As the world has been brought to a standstill—from the dizzying heights of having just surpassed the global record in the volume of air passenger traffic to the ubiquitous grounding of high-flying executives—the coronavirus outbreak has rendered a moment to take a serious look at the way in which we order our societies and our economies.
In the United States, the twinned health and economic crises resulting from coronavirus have laid bare several persistent issues in the socio-economic fabric of the country—and which also complicate the trajectory of sustainable growth for future generations. These issues include fiscal sustainability and ballooning deficits; income inequality and the vast disparity in livelihoods across the income distribution; the hollowing out of the Mittelstand (small and medium enterprises); and the future of work and employment.
Some fret that this moment of humility might be just a temporary lapse, soon to be superseded—perhaps papered over with commercial paper—and forgotten amidst an alacritous return to “business as usual.” And yet, we must not yield to counsels of despair. This will be a “crisis wasted” if we do not acknowledge and instill the principles of solidarity and subsidiarity, the dignity of work, and the recognition that each person matters and has something unique to contribute to society. Moreover, by reimagining its role as “investor of the first resort,” the United States might become a responsible steward for long-term growth, thereby inculcating a greater equality of opportunity across the income distribution.
Fiscal sustainability and ballooning deficits: Whither MMT (Modern Monetary Theory)?
As the coronavirus pandemic has ravaged countries across the globe, central banks and governments have used an unprecedented amount of firepower—via both monetary and fiscal policy—in order to manage the health crisis, shore up economies, and to avert potential financial crises. Governments in advanced economies have committed packages on the order of 10 percent of gross domestic product (GDP) in some cases—with relief packages in the United States far exceeding the stimulus deployed during the Great Financial Crisis (GFC).
The question becomes: With extraordinary measures taken to save lives and to avoid an economic meltdown—combined with a sharp decline in tax revenue for state, local, and federal/national governments—how are we going to pay for all of this debt? Enacting the refrain of former European Central Bank President Mario Draghi to “do whatever it takes” to shore up individuals, households, and economies is certainly justified. But once the health crisis subsides, what are the risks of the mounting debt pile?
In the case of the United States, a procyclical fiscal expansion, declining receipts, and an increase in debt service costs had—prior to the coronavirus crisis—led many to point to fiscal sustainability in the United States as a key risk in the dashboard of the global economy. Nevertheless, the United States’ ability to borrow heavily in debt markets stems from its “exorbitant privilege” of being a fiat currency, the world’s reserve currency, with the US ten-year enshrined as a flight to safety for investors around the globe. Accordingly, the risk of foreign dumping of US treasuries (which some feared during the GFC and recently, during the US-China trade war) is overblown: only one-third of US government debt is owned by foreign governments.
Likewise, the risk of inflation is somewhat overhyped. Demographically speaking, like other advanced economies such as Japan, the United States has been in a deflationary mindset for quite some time. With a declining share of labor income, flat wages for the bottom 90th percentile of the income distribution, the rise of the gig economy, millennials not matching the purchasing power of retiring baby boomers, over-levered households, and inability of a majority of companies to regain pricing power over the consumer since the GFC—combined with historically low demand for key commodities—the risk is in deflation, rather than inflation.
Looking beyond the eventual death of the virus, one of the key issues with keeping the fiscal spigots gushing is that such spending diverts resources away from direly needed investment in social and physical infrastructure. As the coronavirus has so painfully revealed, the United States suffers from an acute shortage of sustainable investments in critical infrastructure such as healthcare, education, broadband and connectivity. Physical infrastructure—such as roads, bridges, hospitals, and even airports—are in exigent need of upgrades. And with gaps in broadband connectivity in some rural areas, many have pointed to the “homework gap” and have called for “broadband equity” in the wake of the coronavirus. Indeed, investing in social and material infrastructure is crucial to heal the great income divide in the United States: as such, excessive spending beyond the coronavirus crisis—and the mounting taxpayer burden of servicing the debt—may come at the cost of growth for future generations and young workers.
Many observers question whether the coronavirus crisis will increase income inequality, which is deeply entrenched in many advanced economies. As one seasoned economist opines, coronavirus is the great “revealer” of the growing gap between rich and poor. The sudden stop to the real economy has decimated employment in jobs for blue-collar workers. Jobs which were naturally growing in increasingly service-oriented economies—such as healthcare, leisure and hospitality, and food service—have been swiftly axed as demand for these services has halted during the coronavirus shutdown. Many of these workers’ households are heavily levered: credit card debt in the United States has reached a historic high of $1 trillion, with many paying between 15-17 percent interest on credit cards.
As a result of the demand shock from the coronavirus, many enterprises are unlikely to recover from the plunge in sales suffered during lockdowns—and probably will face much diminished purchasing power from consumers upon reopening. Consequently, the “savings glut of the rich” is likely to expand significantly. In the United States, striking new research shows that this savings glut has not been matched by corollary investment. In fact, this excess savings is correlated with the expansion of household debt for lower-income households, with the richest households in the United States holding the debt of the middle and poorest income households as an asset class. So with the rich not investing, and, in fact, enabling the increase of more household debt, any eventual economic recovery will almost certainly be unevenly distributed.