The Unemployment Puzzle with Debt at the Center Stage.

It is the debtor that is ruined by hard times.

Rutherford B. Hayes

The whole world has been under the lockdown for nearly two months in the bid to control the spread of the COVID-19 disease. Everyone, from the employees of small businesses to big manufacturing units, the self-employed to CEOs of the big corporate houses have been asked by the governments to stay and work from home. The economic activities in most of the countries, barring some, are at standstill. The world is still far from solving the COVID-19 puzzle and the danger of its re-spread is still looming over us. The COVID-19 has deteriorated the health of the world economy. Most of the world leaders have now accepted that we should learn to live with COVID-19, and it is not wise to halt economic activities anymore. The economic activities have been re-started by many countries in phases, and other countries would soon join the group. It would take about a year or so to achieve the post-COVID-19 level, in the opinion of most of the experts.

Almost every business is suffering losses due to COVID-19. The economic disruption has obliterated the job of millions of people. The rise in unemployment numbers is the most visible, cruel, and discussed consequence of the lockdown. It is directly affecting millions of citizens and the political stability of the state. The issue of unemployment, many times in the past, had seized the chairs of powerful leaders.

The effect of COVID-19 on employment.

In the United States, the unemployment rate before the outbreak of COVID-19 was 3.5%, the lowest in the last 20 years. With the implementation of lockdown after the outbreak of COVID-19, the unemployment rate in the US has risen to 4.5 % in March 2020. The unemployment rate has expected to increase to 16–20% in the coming quarters. According to official data, about 30 million have applied for unemployment insurance since the beginning of the lockdown in the US. The primary reason for the increase in unemployment is job losses of self-employed (plumber, carpenter, electrician, etc.) and the reduction of staff by the small businesses to minimize the loss. Freelancers and gig workers are also severely affected by the lockdown. In countries like the United States, the government has extended the unemployment benefits to the Freelancers, Gig workers, and self-employees to subsidize the effect of unemployment. The situation of jobless in countries such as India and Pakistan is grave due to the absence of the social security net.

The incremental rise in unemployment among many countries is partly due to the restriction imposed on the movement of people and partly due to the mismanagement of the businesses. The self-employed such as electricians, plumbers, masons, mechanics, etc have mostly lost their work, not because of the scarcity of work but due to restrictions on free movement. The workers in the construction industries are also suffering due to the same reason. As soon as these activities would get started, the unemployment rate would come down a little bit. The economic situation would not get better sooner until demand comebacks.

Due to the restrictions imposed by the government to contain the spread of COVID-19, some companies and corporations are facing existential crises. They are laying off employees due to the lack of funds and non-viability. Many have filed bankruptcy protection. Most of the companies and corporation which applied for bankruptcy protection were already under due to huge debt when COVID-19 stroked. COVID-19 has only hastened the process of their bankruptcy. The corporations due to the availability of cheap money, have accumulated huge debt on the name of expanding the business. This debt is now taking a toll on their health during the current crisis.

The remedy for the ailing economy and its impact.

The world is not facing a financial crisis and deadly disease, together, for the first time in history. It has many experiences of facing such crises. But the question is, what we have learned from past experiences? It looks like the governments haven’t learned anything from the past.

There is no escape from the reality that the world’s economic system is not as healthy as it has been represented. The debt of the many countries is at the all-time high and many are asking for the debt write-off since the outbreak of the pandemic. Globalization has linked countries with each other, whether the countries have a good relationship or not. Last time an economic crisis was started in the US with the housing bubble burst, stock crash, and Lehman brothers fall (2008), before that, Asian nations engulfed in the financial crisis during 1997 and now due to the pathogen COVID-19 coupled with the already slowing down the economy.

All the massive financial crises in history, whether it was of 1772, 1929-39,1973, 1997 and 2008-09 has two common factors, one is ‘huge debt Accumulation’ by the large financial institutions and countries. Another is excessive optimism about future returns. This unnecessary optimism leads financial institution to take unprecedented risks and as soon as one of the institution collapse whole system started to come down like the house of cards. The reason is the same for the current crisis. The debt of many corporations/companies are excessively high. They were started collapsing in the first phase of lockdown due to lack of capital which is necessary to sustain such a shock.

All the massive financial crises of history, whether it was of 1772, 1929–3All the countries are now trying to revive the demand as soon as possible to generate revenues and lower the unemployment rate. Every government is running to the experts for obtaining suggestions on reviving the economy. The general prescription suggested by the experts without considering the long term effects are:-

  • Stimulus Package to nearly every industry.
  • Lowering the interest rate.
  • Increase in capital expenditure by the government.
  • Extension of more cash benefits to the poor and unemployed for reviving the demands.

It is impossible for the government, those are already on the verge of default (Example Pakistan) due to huge debt, to act on the above suggestion without accumulating more loans and debt. More debt would lead to a large fiscal deficit and downgrade of rating by so-called rating agencies. The large fiscal deficit means more economic issues for the country and doesn’t forget too much government spending could cause inflation. Debt also negatively impacts the bargaining capabilities of the government when it tries to privatize its Public sector undertakings.

We all think we’re going to get out of debt.

-Louie Anderson

The debt, which is more than the necessary limit, would become the foundation of the next crisis. The industries are already under huge debt, now giving them money with a new deadline for repayment would coax them to take excessive risk to make businesses and projects profitable at a brisk rate which in turn would cause more defaults. The governments to repay the loans, would increase taxes, which could lead to inflation and lack of private investment. This vicious cycle of borrowing is needed to be broken if the world doesn’t want total financial collapse in the future. The ways to bring the debt of the countries at the manageable level should be found at the earliest before things get more out of the control. 

The less debt means more sustainable businesses, fewer job losses, and stable government financial status. It also means that at the time of crisis, if the government borrows money it would not raise the debt level catastrophically.

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2 thoughts on “The Unemployment Puzzle with Debt at the Center Stage.

Add yours

  1. There are some interesting closing dates on this article but I don’t know if I see all of them center to heart. There is some validity but I’ll take hold opinion until I look into it further. Good article , thanks and we want more! Added to FeedBurner as effectively

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