Covid-19: A Global Stick on Classical Economics and Inequality

Published on 19th May 2020

The globe has passed through humanly engineered and natural viral weaves, that have resulted in 50 million plus death tolls in total.  At least — in 1889: the Russian Flu killed 360 thousand people in North America and Africa. In 1918: the Spanish Flu killed 50 million and in 1957: the Asian flu extirpated 1.1 million people across the world. The Covid-19 pandemic is expected to take a significant amount of lives across the world.  

Despite the devastating socio-economic implications of the pandemic, it could also have a positive influence in shaping the long-standing supply side (trickle-down) “political economy.” The coming socio-economic chaos requires a fast response to ensure autonomous consumption (a must make expenditure) for the greatest majority of consumers. The supply side economics can’t respond swiftly due to the time it takes and trickle-down economics exhibited over the past five decades in the US. The consequences of COVID-19 are imminent and must be addressed in order to survive the global socio-political and economic damages.

Covid-19 is a “perfect storm” to oblige governments to shift from the supply side to the demand driven economics. Many governments are required to address unemployment challenges in the short run. Accumulated and undelivered promises of supply side economics have weakened household resistance capacity to absorb economic shocks through widening income and wealth inequality. 

Following the 1970 stagflation (a result of the failure of Bretton Woods monetary order) and the 1973 oil crisis (from oil exporting countries embargo against nations that support Israel); supply side economics was proposed as a solution. It entailed stimulating production by lowering tax and decreasing regulation to producers with a view of boosting the spending capacity of consumers and increasing employment opportunities.

While Arthur Laffer (one of the economic policy advisers in the Reagan administration) notes that tax rates decrease does not necessarily lead to lowering government revenue and can spur higher economic growth, a research which investigated data of the past 50 years in the US notes that the   trickle-down economics, (a theory of Cutting the top tax rate)  reneged on its  promises of Job creation, income and wage growth, and economic growth.

On the contrary, subsequent to the great depression of 1929, Keynes showed how economic growth responds to a stimulus in the short run and its implication on inflation, and unemployment during recession. It assumes that changes in aggregate demand have a strong short-run effect on real output and employment, not on prices, as prices are sticky in the Keynesian range. It recommends an expansionary fiscal policy. The policy was used to address the Great Depression in 1933 through A New Deal program that offered unemployment compensation, recovery and reform under the president Roosevelt.  

Similarly, in the present time of COVID-19, many governments could face similar challenges. The post COVID-19 crisis could result in social crises. Thus, governments should design and implement swift and effective solutions in the short run that can curb unemployment.

The Keynesian approach could provide fast response to stimulate the economy through driving aggregate demand in the short run by raising public expenditures in a way that enhances consumers’ effective demand through raising employability. Moreover, it can also curb income inequality by lowering tax for employees and the working class rather than direct financing or making top tax rate cuts for corporate firms.

By Alula Nerea

Project Consultant and  Development Economist,  Verdant Consulting.

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