Governments should ignore the warning sirens that only hyperinflation can come from pandemic-induced investments.
Inflation is resurfacing in public discourse, especially with soaring commodity prices. Inflation was very high in the advanced capitalist world in the 1970s and 1980s, when it was destabilizing and negatively affected the incomes of millions of people. Rapid price hikes meant big wage increases, but against a backdrop of hyperinflation, real wages could fall further.
Today, international agencies agree that the economic outlook is quite positive. The European Commission forecasts that the European Union will increase by 4.2% in 2021 and 4.4% in 2022 (respectively 4.3 and 4.4% for the euro zone). This is a big turnaround and a recovery after the contraction of 6.1% in 2020 (6.6% for the euro zone). On inflation, however, the commission forecasts rates of 1.9% this year and 1.5% in 2022 (1.7 and 1.3%) – continuing to exceed the 2% benchmark of the European Central Bank.
Globally, the International Monetary Fund predicted a fairly strong recovery. He expects world production, which fell 3.3% in 2020, to increase 6% this year and 4.4% next year. The growth of the United States is expected to be similar and that of the euro area in particular of 4.4% in 2021 and 3.8% in 2022. Production did not decline in China last year and this year, an increase of 8.4% is expected, followed by 5.6% thereafter.
The IMF, however, warns against inequalities: “The strength of the recovery will depend to a large extent on the rapid deployment of effective vaccines around the world.” With his new focus on inequality – a long time ago – he says: “Much remains to be done to push back the pandemic and avoid persistent increases in inequality within countries and divergences in per capita income between economies.”
the outlook of the Organization for Economic Co-operation and Development shows global growth of 5.8% this year, a sharp upward revision from its December 2020 forecast. It also notes, however, that some countries are recovering much more faster than others: “Korea and the United States are reaching pre-pandemic per capita income levels after about 18 months. Much of Europe is expected to take almost 3 years to recover. In Mexico and South Africa, it could take between 3 and 5 years.
Cutting-edge thought straight to your inbox
“Social Europe publishes reflective articles on the major political and economic issues of our time analyzed from a European point of view. Reading essential!”
Columnist for The Guardian
Echoing the IMF, the OECD warns that “while vaccination rates are progressing well in many advanced economies, the poorest countries and emerging countries are being left behind.” And he emphasizes: ‘If not everyone is protected, no one is protected. ‘
One of the reasons the world as a whole is emerging from the recession triggered by Covid-19 is the deployment of the vaccine. It will be the the strongest recovery since 1945 (growing production from trough) – stronger than in 1945-46, 1982 or 1991.
Another reason for its strength is that governments have borrowed and invested heavily and subsidized the private sector to an unprecedented degree to keep businesses private. They have financially supported a large number of workers in the private sector, so that once the recovery begins, businesses can restart.
We Irish had thought that after the crash of financialized neoliberalism in 2008, the government’s bailout of the private property “market” and all private banks would remain the largest state bailout ever. But now it has happened on a much larger scale.
Help us improve public policy debates
As you may know, Social Europe is a independent editor. We are not backed by a large publishing house or large advertising partners. For the sustainability of social Europe, we depend on our loyal readers – we depend on you. You can support us by becoming a member of Social Europe for less than 5 euros per month.
Thank you very much for your support!
Such a recovery will drive up prices. Another factor of inflation is the price of raw materials, which intensify internationally. The demand for clean energy contributes to this. In the Democratic Republic of the Congo, high quality copper is booming as it is used in wind turbines and electric vehicles. The energy future is electricity and copper wire is its core, a lot, a lot.
Government investment programs are turning to environmental sustainability, increasing demand for raw materials such as copper, lithium, nickel and cobalt and other minerals used in sustainable products. Prices for copper, iron ore, palladium and lumber hit record highs in May, and agricultural commodities (grains, oilseeds, sugar and dairy) also jumped.
Another spur of global inflation is China’s voracity request for raw materials and other products. China was largely outside the global market in the 1970s and 1980s, but today it is fully integrated. The huge glut of savings because consumers couldn’t spend so much during the pandemic will also increase demand, and so much price, for a while.
Modest and temporary
However, the rise in inflation could be modest and also temporary, according to the US Federal Reserve. If the Fed were to raise interest rates too quickly, it could trigger another recession in the United States.
Larry Summers, former Treasury secretary and influential right-wing Democrat, is very critical of the investment program that Joe Biden has pursued since he became president, arguing that it will lead to high inflation and worse. He estimates that the administration’s initial stimulus package represents 14% of US gross domestic product. Accompanied by extraordinary monetary policy measures and with the prospect of huge savings, Summers fears that the required response may be overstated: “Now the main risk to the US economy is overheating and inflation. “
But the Nobel Prize-winning economist Joe stiglitz argues that “whether these inflation fears continue their own agenda or just take the plunge, they should not be listened to.” A major recovery can be expected to push prices up in the near term, but that’s not a bad thing as it helps oil the wheels of the economy and business.
The coronavirus crisis has accelerated the shift to digitalization and automation, not least thanks to a huge growth in e-commerce and remote working. This will dramatically increase productivity and likely not reverse, helping to support the recovery.
But the rewards of increased productivity will go to the owners of capital. Meanwhile, many workers who have been displaced need to be supported and retrained. International efforts to properly tax capital and profits must succeed if states are to recoup the costs of the pandemic-related supports they have given to businesses and workers. In this new world, no subsidy should ever again be given, and on such a large scale, to private enterprises by governments without explicit and defined returns for the long-suffering taxpayer.
The public sphere has proven to be the dominant force in the new world order. Its leaders must recognize this. They should adopt the “can do” attitude that progressive politics lacked with the shrinking of the state in the neoliberal era. They must negotiate and plan, with this overriding political ambition, to guarantee the reduction of inequalities and the rapid repair of the climate, just as with Covid-19.