In the midst of what might possibly be since 2008, and staring down the barrel of overwhelming economic, social and human disaster, there is widespread recognition that increased welfare spending is critical not just to contain the fallout from the pandemic, but also to effectively combat it. By ensuring timely delivery of essentials and basic income support, one can minimise the chances of people venturing outside, and hence contain the spread of the COVID-19 virus.

There are valid concerns raised as to whether these measures go far enough in helping workers or whether institutional mechanisms will be able to convert announcements into genuine progress on the ground. This blog post analyses the arguments behind the justification of introducing welfare schemes in today鈥檚 times, and the underlying economic logic behind them.听

The increase in welfare provision is sorely needed in a catastrophic situation such as the one we face. But while the readiness to deploy instruments to achieve this is unprecedented, the measures themselves are not. Much of the welfare measures rolled out by governments are standard income support and welfare packages, larger in scale but with no fundamental changes in their basic design. Much of these measures, moreover, have been advocated by many to deal with fallouts from economic crises in the past, only to be met with middling levels of success and acceptance by the powers that be. The impact of the coronavirus has shown us how quickly governments can turn over the fundamental principles of austerity if they are pushed to do so.听

This post does not simply aim to criticise government policies of the past in light of current actions, but to outline a warning for the future. The problem of economic distress will not go away once the pandemic does, because then we will be dealing with battered economies, high unemployment, and weak to non-existent growth. In such times, when the threat of the virus has ebbed, there will be calls to roll back the welfare measures of the government. These calls will have to be countered stringently, on the grounds that the need to protect welfare and ensure government assistance is not contingent simply on the existence of a virus, but on the inability of the economic machine to provide for welfare.

MONETARY POLICY, CREDIT AND LOAN FORGIVENESS

Nearly have announced their readiness to offer whatever help is needed to combat the pandemic. These moves were carried out during the Great Recession of 2008 as well, under the strategy of 鈥淨uantitative Easing鈥�. At the time, those measures were critiqued for potentially leading to inflation. However, in a situation where the motivation to invest is lacking, there is no fear of inflation spiking. This is as true today as it was in 2008.

There are other policy actions that are, for want of a better word, interesting. The European Central Bank (ECB) that it has removed previously self-imposed limits on the amount of any one country鈥檚 debt it would hold, allowing for an increase in the amount of money it can print. This move will face legal challenges, and an accusation by some that it could lead to the ECB directly bankrolling governments. Yet during the Greek crisis, the ECB did extend financial support, purchasing Greek debt in an attempt to drive down interest rates and provide emergency funding, with the condition that austerity was imposed and government spending slashed. The timeline of events and the deep instability and unrest following these measures are well known.听

It would be ludicrous if monetary support to tackle the pandemic were to be withheld from an economy if the government did not cut taxes and raise revenue. But if it seems ridiculous to ask for austerity measures today, why was it acceptable to ask for it during the Greek crisis, when the human costs of the crisis were significant? And while the ECB has pulled out the big guns today to combat the crisis, one must be wary of what happens after. It is not inconceivable that the ECB or other creditors would ask for austerity once again to repay public debt accumulated in times of the pandemic. These moves will have to be contested on the grounds that the economic logic calling for relief measures today is the same as in any other economic crisis. When private investment freezes up and mass unemployment occurs, no matter what the cause for the downturn, austerity is self-defeating and destructive.

Other measures resorted to to bring relief to small businesses and consumers have been the announcement of loan moratoriums. The Reserve Bank of India has announced that consumers have recourse to a , while the US has that those with student loans from federal sources can postpone payments up till September 30th, with a waiver of interest charges. In France, Prime Minister Macron has announced a freeze on rent and utility bills for small businesses.

These moves are unprecedented, for they go against one of the fundamental building blocks of the capitalist economy. The free market logic goes that if a loan has been taken, the efficiency of the system is ensured if the capital advanced is rewarded through periodic repayments. In the absence of such repayments to capital, it is argued, capital would not be forthcoming, and the economy would suffer from a lack of resources for investment, growth and employment. In the wake of a pandemic, however, governments have realised that the health of the economy cannot be separated from the health of its citizens.

