The world is currently in the midst of the most serious economic recession since The Great Depression, following efforts to tackle COVID-19.
Michael Roberts, who has worked as an economist with investment research firms in the City of London for over 30 years, argues that private corporate debt is of much greater concern than public debt and that something akin to the 'New Deal' of the 1930s is what is needed from the UK government.
Sputnik: Large levels of government spending are being encouraged by mainstream economists and corporate leaders. How much should governments be spending, what should they be spending it on and what are the limitations of massive fiscal stimulus?
Michael Roberts: The levels of fiscal stimulus by governments in the major economies are unparalleled, at least double if not triple the level as a share of Gross Domestic Product than during the Global Financial Crash more than ten years ago.
Whereas in the Global Financial Crash most spending was to bail out financial institutions, the COVID-19 pandemic is not a financial crisis but a supply and demand shock. So, it requires funding to help those not working with income during the lockdown and small businesses to survive with loans and grants.
Not all this hugely expensive funding, however, has gone to the right targets. Much funding has ended up with large companies which often have substantial cash reserves and have been paying dividends to shareholders while many individuals and small businesses have fallen through the safety net.
Sputnik: During the Great Recession of 2007-2009, "austerity" was the buzzword of the day and it was imposed around the West, as though there was no alternative, with seriously negative consequences for many people. Why is fiscal stimulus the right approach in the wake of 'The Great Lockdown' but not for 'The Great Recession'?
Michael Roberts: Fiscal stimulus should have been the order of the day in the Global Financial Crash (aka The Great Recession) too. But now it is essential because the pandemic lockdowns have shut down economies and there is a serious risk that many businesses and jobs will disappear forever. Unemployment rates are already much higher than in 2008-9 and the decline in Gross Domestic Product and investment is greater than at any time since 1932.
Sputnik: What's the difference between the debt and the deficit?
Michael Roberts: Governments tax and spend. A balanced budget is when these tax revenues match government spending on employees, public services and interest on debt. If the latter exceeds the former, then a government would have a budget deficit.
The deficit can be covered by borrowing. Governments issue bonds for the public to buy in return for interest income. This is the public debt. After decades of deficits, many governments have a large public debt relative to annual national output. Indeed, by the end of this year, public debt to Gross Domestic Product ratios will exceed 100 percent in most major economies, even higher than during the Second World War.
Sputnik: Countries like the UK, which have their own fiat currency, can print money and give it directly to the sectors of the economy which require it. Are there any disadvantages to doing that?
Michael Roberts: 'Printing money' or to be more exact creating deposits in banks for households or companies to spend is a very effective way of getting cash into the hands of people to spend and get the economy going. This bypasses the banking system which, as the experience of the Great Financial Crash shows, often blocks the circulation of money and credit to households and companies and diverts it to financial assets. But there are risks in what is called monetary financing (the central bank printing money instead of governments issuing bonds) or 'helicopter money' (cash directly to households).
There is no budget constraint (namely rising interest costs on government debt); and this may mean that the currency expands without limit and relative to other currencies it loses value and purchasing power. Import prices rise and costs to domestic industry and households rise - inflation returns. It all depends on whether the extra money/credit is used productively to boost investment and productivity. If not, the result may be fast rising inflation alongside low growth, i.e. 'stagflation', as in the 1970s.
Sputnik: You've argued that it's corporate debt rather than public debt that "really matters". Explain what you mean by that.
Michael Roberts: There is too much emphasis on the size of public sector debt. Indeed, this debt is often called the national debt. But it is not. Public sector debt is not nearly as large or as important as private sector debt i.e. household debt (mortgages, student debt and credit cards) and corporate debt (bonds and loans issued by companies).
The latter was at a post-war high before COVID-19 as companies borrowed because profits were not high enough to cover investment and production or because they used the cash to speculate in the stock market buying back their own shares. All this was highly unproductive and risked a new financial crash.
Now the pandemic lockdown is driving up corporate debt to new highs, particularly for weaker, smaller firms. There is an increasing risk of bankruptcies and delinquencies (failure to meet debt repayments). This has not happened too much yet because interest rates are very low. But if inflation should return, interest rates will rise and if national output growth stays low, profits will fall. That is a cocktail for a financial crash.
Sputnik: What, in your opinion, is the British government doing right to address the current economic crisis and what is it doing wrong?
Michael Roberts: The government is right to attempt to directly fund households and firms throughout the lockdowns. But the sums even now do not cover everybody and are also directed more to larger firms than the small ones.
And the government seems unsure on what to do to restore sustained economic recovery. So far it is proposing just £5bn in government infrastructure spending, which is tiny compared to the task ahead. In the Second World War, government investment was over 25 percent of Gross Domestic Product. That sort of 'New Deal' investment is necessary to boost employment, reset the economy into productive sectors, rebuild public services, particularly robust health systems, and target 'green' projects to combat global warming.
That does not seem to be on the government's agenda, while the pressure is growing to try and curb government spending and debt once the emergency pandemic funding is stopped.
Sputnik: What policies would you recommend the British government take to protect families and help jump-start the economy?
Michael Roberts: As above, the government needs to be planning a massive public investment programme. The minimum wage needs to be raised sharply, with a move to a four-day [work] week using new technology to boost productivity. Wasteful expenditures on the military and corporate subsidies to fossil fuels should be curbed.