State intervention: the Keynesian key for switching on the post-lockdown revival
The market can eventually sort itself out, but the socioeconomic price will be too high in the absence of measures such as social grants
Keynesian economics is the economics that gets us out of recessions. It is the economics that pulled countries out of the Great Depression of the 1930s. It is also the economics that provided effective remedies after the 2018 global financial crisis and will inevitably be the economics to which governments turn in the aftermath of the coronavirus pandemic.
While our focus now is on the survival of those who live in this country, as it must be, in the months after the lockdown the question of survival will turn to reviving the economy and the role of the government in this process. The effect of the coronavirus pandemic will be severe. Estimates suggest that the economy, which has been in a cyclical downturn since December 2013, could retract by a further 4% in the short term. Once the pandemic is behind us, it will take time for private sector balance sheets to stabilise and investor confidence to improve. Household expenditure will similarly be negatively affected by the loss of employment opportunities and the need to prioritise expenditure.
Governments have several tools in their arsenals when tackling economic recessions. These include monetary policy interventions, fiscal policy and targeted industrial policies. Unfortunately, the recent ballooning of SA’s public sector debt bill provides little room for the government to significantly stimulate the post-pandemic economy through a comprehensive fiscal stimulus package. We are presently dipping into the Unemployment Insurance Fund (UIF) and borrowing from the recently created New Development Bank, and the Treasury seems to be considering IMF loans.
The recent rerating of SA’s sovereign risk by international ratings agencies also means public sector borrowing has suddenly become more expensive. It is, therefore, tempting to suggest that the answer lies in the adoption of responsive monetary policy. However, Keynesian economics ventures that this only becomes a useful tool when strong evidence suggests that lower interest rates will stimulate investment activity. When investor confidence is weak, decreasing interest rates become ineffective as an economic stimulus intervention and may even result in increased inflationary pressures.
John Maynard Keynes altered economic thinking with the view that governments have a fundamental role to play in stabilising economies, and in improving investor confidence. While Keynes agreed with the classical economic doctrine that, in the long run, economies ultimately move to a state of equilibrium, he recognised that this equilibrium could be reached at an unacceptably high level of unemployment. Keynesian economics is based on the view that economies are social constructs that need to be responsibly managed and not merely left to the vagaries of markets in difficult times when rates of unemployment are rising.
To leave an economy to potentially sort itself out in the long term is socially irresponsible — try telling the unemployed not to worry as “everything will sort itself out sometime in the future”. Keynes maintained that the classical economic assumption that wages and prices adjust efficiently to reach an equilibrium is unrealistic and reflects a naive view of how markets work. Historically, Keynesian economics has favoured multilateralism, with Keynes playing a critical role in the establishment of the IMF and other Bretton Woods organisations in the 1950s. These are the institutions that many emerging countries will rely on to help them weather the global economic storm.
Keynesian economics is much more than merely boosting economic growth through government expenditure at any cost. For one, it suggests that one of the aims of government intervention in the economy is to foster investor confidence and reduce uncertainties. Keynes makes the important distinction between risk and uncertainty. Risk is measurable (as for example in a game of cards), it is insurable, and should be left to the private sector. On the other hand, uncertainty should be the responsibility of the government.
Uncertainty arises from unforeseen events of a social, economic, and/or physical nature. That being the case, it is imperative that governments and multilateral institutions such as the IMF, World Bank and World Health Organisation are appropriately funded, and given the institutional capacity to intervene when devastating events such as the coronavirus pandemic arise. Unfortunately, in the past few decades we have seen a retraction of the state through decreased funding and lower support for multilateral institutions, to the extent that in many countries these publicly funded institutions are presently unable to respond effectively when needed.
Keynesian economics, therefore, suggests that governments can alter investor confidence and stimulate economic growth by reducing uncertainty. This, for instance, includes stimulating and stabilising the macroeconomy through targeted government fiscal interventions. This may mean reprioritising public sector expenditure, targeting households through enhanced social grants and targeting specific sectors that need assistance. Social grants are effective in the sense that they meet the immediate needs of households and indirectly stimulate consumption expenditure.
At present, governments across the globe have become the consumers of last resort, supporting numerous companies and economic sectors. Sectoral and company bailouts should be focused on compensating for risks that entrepreneurs could not have foreseen and could not have mitigated against. Globally, governments are increasingly providing such bailouts conditional on private sector entities meeting short- and longer-term employment and other socioeconomic objectives.
In developing economic policies that will gradually move the global economy out of the devastation caused by the coronavirus pandemic, governments will turn to interventions that provide rapid results, have a low risk of failure, and are fiscally prudent. Governments will once again turn to John Maynard Keynes, the economist who gave us an economic perspective that recognises the strength of markets as well as the responsibility governments have in ensuring responsible social outcomes. The coronavirus pandemic will once again illustrate the importance of effective public sector institutions in managing social and economic outcomes in times of uncertainty.
• Viruly is an associate professor with the department of construction economics and management at the University of Cape Town.
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