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After the Pandemic Slump, What Next?

Interview With Michael Roberts

February 25, 2021

Spectre‘s Ashley Smith talked to Michael Roberts about his projections for the world economy. Roberts is the author of The Long Depression: Marxism and the Global Crisis of Capitalism (Haymarket, 2016) and writes regular commentary and analysis on his blog, The Next Recession.

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Last time we talked we were in the early stages of the pandemic and global recession. You have argued that the system was headed for crisis before the pandemic triggered it. What is the overall state of the world economy, especially its key centers like the US, the EU, and China?

I think it’s one year almost exactly since we last discussed the world economy. At the time, as you say, I pointed out that the major capitalist economies were already sliding towards a long delayed recession as industrial output, investment, trade, and profit growth slowed to a trickle – and some countries like Japan, as well as some large so-called “emerging” economies like Argentina, Turkey, and Mexico, were already in a slump.

Well, in the last year, the COVID pandemic and ensuing lockdowns and social isolation, etc. has led to the deepest slump in the major economies in nearly 100 years. In the case of the UK, it is the deepest slump in 300 years!

During last summer, it was hoped that most economies could make a quick recovery as COVID cases fell. But then there was a second “winter” wave of infections, and lockdowns that had been relaxed were re-imposed. In the case of the US, there was really no “second wave,” as cases hardly dropped throughout the year because many states did not impose proper restrictions and opted to “keep things normal.”

But the evidence is clear. Those countries that imposed firm lockdowns and social distancing with the support of the population had much lower death rates and had the least reductions in economic activity, incomes, and employment. There was no trade-off between lives and livelihoods.

By the end of 2020, 93 percent of all countries in the world were in a slump. The national outputs of these countries had contracted by anything between 5 to 15 percent, along with investment and employment. The US economy contracted less than others – by about 4 to 5 percent, but employment dropped by over 20 million, and unemployment rose to around 15 percent. Japan’s economy also dropped by something like 6 to 7 percent.

But Europe took the biggest hit. The UK economy contracted by 10 percent after its disastrous COVID suppression policies combined with the Brexit trade uncertainty. Spain contracted even more, while the Eurozone economies on average declined by 6 to 9 percent.

Only one major economy avoided this disaster: China. The drastic COVID suppression measures imposed by the regime along with massive state-led organization of test and trace, health systems and direction of investment, led to very fast reductions in infections. Deaths per million were the lowest among the major economies.

So, by the second half of 2020, the Chinese economy started to expand again. It was a V-shaped recovery, something that the Trump administration claimed would happen in the US this time last year and which most mainstream forecasters had hoped for in the G7 economies. Indeed, by the end of 2020, China’s economy had expanded by about 2-3 percent compared with 2019!

In my view, whatever we might think about the nature of the Chinese regime on human rights and democracy, what China’s story showed was that state-led planned investment in health systems, industry and trade proved way superior in dealing with the COVID pandemic than the market economies of the G7.

What impact has the pandemic and global recession had on the global South? Are these states and economies headed for another debt crisis? How will that impact them and the rest of the world?

The COVID pandemic has had disastrous consequences for the so-called “global South.” Many of these countries, particularly the poorest in income per capita were already in trouble economically before the pandemic hit. Many had significant debt burdens owed to the corporations and financial institutions of the imperialist North. Their health systems were hugely underfunded, weak and mostly privatized.

Many working people of the global South work in the informal sector with no permanent job or possibility of working from home, as a sizable section of the better-off workers in the North could do. So, they were forced to go to work for employers or maintain their businesses with serious risk of infection. As a result, the spread of the virus was severe in countries like Mexico, Brazil, Ecuador, and Peru.

In countries with relatively higher youthful populations where we could expect lower death rates, there was still no escape. India has suffered the largest economic contraction of the large “emerging” economies, and South Africa’s economy (already in recession before COVID) has plummeted. Unemployment has risen across the global South by over 150 million. And the limited improvement in poverty rates in these countries achieved over the last decade has been completely reversed.

Looking ahead, as you say, there is every possibility of serious debt “events” during 2021 and 2022. The international agencies like the IMF and the World Bank have offered only “debt relief” – that is, lower interest rates or more time to pay. But the governments running these agencies have refused to agree to cancel any debt, which will mount up relative to national output and ability to pay over the next few years.

The response of many of the advanced capitalist states to the pandemic has been torn between lockdowns followed by premature openings and then yet another round of lockdowns. Why?

The governments of the major economies were totally unprepared and unwilling to deal with the COVID pandemic properly. Governments have been reducing health systems and privatizing for decades; and the big pharmaceutical companies did not conduct research into pathogen vaccines as it was not profitable (until now!), and there were no resources for test and trace and hospital treatments.

So, governments were forced into drastic measures of social distancing and lockdowns that destroyed  economic activity. Most pro-capitalist governments were reluctant to maintain these lockdowns for sufficient time and looked to relax too soon in order to “save the economy.” But as I said above, evidence shows that there was no trade-off between lives and livelihoods. For example, Sweden and many states in the US refused to consider that firm lockdowns were necessary; and the result was that both have had heavy death rates and still a collapse in economic activity.

