The economy. A big, bad word that uses graphs and terms like GDP, growth, supply and demand that deaden eyes and make the majority of people want to change the subject to literally anything else. It gets worse when conversations about the economy are linked with ones about the financial sector: interest rates, quantitative easing, bonds. It’s all made to bore you and to want to just leave it to the guys in suits who seem like they know what they’re doing. However, the narrative that says that these guys do not, in fact, know what they’re doing is increasingly common among academics and those who advocate for a fairer economic system.

The coronavirus pandemic has, obviously, been bad for economies. People are inside not doing much, and not buying a whole lot. In America, 22 million people have lost their jobs. Headlines wail about the worst recession in (fill in really long time). Newspapers talk about growth that we thought we would have is in fact reversing, and economies are contracting. But what does all of this mean? The coronavirus, I argue, is revealing holes in our economic system and the economic narrative that many have talked about for a long time but are only now becoming mainstream. If we don’t learn these lessons now, what will it take to learn them?

1.       Growth

When newspapers talk about the economy contracting, they’re talking about GDP and how much it’s growing or decreasing. But what is growth? What is GDP? Super simply, GDP is how much stuff an economy makes. The calculation is made by counting how many products were made, how many services were provided and how much it was all worth and adding it all up to get the Gross Domestic Product. When the economy grows, it means that it made more stuff than last year. So far, so simple. But the thing is: why on earth does that matter?

Asking why it matters makes us ask what the point of an economy is. Why do we care about the economy? The idea is, when the economy grows, it’s good for everyone: there are more jobs, higher wages, and generally more human dignity. But that’s not always the case. Growth is often used as a proxy for human dignity and good things, but it’s increasingly a bad proxy.

“Growth doesn’t take into account a lot of things that are really important for how much the economy actually benefits humans”

Think about the economy as a pie. Growth means that the pie is getting bigger. But looking only at this is an over-simplification. It assumes that the pie is sliced fairly between everybody in society, so everybody profits when the pie is bigger. But we all know that this is not the case. Usually, some people get a bigger piece of the pie than others. Growth, then, is only good, if the benefits of it go to the majority of the people, instead of to the people who already have a lot of pie. But this is not necessarily the case. The reason that we look at growth is because we have all been told that the market will naturally ensure that the pie is fairly divided and that profits will naturally trickle down from the richest to the poorest (e.g. through purchasing services, hiring employees, reinvesting in business, etc.).

Growth doesn’t take into account a lot of things that are really important for how much the economy actually benefits humans. These include inequality (which is bad for a bunch of stuff, like health, crime, and happiness), poverty, access to services (like healthcare and education), and social mobility. Any of these things are arguably better measures of how well a society is doing than growth, but growth is still the thing that we obsess over.

The other negative about growth is that it’s pretty bad for the planet, actually. Focusing on growth basically implies that no matter how rich a country is, it always needs to get richer, and it also assumes that there is an infinite amount of resources to make the stuff with. As it turns out, there isn’t. Focusing on growth also doesn’t look at the harm that making more stuff every year does: the use of resources, carbon emissions, pollution, deforestation. We all see that now that growth has plummeted, people in some countries have seen the sky for the first time in years, and wildlife is returning to places where we thought it never would again. Many economists, like Kate Raworth, are now looking at alternative models of economies, like de-growth, arguing that you can have a happy, stable society without any growth at all. This has been seen for a long time as quacky stuff, but actually Adam Smith, the father of modern economics, believed that this would eventually happen to economies. This idea is becoming increasingly mainstream, and the coronavirus pandemic, which gives us the opportunity to really think about what is important, may be just the right time for governments to start taking it seriously.

2.       Trickle-Down Economics

Trickle-down economics basically refers to the idea that what is good for business is good for the rest of society, because benefits to business trickle down to the rest of society. It’s a theory that basically advocates for tax cuts to businesses and the wealthy, because it incentivises them to do more business and therefore benefit society more. This fantasy has played out over the last 40 years, after Ronald Reagan and Margaret Thatcher convinced everybody that this idea was based on actual evidence (hint: it wasn’t). Prior to reforms in the 1980s, the UK and the US both had very high marginal tax rates for the richest people in their society. The marginal tax rate refers to the amount of tax somebody will pay if they earn an extra dollar. Most societies require people to pay different rates of tax depending on how much they earn. As hard as it is to believe, the US used to have a marginal tax rate of 91% (until 1963, after which it was 70%), meaning that if you were in the top tax bracket (which you had to be pretty wealthy to be in) and you earned an extra dollar, 91 cents would go to tax. This rate is now 37%. These low marginal tax rates incentivise things like incredibly high pay for CEOs. The argument of the neoliberal story is that CEOs are really productive and add a lot of value. This, they say, is why CEOs pay has grown 940% since 1978, although the pay for the average worker has only grown by 12% in the same period. I will leave it up to you to decide how convincing that argument is.

