The Coronavirus Pandemic has resulted in the biggest stimulus packages the modern world has seen. Already in the first few months of the crisis, the sum total was exceeding 10 trillion dollars worldwide. While governments follow Keynesian advice to pump consumer demand, can simply announcing packages solve the woes of the modern global economy?
The response to this crisis is at least three times more than the response to the 2008-09 financial crises. The rationale is derived from simple Keynesian economics. John Maynard Keynes proposed that in times of shrinking aggregate demand, the government must intervene to stimulate the economy by excess government expenditure. These stimulus packages are a necessity if the global economy wants to survive the looming recession without entering a full-blown depression in 2021.
However, to engage in providing fiscal stimulus by either increasing spending or decreasing tax revenue, the government must increase the size of its deficit and borrow money to finance that stimulus. This can lead to an increase in interest rates and subsequent decreases in investment and consumer spending. This rise in interest rates may therefore offset some portion of the increase in economic activity spurred by fiscal stimulus. This phenomenon, wherein an increase in government expenditure might lead to a decrease in private investment is known as Crowding out.
Even if we ignore the possibility of crowding out, given the demand-stricken economy, looking at the humongous packages, Keynes would question the governments of today - how are they financing it?
Governments seem to be overlooking the fact that governments can’t inject money into the economy without first taking money out of the economy. Any money that the government puts in the economy’s right pocket is money that is first removed from the economy’s left pocket. There is no increase in what Keynesians refer to as aggregate demand since every dollar that is spent on a stimulus package is a dollar that the government first must borrow from private credit markets - ‘Keynesianism doesn’t boost national income, it merely redistributes it.’
The rich developed countries have undertaken the highest public debts. The United States with its $1.9 trillion stimulus package has a Debt to GDP Ratio of 127.5% as reported in the first quarter of 2021. The debt-to-GDP ratio in FY2020 was the highest since World War II and is projected to remain high, at least in the short-term, given the ongoing pandemic and recession. The public debt percentages require a concerted effort to be put towards the long term repercussions of excessive interest payments, among other things.
The financial responses undertaken by different governments will have an impact on the people’s short term welfare, as well as the long term economic trajectories of their country.
After everything is said and done, these packages are under implementation and widely welcomed by the people. So how can policymakers ensure that they curb these caveats and extract the greatest benefits, for the economy and the public at large?
Effective delivery of these benefits needs to be a key priority for all the countries. The money must reach those who need it first -and fast. The first task at hand for the countries is to scale up social support infrastructure. This ensures that the money allotted for target sectors and/or communities reaches the end beneficiaries at crucial moments. Countries without sufficient infrastructure need to repurpose existing structures or create new and innovative disbursement channels rapidly.
A second key success factor for delivery, which supports the first, is to strengthen digital delivery. Digital delivery platforms are the tools of modern welfare mechanisms. However, what needs to be noted here is that there has to be uniform access to digital technology for the welfare schemes to remain equitable. India, in this regard, suffers from a pluralistic bias, given that vaccine delivery is based on booking slots on an app. Welfare distribution mechanisms must not suffer from privilege bias and provide robust accessibility to the entire population.
Therefore, governments of today cannot shrug off responsibility merely by announcing packages as the onus of ensuring fiscal health lies on their shoulders. This is coupled with the task of effectively distributing the biggest pay-outs there have been in the financial history of the world. What remains to be seen is the revival trajectories of different nations. Until then, we hope the governments get their act together.
Written by: Ananya Dhanuka (firstname.lastname@example.org)
Edited by: Divij Gera