Economics Newsletter Edition #23

A DUBAI COLLEGE INITIATIVE

WHAT'S INSIDE THIS ISSUE: DKS Ramadan Blog Competition Winning Entry DKS Ramadan Blog Competition Commendable Entries Debt Disaster?

Erroneous Recession Management? A Take on Biden’s Attempt to Economic Recovery & His Contribution to National Debt

JULY 2021 I ISSUE 3

DUBAI KEYNES SOCIETY

"Successful investing is anticipating the anticipations of others."

JOHN MAYNARD KEYNES

EDITORIAL The 2020-21 academic year has been a successful albeit challenging year for the Dubai Keynes Society. Due to blended learning, the weekly presentations had to accommodate Dubai College students both in-person and at home. Although subsequently faced with many technical issues, we were able to adapt and hence quickly normalised this routine of starting a call on Cisco WebEx, sharing the screen, and clicking ‘record’.

The Keynes Society has had the pleasure of welcoming over thirty different speakers this year, presenting on an incredibly broad range of relevant academic topics. What’s notable is that we were able to cover many niche subjects extending beyond standard textbook economics - including finance, politics, and applied mathematics - tailoring each session to different people’s interests. In addition to this, the leadership team decided to diversify by branching into alternative academic activities. This included publishing newsletters, initiating an essay competition during the holy month of Ramadan, and hosting an enjoyable Christmas-themed economics quiz.

None of this would have been possible without the support and advice of Mr. Christopher and the economics department, as well as the passion of the many keen economics students attending each talk on a regular basis. We are therefore grateful for your consistent interest in the Keynes Society, and we hope that the club will remain lively and successful for many years to come.

Kian, Vedant, and Khwaish - the DKS Leadership Team

TABLE OF CONTENTS EDIITORIAL ISSUE 23 Winning entry I Nandan Dhanesh

Commendable entry I Aarush Vir Kharbanda

Commendable entry I Amal Dhanesh

Commendable entry I Aishwarya Srinath

Debt Disaster? Erroneous Recession Management? A Take on Biden’s Attempt to Economic Recovery & His Contribution to National Debt I Lorcan Fallon

DKS Ramadan Blog Competition Winning Entry Nandan Dhanesh The economic system best suited to solving the problem of COVID 19 is a slightly command biased mixed economic system A free market relies largely on the private sector for the provision of goods and services and minimally on the public sector. An advantage of a free market is that it promotes innovation through the process of competition between private sector companies leading to the development of higher quality or new products. Increased innovation has been massively useful during the covid-19 pandemic. For example, the coronavirus vaccines developed by Pfizer/BioNTech and Moderna use innovative mRNA-based technology, giving the vaccines a 95% and 94.1% efficacy rate (placing them among the most efficacious covid-19 vaccines developed to date). These vaccine innovations likely would not have materialized without the highly competitive environment in the United States – one of the world’s most free markets – driving the two companies to develop new technologies in order to improve their products and become more competitive. The largely free market system in the United States also ensured a substantial profit motive for both companies, further encouraging development of such technologies. This free-market environment is why out of the 5 most widely administered vaccines globally, three were developed in the United States (the two mentioned previously plus the Johnson & Johnson vaccine).

However, free-market economies are often linked with high levels of individual freedoms and rights. While this is largely beneficial during normal circumstances, the over expression of freedoms such as freedom of expression and right to free speech have led to copious amounts of harmful misinformation that largely negates the positives of fighting Covid-19 in a free market society. For example, in the United States, anti-mask and anti-vaccine sentiment has been stubborn and widespread, exacerbating the negative effects of Covid-19 and prolonging the negative economic impacts.

In addition to this, in a truly free-market economy where provision of goods and services is based solely on the free interaction of demand and supply, crucial tools in combatting covid-19 such as PPE and vaccines would initially only be able to those countries and people who can afford it. These beneficiaries are less likely to critically require such items as they would presumably have greater access to higher levels of sanitization and overall security against the virus already. This would be a misallocation of scarce resources as tools to fight covid-19 are not being received in areas that require them the most, worsening the effects of the pandemic altogether. This is why I propose the economic system best suited to solving the problem of COVID 19 is a mixed economy.

In particular, a mixed economy that retains practices of uninterrupted competition, maintaining high levels of innovation in order to develop better tools to combat the effects of the pandemic while taking aspects from a command economy to allow the government to allocate critical resources such as food, water, PPE and vaccines to those who need it most rather than to the highest bidder. I believe this could help mitigate the overall impact of the virus better than either a pure command or free market system could. In addition, I believe if some of the social structures of adherence to well-informed government directives and recommendations, often present in more planned economies, were to be present in this system, the impacts of the pandemic could be reduced further through following of restrictions such as mask mandates, social distancing rules and vaccine requirements.

