The facts follow, one after another, and link together at unprecedented speed. It is extremely complex to “organize” a reality that, once again, comes across chaotically. The only certainty thus far is that what David Harvey calls “nature’s revenge” has emerged like an iceberg against which are colliding the conditions of the global economy — political and geopolitical — conditions bequeathed by the weakness of the 2008–9 postcrisis recovery, as well as the consequences of globalized production and the legacy of four decades of neoliberalism. As it seems, to draw on Marx’s metaphor from long ago, “All that is solid melts into air …”
In a context in which the force of the pandemic is advancing, government attempts to flatten the epidemiological curve lead to a steepening of the recessionary curve.1Pierre-Olivier Gourinchas, “Flattening the Pandemic and Recession Curves,” March 13, 2020. This contradiction, which invades the scene by leaps and bounds, requires definitions of the particular characteristics of the current crisis, the role of the monetary and fiscal measures implemented by countries, and finally, some elements of structural analysis and an attempt at some kind of prognosis. Readers should be aware that the disruptive aspects of the moment we are living through suggest that we must prepare for scenarios to develop that are particularly shifting and uncharted.
The Nature of a Crisis: More Serious Than Lehman?
In a recent article, the British weekly magazine the Economist notes that as the economy plunges into a prolonged blackout, some analysts believe they are detecting in the growing economic disruption and market panic the first stirrings of a collapse more severe than that of the 2007–8 global financial crisis. In this context, without sufficiently aggressive government action , the article adds, the world could face a market collapse and subsequent depression.
Obviously, this perspective is not an alien one to governments and central banks, which quite quickly launched a series of initial monetary measures. After lowering the already low interest rate to a range of 0 to 0.25 percent, the U.S. Federal Reserve launched a plan to repurchase at least $700 billion of financial assets as Treasury bonds and mortgage notes. In other words, the Fed again exercised “quantitative easing”2Translator’s note: Quantitative easing involves a central bank buying predetermined quantities of government bonds or other financial assets as a way to inject money directly into a national economy., as it had done after the 2008 economic crisis, and announced coordinated action with the central banks of Canada, England, Japan, Switzerland, and the European Central Bank (ECB), to channel more liquidity to the markets through lines of reciprocal credit in dollars. The Bank of England also lowered interest rates, and the Bank of Japan and the ECB launched asset buyback plans. In fact, banks and governments initially reacted as if it were a crisis similar to the one that spread worldwide after the fall of Lehman Brothers.3Translator’s note: Lehman Brothers, then the fourth-largest U.S. bank investment bank and heavily involved in subprime mortgages, filed for bankruptcy in September 2008 — which is considered to have been one of the major precipitants of the global crisis that then erupted. At that time, a large part of the political establishment and central bankers swore not to repeat the inaction of 1929.4In fact, the 2008 crisis played out as the great defeat of the “free market,” a sort of “narcissistic wound” of neoliberalism. The large-scale bailouts promoted by the Obama administration and many bankers in the Republican establishment are the origin of today’s crisis of the GOP and the consolidation of a right-wing mass base that led, in part, to the emergence of Trump. See Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World (New York: Viking, 2018) In the post-Lehman era, policy was centered on massive monetary measures to rescue banks — not only American ones — and big business, while millions of people fell into unemployment and misery and millions more were left homeless. A battery of measures internationally, as I discussed in a previous article, combined with the emergence of China as a key factor in supporting the “real economy.” But this time, the initial response of the “markets” demonstrates that, apparently, it is not the same.
These impulses toward recession are not immediately triggering bank failures — there have not yet been any — or successive stock market declines, although Wall Street has so far lost everything it gained during the Trump era. Rather, the situation is reversed. The banking risk and the stock market declines have their origins in the contractive paralysis resulting from the quarantines and border closures with which many governments are trying to halt the pandemic — often too late and, in most cases, with health systems already destroyed by years of neoliberalism. In fact, we are witnessing a break in the payment chain and commercialization, with a particular effect on the service sector, which has flourished in the current era of globalization. This has already resulted in huge losses in jobs, work hours, and so on. This is exacerbated by the significant percentage of workers flung into precarity by neoliberalism and deepened in the post-Lehman period. The U.S. Department of Labor last week reported one of the largest spikes in unemployment insurance claims since September 2017.