States around the world have yet again stepped in like they did during the 2008 financial crisis and Great Recession to save the system from collapsing. What have they done? Has it worked? Why or why not?

There are 2 economic policy tools available to governments to deal with slumps under capitalism. There is monetary easing and there is fiscal stimulus. Monetary easing means getting the Fed and other central banks to cut interest rates to make borrowing to invest or spend cheaper and to inject credit so that banks and corporations are flush with cash to handle losses as sales and profits collapse and to prop up the banks.

In the modern era, injecting credit has been done by so-called “quantitative easing,” i.e. the central bank buys the bonds of the government and corporations through “printing” money. QE was the policy used after the Great Recession to get economies going again. But it did not work in restoring GDP, trade, and investment growth rates to anything like pre-recession levels. Instead, most of the credit injections were used by banks, financial institutions, and large corporations to invest in financial assets (bonds and stocks), to pay higher dividends and buy back shares to boost their prices.

Fiscal stimulus after the Great Recession was used only for a short period of time before governments reversed any deficit-financing to balance the books and try to reduce public sector debt which had rocketed after bailing out the banks.

In this pandemic slump, both policy tools have been used again but this time at humungous levels because the hit to businesses has been so much greater. Combined credit injections and government spending reached between 10 to 20 percent of GDP in most major economies in 2020, split about 50/50. This largesse has enabled most businesses (but not all) to survive during 2020, relying on a mixture of loans and grants; while workers have been “furloughed,” received one-off checks, or put on “pandemic relief” assistance.

Even so, employment rates have dropped sharply and many small and medium sized businesses are on the edge of bankruptcy. Some 20 percent of US and European companies were already “zombies” before the pandemic, with their profits barely covering wages and interest on debt, with nothing to spare to invest and expand. During this year, many of these “zombies” may go under, unless the fiscal and monetary injections are sustained.

Moreover, these monetary and fiscal measures have done little to restore the productive, employment creating sectors of the economy, particularly in the large service sector. Instead, value creation has collapsed while fictitious capital has been ploughed into the stock and bond markets.

The Biden administration is planning an enormous new stimulus, another massive investment in infrastructure, and is openly considering adopting an industrial policy to bolster US manufacturing – especially in high tech. Does this represent a turn away from neoliberalism to Keynesianism? Will it work? Will we see a cyclical upturn as many bourgeois economists predict after the pandemic subsides?

In this pandemic slump, in contrast to the Great Recession, there has been a change of policy by governments. That is partly because the lessons learnt from the failure of monetary policy after the Great Recession and the extra damage caused by adopting fiscal austerity to control debt (and failing). Also, the pandemic slump is at least twice as severe as the Great Recession.

So, the policies of austerity have been dumped (at least for now) and the cry is that “we are all Keynesians now.” The IMF, the OECD and the ECB all now say: “don’t worry about the deficits and the debt for now, just spend to save the economies.” With interest rates at all-time lows, the cost of servicing the mounting debt will be manageable and once economic recovery is under way, we can look at the debt problem then, the argument goes.

In a way, this is right for the short term. But the problem for capitalist economies is that unless profitability rises significantly over the next few years, investment growth will be weak and so will economic growth. And if interest rates start to rise, then the debt burden will start to push the zombies into bankruptcy, just as fiscal and monetary support is reduced.

Moreover, even if low interest rates stay, such is the size of the accumulated debt, both corporate and government, that debt servicing costs will rise anyway to squeeze available profits to invest productively. Rising and high levels of debt cannot be ignored indefinitely especially if profits do not rise sufficiently.

This is the issue with Biden’s stimulus program. At first sight, it seems big; mainstream economic forecasts suggest that it could add at least 1 percent to GDP growth over the next few years. But even if Biden’s investment program is fully implemented, that will take government investment to GDP in the US to just 4 percent, while capitalist sector investment is 15 to 20 percent of GDP on average. So, the latter is decisive in restoring US capitalism.

That means getting profitability up sharply from its current all-time lows. Sure, the very big tech and media companies like the FAANGs (Facebook, Amazon, Apple, Netflix, Google) are making huge profits, but the majority of US and European companies have very low profitability. To get profitability up and recover from a slump under capitalism requires 3 things.

First, unproductive employees must be sacked and wages for those kept on held down. Second, expanding firms must aim to introduce new labor saving technologies to boost the productivity of labor. And third, the zombie deadwood companies must be allowed to go bust, be taken over or liquidated, to cleanse the market and raise profitability for the rest. None of these 3 requirements looks likely to happen any time soon.

