanliness and infection control compliance not being met. Furthermore, there are no plans to stop prisoner transfer between institutions in England and Wales.

How can governments ensure safe and secure prison environments during this pandemic without violating the rights of those in their care? To date, the policy response has resulted in restrictions of movement within and to prison establishments, prisoners’ activities being restricted to only shower, phones and exercise, and no social visits from friends and family members. Whilst these measures might be considered practical, prison riots in San Vittore prison in Milan, Unidad Penitenciaria in Argentina and La Modelo prison in Colombia indicate that they are unsustainable. The blanket restriction of movements and visits, as well as poor prison conditions, can also trigger fear and anxiety amongst prisoners.

A more viable and sustainable way to limit the spread of coronavirus in prisons is to reduce the current prison population. This requires the implementation of two proactive strategies: suspending short sentences and ordering the early release for older and female prisoners.

With regards to suspending short sentences, a key underlying fact is that England and Wales have the highest incarceration rate in Western Europe, despite recent decades of declining crime levels. The push towards longer sentences, in addition to the use of community sentences, has also contributed towards the high rate of imprisonment. Despite a shrinking budget (22% overall since 2010), prisons have been stretched to breaking point, and we are now reaping the consequences.

To reverse this trend requires new thinking and operational space by the government, for example moving the most vulnerable prisoners to less-crowded parts of the establishment, ‘cohorting’ (i.e. the gathering of potentially infected cases into a designated area), and reducing the extent to which prisoners mix. Other jurisdictions have implemented such measures. For instance, the Washington District Attorney now prioritises serious violent crimes in order to lessen the burden. With the UK government being inclined towards easing prison population pressure, suspending short sentences is a clear way forward.

Secondly, the early release of older and female prisoners could also help lessen overcrowding, which is a key risk factor of coronavirus. The global rise in ageing prison populations, longer sentencing, and delayed parole reflect the ageing populations in developed countries. Another growing minority group is female prisoners, eight in ten of whom commit non-violent offences (e.g. theft) and therefore generally attract short custodial sentences.

Many of these older and female prisoners do not pose security or public protection threats; releasing them early could improve prison population management. New York and Los Angeles have already freed vulnerable prisoners amid the coronavirus outbreak. Similarly, Spain and Iran have followed suit so as to reduce virus transmission amongst prisoners and staff. The recent ministerial intention that prisoners could be released on temporary licences or transferred to bail hostels, whilst modest, could see more than 9,000 prisoners being freed on the grounds of exceptional circumstances.

Reducing the prison population also demonstrates compliance with international policy and legal obligations. The Mandela Rules impose a duty of care on the state to protect prisoners’ health, since when an individual is deprived of their liberty, there is no other alternative but to rely on the authorities to protect their health.

Furthermore, this avoids triggering legal actions from prisoners. Legal cases such as Yarashonen v Turkey and Alimov v Turkey demonstrate that a state is in breach of Article 3 of the European Convention of Human Rights (prohibition of torture, inhuman or degrading treatment or punishment) when it fails to contain frequent outbreaks of contagious diseases, chronic overcrowding, unacceptable cleanliness levels, poor medical interventions and the psychological fear of contracting diseases. Reducing this population not only improves the capacity of prisons to deal with coronavirus outbreaks, it is also necessary, proportionate, and deferential towards individual dignity.

Acknowledging that the coronavirus pandemic is the ‘worst public health crisis for a generation’ and that vulnerable populations with underlying health conditions need utmost protection, the current crisis forces us to reflect on how we manage the prison population in England and Wales. Coronavirus is largely preventable; suspending short sentences and providing for the early release of older and female prisoners will provide the government with increased capacity to deal with the magnitude of the issue.

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About the Author

Nasrul Ismail is Lecturer in Criminology and an ESRC PhD Researcher in Public Health at the University of the West of England.

 

 

 

All articles posted on this blog give the views 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 visuals on Unsplash.

COVID-19 and economic lessons from previous pandemics

Looking at past pandemics, Costas Milas expects the economic downturn caused by the novel coronavirus to be significant but temporary. He also explains why some wages rise during such episodes and why unemployment benefits must rise as well.

Diseases cause panic and take a significant social and economic toll. The Black Death, for instance, which lasted between 1348 and 1350, killed between 75 million and 200 million people worldwide and about half of the population in England. It also contributed to a dramatic cumulative GDP fall of 29% and to a ‘flight-to-safety’ increase in the price of gold by 8% between 1348 and 1351. Nevertheless, as a consequence of the scarcity of labour, real farm wages in England went up (cumulatively) by 116.2% whereas real wages of building craftsmen went up by ‘only’ 42.6%, which makes sense if we consider that avoiding a disruption in farm production was a priority. At the same time, flight from cities led to a downward pressure on rents and, therefore, the incomes of the upper class. Last, but not least, the English Parliament was prorogued several times in 1349 and only met again in 1351.

