THE COVID PANDEMIC SLUMP OF 2020 was no accident of history. It was not a one-in-a-million event like an asteroid that suddenly drops out of the sky. In the last thirty years, there have been increasing warnings from scientists that pathogens, deadly to humans, contained in wild animals for thousands of years in remote parts of the planet, were gaining access to farm animals and food markets. The Covid pandemic was an “accident waiting to happen.” The drive for profit by multinational energy, mining, and industrial farming conglomerates globally has not just caused environmental degradation and global warming, it has also caused a spread of viral pandemics. In this sense, it was global capitalist development that caused the pandemic.
But the pandemic also triggered an economic recession that was already brewing before Covid struck. The depth of the pandemic slump was unprecedented because governments had ignored warnings of a pandemic and had weakened health systems for decades, which then proved unable to cope, forcing lockdowns and the collapse of international trade and travel. Now, thanks to the efforts of (mostly publicly funded) science, vaccines have been produced in record time, supposedly to make it possible for countries to (falteringly) come out of the slump and make a return to some semblance of “normality.” However, Covid has not been eradicated. New variants have sprung up and continue to wreak havoc around the world—with many countries facing further waves of infections and deaths. And millions have been left with permanent “Long Covid” illnesses.
The major capitalist economies may come out of their comas with an energy injection of money, credit, and government spending. But these “economic patients” have been permanently damaged. The underlying weaknesses and contradictions in capitalist production have not been resolved; indeed, they have been even more exposed. The rest of the 2020s is not likely to resemble the “Roaring Twenties” that followed the (so-called “Spanish”) flu epidemic of 1918–20. Rather, it will likely be a continuation of the slump, what can be called a Long Depression that the major capitalist economies have been locked in for the last decade.
The Impact of Covid
It is now nearly two years since the Covid virus started to infect humanity and eventually turn into a pandemic. There have been more than 215 million cases of Covid–19 infections officially reported, with more than 4.5 million deaths. And this is an underestimate, as data for excess deaths over a five-year average suggest that between seven to thirteen million people have, in fact, died from the virus.1The Economist, May 15, 2021.Even if we use officially recorded deaths, the death rate is 2 percent of all Covid cases. Each year, influenza kills about 0.1 percent of people who catch it. By this measure, the Covid–19 virus is clearly much more deadly.
Of course, not everybody has been infected yet, but micro-studies suggest that around 0.5 to 1 percent of those infected with Covid–19 have died; that is about five to ten times more deadly than annual influenza.2 Robert Verity et al., “Estimates of the Severity of Coronavirus Disease 2019: a Model-based Analysis,” The Lancet 20, no. 6, June 2020: 669–77. Quick math shows that with a world population of about 7.8 billion, and assuming “herd immunity” is achieved at 65 percent of the population (something which now seems unlikely given the spread of new variants like Delta), then an uncontained virus could have killed thirty-five million people. So, the actions to contain the virus and the speedy introduction of vaccines have so far kept the deaths significantly below such projections.
That’s hardly much to cheer about. Governments around the world have been warned for decades that new pathogens deadly to humans were emerging ever more frequently and likely to turn into pandemics. From SARS, MERS, Ebola, and now Covid–19, epidemiologists and health organizations have been warning of the impending danger. The UN set up a Global Preparedness Monitoring Board which reported in September 2019 and warned of a viral pandemic:
Preparedness is hampered by the lack of continued political will at all levels…Although national leaders respond to health crises when fear and panic grow strong enough, most countries do not devote the consistent energy and resources needed to keep outbreaks from escalating into disasters.3 A World at Risk, Global Preparedness Monitoring Board 2019 Annual Report, September 16, 2019.
The dangers were ignored. And there are several reasons why. The lack of preparation was exhibited in the failure of big pharmaceutical firms to invest in research and production of effective vaccines to provide humans with immunity. The technology is there to do this—as we have now seen with the success in producing effective vaccines. But before the pandemic, sixteen out of the top twenty American pharmaceutical companies did no vaccine research because highly infectious diseases were previously concentrated in the poorer parts of the world where there was no profit to be made.4 “In the Name of Innovation,” Corporate Europe Observatory, May 25, 2020, https://corporateeurope.org/en/in-the-name-of-innovation.[/mfn] They preferred to concentrate on profitable antidepressants, opioids, diabetes drugs, and cancer treatments: the diseases of the Global North.
Then there was the state of healthcare systems around the world. In the advanced capitalist countries, public healthcare has been starved of funding, privatized, and hollowed out over the last forty years to the benefit of private profit and the market. And healthcare spending has not been directed towards prevention or primary care but mainly to emergency treatment. A 2015 study of tuberculosis rates in ninety-nine countries found that cuts in public spending on healthcare and the privatization of the sector were related to a higher prevalence of TB.4 “In the Name of Innovation: Executive Summary,” Corporate Europe Observatory, May 25, 2020, https://corporateeurope.org/sites/default/files/2020-05/IMI-BBI-executive-summary-final_2.pdf. This was set against decades of privatization of healthcare systems in developing countries, often encouraged by the World Bank and International Monetary Fund (IMF).
