When the Dismal Science Hits Rock Bottom pt. I — Debt, Inequality & Political Decay
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Source: Unplash/Scott Webb
“Nothing is Tragic. Everything is unreal.” ~Emil Cioran Introduction & Personal Note
Feel free to skip this part if your only objective is the economic analysis, however, there is some interesting insights in the intro.
I guess 2020 has been a tough year for most of us, the global pandemic of the novel coronavirus (Covid-19) forced us to forsake our daily life’s and to adapt to a life of reclusion and social isolation. The worst part is the ripple effects which led society to a state of questionable social behaviour, herd mentality, fake news, and a never-ending emotional exhaustion from everyday life with the unknown.
The damages caused by the pandemic in less than a year were able to lead the global economy to a short but deep recession with an estimate of 305 million full-time job losses worldwide and to worsen the situation of governments that were already crippled with years of public debt (ILO, 2020). The darkest part is, that some of the ‘qualitative’ variables from this disaster cannot be measured, since the damages were caused to people and their families. Not only the economy that was damaged, but also the entire morale of our social order, as people became reclusive in their own personal ‘home prison’ forced to the stagnated cycle of social media updates, pessimistic real-time news, zoom meetings, and infinite remote demands. The traumas brought by this period of stagnation may be felt for the next years to come, with the possibility to change and destroy some economic orders for good.
We can assume that the 2020 pandemic, was able to challenge: the efficiency our governments, our ‘modern’ economic models/policies, our ‘risk mitigation’ strategies, and our naïve optimism about a better future. As we arrived in 2020 exacerbated by the hope of a prosperous decade, our models of social management and human morale were dismantled by the unpleasant absurd of reality. It’s soon to officialize if this is the death of the tragic hero (in this case our current economic models) or if our economic tools might blossom to a mixture between an Apollonian and Dionysian perspective, were passion, creativity, spontaneity is able to meet technicality and pragmatism.
The Covid-19 pandemic brought a new battle to governments that already struggled to balance their budgets, as governments had to re-allocate resources for the people in financial distress, the health system, and to the proper maintenance of law & order. Despair arises when we live at times nudged by extreme political polarization with a high barrier to a societal consensus. In other words, we can say that we have a difficult plot-twist to overcome, in order to restructure our social systems, and is required more than government spending and policies. Is hard to stay optimist when you understand the circumstances that society faces in this new decade. In this article, we will contemplate some worrisome aspect for the recuperation of the global economy even after the pandemic.
To conclude this grim memoir, I can say that I’m probably biased in my point of view. It’s hard to change your own perspective when you live in the middle of the storm, in the masterpiece by M.C. Escher we can see that perspective is a matter of relativity so there’s many points of view we can see how things work (see the image below). However, to a certain degree, I believe that it can be a healthy thought experiment to challenge the economic status quo, and address the indirect way the harsh reality we may face in post-pandemic years. In this series of articles, I might be prone to commit Malthusian errors and over-dimensioned the probability of misfortunes, but it’s better to raise a red flag before destruction than after.
Sources: BYU museum of art/ M.C. Escher.
Now to the real deal…
Debt & Despair
As harsh as it can be, it’s a good epistemic practice to ask yourself if society was stable before the Covid-19 crisis struck. As much as the quality of life in the late 2010s has improved to an astronomical degree due to technological and communication innovations, we still live in a highly unequal world with a large gap between the rich and the poor. The latest data from 2019 show that the top 1% of the richest people in earth owns 44% of the total world’s wealth, while adults that live with less than US$ 10.000 make up for 56,6% of the world’s population and they hold less than 2% of the global wealth (Inequality.org, 2020). To crunch even more unpleasant stats, we live in a world where the top 10 billionaires in the world today make more than some countries Gross Domestic Products (GDP). Given this perspective, it can be a dark reality to know we live in such an unequal world.
As bleak and depressive it can be to know that human society may never face full income equality, it is even worst to know that the wealth disparity hole will be dug even deeper after the events of 2020. This year alone Jeff Bezos achieved US$ 200 billion and Elon Musk became the second richest person in the world with a net worth has grown by an estimated $100 billion since the start of the year. In the meantime, it is estimated that the Covid-19 pandemic will add 88 million to 115 million people to extreme poverty this year alone. This means a total ride of 150 million by 2021, and this will all depend on the events of 2021 (World Bank, 2020).
Furthermore, some may use the argument that economic rebounds already started as the third quarter (Q3) of 2020 has brought GDP growth in China (2,7%), The United States (7,4%), The European Union (12,1%). And this stimulus can even be further replicated to emerging economies like Brazil, South Africa, and India which struggled this year. Even with a shy recovery of Q3 and Q4 (fourth quarter) or even with a stimulus in 2021, we won’t be able to shake off the high levels of public debt which countries face nowadays. The public debt problem only became a bigger problem with the 2020 pandemic, as governments were “obligated” to spend a large amount of “un-existent” cash in order to finance public health requirements and job losses.