Some of the above observations were repeated during the 1918-1919 Spanish flu pandemic, estimated to have killed 40 million people worldwide. It is difficult to separate the economic effects of the Spanish flu from those of World War I because wartime production arguably put upward pressure on wages as a result of rising labour demand. Nevertheless, research has found that US manufacturing wages increased; indeed, US cities that had greater influenza mortalities experienced higher real wage increases. Data from the UK suggests that the real wages of building labourers in London went up (cumulatively) by 34.2% in 1918-1919, whereas real GDP in the country fell by 6%. On the other hand, house prices increased (cumulatively) by 20.3% in 1918-1919. In Sweden, which was not involved in World War I and so more clear-cut references can be made about the economic consequences of the Spanish flu, the pandemic affected incomes from stocks and rents negatively, whereas wage rates were not affected. Last, but not least, the price of gold increased (cumulatively) by 6.1% in 1918-1919.

Notice some parallels with today’s economic situation. As stock markets drop on fears of a coronavirus-related economic slump, the flight-to-safety investment strategy repeats itself. Indeed, the price of gold hit a seven-year high before dropping again as investors sold gold to cover their losses elsewhere, which serves as a reminder that although gold is a flight-to-safety investment strategy, there are periods in time that it loses, at least temporarily, its safe haven status.

With Britain’s public becoming increasingly anxious about the novel coronavirus outbreak and both monetary and fiscal authorities responding to address the looming recession, it makes sense to explore how rising financial stress impacts on the economy. As can be seen from Figure 1, there is an adverse relationship between financial stress and economic growth. The financial stress indicator pools information from the volatility of the exchange rate, the volatility of the equity market, the volatility of the bond market and the risk premium that investors demand to hold UK corporate bonds rather than the less risky UK government bonds.

Figure 1: UK GDP growth and financial stress, 1970-2019

Financial stress is a good predictor of future movements in real GDP growth. From a historical point of view, a rise in financial stress signals a slowdown in UK growth between one and three quarters prior to growth turning negative. Although data for the first quarter of 2020 is not yet published, we know that financial volatility is on the rise which suggests a significant hit to the economy.

Nevertheless, it is important to look beyond the negative impact of financial stress on the economy and pay particular attention to those who will lose their jobs or take an income hit if they are quarantined. This is really pressing because unemployment benefits in the UK are much lower than those in other countries or the OECD average. Indeed, unemployment benefits in the UK account for 34% of previous incomes for the first two months. On the other hand, unemployment benefits in the US account for 57% of previous incomes for the first two months. Unemployment benefits rise to 60% of previous incomes in the case of Germany and rise further to 64% of previous incomes for the OECD average.

Many will feel uncomfortable at the prospect of central banks taking additional quantitative easing measures to support the economy. Quantitative easing, or large-scale asset purchases, refers to monetary policy actions whereby central banks purchase predetermined amounts of government and corporate bonds in an attempt to inject money directly into the economy. There is pressing need for policy-related action because economic policy uncertainty, both in the UK and worldwide, is on the rise. This halts investment planning and undermines productivity. At the same time, the confidence of our business leaders in the economy is being affected.

Still, with current government bond yields at extremely low levels, it is questionable whether further quantitative easing is an effective way of suppressing sovereign interest rates further and reviving the economy in terms of injecting additional liquidity. In fact, Chris Martin and I have recently shown that quantitative easing loses its effectiveness at very low interest rates. Notice, however, that sovereign interest rates dictate, to a large extent, corporate interest rates within a particular sovereign. Mid-March saw, at least temporarily, an increase in government yields and an even sharper increase in corporate yields. This forced the Bank of England and other central banks to intervene by authorising additional quantitative easing which, in effect, acted as a ‘catalyst’ in driving (again) government bond yields down. Whether this translates also into lower corporate yields remains to be seen. This is because firms are currently operating in (dangerously) sliding supply and demand conditions which makes it more likely than not that they will have to lay off workers even if they secure temporary government support. This is why, as I mentioned above, unemployment benefits need to rise.

Looking at the history of pandemics, there is hope that some wages will have to rise. This should definitely apply, as a matter of urgency, to those who are currently on the front line, such as nurses, whose starting salaries took a hit in real terms after the last financial crisis.

There is another lesson from the economic effects of past pandemics and earlier recessions. As the Economics Editor of the Sunday Times recently noted, recessions tend to be short-lived. If history were to repeat itself, the chances are that we will witness a deep economic downturn. Forecasters predict that the looming economic downturn will be a ‘V-shaped’ rather than a ‘U-shaped’ one. In other words, the downturn should be significant but temporary. To what extent history will repeat itself remains to be seen.

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About the Author

Costas Milas is Professor of Finance, University of Liverpool.

 

All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science.

COVID-19 and the language of pathology: when public health vocabularies advance into parallel domains

Jonathan White explains why analogies associated with public health tend to be used in areas unrelated to the latter, such as the economy and migration. He writes that such perspectives can often be a way to rationalise limited intervention on the part of authorities, as well as to detach issues from their social and political context, limiting this way individual responsibility. 