What is new and what remains floating in the graph of the two opposing curves of coronavirus and economic contraction is that both a prolonging and worsening of the pandemic and a new Great Recession and even a Depression could develop into extremely unstable situations for the economic and political elite — including right-wing characters such as Trump and Boris Johnson and even center-left coalitions such as that in the Spanish State between Pedro Sánchez and Podemos. Such situations will challenge the weaknesses of the post-Lehman recovery framework. In fact, in this context, while the expansive monetary measures appear necessary to facilitate the circulation of money in the midst of a storm that in its most superficial aspects seems to be a liquidity crisis, they are showing themselves to be clearly insufficient to halt the disarray.
Panic and “Keynesianism” (or Self-Fearing Monetarists)
This situation explains the demand from several international organizations, including the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), and the World Bank, that governments immediately institute massive and aggressive fiscal policies. As economist Michael Roberts pointed out a few days ago, fiscal policy is the universal cry of economists and policymakers. Financial Times columnist Martin Wolf, for example, warns that we may be facing a greater economic threat than in 2008–9. He points out that while it will be particularly difficult to contain the spread of the disease in countries with a limited social safety net, such as the United States, there is a risk of a collapse in demand and economic activity that goes far beyond the direct impact of the health emergency. In this context, Wolf raises the urgent need not only for central banks to guarantee liquidity but also for a series of measures such as generous sick pay and unemployment insurance during the crisis period, even for the self-employed. He adds, “If this is too difficult, governments can just send everybody a cheque.” In addition, it will be necessary to maintain revenues and minimize the long-term costs to businesses, while governments can later impose additional taxes to recover the outlays.
For his part, economist Olivier Gourinchas calculates that if 50 percent of production is halted for one month and 25 percent is halted for two months, there will be a 10 percent drop in GDP. Another two months with a 25 percent drop would cost another 5 percent retraction. Gourinchas points out that governments may need to deploy fiscal resources at levels proportional to these drops in production.
Both economists agree that fiscal policies are served by the fact that national debt rates for states are at historic lows — a situation far removed from that of dependent countries such as Argentina, for which interest rates are prohibitive. Gourinchas notes that the yield on 10-year Treasury bonds is 0.88 percent, while rates in the euro zone are equally low. Even a 10 percent increase in GDP of the debt only increases annual interest costs by 0.1 percent of GDP. A coordinated issuance of “jumbo” sovereign debt between 10 and 20 percent of GDP, coordinated with an expansion of quantitative easing by the ECB, would provide much-needed fiscal space.5Gourinchas, “Flattening the Pandemic.”
It is clear that panic — and the coming elections, particularly in the United States — rather than actual affinity for these policies is what is leading not only several European governments but Trump himself down the path of fiscal stimuli under a different guise than exclusive tax cuts for the rich. After the ECB called on governments to launch strong fiscal plans, the Spanish State announced it will allocate 20 percent of its GDP to generating loans, credit guarantees, aid, and social benefits. The United Kingdom will devote 15 percent of its GDP to credit guarantees and other measures to help companies in duress, while Rishi Sunak, Britain’s chancellor of the exchequer (the equivalent of finance minister) declared his willingness to increase the size of guarantees on loans so cash will reach all companies that need it when their businesses collapse. At the time of this writing, Boris Johnson had announced that his government would subsidize companies for three months by covering up to 80 percent of the wages of workers confined to home to keep them from being laid off.
