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Capitalism won't die of coronavirus 2.0

Back in April, I wrote this article describing how coronavirus wasn't going to 'kill capitalism', ie result in massive systemic change to our largely capitalist economies. Sure we will see some changes but they likely won't be systemic. The article was in response to media describing how the end was nigh for our existing economic system. 

The article described how the rules of the game aren't changing, we can still expect the rich to get richer, and the powerful more powerful. That's still the case but there probably is more reason to believe we will see some changes. This article will expand on what we have seen in recent months as well as discuss some of the policy shifts we are seeing that suggest change is a possibility.

The economy is looking more two-tiered than before COVID-19

Throughout coronavirus, we have seen a mix of policy and events that suggest the existing system we operate in is alive and well. Private ownership of capital still the most lucrative game in town. The 'recovery' after lockdown measures were relaxed has been remarkably unequal with existing wealth disparities reinforced rather than reduced.

The existing wealth distribution has been reinforced:

  • Share markets have rebounded reinforcing existing wealth disparities as those with the luxury of holding assets enjoyed growth since March/April. Those who had spare cash would likely have done very well out of the share market recovery if they weren’t scared off from investing.

  • White-collar workers are doing ok relative to workers in trades and hospitality who are required to work directly with people or access their homes. Note that nobody has escaped COVID-19 unscathed, but it's been worse for some than others.

  • Billionaires are doing better than before with the assets of United States billionaires growing by a third during COVID-19.

  • Property prices keep going up reflecting what seems like NZ's systematic problem in NZ around lack of supply, a poor tax regime and speculation. Safe as houses perhaps? Lower interest rates haven't helped here with banks offering ~2.5% mortgages.

The biggest reason why we are unlikely to see a massive change though is that Governments have reacted with huge interventions that support the current system eg wage subsidies, bailouts and spending programmes. These programmes directly benefit companies and shareholders as instead of their organisation potentially failing or losing large amounts of money, companies are kept alive through the bailout. Of course, it makes sense for governments to do this for worker's sake too, but it does reinforce the existing economic structure.

Governments giving stimulus to the economy

However, our economic structure feels like it's on shakier foundations

It almost always makes sense to support the system short term rather than have radical, painful change over a concentrated period. That’s why governments use bailouts. It sucked in 2008 and it sucks now - but it does make sense. Without doubt, governments do need to find a way to address the ‘privatised profit, socialised losses’, potentially by taking a large stake in the companies bailed out.

For the time being, the existing economic structure and dynamics have been retained. However, it is on shakier foundations. Societies appetite for change is clear. COVID-19 has shifted the ‘Overton window’ - the window of policies considered acceptable by society. Much as Trump did in 2016 where he made building a wall on the border of Mexico more acceptable, COVID-19 has changed people’s appetite for redistributive policies. But it remains to be seen whether there will be reforms to address disparities.

Now more than before people are asking governments to intervene and address what they perceive as gross inequality. In NZ, The Greens and Labour are both looking at tax reform that would level the playing field somewhat. Labour with a new top income tax rate (very minor reform here), and the Greens with a wealth tax. It's a shame neither of their policies addresses the elephant in the room around housing. In the United States, the Democrats are pushing for increases to the minimum wage up to $15 by 2026. Across the board, we are seeing a greater appetite for redistributive policy. Whether that actually happens or not remains to be seen.

Reforms tend to treat the symptom not the cause

It's important to recognise that ideas around tax reform or redistribution treat the symptom through intervention - not the cause. They are not direct systemic changes. The market will still operate on a demand and supply basis. At a high-level, redistribution in market economies can be thought about in a couple of ways:

  • Social measures before government intervention with individuals or groups determining what is appropriate. That could look like trade unions fighting for a higher wage, CEOs saying they don't need to earn 100x more than workers, or individuals donating to charity.

  • Government intervention to adjust the wealth/income distribution through taxation that directly redistributes money from high earners to lower earners. That looks like tax for welfare payments, vouchers or an unemployment benefit.

Most initiatives suggested today fall into the second category with the economy becoming a bit more mixed. Seeing more redistribution before government intervention implies a substantial cultural change. A systemic change would suggest changes to, for example, the laws around property rights or moves to a command economy. That is very different.

If people don't forget and move on I am optimistic that we could see new policy that addresses disparity. Only time will tell however as so far COVID-19 has made our economic system more unequal. If the rules of the game aren't changing the system will still operate as it did before with disparate wealth/income distribution. Tax and welfare interventions would level the playing field somewhat.


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