The amount of income tax applied to the highest incomes in the United States dropped from 70 percent in 1980 to 28 percent in 1988.

Image source: Thomas Piketty

3.   Redistribution

The economies of European countries and of the US are both contracting. But in the US, a fifth of children are now going hungry, and people are queuing for hours to access food in food banks. In Europe, things aren’t great for many people, but the social safety nets and redistributive mechanisms that we have put in place mean that the state looks after almost everyone in danger of falling under that line. The US, whose policymakers have long stuck by the idea that people get what they deserve and that the markets will distribute money fairly, is finally seeing what that really looks like. This has been building up for years, while the middle class has been squeezed out of existence. The minimum wage has not kept pace with inflation or productivity, the cost of education has soared (as has the penalty for lack of education), union membership has decreased, and the rich have gotten much richer. This has festered quietly while people were able to scrape enough money together through working several jobs (often insecure jobs at an incredibly low minimum wage), but now that the pandemic has shut down the industries that employed many of these workers, the US now needs to face the music. The reality is, a significant slice of the American population was living hand to mouth in one of the richest countries in the world, and they now don’t have the financial resilience to get through the pandemic which has left them without the ability to pay basic expenses. The US government has responded with ‘stimulus checks’ to the value of $1,200. The national average of monthly rent for a two-bedroom apartment in the US is $1,196. 

“CEOs pay has grown 940% since 1978, although the pay for the average worker has only grown by 12%”

All of these narratives are neoliberal narratives. It is easy to see neoliberalism as an American or UK problem, as they have taken neoliberalism to its extreme. We often look across the pond in wonder at the price of healthcare and health insurance, at the quality of public schools (and the price of private ones), at the high cost of living and the low minimum wage, at the lack of a welfare system that provides a safety net. But neoliberalism has also gradually become Europe’s economic narrative. Ireland is a good example. Ireland is essentially a tax haven for tech firms, who are paying almost zero tax on their enormous profits. We are told that the benefits of these firms for Irish society will trickle down, that it is not necessary for the government to redistribute them because the economic growth they bring will benefit everybody. But the average resident of Dublin has not felt the benefits of Google. The average resident who has benefited most from Google’s location in Dublin are probably those who work for Google. But Google hires its low-skilled workers on a low-wage contract with a firm that ensures that it doesn’t have to provide its security guards, caterers, and cleaners with the kind of benefits it provides to its high-skilled employees (like job security). Maybe not so beneficial after all. For the other residents, these tech firms bring only higher housing prices and a worsening housing crisis, as their employees who boast inflated salaries both add to the demand for housing but can also outbid most other workers. The money that the government could earn from taxes could have been used to solve the housing crisis, and to create infrastructure and accommodation for Google’s employees. Instead, these are paid by the average Irish taxpayer. But, we are told, the economy grew last year and that’s what really matters. Worse, when the economic crisis hit in 2008, instead of increasing corporate tax rates or taxes on the very wealthy, the government cut funds to essential services.

The coronavirus is showing us that when times are good, profits go into the pockets of multinational corporations (who actually don’t use them to invest in business, but mostly spend on stock buybacks that have no advantage to society, giving a short-term windfall to their shareholders) and into huge executive salaries. But when times are bad, like when there is a global pandemic, the government is called upon to pay employees’ salaries. This, again, is clearly seen in America, where airlines that have spent 96% of their profits on stock buybacks (which, again, do nothing for anybody but shareholders and could be used for long-term investments, a backup fund in case of crisis, or to raise employee salaries) over the last 10 years are now asking for government aid to get them through the crisis. Big restaurant chains that boast enormous profits are doing the same. Yet again, though, America is not alone. European countries are also talking about providing aid to firms that have poorly planned for crisis. Booking.com, which spent $8 billion on stock buybacks last year is threatening huge layoffs (essentially putting the burden of its poor choices on the governments that pay unemployment benefits) and asking European governments for aid. If this does not make us realise that our economic narrative, which tells us that what is good for business is good for society, is wrong, then I’m not sure what it’s going to take.

Featured photo by Ehud Neuhaus