These moves are very welcome, no doubt. But these measures do not owe their first articulations to today鈥檚 policy-makers. of the response to the 2008 mortgage crisis was that it was biased towards banks, and did not provide any support to families to help restructure the terms of their loans. The homeowner assistant program announced by the US government was a voluntary program that primarily supplied capital to banks, and did not meaningfully involve homeowners. If loan rescheduling can be seen as a valid response to today鈥檚 deep crisis in the economy, why couldn鈥檛 it have been done before? It is vital for progressives to establish these moves as valid precedents, and ensure it does not become a one-off move, seen as being applicable only in pandemics.

INCOME AND CONSUMPTION SUPPORT

India is increasing the allocation of food to be distributed through the Public Distribution System, and to each resident to combat the outbreak. In the US, would get an additional $600 per week over and above the benefits from their states, with an additional month of benefits. This did give rise to some pushback from certain Republican senators, who claimed that the increase in benefits would incentivise workers to quit their jobs.

This is a familiar argument, enshrined in textbooks and mainstream discourse alike, frequently marshalled to argue why unemployment benefits should not be increased. Though there have been several arguments against this line of thought. For one, if workers are quitting jobs to avail of unemployment benefits, perhaps one must question why wages are so low, instead of attacking benefits for being so high. Nonetheless,听 it is remarkable that, apart from a few Republicans, the mainstream has not reacted negatively to these measures. The fact that the magnitude 鈥� actual and potential – of the unemployment crisis facing us today is vastly different from all other crises we have faced should not stop us from stressing the universal applicability of these measures in times of all economic crises.听

, relief comes in the form of increased food support, with ration card holders eligible to an extra 5kg of rice and wheat free over and above their existing entitlements, with an extra 1 kg of pulses for three months, along with a host of other measures. The extra rations of cereals that are to be drawn from the buffer stocks of the Food Corporation of India (FCI), with additional procurement in the case of pulses.听

There are several problems in the current scheme that have to be addressed. For instance, will migrant workers be able to access this scheme if they are not in their place of origin? Will coverage be held up for the vulnerable due to misplaced concerns about 鈥渆fficiency鈥� and with ? Regardless of these vital concerns, it is no doubt a positive move for the government to ensure the problem of hunger is mitigated in these difficult times. But the problem of hunger is not unique to a pandemic. Buffer stocks in the FCI have always been present, and could have been used at any time to alleviate hunger. We must ensure that it continues to be used in this manner post the pandemic, when depressed economic activity would imply rising levels of food insecurity for the poor.

POLICY IN A POST-COVID WORLD

None of the above is meant to minimise the severity of the current situation or to critique the essential logic of the welfare measures introduced. This post simply makes the argument that while the pandemic is a threat the world has never faced before, the essential economic aspects 鈥� that of huge costs to human welfare due to rising unemployment, falling investment, and debt traps – of the current crisis is similar to crises we have faced before. Governments鈥� willingness to extend help to those affected that is on display today should ideally have been there every time the economy faced a crisis.听

Moreover, this post is also a call to arms for progressive sections, to ensure the logic of welfare as enshrined in these policies today is institutionalised in the economy going forward, and the response to the pandemic is not seen as a response to a one-off, unique event. Whenever economic crises lead to a rise in economic insecurities, it must be combated with the same alacrity as seen today. It may be impossible for the quantum of support that is seen today to be forthcoming at all points in the future, but we must push to ensure that the willingness to intervene becomes an institutionalised feature of the State.听

Some writers believe that the pandemic marks a turning point in which policy will move . Some believe that the world might just retreat behind . It is, of course, nearly impossible to formulate a vision of the future in the midst of an uncertain present. But if we do wish for a more humane society to emerge on the other side of these trying times, it is essential that the world is made to realise that it should not take an existential threat to humanity for policy to put citizens first.听

Rahul Menon听is听Assistant Professor in Economics at the Tata Institute of Social Sciences, Hyderabad, India.

Photo: No To Austerity: Anti-Austerity Protest In Dublin (Ireland) – 24 November 2012. By .

Bradford deLong has recently argued that neoliberalism provides a way for former colonies to close the gaps with their erstwhile colonial masters. But this argument ignores the fact that several economic policies of colonial times were explicitly laissez-faire in nature.