Much analysis of the new coronavirus focuses on the medical challenges and economic costs. But the problem also has significance for how policy-making is conceived and conducted. As the public agenda becomes focused on disease control, related political issues are liable to be cast in its image. Faced with a virulent pathogen, everything starts to look like a virus. An approach well suited to fighting infectious disease can re-emerge in fields less appropriate, weakening the capacity for directed change.

The language of pathology has been central to current affairs for some time, nowhere more so than in descriptions of the economy. ‘Contagion’ in the markets, ‘transmission mechanisms’ and the ‘exposure’ to risk are common terms of analysis. Well before Covid-19, epidemiology had become a rich source of analogy for grasping financial capitalism, encouraged in part by the experience of health emergencies. The concept of contagion became increasingly popular in the late 1990s during the Asian financial crisis (or ‘Asian flu’), as economists and IMF policy-makers took inspiration from colleagues in the study of disease. Historians observe that interest in the tools and terminology of epidemiology tracked a series of outbreaks – avian flu (1997), SARS (2002) and swine flu (2009) – that seemed to illustrate their utility. The effect was to popularize concepts that would shape the description and management of the Great Recession, notably in the Eurozone crisis of the early 2010s.

Migration policy is another area where this outlook has been adopted. Openly racist views, in which migrants are cast as spreading disease or even as a disease themselves, are just the crudest expression. One sees traces of epidemiological thinking also in less dramatic official responses to the movement of people. The concept of the ‘hotspot’ became central to Europe-wide policies aimed at controlling inward migration in the autumn of 2015, denoting places of concentrated irregular migration on the EU border. Hotspots would become sites of targeted measures and intensified monitoring, bringing together local officials and supranational agencies in ‘frontline’ member-states. EU border control continues to be administered in these terms.

As metaphors and analogies associated with public health advance into parallel domains, they join those drawn from other aspects of the natural world – storms, floods, forces and the effects of gravity. With the appearance of the new coronavirus, one can expect the immediate appeal of these naturalist imageries to grow – see recent talk of ‘vaccinating the economy’ and building its immunity. These perspectives are widespread because they suit some powerful interests, and resonate also with some ingrained ideas about the nature of economy and society. More than just suggestive turns of phrase, they express a deeper political logic.

Most of the time, naturalising perspectives can be a way to rationalise limited intervention on the part of authorities. When socio-economic challenges are cast as the extension of natural forces, they invite lowered expectations about what policy can achieve. Problems can at best be managed and tamed, and to the extent that causes are sought they tend to be treated as brute facts – things that can be factored in but not altered. Policy-making is cast as essentially reactive, responding to dynamics already in progress.

Conversely, when the costs of a laissez-faire outlook become unsustainable, the naturalising view doubles up as a licence to break with existing commitments, whether policy promises or legal constraints. When something is likened to an infectious disease, it is likened to what is unpredictable and apt to develop exponentially, inviting actions that bend to the demands of the moment. Logical as this may be for handling an epidemic, it offers a free pass for discretion and inconsistency in other aspects of government. And when restoring health is the implied goal, one can expect this to combine with a conservative orientation towards much of the status quo.

A key connotation of policy as contagion-control is that officials face challenges not of their making. The problems at hand – in finance, migration, social order and elsewhere – are cast as spontaneous developments rather than the effect of past choices. Comparisons with contagious disease detach issues from a broader social and political context. This is, of course, one way officials may seek to lighten their responsibility. When the challenges they face are naturalised, they arise through no fault of their own. For those charged with administering an economy prone to crisis, made that way partly by policy decisions, the appeal of notions like contagion is understandable. Similarly, one sees the attraction of attributing all manner of difficult circumstances to the appearance of a virus (see e.g. the March UK budget): economic stagnation whose causes are long-standing, along with a host of unwelcome social conditions, are then redefined as maladies that emerged from nowhere.

Perhaps the most basic reason these perspectives stick is because they accord with how economy and society tend to be viewed. Only once ‘the economy’ is seen as a system of its own with its own dynamics, independent of particular human wants, values and experiences, can it be approached in these naturalising terms. Before such an outlook can be applied, economy and society must be conceptually detached. Likewise, only once one has developed an abstract category of ‘migration’ can people on the move be approached as the bearers of natural forces. The naturalising view builds on the separation of systems from persons.

One implication of infectious disease is to build the appeal and plausibility of a policy-making template too easily transferred to other domains – a template in which the role of officials is to use discretionary means to manage problems of nobody’s making. However crucial the input of epidemiology today, such an outlook will hardly suffice to handle the socio-economic challenges heading our way, for which transformations rather than remedies seem needed. Today it is evident like rarely before how far crises are bound up in the structures and priorities that societies embrace. Out of the upheavals of the period to come one must hope a different kind of consciousness emerges, more receptive to how the social world is irreducible to the natural.

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About the Author

Jonathan White (@jonathanpjwhite) is Professor of Politics at the LSE.  His latest book, Politics of Last Resort: Governing by Emergency in the European Union, was published with Oxford University Press in 2019.

 

 

All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science.

 

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