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The relevance of Economics within a pandemic and can Economists make things better?

Author: Hubert Kucharski Disclaimer: This article has been entered as an academic essay part of the NCH Essay Competition which has concluded

Date Submitted: February 1st 2021

Introduction:

The following article will illustrate expansionary fiscal policies which the UK government has introduced during the coronavirus outbreak to maintain economic growth. Firstly, to outline how economists made things better, this article will assess the impacts of Furlough and “Eat out to Help out” schemes on aggregate demand. It will then comment on the problems with the schemes, what could be done instead; if anything, and how introducing the schemes reflects the importance of economics in a pandemic.


Maintaining Economic Growth:

Economic growth, in the short run, is an increase in real GDP and long run, an increase in the productive capacity of the economy. The government objective is for economic growth to be stable and sustainable; this allows businesses and consumers to plan. A recession occurs when a nation experiences two consecutive quarters of negative economic growth. Similarly to the 2008 Financial Crisis, COVID-19 has also resulted in recession. Trading economics illustrates in the economic quarter of January 2020; economic growth was at -3%, this worsened to -18.8% in the quarter ending July 2020,[1] thus showing two consecutive periods of contraction.


This recession is caused by decreased consumer confidence because of COVID-19. The social health risks which COVID-19 imposes causes consumers to be afraid of the dangers associated with being near others. Meaning individuals are less likely to leave the house for reasons which are not essential, such as leisure activities and socialising. The Office for National Statistics illustrates 62% of adults "stayed at home or only left for work, exercise, essential shopping or medical needs."[2] Therefore adults are concerned about the health risks of going to public areas as many are trying to restrict the number of times they leave the house to decrease infection risk. Another figure from the Office for National Statistics also shows this fear of COVID. It states 76% of adults are "very or somewhat worried about the effect of COVID-19 on their life right now.”[3] This concern about COVID-19 causes households to be uncertain about their future, financially and healthwise yielding a reduction in consumer confidence.


A decrease in consumer confidence results in consumers becoming reluctant to spend money on goods and services. Financial Times reports “consumer spending fell 36.5% in April compared with the same month last year."[4] Furthermore, Britannica illustrates “private consumption constitutes about two-thirds of all economic activity in most countries."[5] Therefore, decreases in consumer spending yield a reduction in aggregate demand.


Reductions in aggregate demand result in disinflation. Trading economics illustrates the UK inflation rate in January was 1.8%, this slumped to 0.6% in June;[6] 1.4% below the government target. A 1.2% reduction in the inflation rate results in decreased incentives for firms to produce more. The decrease in demand for goods and services means firms produce less, therefore, to cut costs, firms cut back on their factor inputs. One of these is labour; laying off workers decreases costs as businesses no longer have to pay as many wages. A BBC article from October illustrates in 2020, the number of redundancies in the UK hit 227 thousand.[7] Although these redundancies reduce costs for businesses, they have consequences for the economy as business spending decreases.


Consequently, this combination of a decrease in consumer and a drop in business spending yields a contraction in aggregate demand. Therefore, to maintain economic growth, it is the Keynesian view, governments should increase their spending and accumulate debt whilst introducing policies to stimulate aggregate demand. One of these policies is the Furlough Scheme.


Government Policy: The Furlough Scheme

The Furlough scheme; first introduced on the 19th of March 2020, is a job retention scheme to keep unemployment low by subsidising 80% of workers wages. Evidently, the current unemployment figure, as of December, is 5%[8] However, some economists would argue this is misleading. Individuals on Furlough do not work. Therefore, they are not producing any goods or services for the economy, distorting the employment figure making it seem higher.


As previously explained, during periods of recession, businesses tend to cut back on factor inputs; primarily labour, to reduce costs. Within industries where there is a large labour supply, such as retail and food, business owners do not have incentives to keep their employees because there will be another individual willing to do work instead; after the effects of the recession are over. Therefore, these sectors have had an increase in redundancies compared to other areas. This is reflected in a BBC article, using data, it can be calculated the total value of claims from wholesale/retail and accommodation/food services accumulates to £13.6bn, also, the total value of claims at that time was £35.4bn.[9] Therefore, a large majority of Furlough claims comes from sectors where labour supply is extensive. Furthermore, a large available labour supply keeps wages low. Meaning, before COVID, individuals working in these sectors had limited disposable income. Therefore, it is unlikely they have saved as a safety net. Consequently, Furlough needs to protect these people to ensure they have an equitable standard of living during COVID, illustrating how economists have made things better.