DKS Ramadan Blog Competition - Commendable Entry Aarush Vir Kharbanda

The economic system best suited to solve the problem of COVID-19 Governments across the world are baffled and trying their best to solve the unprecedented challenges that has emerged in economic systems due to COVID-19. An epidemic on the scale of what is being seen today with the COVID 19 crisis not only cripples the social structure with millions falling sick, but also damages the economic system by not only drawing significant resources across sectors, but by offering a complete national shut down as a viable solution bringing economies to a grinding halt. As businesses grapple with reduced demand for goods and services and loss of labor, government spending gets directed towards addressing the healthcare needs in the country and if the situation continues to spin out of control, the impact on economies can be disastrous. Countries that practiced significant controls in the early phase of the pandemic breakout and gradually opened the economies under very strict conditions, thereby averting long drawn lock downs, and a strain on the economic resources, have fared much better over the last year; both socially and economically.

It is difficult to say at this point of time which economic system has performed best, however it appears that “social economies” are much better organized. According to OECD, “[Social economies] put social and environmental concerns at the heart of their business model, prioritizing social impact over profit maximization”. A huge reason that explains why social economies are succeeding in the battle against the pandemic, are their core values. Social economies are instrumental in developing solutions to social and environmental problems that would otherwise be ignored or taken with as pinch of salt in a capitalistic economy. Democratic dictatorships (As Lee Kuan Yew uses the term for Singapore), have done remarkably well in terms of reducing number of COVID- 19 patients, helping people to go back to work, but they have done it by forcing people to live in a complete bubble. Jacinda Arden’s government has also taken a similar approach in New Zealand. World’s largest democracy, India, has however failed miserably due to government’s lapse and bad ruling. The country has gone into a second lockdown putting immense pressure on the economic system. Economic decisions are integrated with political decisions. When one goes wrong, the other does not work well. So, overall, social economies (such as those in the Nordic region) have played an important role in addressing and mitigating short- and long-term impacts of the COVID-19 crisis on economy and society, by assisting the recovery from the crisis by providing innovative solutions that are aimed at strengthening public services to complement government action. In the short term and in the long term, social economies have helped reshape the post crisis environment by promoting inclusive and sustainable economic models. The specific features and underlying principles of this economic system can inspire models of social innovation and a sense of purpose to firms operating in the market economy.

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DKS Ramadan Blog Competition Commendable Entry Amal Dhanesh

The economic system best suited to solving the problem of COVID 19 is a mixed economic system - with a focus on the public sector.

Firstly, a mixed economic system that makes use of public-private partnerships has been the most effective for vaccine rollout – for example in the United States.

Vaccines made by Pfizer and Moderna rely on fundamental discoveries that emerged from federally funded research, as well as billions in direct government funding during the development of the vaccines. Additionally, vaccine rollout is an ongoing public-private partnership, with governments providing the shots free at the point of use (an example of a merit good which may have been under-consumed in a free-market system due to high marketdetermined prices). Another essential role the public sector played in the vaccination rollout was safety and efficacy monitoring of the vaccines, as well as education of the population through organisations like the CDC and FDA – ensuring the quality of vaccines while also encouraging public participation and reducing vaccination hesitancy.

Simultaneously, private-sector companies (such as Pfizer and Moderna) were incentivised to produce the vaccines at such an expedited rate because of the potential for future profits from vaccine distribution (an incentive that isn't present for public-sector producers in a pure command market system). Also, profit incentives for these companies would have driven them to reduce costs and maximise productivity – limiting the total cost of the vaccination effort and efficiently allocating vital vaccine ingredients (a task that may not have been possible by a public-sector organisation). Furthermore, emergency deregulation (a free-market leaning policy) allowed for the vaccines to gain FDA approval in record time, furthering accelerating their delivery to the public.

Vaccination is crucial to ending the pandemic and a mixed economic system is best to support it. The public sector provides funding, safety regulation and open access to vaccination while the profit-driven private sector provides vital and rapid innovation in the development and production of vaccines while efficiently allocating resources involved in the process.

However, while I think that the best system to solve the problem of COVID-19 is mixed, I believe it should also be skewed towards a command economy. This is because, during the pandemic, we have often seen the public sector serve as crucial providers of welfare and guidance. For example, the US government expanded unemployment benefits and distributed US$1,400 ‘Economic Impact Payments’ to some citizens. Internationally, many governments swiftly implemented COVID-19 safety regulations that have helped to slow the spread of the virus and save lives.

