Economic Recovery from COVID 19
COVID 19 has resulted in great costs to the economy due to the standstill caused by the lockdown. India’s lockdown which was one of the largest in the world cost the economy approximately $ 4.64 billion a day. Many companies have either cut salaries or laid off their workers due to the decreased demand for goods. Governments have announced massive stimulus packages to restart the economy. So far the success of the packages is yet to be seen but they include many necessary actions. Some countries are also changing their policies to become more self-reliant. In this article, I will identify and outline the economic concepts behind the economic recovery plans of different countries, and also explore the idea of a Universal Basic Income in the context of the COVID crisis.
Most stimulus packages have included expansionary fiscal and monetary policy. Expansionary fiscal policies are actions taken by the government to increase demand in the economy, either by decreasing taxes or increasing government spending. Expansionary monetary policies are actions taken by the central bank to decrease the interest rate and foster economic activity by increasing money supply in the economy.
Countries have taken different approaches to increase demand in the economy. The US as part of its $ 2 trillion aid package has promised money transfers to those whose income falls under a certain designated amount. Some governments such as Denmark are reducing taxes, the effect of which is similar to government transfers. Whereas China has focused more on increasing government spending directly into the economy through expanding the public sector and providing support through state-owned enterprises. Both these actions attempt to cover the recessionary gap by shifting the aggregate demand curve to the right. In the first case, individuals have a higher income so they spend more, thereby increasing the demand for goods. The overall increase in demand increases the real GDP. In the second case, the government increases spending by investing a certain amount for a particular project. The aggregate demand and GDP increases by that amount but that action also results in a chain reaction causing a further increase. Government spending in the economy generally causes a greater increase in GDP than an equivalent increase in government transfers since people save a significant portion of the government transfers especially during uncertainty, reducing the overall change in GDP. The “New Deal” after the great depression followed the principle of direct government involvement in the economy to achieve greater gains in real GDP.
In addition to increasing aggregate demand, stimulus packages are focusing on factor markets. A large section of India’s package is directed towards creating a credit line for MSMEs. The goal behind this is to make it economically sustainable to keep workers employed despite the lack of demand. This is beneficial in supporting workers in maintaining a stable income, which could then spur increased demand for basic goods. The second benefit is in helping companies stay in business and be prepared to restart production as the country opens up again. There could also be a shift between sectors in the labour supply. Since migrant workers are going back to their homes, the supply of labour in rural industries such as agriculture could increase.The increasing shift in businesses towards digital will mean greater demand for new age skills like artificial intelligence, digital marketing etc and require reskilling of labour into those areas. The Indian government has announced such a plan but the monetary allocation towards it is not yet clear.
In order to increase capital flows into the economy, both China and the US have aimed to decrease the interest rate to further increase demand through monetary policy actions. China has done this through open market operations. Expansionary open market operations are most commonly the purchase of treasury bonds by the central bank that leads to an increase in the money supply . In the money market, the money demand curve is downward sloping while the money supply curve is vertical. The real interest rate is on the Y-axis while the quantity of money is on the x-axis. As the money supply curve moves to the right, the interest rate decreases. The increase in money supply causes an increase in the supply of funds in the loanable funds market, which leads to more borrowing thereby increasing investment, which is a direct component of GDP. The US, on the other hand, has decreased the federal funds rate, which is the rate at which banks lend their excess reserves to each other. This increases the money supply as well.
Many countries have shifted towards more protectionist policies in the face of COVID. Policies such as Trump’s H1B visa restriction and Modi’s “Atma Nirbhar” statements show that countries want to prioritize their local industries and workers. While this benefits local industries and their workers it is extremely detrimental to consumers. In a free trade market, the domestic supply is upward sloping while the world supply curve is perfectly elastic due to the expectations of unlimited suppliers. In this market, only the most efficient domestic firms are in the industry while the rest is from the world supply. Once you remove the world supply curve or increase the price through tariffs, the number of domestic firms increases but the price goes up and the quantity sold decreases. This results in a decrease in consumer surplus. This also leads to inefficiencies as the lack of competition reduces the incentive for previously efficient firms to continue to do so and inefficient firms are now a part of the market. This also goes against the principle of comparative advantage. If one country has a comparative advantage in good A while another in good B and they trade, they can increase their consumption beyond their production possibilities curve.
Countries like China have used this as an opportunity to increase their control in the global economy. As the dollar is falling, China has removed all restrictions on foreign investment to increase the value of their currency. This will increase the demand for the Yuan. However, this policy might be offset by the negative impacts of the conflicts China has with various nations. As of now, there has been an increase in the exchange rate for the Yuan from pre-COVID times.
Universal Basic Income?
The idea of a Universal Basic Income as a way to offset negative economic shocks and alleviate extreme poverty is particularly relevant as countries look to help their economies recover post COVID. UBI is an unconditional income transfer given to eligible citizens of the country. This could be in replacement of or along with other social benefit programs. The initial effect is that it increases the incomes of individuals thereby increasing the demand in the market. In addition to this studies have shown that it increases spending on positive services such as education. This could lead to long-run growth by increasing human capital.
For India, a form of UBI will help immensely in the economic recovery. The current policy is focusing on helping support MSMEs financially to stay in business and keep their workers employed. However, a more effective way to restart the economy is by increasing the demand for goods. Some of the concerns surrounding UBI is that it leads to the purchase of negative goods and that it reduces the incentive to work. UBI has the same risk of being used for an unwanted good as programs such as food stamps. For example, if someone is earning $400 and currently spends $150 of it on food, an additional transfer of $100 will give them $350 to spend on other goods. If they receive a $100 food stamp instead, then instead of spending $150 on food they only have to additionally spend $ 50, this still leaves $ 350 to be spent on other goods. Studies have shown that if UBI is provided in addition to other programs, it doesn’t reduce the incentive to work. On the other hand it gives people the opportunity to upskill themselves and get better jobs.