In the course of the last week, the ECB announced an exceptional monetary measure involving a plan to buy public and private assets for 750 billion euros. Trump, for his part, foresees a battery of stimuli totaling about $1 trillion that include tax deferments, assistance to sectors particularly hard hit, such as airlines and hotels, and sending money directly to citizens. The Treasury Department’s proposal, which has yet to pass in Congress, would allocate most of the package to these cash payments, which would total $500 billion and be paid in two installments.6The policy of distributing money directly from the state in this way is known as “helicopter money,” a term coined by economist Milton Friedman, the father of monetarism, in a parable he wrote in 1969 about dropping money from a helicopter. Trump also announced that he could intervene in the oil price war between Russia and Saudi Arabia.
Following the announcement package, European, Asian, and U.S. stock exchanges all rebounded. But Wall Street failed to record two consecutive days in positive territory. A warning from the World Health Organization that global health systems were “collapsing” and the partial quarantine ordered by New York’s governor caused Wall Street to close its worst week since October 2008. No matter how real these promised stimuli by countries end up being, it is clear that for now the coronavirus pandemic is winning the race with the monetary and fiscal emergency packages.
Like a War … But without a War
It is quite difficult to figure out all the possible variants of that race and the scenarios that could result. Should the pandemic subside in a limited time, which seems unlikely, the monetary and fiscal stimuli would have to act on the swampy terrain of an economy that will add that shock to its already lacerated underlying weakness. But if, as seems most likely, the pandemic cannot be contained in a more or less reasonable time, the scenarios being considered are much more frightening. In a recent estimate, the United Nations calculated that due to the consequences of the pandemic on tourism, a sector in which activity could contract by 25 percent, the number of people living beneath the poverty line in Latin America could increase by 35 percent, from 67 million to 90 million. Further, in line with the Gourinchas estimates, the Economist article cited above suggests the possibility that several “core countries” will experience economic declines close to 10 of their GDP — a situation, as the article notes, that is relatively common in developing economies but not in the industrialized ones. In the “core countries,” it adds, most of the recorded declines of such magnitude are associated with the world wars or the Great Depression.
It is interesting to pause for a moment on this last point. The British economist John Maynard Keynes spent much of his life speculating about the possibility that the economy could receive the powerful boost derived from wars but without war. He failed, and ended up assuming — not without regret — that perhaps only a war could bring the economy out of the crisis of the 1930s. He was right about that. Rather than achieving in peacetime the impetus wars give to the economy, capitalism historically has showed its exceptional capacity to unleash contractions similar to those suffered during wars, but “without war.” This happens only during extraordinary situations, and there is no doubt we are facing one of those. A pandemic moves at great speed through the open veins of globalization, somehow using the contraction of time and space limits. It is an event that, moreover, is taking place not under relatively “normal” conditions but on a particularly rarefied terrain that intertwines at least two planes. On the one hand, as I discussed in “Will Coronavirus Unleash the Next Great Recession?,” a decade of economic weakness led to multiple social and political crises and growing geopolitical tensions. On the other hand, and as Harvey points out, the paralyzing consequences of globalization are evident; they mix the primacy of services (airlines, hotels, restaurants, and so on), altered in particular by the halting of traffic on a planetary scale, with the disastrous condition in which the health systems in most countries have been left after decades of neoliberalism.
But the absence of “war” in similar contractions has a deep meaning and establishes a tremendous difference. The economic impetus wars generate in the capitalist economy is associated with two fundamental elements. First, the centralized state’s demand that most industries convert at an accelerated pace in times of war — which displays substantive elements of planning — is a drag on investment for developing capitalist industry and services.7Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War (Princeton, NJ: Princeton University Press, 2016). Second, the very physical destruction of productive forces, generated by war itself, opens up great opportunities for reconstruction. These are the types of impetus that unleashes large outlays of capital in new investments and that in turn demands the development of new industries and new techniques under conditions of high profitability, to which Alvin Hansen refers.8Alvin H. Hansen, Full Recovery or Stagnation? (New York: W.W. Norton, 1938). So in the derivations of the current situation and in developing worst-case scenarios, we could find ourselves facing economic downturns of the magnitude typically brought about by wars but without the reactivating elements of the economy as a whole that characterize the destructive/regenerative relationship between capitalism and war.