The recognition of the dangers of allowing finance a free hand in the economy has led to a rethink of the soundness of neoliberalism as an economic and policy doctrine, from . has attacked the theoretical foundations of neoliberalism itself, judging that its insistence on allowing for unhindered market activity is bad economics itself, for economic models that make a theoretical case for markets cannot be easily transplanted into the real world in the way that advocates of neoliberalism believe.

Yet this is not to say that the concept is dead and buried. As Harvey (2007) points out, neoliberalism is a political economic process that ostensibly seeks to organise society and economies around the principle of free market activity, while primarily attempting to shift the balance of power towards dominant economic classes that control capital. Seen in this light, neoliberalism is still a powerful force shaping political and economic changes in much of the world today.

, first published in 1998 and re-published now shows that the term 鈥渘eoliberalism鈥� still carries intellectual currency. His is a curious argument; neoliberalism provides the only suitable path for countries of the developing world to close the gap with their former colonial powers. Access to the latest goods and technology allows developing economies 鈥� with low levels of productivity 鈥� to boost productivity and output growth, and consequently incomes. The reason the State should stay away from the economic sphere in the developing world is because democratic institutions have not been established yet, and hence the political sphere is vulnerable to capture by elites.

This argument neglects and that would go on to suppress democratic rights. DeLong does highlight that the East Asian economies achieved high per capita income levels through the use of the Developmental State, but states that economic growth there came only at the cost of genuine political democracy and massacres by the military, completely glossing over the fact that economic progress and a 鈥渞obust鈥� social democracy in the developed world was built on the backs of , and in the colonies.

The links between colonialism, capitalism and the subsequent development of Asian and African economies is well-known. Yet there is a deeper point to be noted; the dichotomy drawn by DeLong between colonialism and neoliberalism is false because colonial economic policy has always been neoliberal with respect to two important economic spheres, public finance and international trade.

The Laissez-Faire Colonial State

One of the hallmarks of neoliberal economic policy is the limited State intervention in markets, an adherence to reducing fiscal deficits, and a commitment to preserving laissez-faire. It could well be argued that the colonial state was not neutral with respect to the economy, and intervened with a heavy hand to preserve its rule. But in the economic sphere, it was thoroughly committed to the idea of laissez faire and balanced budgets.

As Morris D. Morris (1963) writes, 鈥淕overnment policy during the nineteenth century, despite its authoritarian characteristics, was in its economic aspects essentially laissez faire. The British raj saw itself in the passive role of night watchman, providing security, rational administration, and a modicum of social overhead on the basis of which economic progress was expected to occur鈥�. The colonial state sought to ensure its budgets were balanced; it would only undertake investments if they generated adequate returns to cover their costs at market interest rates. India was a primarily agricultural economy, with a small industrial base, and hence State revenues were largely dependent on the monsoons.

This ensured that public spending was pro-cyclical, and that slowdowns were not compensated by injections of demand from the State. As Morris himself realises, this policy of the colonial government 鈥溾�ad adverse effects on the general responsiveness of indigenous entrepreneurship, reducing confidence and keeping the flow of capital into commerce and industry below what it otherwise might have been.鈥�

These restrictions were not just seen in India, but was an essential feature of public finance in nearly all British colonies. As Stammer (1967) notes, colonial governments accumulated reserves during booms and failed to expand public spending during recessions, avoiding the use of deficit financing. The following quote by a British governor of an African colony 鈥� quoted in Stammer 鈥� perfectly outlines the neoliberal character of colonial economic policy:

鈥淚t is the duty of every African government, not to provide work for the workless, but so to govern that private enterprise is encouraged to do so; that trade is allowed to grow without hindrance; that business houses are given every facility and encouraged to start new productive works.鈥� (Quoted in Stammer, pg 194).

It was only after the havoc wrought by the Great Depression that British economic policy towards its colonies changed, with the passing of the Colonial Development and Welfare Act in 1940, which ensured that colonies did not have to generate their own financial resources. Nonetheless, it is safe to argue that there was no essential change in the laissez-faire character of colonial powers when it came to the economic policy of the colonies.