However, individuals supported by Furlough will see a 20% reduction in their wages. The majority of workers protected by Furlough come from industries with low wages, meaning they have low disposable incomes. Therefore, a further reduction in their income will force them to switch from normal to inferior goods, yielding a fall in their standard of living. Also, an instant loss of their original income will cause further uncertainty and lack of confidence. Hence, Furlough on its own is not enough to increase aggregate demand to drive economic growth.


Government Policy: Eat out to Help out

Although Furlough ensured vulnerable individuals in society had a safety net during COVID, it did not provide incentives for consumers to spend. Even with subsidised wages from the Furlough scheme, consumers have a higher propensity to save during a recession due to uncertainty and lack of confidence. Therefore, to combat this saving glut, the UK government released the “Eat out to Help out" to increase aggregate demand.


The scheme incentivised consumers to spend by providing a price decrease of 50% on food and non-alcoholic drinks on specific weekdays between the 3rd and 31st August within outlets partnered with the scheme. The price elasticity of demand for restaurant or pub meals is elastic, due to the fact that the pub/restaurant industry is highly saturated, therefore, because consumers have a large amount of choice, it would be logical for them to maximise their utility by going to establishments with the best prices. Consequently, the market is price-sensitive, therefore price-elastic.


For price-elastic goods, quantity demanded is sensitive to price changes, meaning decreases in price yields large increases in quantity demanded. The data reflects this, the UK Parliament reports “overall, £8849 million was claimed under the Scheme across 78,116 outlets. Over 160 million individual meals (covers) were claimed; the average claim per cover was £5.24.”[10] Therefore, the scheme yielded a large increase in consumer spending due to the financial incentives it offered, increasing aggregate demand.


Furthermore, price reductions yield large increases in revenue for pubs and restaurants. The Guardian reports the scheme generated £849m for venues,[11] causing a multiplier effect as increases in revenue signal businesses to increase their factor inputs such as labour, thus yielding an increase in employment with the Sun commenting that the scheme was “credited for getting 400,000 workers off furlough.”[12] When firms scale their factor inputs to meet demand increases, their spending also increases, expanding aggregate demand, increasing economic growth. According to Trading Economics, in the last financial quarter, the UK economy expanded by 16%[13] Additionally, the scheme decreased the reliance businesses had on subsidised wages in food industries. Therefore, resources used for Furlough can be used in other sectors, such as, working on testing kits and rolling out vaccinations. Illustrating how economists have helped make things better.


However, the “Eat out to Help out” scheme has assisted the spread of COVID-19. Sky News published an article suggesting 8% - 17% of infections can link to the scheme.[14] Therefore, the scheme increased economic growth in the UK. However, it has done so at the expense of public health. Consequently, the scheme was government failure, meaning the government will have to increase spending on the NHS to counteract worsening public health; making the spending regrettable as living standards have fallen as total COVID-19 cases are at an all-time high of 3.8 million.[15] Therefore, the government should prioritise their spending on public health during COVID.


How relevant is economics in a pandemic:

Therefore, the best way to deal with COVID-19 is its eradication. New Zealand, a nation that took aggressive public health measures, is now able to “carry out 10,000 tests a day”,[16] according to the BBC. The result of this is 2,304 cases with 2,208 recovered.[17] Therefore the ideal strategy for dealing with COVID is to maximise spending in public health to eliminate it, rather than using Keynesian economics; which promotes consumption and creates conditions necessary for the increased spread of COVID-19.


Furthermore, the economic models today cannot forecast and predict a pandemic from happening. COVID-19 can be described as a ‘black swan event,’ which Investopedia illustrates as “an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.”[18] Due to the uncertainty of COVID and its constant change such as announcements of new COVID strains, economists within the government find it difficult to create economic forecasts, making it challenging to plan up-to-date policies.