While some of these restrictions may have hampered short-term economic growth more than a free market’s laissez-faire approach, there is evidence to suggest that countries that quickly imposed tight lockdowns (for example, Singapore) are now benefitting from lower COVID-19 cases and consequently, better economic recoveries. A pandemic such as this one requires extreme cooperation and organisation – a task that can only be fulfilled by government and the public sector. Meanwhile, the private sector has played and will play a pivotal role in vaccination efforts and economic recovery. Therefore, a mixed economic system (biased to the planned economy side) is best to leverage the two sectors and solve the problem of COVID-19.

DKS Ramadan Blog Competition - Commendable Entry Aishwarya Srinath

“The economic system best suited to solving the problem of COVID 19 is .................”

The economic system best suited to solving the problem of COVID-19 is a social market economy. The COVID-19 pandemic is an invitation for creative destruction: a chance to terminate defunct investments and establish a resilient economy.

In the 1970s, neo-liberalism was brought about in many western countries. However, this economic system had flaws: its failure to guard against the ever present possibility of collapse and its negligence of social justice. This meant that during recessions such as the one we are experiencing now, economies aren’t able to sustain themselves.

The best way forward is through a social market economy - a free market capitalist economic system alongside social policies.

This was adopted by Scandinavian countries after World War 2 and called the Nordic model.

Generous welfare systems and an equitable distribution of wealth characterise this model, achieved through high taxes and public spending. These countries have enjoyed high living standards and strong economic growth.

Economic history shows that this model works well during a recession to help countries maintain a stable economy.

One of the key factors of the Nordic model is government spending, which adheres to the idea of the Keynesian multiplier effect. This idea brought forth by Keynes says that if the government invests in large projects during a recession, employment and national income will rise. This is because the workers in the large projects would spend their income on other businesses, creating further employment. This process would then continue, leading to a booming economy.

Many countries have adopted the Nordic model in the pandemic’s wake, such as the U.K. and U.S, who have offered stimulus packages to their citizens and businesses to incentivise spending.

I believe that the Nordic model will solve the problems brought forth by COVID-19. For instance, one problem is that incomes of workers have been cut due to premature deaths, workplace absenteeism and reduction in productivity. If the government invests in healthcare to minimise deaths and offer treatments; the health of citizens would improve, leading to a higher workplace attendance and a boost in morale, so that productivity rises. In addition, another problem is that consumers have shifted spending habits due to panic, which has affected firms.

This can be fixed through government stimulus packages to citizens. This would increase income levels, engendering people to having a higher disposable income to spend on goods and services, leading to more money circulating in the economy and GDP would rise.

Currently, we have both a short-term and long-term crisis on our hands. The short-term threat is to jobs and livelihoods. Currently, the virus is no longer the fundamental problem: it is the scarring of the economy produced by a prolonged and continuous period of non-work which will damage the recovery. If these issues persist, it can lead to an economic depression. In the long run, the risk is of the exhaustion of Nature’s tolerance for our profligate habits. We must enfold our pandemic recovery measures into a long-term strategy for a sustainable way of life.

Debt Disaster? Erroneous Recession Management? A Take on Biden’s Attempt to Economic Recovery & His Contribution to National Debt.

As Discussed in Lorcan Fallon’s DKS Presentation (II) $27,000,000,000,000. What does this number mean?

It is no secret that the United States is the country with the largest debt, totaling $27 trillion.

Although it is the US itself that a large majority of the US debt is owed to, stemming away from the widespread thought that it is China who holds the majority of the US’s debt, the problem of an ever-growing national debt has instilled fear among many Americans, politicians and economists.

Every election cycle, there is always some mention of the national debt, after all, it is as big as the elephant in the room. It is important to note that it is virtually impossible to ‘eliminate’ or ‘pay back’ the national debt, and it is extremely difficult to not add to the national debt. The Republican Party is perhaps the most debt-adverse party, labelling themselves as ‘fiscal conservatives’. From my previous talk in DKS, I explained how political ideologies dictate economics, and with fiscal conservatism, the ideology promotes tax cuts, government spending cuts, and this should lead to reduced government debt, and a more balanced budget.

Democrats tend to be more relaxed when it comes to government spending and debt, as they see this as an investment which will reap the benefits in the long run.

How has COVID & Biden affected the National Debt and Spending so far?

The hefty price tags on the stimulus packages promised by Biden has already sent alarm bells ringing in some people’s minds. The American Jobs Plan and The American Rescue Plan, along with other smaller spending schemes has already cost the US $6 trillion, and to the Democrats, this isn’t enough; they want to pile on another $6 trillion in spending as soon as possible before the 2022 elections, where The House and/or Senate may be flipped Republican.