It might take years or even decades for some countries to recover and pay-off their public debts (if someday it can be re-payed to a stable status). The pandemic crippled business activity which led to a smaller share on wages, and consequentially less income for governments. If we notice the graph above, we can notice that the majority of countries crippled by public debt are developing nations like Sudan, Eritrea and Lebanon. Developed nations like Japan, Italy, Portugal and Singapore are able to continue to roll on their debt, however, for developing nations this mission is much harder. For example, we witnessed the disasters with the explosions in the capital of Lebanon: Beirut, a country which prior to the Covid-19 crisis struggled to maintain a stable government. In recent times Lebanon is struggled to rebuild their cities from the civil war in 2006, which cost a lot of money, and in only 14 years the country faces a challenge to maintain a normal standard of life. This is just one example, as we could continue to explain all the other systemic problems that Sudan, Greece and Eritrea face.
The point to be taken is a simple one, the majority of countries already faced complex debt issues in the past twenty years, and with the 2020 pandemic crisis, these problems only became worst. As the debt problem dilemma goes on, governments will continue to fight inequality and lead to job creation with new monetary tools. Even so, there’s no guarantee that new sophisticated models to money creation may solve our complex problems or make them even worst. In the meantime, the gap between the rich and the poor will only continue to widen, as some barriers are hard to overcome due to political disorders.
Political Madness
As developmental economists Acemoglu and Robinson wrote in their well-celebrated work, onetarists, New Classical, Neo & Post Keynesians, and behavioural); we won’t be able to solve the biggest barrier in human society: “Why Nations Fail?”, the problem of inequality and economic deterioration is intensified whenever a country has unstable governmental institutions. Even if we present solutions by vintage economic schools (e.g. the Austrian school, Classic economics, Marxism, Monetarism, Keynesian and Chicago) or even modern schools (e.g. Modern m corruption. Most economists might dodge this topic and claim “ to not be a problem for economics to solve”, however, this existential issue limits the inherent capacity for economic models to operate (see, Myrdal — the economics of corruption -1975). If governments are easily persuaded by lobbyists and power influencers, no matter how sophisticated an economic solution might look in theory, it will never come to fruition. If we don’t understand the epistemic limitations of human morale & ethics, we won’t be able to understand the idiosyncratic nature of human behaviour. Therefore, every single model will fail at a certain point, until another quick fix comes to put our problems under the rug.
Francis Fukuyama in his insightful essay, “America in Decay”, wrote about the short-comings of the U.S. presidential system and it’s a slump in societal morale. According to Fukuyama, the democratic dynamic has led to a mutation of the U.S. political system which encouraged bribery and interests of external groups to manipulate U.S. lawmaking rather than interests of society. This political distortion ended up being replicated by Latin American, African and Asian countries that copied the American presidential system. Although , every country’s sociological and cultural background it’s also responsible to shape up their own level of corruption. In all regard, we must admit that the human condition has always been a tough barrier for the social sciences to overcome, such an abstract concept cannot be represented with accuracy whenever is simulated by any model. In this scenario, the mechanical use of economics is disabled in its capacity to solve problems, as the root problem becomes the distortion of bureaucracy. Although, we must admit that economics attempts to explain such dynamics by micro and behavioural theories, such as information asymmetry, incentive theory, the free-rider problem, and rent-seeking.
To expose the problems with the presidential system is only one of the many complex branches of corruption that we can explore. Furthermore, we can now understand the limitations which cripple most economic model of development and growth. If policies are easily manipulated by external players (e.g. big corporations), this means that any kind of economic plan will envision to benefit such agents. This is a clear pattern which demonstrates that human society has evolved to a pseudo-plutocracy, which pretends to help human society. In the middle of the 2020 pandemic, we can see countless examples of countries that struggle to maintain order in their public health administration. One prime example is the broken healthcare system in the U.S. which has become a poster child of excessive regulatory standards which benefit big pharmaceutical companies, and privileged military spending over health. Although the recent election of president Biden might improve regulatory standards, Biden’s promises won’t be achieved with ease nor with agility. This is actually an interesting topic which deserves an article (or another series) to dismantle the few ramifications, pros and cons of the health care system. With this in mind, we believe the readers by now get the general idea of what is going on: the game is basically rigged.
Note: To not be biased, it actually exists an alternative branch of called “ the economics of corruption”. Many economists can graduate in a PHD without even reading a page about this. To the disappointment of the author, this is something that is ‘not considered common knowledge’ for most economics scholars as it should be something taught since the bachelor’s degree. It is sad to know that the integration of politics to economics is still a rare thing to see in academia.