Consequently, because of the inability of economic models to make accurate predictions for future events, Economics becomes irrelevant during the pandemic. Hence, governments should focus on eradicating COVID. Therefore, public health spending and aggressive measures such as the closing of borders should be prioritised to mitigate the spread of COVID. Therefore, economists should look into the long-term and evaluate the measures they can put into place to prevent an economic shock from a pandemic happening.


References:

[1] Joana Ferreira, “UK Q4 GDP Growth Confirmed at 0.2%,” Tradingeconomics.com (TRADING ECONOMICS, March 29, 2019), "https://tradingeconomics.com/united-kingdom/gdp-growth">https://tradingeconomics.com/united-kingdom/gdp-growth


[2] “Coronavirus and the Social Impacts on Great Britain - Office for National Statistics.” www.ons.gov.uk, January 29, 2021. https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandwellbeing/bulletins/coronavirusandthesocialimpactsongreatbritain/latest.


[3] lbid.


[4] Subscribe to Read | Financial Times.” www.ft.com, n.d.

https://www.ft.com/content/75476d15-051a-4e51-8e57-f15b1649cbf4.


[5] Pete Bondarenko, “Consumer Confidence | Economics,” in Encyclopædia Britannica, 2019, https://www.britannica.com/topic/consumer-confidence.


[6] Moya, Stefanie. “UK April Inflation Rate below Forecasts at 2.1%.” Tradingeconomics.com. TRADING ECONOMICS, May 22, 2019. https://tradingeconomics.com/united-kingdom/inflation-cpi.


[7] Plummer, Robert, and Daniele Palumbo. “Covid: What Impact Has the Furlough Scheme Had?” BBC News, October 30, 2020, sec. Business. https://www.bbc.co.uk/news/business-54601117.


[8] Ferreira, Joana. “UK Jobless Rate Holds Steady at 44-Year Low.” Tradingeconomics.com. TRADING ECONOMICS, February 19, 2019. https://tradingeconomics.com/united-kingdom/unemployment-rate.


[9] Plummer, Robert, and Daniele Palumbo. “Covid: What Impact Has the Furlough Scheme Had?” BBC News, October 30, 2020, sec. Business. https://www.bbc.co.uk/news/business-54601117.


[10] Hutton, Georgina. “Eat out to Help out Scheme.” Commonslibrary.parliament.uk, April 11, 2020. https://commonslibrary.parliament.uk/research-briefings/cbp-8978/.


[11] Partridge, Joanna. “‘Eat out to Help Out’: Venues Claimed More than £849m through Scheme.” the Guardian, November 25, 2020. https://www.theguardian.com/business/2020/nov/25/eat-out-to-help-out-venues-claimed-more-than-849m-through-scheme.


[12] Cole, Harry. “Rishi Sunak Defends Eat out to Help out as Data Shows No Link to Covid Increase.” The Sun, January 28, 2021. https://www.thesun.co.uk/news/13881675/rishi-sunak-eat-out-to-help-out-scheme-covid/.


[13] Ferreira, Joana. “UK Q4 GDP Growth Confirmed at 0.2%.” Tradingeconomics.com. TRADING ECONOMICS, March 29, 2019. https://tradingeconomics.com/united-kingdom/gdp-growth.


[14] Phillips, Alexa. “Coronavirus: Revealed - the Impact Eat out to Help out Had on Infection Rates.” Sky News, October 30, 2020. https://news.sky.com/story/coronavirus-eat-out-to-help-out-accelerated-second-wave-of-covid-19-study-says-12118285.


[15] “Coronavirus (COVID-19) in the UK.” coronavirus.data.gov.uk, January 31, 2021. https://coronavirus.data.gov.uk/details/cases.


[16] Jones, Anna. “How New Zealand Went ‘Hard and Early’ to Beat Covid-19.” BBC News, July 10, 2020, sec. Asia. https://www.bbc.co.uk/news/world-asia-53274085.


[17] “COVID-19: Current Cases.” Ministry of Health NZ, 2020. https://www.health.govt.nz/our-work/diseases-and-conditions/covid-19-novel-coronavirus/covid-19-data-and-statistics/covid-19-current-cases.


[18] Scott, Gordon. “Black Swan Definition.” Investopedia, 2019. https://www.investopedia.com/terms/b/blackswan.asp.

 

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