Colonialism, Neoliberalism and the Shaping of Comparative Advantage

A focus on comparative advantage is associated with neoliberalism, suggesting that today鈥檚 developing economies should export agricultural and labour-intensive goods. There are two major problems with this assertion. Firstly, the successful export-oriented Asian economies of today consciously built up their technological capabilities and exported goods that had nothing to do with their 鈥渃omparative鈥� advantage. As Rodrik notes, much of the goods exported by China are of a far greater technological intensity than what would be appropriate to their relative supplies of labour and capital. The South Korean government provided subsidies and active State support to get firms to upgrade and export goods of a more capital and technologically intensive nature, as various authors 鈥� such as Vivek Chibber and Atul Kohli – attest.

The second problem is that the characterisation of today鈥檚 developing economy exports as being inherently labour-intensive and agricultural is ahistorical, for there is no real recognition of the impact of colonial policies on domestic manufacturing. Amiya Bagchi (1976) has written extensively on the 鈥渄eindustrialisation鈥� of Indian textile manufacturing and the impact of colonial policy over the 19th century.

To be sure, there exists a large debate about the exact causes of deindustrialisation in India. While Bagchi lays the blame squarely at colonial economic policy, Tirthankar Roy believes that technological and market changes were largely to blame. The industrial revolution led to an increase in productivity in Britain, and Indian industry simply couldn鈥檛 cope.

There is no doubt that Indian textile manufacturing in the 19th century was not as productive as British machine spinning. Yet it is important to understand that Indian textiles were forced to compete with British goods, which circulated freely within the Indian economy. In a sense, trade in India was truly 鈥渇ree鈥�, for there was no impediment to the movement of British goods.

Colonial policy denied the Indian economy the very same tools the British economy adopted to spur technological change 鈥� the use of tariffs to protect the domestic economy and improve its technological capabilities. As Ha-Joon Chang (2002) has shown, Britain industrialised behind the wall of high tariffs during the 1800s, only lowering its tariffs in the middle of the 19th century, once it had established itself as a major manufacturing power. The dominant capitalist economy of today, the U.S., similarly had extremely high tariff barriers before it was ready to enter the free trade arena. Moreover, even though Britain did lower tariff barriers, manufacturers in Britain were still able to protect their markets from Indian goods. As Maddison writes:

鈥淚ndia could probably have copied Lancashire’s technology more quickly if she had been allowed to impose a protective tariff in the way that was done in the USA and France in the first few decades of the nineteenth century, but the British imposed a policy of free trade. British imports entered India duty free, and when a small tariff was required for revenue purposes Lancashire pressure led to the imposition of a corresponding excise duty on Indian products to prevent them gaining a competitive advantage.鈥� (Maddison, 2006, pg 56).

Thus India鈥檚 鈥渃omparative鈥� advantage in agricultural goods cannot be assumed to inherently characterise the economy, and must be seen in the context of a policy of free trade imposed upon it by its colonial power, Britain. The following quote by Tirthankar Roy demonstrates the essential compatibility between neoliberal policy prescriptions and the colonial experience with regards to free trade:

鈥溾�hereas British policy believed in exploitation of comparative advantage in trade, independent India turned firmly away from participation in the world economy, precisely at a time that the world economy experienced a boom. When economic reforms in the 1990s reintegrated India in the world economy, the major beneficiaries were manufactures that were intensive in semiskilled labor, in a late but welcome reversion to the colonial pattern of growth.鈥� (Roy, 2002, pg 110. Emphasis added).

The adoption of neoliberal reforms in India after 1991 did lead to periods of extremely rapid growth, as compared to the period from 1947 to 1991 (though this cannot be taken as vindication of neoliberalism in general). But much of this growth has come from inflows of foreign finance (Nagaraj, 2013), which curtails the policy space available to the government, . While colonialism benefited foreign capital, neoliberalism shifts the balance of power to big domestic capital and international finance capital. 听It is a cruel irony therefore, to hail neoliberalism as an antidote to colonialism, as neoliberal economic policy was one of the highlights of colonial policy, bringing in its wake severe hardships for much of the world鈥檚 population.听

References

Bagchi, A. K., 1976. . The Journal of Development Studies, 12(2), pp. 135-164.