Closing thoughts & Commentary
In 2020 we could witness shades of dark grey controversies and chaos, from the Covid-19 pandemic to bush fires, political polarization, and the rise of a broken generation. Teens and young adults born in the 1990s, 2000s and 2010, will be the most affected by the ramifications of this present crisis. The changes in 2020, brought a new economic dynamic that will re-shape labour markets to unprecedented levels, this will require flexibility or patience in order to society adjust. According to the World Bank, youth unemployment (% of total labour force ages 15–24) has reached 15.50% globally in 2020, while general (global) unemployment is at 5.42% in 2020 as well. The most likely scenario it will be, that it will take years for society to find stability and the gap between social classes. Some might say that with a crisis it comes opportunity, however this “opportunity” is to the few that already have resources or the proactivity to overcome social barriers. The pandemic brought even more space for big corporations to operate, that run our smartphones and computers that became our best friends in the lockdown periods we experience. We are laboratory rats or raw data for corporations to test savvy marketing tools to satisfy our primal needs.
The hole of public debt will continue to deepen, and with this pace, it might take years for governments to implement efficient plans to boost economic activity to pre-pandemic levels. Some may believe that 2021 will be a year of prosperity and resolution, however, this is just our “naive collective optimism”. There’s no guarantee that things will become better next year, there is a possibility that the virus might mutate, vaccines can be useless or we might need to implement new tools to public spending and social isolation (nothing is certain yet). There’s a possibility that monetary institutions might have to create other alternative versions of quantitative easing or emergency budgets in the mid-term. Idealists might say that this can be solved by the implementation of a new and better system (modern monetary theorist fall for this trick), however, we won’t be able to implement a new method if our governments are corrupted and if are unable to solve the economic problems that are in front of us. To sum it up, I hope I’m wrong about everything that was written here (so I’m okay if you disagree with me) because if I hit the right spot, we are up for an era of decay or social dystopia.
Philosophers like Albert Camus embraced the absurdity of life and contemplated the impersonality of the universe which can bring us a release from orderly expectations. To re-shape our economic models to best fit our controversial species, we need to dismantle our expectations that “the economy” is an entity which works for us, and admit that we need to mitigate the external risks outside of the scope of economics which may distort our entire social order. If I had the solution to this problem, I would probably win Clark’s medal next year, since this is a small possibility in a humble blog post, I hope influence proactive minds to help solve this solution so our generation won’t fall into total darkness.
Sources
Acemoglu, D.; Robinson, J., 2012. Why Nations Fail. 1st ed. New York, New York: Crown Business.
COVID-19: Stimulating the economy and employment: ILO: As job losses escalate, nearly half of the global workforce at risk of losing livelihoods. 2020. COVID-19: Stimulating the economy and employment: ILO: As job losses escalate, nearly half of the global workforce at risk of losing livelihoods. [ONLINE] Available at https://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_743036/lang--en/index.htm. [Accessed 04 December 2020].
Fukuyama, F., 2014. America in Decay. 1st ed. Palo Alto, California: Stanford University.
Inequality.org. 2020. Global Inequality — Inequality.org. [ONLINE] Available at: https://inequality.org/facts/global-inequality/#:~:text=Their%20data%20also%20shows%20that,82.8%20percent%20of%20global%20wealth. [Accessed 18 November 2020].
John, Ann; Pirkis; Jane; Gunnell, David; Appleby, Louis; Morrissey, Jacqui. BMJ. 2020. Trends in suicide during the covid-19 pandemic. [ONLINE] Available at: https://www.bmj.com/content/371/bmj.m4352. [Accessed 16 November 2020].
Unemployment, total (% of total labor force) (modeled ILO estimate) | Data. 2020. Unemployment, total (% of total labor force) (modeled ILO estimate) | Data. [ONLINE] Available at: https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS. [Accessed 04 December 2020].
Unemployment, youth total (% of total labour force ages 15–24) (modelled ILO estimate) | Data. 2020. [ONLINE] Available at https://data.worldbank.org/indicator/SL.UEM.1524.ZS. [Accessed 04 December 2020].
World Bank. 2020. COVID-19 to Add as Many as 150 Million Extreme Poor by 2021. [ONLINE] Available at: https://www.worldbank.org/en/news/press-release/2020/10/07/covid-19-to-add-as-many-as-150-million-extreme-poor-by-2021#:~:text=The%20COVID%2D19%20pandemic%20is,severity%20of%20the%20economic%20contraction. [Accessed 27 November 2020].
Originally published at https://www.studentsofeconomics.com.