Biden’s stimulus has triggered a debate between bourgeois economists over the danger of inflation. Larry Summers has argued that Biden’s program is too large, and that it both risks triggering inflation and wastes money that should be saved for their investment in infrastructure and industrial policy. Other advocates of austerity, who you call “austerians,” agree with him. By contrast, Treasury Secretary Janet Yellen dismisses these concerns as overblown and argues that the biggest danger is not spending enough money on the stimulus. Which side is right?

Mainstream economics has two main theories to explain inflation. There is the quantity theory of money espoused by monetarists, who argue that inflation is a monetary phenomenon, that is, price inflation picks up whenever there is “too much” money in the economy: too much money chasing too few goods. Well, the last 10 years have put doubt into that theory as money injections have been huge and inflation in the “real economy” has slowed.

The other mainstream theory is the Keynesian one that there is a trade-off between unemployment and inflation. So that as capacity for production is maximized and there is full employment, then wages rise, and this forces businesses to hike prices in order to maintain profits. Inflation is thus blamed on workers asking for too much.

In effect, this is the argument of orthodox Keynesian Larry Summers. The difference between Summers and Yellen is that Summers thinks economic recovery will be so speedy and US economic capacity to expand is so poor that the US economy will quickly overheat, then wages will rise and price inflation will come back quickly. Yellen (and Powell), on the other hand, think that the economies have lots of slack and that there is plenty of space to expand for the next year or so without wages rising to push up inflation.

In my view, both sides are right and wrong. Summers is wrong that economic recovery will be speedy and high as a result of Biden’s packages, but he is right that US economic capacity has been weakened by the pandemic slump and is no position to leap forward. Yellen is wrong about that, but she is right that economic recovery will be modest and not lead to “overheating” and sharp wage rises.

But both mainstream theories are inadequate explanations of inflation. Changes in the prices of commodities are driven by the purchasing power of profits and wages, i.e. new value in the economy. Yes, wage rises will boost demand for goods and services, but don’t forget profits too. And if central banks are also pumping money into the economy that will add to price inflation because monetary injections do not create new value.

In the pandemic slump, in the US, profits have fallen by about 25 percent and wage bills (falling employment) by about 10 percent. So even though money supply has jumped over 40 percent, there has been no inflation. Indeed, as much of the money injected has been hoarded, the so-called velocity or turnover of that money has fallen sharply.

However, in 2021, we can expect profits to rise and even the overall wage bill to rise, and the monetary injections look set to continue, if at a slower pace. So, I expect goods and services inflation to pick up. That will raise problems for the monetary authorities if and when they should raise interest rates to curb inflation and wage demands. If interest rates rise, then financial markets will dive. But we are not there yet.

You have argued that neither Keynesianism nor neoliberal austerity can drag the world economy out of what you call the long depression. Why? What would work within capitalism? And who would pay the price for that?

As I said above, capitalism gets out of its regular and recurring crises by making labor pay. It makes labor pay by cutting the workforce of “unproductive” workers and creating a reserve army of labor that depresses wages. And it introduces new technology to boost labor productivity. The aim is to get profitability up so that business investment will respond.

However, that did not happen after the Great Recession. Profitability did not recover because the liquidation of weak firms was not allowed to happen. Zombie firms stayed as the living dead. Financial asset prices rocketed and that’s where the profits were made: in fictitious capital. Investment in productive assets was weak and productivity growth was very low (just 0.6 percent a year in the US).

The pandemic slump has also caused serious scarring of productive assets, including losses of capacity and productive workers that will be difficult to restore without a massive investment program. So instead of a V-shaped economic recovery and quick return to pre-pandemic economic levels and then onwards and upwards, the “recovery” is more likely to be what I call a reverse square root, where trend growth from 2021 onwards will be lower even than in the 10 years after the Great Recession.

In other words, there would be yet another leg to the Long Depression in investment, productivity, and profitability that the major capitalist economies have experienced over the last ten years. Remember, it took over 20 years to get out the depression of 1873–96 in the major economies and required several severe slumps to do so. The Great Depression of the 1930s was only ended by the war economies in 1940, when government investment replaced capitalist investment for the war effort.

So, either capitalism returns to another slump some time in this decade to cleanse the system or it is replaced.

The far-thinking sectors of the global elite are worried that the pandemic is storing up deep grievances that could detonate another round of political polarization and explosive struggles throughout the world system. What’s your perspective on how this crisis will impact politics, as well as class and social struggle?

There was a very interesting analysis done by the IMF recently, which showed that levels of unrest and struggle had been rising significantly prior to the pandemic slump. The pandemic in 2020 cut across that, but the IMF reckons the previous trend could return as countries come out of the pandemic this year and beyond. There is every reason to expect that, given the weak recovery ahead. Indeed, if the recovery is stronger that in turn could revive the confidence of labor movements globally.

Ashley Smith is a socialist writer and activist in Burlington, Vermont. He has written in numerous publications including Truthout, International Socialist Review, Socialist Worker, ZNet, Jacobin, New Politics, Harpers, and many other online and print publications. He is currently working on a book for Haymarket entitled Socialism and Anti-Imperialism.


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