It should come as no surprise that this amount of spending has dramatically increased the US Debt. The graph below shows how debt (as a % of GDP) has increased, and you can see a near vertical spike, signaling Biden’s spending plans.

Criticisms from the Republicans The massive spending plans have drawn unsurprising backlash from the Republicans for numerous reasons, as they highlight Biden’s incompetence, policy failure and reckless spending. Meanwhile the Democrats continue to support the schemes as much as they can, citing the importance of government spending to encourage consumption, and will continue to do so as long as they have both the House and the Senate.

Criticism #1: The Spending Plans are NOT Helping Reduce Unemployment.

The US set a target of an additional 1 million to 2 million jobs by April 2021. However, the figure turned out to only be 266,000; a very disappointing figure considering the seemingly endless amount of cash that was injected into the economy.

Below shows the change in employment. The sharp dip represents the first wave of the virus in the USA, and the quick rebound to around 5 million more jobs illustrates Trump’s successful policy initiatives.

The point January 2021 signifies Biden’s inauguration and from that point onwards, there is a noticeably bleak outlook on employment improvements, despite heavy government spending.

Criticism #2: Inflation is at a 12 year high and it is affecting the vulnerable.

Although inflation is a direct effect from economic growth, the inflation figures are becoming concerning and have hit a 12 year high. Government spending boosts aggregate demand (AD) as AD=C+I+G+(X-M), and a rise in AD would raise inflation.

The rapid injection of government money from Biden’s packages have resulted in a 4.2% rise in average price level, bearing in mind that the target for inflation is at 2%.

This has been the highest since 2008, and this level of inflation can have a detrimental impact to those who live on fixed, low incomes, as their incomes will not increase in accordance to the high levels of inflation. People living in the poorer end of society may not be able to afford things that they may have previously not been able to afford. Republican Senator Rick Scott (RFL) pointed out that although a 5% rise in the price of milk and 7% rise in the price bread may not seem like much, it can mean everything to those who live on these low fixed incomes. As someone who lived in poverty as a child, Scott recalled his mother giving him a set amount of money to go to the super market to buy food for the day, and this amount would not change as their incomes were fixed. One day, people who are living like Senator Scott once did will find that they may not be able to afford the basic necessities, and this can be harmful to their standard of living. It is important to reiterate that inflation is always expected with growth, but one must not forget it’s impacts on low income households and those on a fixed income.

Criticism #3: There are more jobs available than people willing to work.

Biden has been extremely generous with his benefits, and the money people receive to stay at home is roughly $618 a week, which is $15 an hour, twice the minimum wage. It is therefore obvious to identify why the employment figures have only improved by 266,000 jobs – because Biden is essentially paying for people to stay home. There are an abundance of jobs, however, it is simply more logical to stay at home and collect the government benefits: would you rather stay home and reap high benefits, or go out to work and use up your time and energy for lower pay? When presenting this argument in my DKS talk, a member of the audience asked me “Why wouldn’t people go out work?

They want to be functioning members of society”, and the simple answer to this is that is just simply rational and logical to stay at home, where leisure time, money from benefits and safety from the virus is maximised. The BBC found tgar some restaurants were offering ‘a $300 bonus to get staff for our restaurant’, simply because people chose not to work. No business should take extra money out of their pockets like this – and this heavily impacts smaller businesses and family owned restaurants – if they do not have the staff, they must either close down or pay even more to workers, thereby incurring a larger cost of production. Unfortunately, many businesses have had to close down as they cannot maintain service with a lack of workers. To put it simply, the poor employment crisis can be put down to the government “paying people too much not to work”, as said by Republican Senator Roy Blunt.

Moreover, it is important to consider where some of this money comes from. Although a lot of this is financed by borrowing, thereby worsening an already enormous national debt, some of the money also comes from those who are out to work, and it is indeed the tax payer who suffers at the expense of others who enjoy the benefit. In the Republican’s eyes, why should some suffer in this way?

However, it is important to recognise that there are still a lot of people who really rely on these generous benefits, and that these benefits can improve the standard of living for some who live off of the minimum wage.

Hopefully this brief article has given you a brief introduction to the concept of the US National debt, as well as the contemporary insight into Biden’s policies. The author of this article is heavily critical of Biden, and this is reflected in the narrative of this piece, but he encourages readers to explore both sides of the argument and arrive at an informed judgement, whether it is in line with the views expressed above or not.

JULY 2021 I ISSUE 3