World Economy Saddled With Debt

World economies entered the pandemic saddled with debt, which will hamper the pace of economy recovery. Many countries depend on consumer spending to drive their economies (about 70% in the U.S. and Canadian), and during an economic slowdown firms lay off workers who must cut spending. Still, the IMF estimates global economies will rise 5.2% in 2021, fueled by growth in India and China.

Japan continues to lead the pack of major countries with 234% debt to GDP (developing countries’ ratio averaged 250% at the end of 2020), while the U.S. government’s appetite for debt remains strong. Before COVID-19, U.S. debt continued its climb, and with COVID-19’s effects ended 2020 at 109% debt-to-GDP. The U.S. is one of the strongest economies in the world, yet it ranks among countries with the highest debt to GDP ratio consistently — twelfth at the end of 2020.

Global Stock Markets Recovered Sharply

Governments Response to COVID-19

The Canadian government pumped vast sums into the economy to help individuals, families, and firms, and to prevent a major economic downturn. This spending binge caused the deficit to grow at the fastest rate among G-20 countries, and produced a huge debt surge.

Our strategy is clear: We will do whatever it takes to help Canadians through this crisis. We will invest in every necessary public health measure. We will support Canadians and Canadian businesses, in a deliberate, prudent and thoughtful way. And we will ensure the Canadian economy that emerges from this pandemic is more robust, inclusive and sustainable than the one that preceded it, with a stronger, more resilient middle class.

Canadian Government Fall Economic Statement 2020

Canada is gambling that its substantial response to the COVID-19 crisis will cause an early economic rebound once the country reaches herd immunity. Households did not respond as expected — they saved instead of spent funds. And despite the massive funds’ infusion, Canada’s economy shrunk 5.4% in 2020, the most since the Great Depression. Still, the government claims that without its intervention, unemployment would have peaked at almost 20% instead of about 13%.

Meanwhile, by the end of 2020, household debt fell  to 175% of disposable income. And the more relevant household debt service ratio (principal and interest as a proportion of household disposable income) rose to 13.6%, from 12.2% in the third quarter of 2019.

Lessons From Governments Response to Great Recessions

First, the hardest hit and the greatest needs are in the lowest income groups. Poor families will get poorer even with help because of their fragile base. Richer families will get richer with help for the opposite reason. Second, firms will not self regulate and will seek ways to cheat when asked to regulate themselves. The public policy think tank, The American Enterprise Institute’s post mortem of the Great Recession showed:

The crisis certainly could not have occurred without certain private firms (e.g., Citigroup, UBS, Merrill Lynch) engaging in excessive corporate short-termism (or perhaps ‘greed’). 

And yet government regulators created bureaucracy to regulate these firms but did a poor job. So, while government must intervene in the economy sometimes, it must target its help to the poor and those in need, and manage the delivery well. 

Third, whatever action government takes the opposition will oppose because politicians know the major of the population won’t hold them accountable for their stupid decisions. Blind party affiliation and self interest will cause opposition, too.

Three views exist about government intervention in the economy — conservative, liberal, and ignorance (which includes some in both groups). Conservatives, abhor government involvement; some conservatives see any help as a socialist plot which is utter rubbish. Liberals want Keynesian-style intervention, period. The ignorant listen to the news and take talking points from their favorite commentators, disregard common sense and facts, and hold co-opted views as sacred. People do not dialogue or discuss facts. We have become polarized. Like sheep, people follow politicians, many of whom make bad decisions confident the unsophisticated electorate won’t hold them accountable.

Canadian Government Response to COVID-19

Let’s look at Canada’s response to the pandemic. First, here is a vital question: What value do we place on elevating interests of the people above the deficit? Are people’s health, security, dignity more important than balancing the budget? To be sure, without financial support, more people will need government help later. So, perhaps Canada’s strategy is wise for the long-term to prevent widespread suffering, and position the economy for rapid recovery.

The central issue is how well government targeted its help and how effective it managed that help. Research abounds showing governments are ineffective, wasteful, and often corrupt. They will not use the best vehicles to deliver help; they will funnel funds through cronies, and they will not direct help where it’s needed most. For instance, small businesses are the engine of our economy. Their lobbyists might not be as effective as larger businesses. Did the Canadian government target small businesses in sufficient detail to help most survive this crisis? Time will tell, but early signs show they did not, and they wasted funds in other areas.

Conclusion

Governments must use this time to develop infrastructure projects, which should become the engine of economic growth in the near to medium term. That consumers should spend COVID-19 relief funds to keep the economy moving is sophistry. If government wants people to benefit from its help, politicians should encourage households to be wise stewards because some individuals might not return to work for a long period (or never) as happened after the Great Recession.

Debt and deficits need servicing and these costs, even with low interest rates, will claw funds from other needed areas in the economy. Meanwhile, after this round of financial support, government must remove taxes from small businesses and create a less bureaucratic environment for them to return to pre-pandemic levels and grow. Small businesses are the economy’s wealth generators and job creators; we must encourage them.

Time will tell whether the Canadian strategy works. The government’s intentions were good, but early indications show poor execution. 

© 2021 Michel A Bell

See Also:

Supporting Businesses During The Pandemic Means Supporting People During The Pandemic

Corporate Welfare Destroys Jobs Long Term

The post Will Governments COVID-19 Response Yield Sustained Economic Recovery first appeared on Michel A Bell Stewardship Blog.