Chang, H.-J., 2002. . London: Anthem Press.

Harvey, D., 2007. . The Annals of the American Academy of Political and Social Science, Volume 610, pp. 22-43.

Maddison, A., 2006. . s.l.:Routledge.

Morris, M. D., 1963. . The Journal of Economic History, 23(4), pp. 606-618.

Nagaraj, R., 2013. . Economic and Political Weekly, 48(20), pp. 39-51.

Roy, T., 2002. . The Journal of Economic Perspectives, 16(3), pp. 109-130.

Stammer, D., 1967. . Social and Economic Studies, 16(2), pp. 191-205.

Rahul Menon听is听Assistant Professor in Economics at the Tata Institute of Social Sciences, Hyderabad, India.

Photo credit: Melton Prior

The concept of secular stagnation, first propounded by Alvin Hansen in the 1930s, has enjoyed an academic 鈥� and mainstream 鈥� resurrection thanks to Lawrence Summers (2014, 2016), who first advanced the theory as an explanation for the subdued recovery and anaemic growth prospects of advanced economies. A surprising criticism recently came from (August, 2018), who believes that the theory offers a convenient escape away from assuming responsibility for failed policy during the crisis. 听An acrimonious debate between followed. 听

On the face of it, Summers 鈥� and 鈥� are right: the modern theory of secular stagnation does see a central and substantial role for fiscal policy. The problem, however, lies in the fact that a short-term fix for aggregate demand shortfalls 鈥� fiscal policy 鈥� is being advanced as a long-term solution of the problem of reduced growth prospects. The central question of what drives investment in a capitalist economy is not addressed.

Secular Stagnation: Excess Savings in a New Keynesian Framework

. It is situated within the Wicksellian framework, where investment and savings at full employment are equilibrated by the natural rate of interest. The presence of cash implies that interest rates cannot be negative. When the natural rate of interest is negative, and nominal interest rates are constrained by the zero lower bound, real interest rates cannot be brought in line with the natural rate. In such a situation, excess savings generated due to factors such as demographic change or excessive savings in developing economies cannot get absorbed by investment, leading to stagnation.

However, the modern framework of secular stagnation situates Wicksell鈥檚 theory in a New Keynesian framework. The framework thus adopts a pre-Keynesian view, wherein the interest rate, rather than income, is believed to adjust investment and savings. In standard New Keynesian models, the Euler equation shows how the real interest rate determines inter-temporal consumption.

At non-negative interest rates, savings today cannot fail to be manifested in tomorrow鈥檚 aggregate demand, since the only purpose of current saving is to carry consumption from today to the future. The capitalist system is seen as an inherently rational system, whose chief goal is to provide for consumption, and only institutional specificities 鈥� the presence of cash and non-negative interest rates 鈥� keep it from achieving full employment. In such a situation, fiscal policy and government spending is required to raise the level of aggregate demand.

Keynes鈥� highlighting of the power of animal spirits and the forces driving investment have been ignored. Investment demand is autonomous, according to him, and could fall even at positive rates due to uncertainty or adverse expectations. Given a certain amount of savings 鈥� determined by savings habits and the distribution of income 鈥� a fall in investment would imply greater leakages of demand out of the system rather than injections into it, and hence a reduction in aggregate demand, output and employment. This situation could not be remedied through the manipulation of interest rates alone. Fiscal policy would be required even at positive interest rates in the face of aggregate demand failures in the short-term.

It is unclear whether fiscal policy can work as a long-term solution when the rate of investment is chronically depressed. In fact, it is ironic that the modern theory of secular stagnation focuses so heavily on the role of interest rates, given that Alvin Hansen himself wrote that 鈥溾�he role of the interest rate as a determinant of investment has occupied a place larger than it deserves in our thinking鈥� ().

More Malthus than Keynes in New-Keynesian Secular Stagnation

The modern theory of secular stagnation owes more to the underconsumption theories of Malthus and Hobson than Keynes. Those theories too assumed that the primary outcome of the capitalist process is providing for consumption, and any constraint to consumption would lead to stagnation and slow growth. The difference is that while the modern theory sees the constraint as arising from purely monetary factors, the under-consumptionists assumed it arose from class dynamics in a capitalist society. Malthus held the loss of 鈥渦nproductive consumers鈥� responsible while Hobson highlighted the dangers of falling wage shares for labour.

