By Michael Every of Rabobank
Back at what feels like the beginning of time, one of my --quite traditional-- high school teachers embedded in me the question that I should always consider when reading any source or data: ‘Cui Bono?’ - "to whom is it a benefit?" That is to ask, who wrote what I am quoting? From what standpoint? To what end? And in terms of data, besides the quality of results, who paid for the study? What ideological framing, if any, may have slanted the results? And which study, that might have provided different answers, was not carried out and why – and can you find someone who did that work elsewhere? Nowadays of course a far more essentialist variant of this critical thinking is prevalent in many Western education systems, but the same lens can be turned on it too, as it arguably should be on everything. Trust me, this really matters for markets, because there are so many examples of where just a little incredulity, rather than instant credulity --“because markets”-- might be of analytical benefit to us all.
How about the classic past example of Alan Greenspan, former Fed Chair and ‘guru’, who in 1983 argued it was necessary to raise workers’ social security taxes to bridge the fiscal deficit following the Reagan tax cuts for the rich in 1981; then, after Clinton’s 1993 tax hikes partially reversed Reagan’s second tax cut for the rich in 1986, and there was an economic boom fueled by Greenspan’s own monetary-policy tech bubble, in 2001 he argued the US fiscal surplus was a problem - and the only solution was a massive $1.3 trillion Bush tax cut aimed again at the rich. (NB Greenspan was not arguing that fiscal surpluses are harmful from an MMT perspective!) What did one expect from a man with a crush on Ayn Rand?
Another more recent past example floated last week was that anyone with a knowledge of heterodox economics could have also seen in advance that QE could never achieve its key goals. Central banks may keep saying it has, but the slump in productivity and inflation, and the gig/hawkerisation of the pre-Covid economy, all made abundantly clear this was Greenspanish thinking. Indeed, now we see that it is *fiscal policy* and ‘Build Back Better’ that are required to stop the rot, and rotten populism: where were all these thinkers for the last few decades? And cui bono in their absence?
This issue is pertinent today too because there is an ongoing debate about if we are going to ‘beat’ Covid in the way the general public conceives of these things. Scientists -–not the ones you hear most from, or the ‘data’ variant-- always made clear vaccines would not stop Covid in its tracks if, like other such viruses, it mutated into something more dangerous and/or transmissible, which vaccination can theoretically accelerate in a process known as ADE. (And on which the jury is still out.) There is a popular misconception that at some critical threshold of vaccination Covid just ‘goes away’, but the science, regardless of who Twitter bans, suggests that happy outcome will arguably only happen if new variants become milder, like a ‘flu.
So what should we do? In Australia, which was aiming for Zero Covid a few months ago, the health advice in New South Wales is now that: “We need to get used to being vaccinated with Covid vaccines for the future” and that Covid is just going to be part of our lives from now on. And, indeed, Israel is preparing for a fourth booster shot in early 2022. But at some point ‘cui bono?’, and what the cost/benefit analysis of this is, will again be at the forefront of public and government debate; and the different answers that are generated will produce deep social and international splits. As if we are short of them!
Indeed, the issue is doubly pertinent because just as Covid is not ‘sorted’, neither is the economy. Regardless, much-heralded ‘Build Back Better’ is already being forgotten in major economies - apart from China, where it is being greeted with genuine shock and consternation by markets. True, there is the US $3.5 trillion fiscal package and the infrastructure deal - but will they pass? (And how productive that spending would prove is another question.) Yet the US just saw 7.5m people lose extended unemployment benefits yesterday, and another 2m lose an additional $300 in weekly top-ups, on top of the lapse of the eviction moratorium. EU governments are heading in the same direction, as is the UK.
Some say it will end in economic ruin, and the only option is for more public hand-outs from now on: Cui bono, beyond the recipients? And there are those who say that this will work out fine because there are so many job openings in more productive sectors it will be a positive shock to the economy: Cui bono on *that* assumption?
Meanwhile, let’s look at the (limited) evidence from Israel, which: 1) vaccinated rapidly; 2) opened up; 3) got hit by Delta; 4) did 3rd shot boosters and is planning 4th; and 5) has removed pandemic economic job assistance in an economy with a stark divide between high- and low-productivity sectors. What do we see there? That unemployment has jumped – and stayed high. The headline was 5.0% in July against a peak of 5.5% earlier this year, and on a broad basis 8.4% vs. 9.0% the month before and a peak of 18%. Moreover, low-skilled workers are quitting their jobs at record levels even though the transition from waiter to high-tech is hardly an easy one for most. It seems Covid has forced a reassessment of life choices for many, with fewer willing to work for low wages in low status, low productivity, high stress sectors: that is a trend we also see among truckers/delivery drivers in the US and UK (not helped by tax changes and Brexit in the latter), which is exacerbating current supply chain dislocations.
Against that backdrop, is paying people more in welfare a good decision, “because big government”? Is telling people to go back to low wages in low status, low productivity, high stress jobs or starve, “because markets”? Indeed, aren’t workers suggesting they would prefer something more shocking to markets, along the lines of China’s ‘Build Back Better’, e.g., on-shoring supply chains, boosting infrastructure, lowering costs of living, and redirecting capital towards higher paid, higher tech, higher productivity manufacturing jobs? Cui bono? And who *doesn’t* benefit?
Well, China’s mega developer Evergrande for one is looking ever less grand, as it struggles to raise $7.4bn in short-term debt obligations, its bonds are no longer eligible as collateral, and some are suspended on one Chinese exchange, even it talks of default risks, and Chinese USD junk bond yields, particularly for property developers, gap higher in unison. Not that this kind of mega credit event matters for CNY, of course, which is a precursor of what markets look like when they have broader social goals.
Indeed, the full market implications (even if means no actual movement!), from tapering(!) QE to fiscal stimulus, to what kind of fiscal stimulus, to geopolitical tensions, arguably all run through what happens next with Covid, and on our attempts to impose idealized views of it and other things onto a very complex reality without thinking about who benefits, and why we ourselves are using those arguments.