OPINION: The Consumer is King!
Cevdet writes: Ordinary citizens proved to be the engine that drives the global economy; not tax cuts for the ultra-wealthy.
@KorsanCevdet, 16 December 2020
COVID-19 triggered systemic disruptions that turned our lives upside-down. National lockdowns were supposed to mitigate the pandemic’s risks, but triggered the worst economic crisis of modern times. So, what has 2020 taught us? Well, we can confidently conclude that the Consumer is King. Ordinary citizens proved to be the engine that drives the global economy; not tax cuts for the ultra-wealthy. Taxation must be graduated, fair and not burdensome — particularly for working, middle class families and small businesses, and everyone has to pay their share without exception. If regular families and consumers cannot earn and spend, the circular flow of money comes to a grinding halt and the economy collapses, including shops on the high street, small–to–medium sized businesses, and aspiring entrepreneurs which are the backbone of most national economies.
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This year’s crisis was further exasperated by the wholesale mismanagement and sheer negligence by leading Western countries, pre-eminently the United States and its European partners. For years, experts warned of pandemic risks and developed nations should have been better prepared. Almost all failed miserably. To complicate matters, over the past three decades, key supply chains moved eastward as China became the world’s low cost, mass manufacturer and supplier of critical goods. This proved to be a very wise strategy for China and costly for everyone else. Global transformations made the Peoples Republic of China the world’s second largest economic and military power, and China is not an idle actor. On the multi-dimensional global stage, China now challenges all its rivals, including the United States, Japan, Russia, and India, without hesitation. This fact greatly complicates matters for all because the world has become dependent on China for a number of its strategic supplies. There will likely be material changes in the post COVID-19 environment as the United States and its allies work to mitigate against this critical strategic dependency. Nevertheless, China already appears to be a few steps ahead with its Belt and Road Initiative. Watch this space as the next decade is going to be very interesting and extremely competitive as our multi-polar world evolves.
Shameful to admit, there have also been far too many irresponsible people. Denying the scientific basis of COVID-19’s risks and not adhering to preventive measures, such as, wearing masks and social distancing, is tantamount to criminal negligence and should be dealt with by law enforcement. In contrast to the Western experience, we have seen a number of Asian countries take a disciplined approach to tackling COVID-19 and they have come out on top. Taiwan, for example, has never locked down and only had 742 positive COVID-19 cases and 7 deaths (as at 15 December 2020). Similarly, Singapore, South Korea, and Vietnam have tightly controlled their jurisdictions, managed to avoid wide scale lockdowns, and are well on their way to recovering. Although Wuhan, China, was the first epicenter of this pandemic, Chinese authorities responded with very strict measures, including effective track and trace systems, and life is now pretty much back to the ‘new normal’. China also recorded 4.9% economic growth between July and September 2020. In contrast, the United States and most European countries will take much longer to recover and be significantly costlier due to their mishandlings. Rest assured, this will not be the last pandemic so lessons must be quickly learnt and action taken to mitigate future pandemic risks.
Marginalized communities throughout the world, including those in advanced economies, face an even worse situation because they do not have the resources or ability to appropriately respond to the many dimensions (e.g., health — both physical and mental, financial, educational, or social) and costs of this pandemic. Disparities between the wealthy and poor have increased as unemployment soared, health care systems were overstretched, and government programs were challenged with keeping up with societal support needs. There are now even greater challenges for the economically disadvantaged, and lower income to middle class families due to the cumulative effects of this crisis.
There is, however, a twinkle of hope. Positive vaccine developments and large-scale inoculations are being rolled out which should help reduce the physical health risks and enable people to re-engage in public life. But the current state of the global economy makes the sub-prime (2008–2010) and the European sovereign debt (2009–2014) crises look like a walk in the park. The World Economic Forum predicts that this crisis will be three times worse than 2008. Unlike 2008–2014, the systemic challenges we face today are the result of economic paralysis and affect everyone. Almost all segments of society and sectors of the economy, including local, state, and national governments, are financially stretched and will be coming out of this crisis in a significantly worse position. People have either lost or are in fear of losing their jobs and not willing to spend or simply cannot move freely to transact due to the lockdowns. In October 2020, the IMF forecasted that the global economy will contract -4.4% this year, advanced economies are expected to decline by -5.8%, and emerging market economies will see a -3.3% decline.
In line with the economic contraction, unemployment rates hit double digits in a number of countries. In April 2020, Canada registered 13.0% unemployment, Greece was at 15.8%, Spain was at 15.3%, Turkey was at 13.6%, and the US was at 14.7%. Overall, the OECD recorded 8.8% unemployment, with the its major 7 registering 9.2% and the Eurozone hitting 7.4%. As expected, government deficits have also ballooned. For example, the United States is forecasted to have a federal budget deficit of approximately $3.3 trillion in 2020, tripling 2019’s figure; the largest since 1945. The IMF estimates that COVID-19 will cost upwards of $28 trillion (2020–2025), making this the worst crisis since the Great Depression. Servicing these debts will not be easy, particularly in a few years when interest rates begin to rise. This will likely trigger a proper global sovereign debt crisis, not one that is limited to Europe’s PIGS or some emerging markets.
The only exception to this economic turmoil is the technology sector. E-related companies and their owners have performed exceptionally well. As our lives came to a stand-still, most people turned to the “e-way” of doing things. We could not travel to the office or physically go shopping, so we logged into our virtual worlds to work and shop online, even for groceries, as this was far less risky than going outside. Simply put, COVID-19 is highly contagious and these online activities are actually safe and encouraged.
While lower–to–middle income families suffered the most during this crisis, billionaires fared quite well. The total wealth of the world’s upper echelon surpassed $10 trillion in October 2020, increasing by approximately 27%. From March to December 2020, the high-tech billionaires hit a wind-fall as Jeff Bezos’ wealth increased by 63.2% ($113 b to $184.4 b), Elon Musk’s grew by 481.7% ($24.6 b to $ 143.1 b), Bill Gates became 21.1% richer ($98.0 b to $118.7 b), and Mark Zuckerberg almost doubled his wealth at 91.7% ($54.7 b to $86.5 b). I wonder how much of this appreciation will be taxed though? Seeing that Jeff Bezos and Bill Gates are residents of Washington state and Elon Musk is relocating to Texas, all 0 % income tax jurisdictions, it is not too difficult to see why the United States faces deficit challenges and disparities in wealth. Governments need to seriously examine the structure of their economies to make sure prudential concerns are accounted for as some companies have possibly become too big to serve the interests of all stakeholders and the public good.
Clearly, 2020 ended up being nothing like what most of us expected. COVID-19 disrupted our lives and transformed the world. Our economic recovery will for the most part be very costly and slow. Society at large requires responsible governments and leadership, including the proactive participation and engagement of the private sector to minimize the negative consequences of this crisis. There should be a concerted effort to soften the impact of our current situation on the economically disadvantaged, lower income families, and the working, middle class. 2020 demonstrated that the Consumer is King and judicious action must be taken to re-empower and re-energize our society through re-engaging in normal life and spending. God save the King (and the Queen for that matter)!