In this context — an absence of future prospects, the framework of a collapsed globalization for the time being, and without new “big business” to replace neoliberalism in crisis — the contradictions and frictions between the powers are intensifying. This is particularly evident in the confrontation between the United States and China, although of course it also involves Germany and Europe as a whole. It is quite remarkable how the pandemic is becoming more and more clearly the almost explicit terrain for such hostility, in which containing the coronavirus and saving human lives emerge as a condition for demonstrating countries’ power. The fight over the “origin” of the virus and the exhibition of power China is now attempting after apparently seeming to have controlled the pandemic (although it remains to be seen, and it came at the cost of great blows to its economy), as well as the development of Western Europe as the new epicenter of the disease, with the United States as a potential next victim, are different expressions of this. The fight over who first creates a vaccine that mainly involves the United States, China, and Germany becomes, in this context, a redefinition of the battle for state-of-the-art technology that initially emerged under the distorted form of “trade wars.”
As the New York Times puts it, “a global arms race for a coronavirus vaccine is underway.” The newspaper notes, “What began as a question of who would get the scientific accolades, the patents, and ultimately the revenues from a successful vaccine is suddenly a broader issue or urgent national security.” So, “while there is cooperation on many levels — including among companies that are ordinarily fierce competitors — hanging over the effort is the shadow of a nationalist approach that could give the winner the chance to favor its own population and potentially gain the upper hand in dealing with the economic and geostrategic fallout of the crisis.” It is thus no coincidence that this is already being militarized. In China, a thousand scientists are working on the vaccine, and researchers from the Academy of Military Medical Sciences are recruiting volunteers for clinical trials. Meanwhile, Trump tried unsuccessfully to buy the German company CureVac to carry out its research and production in the United States. China also tendered stock ownership and benefits to the German company BioNTech in the race for the vaccine.
In the extremely dire circumstances the development of the pandemic imposes on the already stagnated conditions of deeply globalized capital, the role of the state is intensified, as are the elements of nationalism already at work. An extended duration of the COVID-19 pandemic dragging along with it a large-scale depression — which is a very likely scenario — will sharpen the clash between these trends and will demand a global reconfiguration. Such a redesign will mean, over the course of its development, new convulsions in the class struggle — which was already on the rise — and the intensification of disputes between the world’s powers in the economic, political, and military arenas. The possibility of large-scale armed conflicts cannot be ruled out.
First published on March 22 in Spanish in Ideas de Izquierda.
Translation: Scott Cooper
|Pierre-Olivier Gourinchas, “Flattening the Pandemic and Recession Curves,” March 13, 2020.
|Translator’s note: Quantitative easing involves a central bank buying predetermined quantities of government bonds or other financial assets as a way to inject money directly into a national economy.
|Translator’s note: Lehman Brothers, then the fourth-largest U.S. bank investment bank and heavily involved in subprime mortgages, filed for bankruptcy in September 2008 — which is considered to have been one of the major precipitants of the global crisis that then erupted.
|In fact, the 2008 crisis played out as the great defeat of the “free market,” a sort of “narcissistic wound” of neoliberalism. The large-scale bailouts promoted by the Obama administration and many bankers in the Republican establishment are the origin of today’s crisis of the GOP and the consolidation of a right-wing mass base that led, in part, to the emergence of Trump. See Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World (New York: Viking, 2018)
|Gourinchas, “Flattening the Pandemic.”
|The policy of distributing money directly from the state in this way is known as “helicopter money,” a term coined by economist Milton Friedman, the father of monetarism, in a parable he wrote in 1969 about dropping money from a helicopter.
|Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War (Princeton, NJ: Princeton University Press, 2016).
|Alvin H. Hansen, Full Recovery or Stagnation? (New York: W.W. Norton, 1938).