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David McWilliams: The better the economy does, the more Covid-19 spreads

Bluntly, there will be no economic momentum as long as we have lockdowns

In his Irish Times article today, my colleague Cliff Taylor asks "What happens next? How can economic momentum be built if we are facing rolling waves of restrictions"?

The honest answer is that economic momentum cannot be maintained with rolling lockdowns and, back in March, this is the reason I preferred to describe what we were experiencing as a “Pandession” rather a recession or depression.

This is precisely because the evolution of recessions and even depressions is governed by the laws of economics. What we are experiencing is governed by a pandemic.

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It is critical to understand that not only are economic momentum and the pandemic not working in tandem; they are working against each other. As we gain economic momentum, the pandemic gains a foot hold. As the economy recovers, the society locks down, arresting the momentum and pushing the economy back.


Why is this? It is because economic momentum is social. The economy both in ancient times and in modern times is a social construct. The first economies emerged in Mesopotamia, evolving alongside the first writing and basic mathematics. Urban life, based around surpluses in grain and food, was emerging and the economy arose as an organisational method to arrange society. It is a tool that helps co-ordinate the way we live – and money is its primary technology.

Humans organise social hierarchies, social relations and the distribution of goods via a heavily interdependent economy based on trade, co-operation and above all human interactions. The economy facilitates the herd and herd-like behaviour.

Once you appreciate this, recessions and booms are easy to understand. Because we live in an uncertain world, there are no inevitabilities or safe bets. All we have are feelings or hunches about the future. The economic and business cycle is, therefore, all about human nature today and how it oscillates between optimism and pessimism about the future.

Recoveries are a function of optimism. It spreads contagiously in the herd, propelled by whispering, giddiness and gossip. A downturn is the opposite

The economic cycle is a feeling we have today about tomorrow. We are social animals, who influence each other profoundly. When optimistic, we chat, cajole and enlist each other into our positivity. We get giddy together. We spend today, because others are spending. Optimism is infectious. We believe that tomorrow will be better than today, so we don’t worry too much about it. Anxiety is the enemy of economic recovery.

I am describing here that elusive “economic momentum” that Taylor refers to. It was the same process in ancient Sumerian civilisation as it is today. In Greek, Mesopotamia means “between rivers” and the two great rivers, the Euphrates and the Tigris, created the fertility for the grain-based societies, which allowed surpluses, allowing distribution, mediated by money.

Once the Sumerians had money, they could measure the future because they could say to each other, I will lend you one shekel today and you will have to pay me back two shekels next year.

By putting a monetary price on the future, the ancients could calculate risk and form opinions and probabilities about conditions next year. If an ancient trader was optimistic, he bought a slave (one of the main commodities back then), hoping to sell the slave later and make a profit.

Why did think he might make a profit? He did so because he understood that the economy is social. Humans talk our way to economic recovery. He gambled, as we still do, that if everyone in the ancient temple was getting optimistic, gossiping about the future (when they should have been praying), the demand for slaves would go up, so too would the price and he would sell on at a profit. The economy has not changed that much since the Mesopotamians.

Recoveries are a function of optimism. It spreads contagiously in the herd, propelled by whispering, giddiness and gossip. A downturn is the opposite; it too is spread by gossip, horror stories about bankruptcies and the viral need of the herd to believe stories. This is why people invest: they believe a story about the future when no one actually knows what’s coming around the corner.

However, we need some sense of the future to form opinions about it. The way the modern economy recovers from a recession is that human nature, hardwired for optimism as it is, elbows out the temporary pessimism of the recession and off we go, spending money we don’t have, splashing out, buying on tick or imagining we will be rich tomorrow.

We borrow, which can be seen as our “imagined future” rich self, dipping into his savings to give our “poorer reality self” a dig out.

This wondrous human process ebbs and flows over years, generations, even millenniums, and around such arbitrary guesswork we organise human society of ever-increasing complexity. As Fr Dougal might say, “That’s mad, Ted.”

Now consider what Covid-19 does – or, more accurately, what lockdowns do.

The lockdown robs us of future visibility. We can’t form opinions because the pandemic is the boss and the pandemic alters our sense of time. In addition, because more than 60 per cent of the modern economy is consumer spending – takeaways, retail, pubs, crowds, going out – our lockdowns are taking away the very social effervescence that is critical for forming opinions about the future and, more critically, we drive a nail in the coffin of the public gossip which determines the business cycle.

In its stead, we get ingrained pessimism. We can’t go out, so the social or “craic economy” can’t get up off the floor. Anxiety is prolonged, not by the economy but by the disease. The natural process of economic upswing is stuck.

In terms of the country, certain sectors will not be that affected by this because they have the wealth to see into the future.

The ability to see ahead is determined by your pocket, which is why rich people are always making 10-year or even intergenerational plans. The average person’s time horizons are more limited, which is why the Pandession breeds more anxiety in the poor than in the rich. For the rich, falling prices mean opportunity; for the poor, falling prices mean unemployment.

Bluntly, there will be no economic momentum as long as we have lockdowns. This means the State has to borrow heavily to keep the show on the road. We should not be worried about this. Government spending is the mirror image of private saving. People are saving because they are anxious and won’t allow themselves to construct a positive future until the pandemic passes.

Right now, the Irish saving rate is rocketing as people build up their savings. Basic macroeconomics demand that the Government spends now and keeps spending until this pandemic is over. When it passes, the savings built up by the private sector will cascade into the economy, driving up tax revenues and growth rates, driving down debt ratios and budget deficits.

Ultimately, the economy will rebalance itself, allowing the economic conversation to restart and off we go again, momentum will build, the herd will chatter and the economic cycle will reassert itself free of the pandemic.