Bleaney (1976) highlights the chief problem of under-consumption theories that is a central weakness of the modern theory as well; there is no explanation of the factors driving investment. If profits can be generated through the production of machines to make machines, or through armament production, then investment will be carried out and aggregate demand will not face any shortfall. Such production may not be strictly rational in that consumption is ignored, but, as Kalecki pointed out, capitalism is not a rational system.

The question posed by the modern stagnationists 鈥� whether a positive trend rate of growth can be assumed irrespective of cyclical fluctuations 鈥� is an important one, though the answer they provide is insufficient. Growth models like Solow鈥檚 assume that the trend rate of growth is determined by exogenous factors, namely the rate of growth of population and Harrod-neutral technological progress. But that answer arises from a model that assumes away the problem of deficient aggregate demand in the long-run.

What Drives Capitalist Growth?

Conceptualising investment as being determined by exogenous factors opens up new and exciting fields in the study of capitalist growth. Using an autonomous investment function, Kalecki (1962) showed that the only stable long-run growth rate of a capitalist economy was zero, with a positive trend arising only due to the operation of exogenous factors termed innovations. These innovations are not merely to be thought of as technological changes, but could also be inventions, the discovery of new sources of raw materials and markets, changes in institutions etc.

Innovations, interpreted in a broader context, are central to growth in Schumpeter鈥檚 vision. Schumpeter believed that Keynes鈥� pessimism with regards to the motives for long-run growth stemmed from the fact that the factors that gave rise to investment opportunities, such as technological changes, 鈥溾�ew sources of food and raw materials鈥︹�� were being closed off to the developed capitalist world, while the saving habits of the bourgeoisie continued unabated (Schumpeter, 1946, pp 500-501).

Schumpeter鈥檚 diagnosis of stagnation is due to a specific form of evolution of capitalist society rendered moribund due to monopolies and attitudes towards risk-taking, while the criticism of Kalecki is more far-reaching: any form of capitalist society is prone to stagnation unless suitable exogenous factors are in operation. In his seminal article laying out the framework of secular stagnation, Hansen was pessimistic about the future prospects of growth because he did not believe that the pace of technological progress was smooth, and found no grounds to assume that capital-intensive, technologically sophisticated sectors such as railways and automobiles would emerge at a rate sufficient for the maintenance of a high inducement to invest consistently and uniformly through time. 听

In conceptualising of capitalist growth of being driven solely by consumption, and in tying aggregate demand to the working of interest rates alone, the modern theory of secular stagnation assumes short-term fixes can solve a long-run problem. Shifting the focus from consumption and excess savings to autonomous investment flips the central question entirely: the question to be asked is not what constrains capitalist growth, but how did it ever manage to grow in the first place?

References

Bleaney, M. F., 1976. Underconsumption Theories: A History and Critical Analysis. London, Lawrence and Wishart.

Eggertson, G. & Mehrotra, N., 2014. A Model of Secular Stagnation. NBER Working Papers, no. 20574.

Hansen, Alvin, 1939. Economic Progress and Declining Population Growth. The American Economic Review, vol 29, no 1, 1-15.

Kalecki, M., 1962. Observations on the Theory of Growth. The Economic Journal, vol. 72, no. 285, 134-153.

Schumpeter, J. A., 1946. John Maynard Keynes 1883-1946. The American Economic Review, vol. 36, no. 4, 495-518.

Summers, L. H., 2014. U.S Economic Prospects: Secular Stagnation, Hysterisis, and the Zero Lower Bound. Business Economics, vol. 49, no. 2, 65-73.

Summers, L. H., 2016. Secular Stagnation and Monetary Policy. Federal Reserve Bank of St Louis Review, vol. 98, no. 2, 93-110.

Photo:听National Archives at College Park.听Unemployed Men Queued Outside a Soup Kitchen in Chicago During the Great Depression.

Rahul Menon is听Assistant Professor in Economics at the Tata Institute of Social Sciences, Hyderabad, India.