Alfred Dawes | Economics of plague

I am far more inclined to believe I am more a student of history, rather than one who pretends to know much beyond CXC Principles of Business. That is why the arguments for and opposing interest rate hikes sail over my head. Team Transitory Inflation has taken a beating, deservedly or not, as inflation has taken root and there are no signs that we are out of the woods. The debates now centre around how much raising interest rates to high levels and/or at a rapid pace are necessary. The nuances surrounding the discussion make for interesting bar talk, but if central banks around the world get it wrong, then the consequences – hyperinflation, recession or stagflation will hurt us all.

The black death, or the Bubonic Plague, ravaged Asia and Europe during the Middle Ages. It is estimated that over fifty million people were killed by the rat-borne disease. Some sources claim that half of Europe’s population was wiped out. The socio-economic changes brought about by the plague changed the world forever, paving the way for the age of exploration that resulted in the creation of the modern world.

With entire towns and villages depopulated and the workforce of the feudal manors decimated, the economies of affected states shrank significantly. The labour shortages across the continent handed bargaining power to the peasants who lived in almost slave-like conditions on the farms of their feudal lords. Now these survivors could ask for better conditions and wages, moving freely for the first time to landowners who offered them a better life. It was a complete disruption of the status quo. The improvement in the conditions of the serfs led to changes in the structure of the society, with greater freedoms.

The post-pandemic economy boomed as a result of inheritances passing to the hands of survivors who sold off or leased land to the emerging middle class. With increased wages and less people alive relative to the available money in circulation, inflation set in and would last for years. Wages in England rose up to 40 per cent in the decades following the plague. However, inflation reduced the purchasing power of wage labourers. The classic cycle of higher inflation leading to increased demands for higher wages which led to greater spending, which in turn sustained inflation. Confronted with death resulted in more persons living with reckless abandonment. The spend on luxury items increased after the plague and these habits were passed on to later generations.

Inflation following a pandemic was again seen in the Spanish flu of 100 years ago. Estimates point to over 50 million dead worldwide, with the majority of deaths occurring in the younger population. This massive reduction in the workforce on the heels of a devastating World War I that claimed the lives of millions of young soldiers sent shocks around the global economy. Again, labour shortages gave workers greater bargaining rights, and again, inflation set in as increased desire to spend after two years of near-death experiences.

INCREASED RISK TAKING

Studies have shown that pandemics lead to increased risk taking behaviour and intemperance. Consumption increases with a vengeance once the pandemic ends. Pandemics are also associated with a disruption in the socio-economic status of affected countries. The resulting economic and social consequences of pandemics largely depend on the initial conditions, who and how many died. Any attempt at forecasting where next we are headed should examine the historical data, rather than conventional economic models.

Modern-day scenario is eerily similar. In an attempt to cushion the economic fallout from the non-pharmacological interventions used in the fight against COVID-19, governments spent lavishly on stimulus packages while interest rates remained at historic lows. The increase in the money supply led to massive spending by “lockdowned” survivors with a new outlook on life. The resultant supply chain disruptions were the genesis of inflation. Although initially perceived to be transitory in nature, inflation has set in, with the war in Ukraine contributing to rising oil prices and global food shortages.

The great resignation has led to a contracting economy with paradoxical labour shortages. At the same time, retirees are re-entering the workforce as the buying power of their pensions have been eroded significantly. With rising interest rates and ridiculously high real estate prices, millennials are moving back in with their parents. Despite all of this, unemployment is low and consumer spending is still strong. The Federal Reserve is pointing towards these and other positives and away from a second consecutive quarter of economic contraction to deny the existence of a recession. Nobody knows exactly what will happen next in these uncharted waters.

Here in Jamaica we never had the superheated economy of the United States. It is a different situation for a country just trying to regain lost economic ground and heavily dependent on the health of our trading partners. Although the majority of our inflation is imported, the aggressive stance of the Bank of Jamaica is supposedly geared towards preventing locally originating inflation from gaining traction. As we only have foresight learned from hindsight, maybe we ought to be reviewing historical in addition to economic textbooks.

As the experts trade barbs, we can only hope for the best that whatever course is charted is the correct one. The increase in monthly loan repayments as well as high gas, food and utility bills are not easy to stomach for the most frugal among us. If the current interest rate regime is supposed to be working to make our lives better, it is scary to imagine what the alternative would have been.

Dr Alfred Dawes is a fellow of the American College of Surgeons, CEO of Windsor Wellness Centre. Follow him on Twitter @dr_aldawes. Send feedback to columns@gleanerjm.com and adawes@ilapmedical.com.