29. The no recovery scenario of a permanent GDP collapse

The biggest economic risk of the coronavirus pandemic, which no trader has so far factored in, is a permanent change in consumption habits. After having been obliged to try it for a while, consumers may actually stop buying products and services they don’t need. This would be catastrophic for the economy, or at least for GDP, the useless, coarse measure of how our economy is doing. GDP would be permanently affected and there would be no recovery. Of course, the economy only makes sense as a construct to improve human lives and, therefore, in real terms this may not be a disaster at all, after a period of adjustment to pivot jobs, develop new industries, etc. The big fly in the ointment, and there is always one, is that our tax system generates its revenue from middle income work and consumption, and tax revenues may not suffice to sustain, let alone develop, the welfare state. We may come to a point where we finally have to tax corporations and wealth fairly, perish the thought

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Comments

b8c said…
Don't worry Santi, the cynic in me suggests that those very same corporations and wealthy may well find a way to continue to tax those of middle income to save their own bacon. On that note - how about a massive (99%?) tax on profit for all the "bankers" (aka gamblers) who shorted the markets and made huge gains at the beginning of the corona-crisis? Surely that money would be well used to fund health-care/research and to bail out beleaguered governments who are using tax dollars to pay for furloughed workers - somebody will have to foot that bill. Oh ... don't worry, I'm sure that profit is already off-shored and it's those of middle income who will end up footing the bill.
Melkisecebe said…
A tax system based on corporations and the wealthier will be an amazing outcome, and stop consuming what we do not need a better world. Fingers crossed!
Trevor C said…
Hi Santi, great article! Recent economical data on retail sales numbers were bad and still the GDP is holding up. I guess where do the flows of money go when everyone is struggling. If your company pay dividends or is headquarters in a tax haven you should not be allowed access to government bailout (see the Denmark model).
thanks for the post, I look forward to more!
SantiDominguezV said…
Wow, lots of somements! Great! I will take them in order. Yes, chances are middle income will still pay the lionshare of the tax, but woult it not be great if this shock necessitated a change in taxation and further (or initial) taxing of corporates and high net worth? As for the bankers, I agree but you have to be a bit careful, some of the gamblers (inadvertently) are pension funds, etc., so normal people's pensions are also in there, but yes, a higher rate of tax for these kinds of profits would be very sensible. Much likelier within EU than in US or UK, though. As for the offshoring problem, absolutely right, a lot of the money will be gone, less from the bankers but more from the high net worths... something else I would like to see as an outcome would be getting to the point where we have to start taking a global taxation system with no havens seriously... but that requires sensible governments in all major jurisdictions, which may not quite reflect current reality!
SantiDominguezV said…
Totally agreed on both of these things being an improvement... Although both of them are unlikely (I guess the first less likely than the second, but you never know). Any move in either of those directions, even if only partial, would be really welcome!
SantiDominguezV said…
Trevor, thank you! Great comment! Yes, I am not sure where that GDP is coming from, but I guess the impact will be delayed by 1-2 months. Totally agreed with the tax havens. With the dividends, maybe a bit more careful... if you paid dividends before this happened because you were doing well, and now you are being hit badly, I would be sympathetic to bail out so long as some 'no future divis until all money returned' kind of model... which would need some work...

Glad you are looking forward to more, I am committed to a further 972, as you can see in post number 3... so plenty to come, one every day (a bit of a homage to the 1,001 Arabian Nights
b8c said…
Thanks for the reply Santi - nice to have an interactive forum where important topics are given a good airing and where we can have sensible and intelligent discussion :) I look forward to reading more.

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