Recent studies have shown that a 10 percent increase in the percentage of hospital beds per one thousand people results in a 1.7 percent decrease in Covid–19 deaths.5 Some of the highest mortality rates are in the US, Italy, and Spain (which have around three hospital beds per one thousand people), whereas less privatized systems have a much higher ratio of hospital beds, such as Germany (8.2 per one thousand people), South Korea (10.9), and Japan (13.4). In other words, the more a healthcare system was public and properly funded and resourced, the more success it had in saving lives. Privatization kills.
Most healthcare systems were already stretched to the limit in dealing with illness and disease before the pandemic broke. Indeed, it was regarded as “efficient” (that is, more profitable) to run hospital capacity at ninety-nine percent, with no room for major emergencies. Many providers had no stock of necessary equipment for virus pandemics like masks, PPE, ventilators, or even medicines to ameliorate the impact of the virus. When the pandemic hit, many European and American healthcare systems were overwhelmed. Also, healthcare facilities were obliged to concentrate on the Covid–19 patients to the detriment of other seriously ill patients, leading to secondary deaths, while the impact on long-term care homes was ignored. And in the poorer countries of the Global South, there was just no protection or support.
Some states, such as the Swedish government, claimed that lockdowns were unnecessary and social distancing would be enough. That did not prove to be the case, as Sweden’s death rate has been ten times higher than its neighbors in “locked down” Denmark, Norway, and Finland—and indeed its rate approached hard-hit Italy until it later changed its policies. Other governments, such as those in “Trumpist” Brazil or Trump’s US, claimed that Covid–19 was either a “hoax” or no worse than the flu, and so there was no need for any containment. Again, policies based on that view have proved to be disastrous for the death rates of these countries.
Eventually, governments had to impose drastic lockdowns. But lockdowns alone were no answer to containing the pandemic. The countries that succeeded most in controlling the virus and saving lives have been those that had early lockdowns, but also had effective mass testing and tracing of infections, fully serviced healthcare systems, and massive community cooperation. China, where the virus started, has had only four thousand and six hundred deaths, or three per million (Figure 1). Taiwan, South Korea, New Zealand, and the Scandinavian countries (except Sweden) have also succeeded to varying degrees.5 “Weekly Trends,” Worldometer, https://www.worldometers.info/coronavirus/#countries.
Figure 1: Covid–19 Deaths per Million (as of August 30, 2021)Source: Worldometers
In the Global South, lockdowns were not successful in containing the virus because it was impossible for most households (unlike in the Global North) to work from home with broadband, and millions are casual informal laborers who must go to work, come what may. And living in crowded slums is no environment for effective isolation or social distancing. Moreover, healthcare systems in these countries are inadequate and mainly private, so there is minimal testing, and those with severe infections cannot get treatment. Hundreds of millions in Peru (the worst affected country in the world), Brazil, Mexico, India, and South Africa are still being infected. Cases continue to skyrocket, even if the relatively young populations mean that death rates are low in some cases.
In most of the advanced capitalist countries of North America, Europe, and Asia, the lockdowns have been gradually relaxed. This has now led to a new wave of cases, as the virus mutates into new variants, requiring yet another round of “lite” lockdowns. In the recent waves, death rates are not as high as before because, with the old generally self-isolating, Covid–19 now mainly affects the young and healthy; and health systems are also better prepared and resourced. Even so, the old and the sick are forced to stay at home or in long-term care homes. And many of those who were severely affected by the virus have been left with permanent damage to respiratory and heart systems and other “mysterious illnesses,” called “long Covid.”6 Clive Cookson, “‘Long Covid’ Symptoms Can Last for Months,” The Financial Times, October 15, 2020. Long Covid now affects more than fifteen million Americans, which could see as many as one and a half million
The Pandemic Slump
The lockdowns, the suspension of international travel and trade, and the requirements of social distancing led to global economic collapse in 2020. The Covid slump started as a supply-side shock as economies closed down, with lockdowns and isolation measures seen as the only answer to avoiding catastrophe. Economically, that means supply stopped, which then led to a collapse in demand as people were laid off, and businesses crashed.
The major economies of the world have suffered the largest contraction in output and income in more than one hundred years (since the 1918 flu epidemic). More than five hundred people globally are being driven back into “official poverty” (earning less than $5.50 a day). Millions of people have lost and will lose their jobs globally, as well as small businesses closing for good. Government bailouts in the form of cash handouts for the unemployed and loans to companies have been inadequate to save jobs and incomes, particularly in the cash-strapped Global South. Around 2.7 billion workers worldwide have been affected by full or partial lockdown measures, that is, around 81 percent of the world’s 3.3 billion workforce. The world economy has seen nothing like this.7 World Economic Outlook Update June 2020, International Monetary Fund, June 2020, https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020.
Figure 2: Global Real GDP Growth (percentage)Source: International Monetary Fund data.
During the lockdowns, output in most economies fell by a quarter according to the Organization for Economic Cooperation and Development (OECD) (Figure 2), with the effects felt in sectors amounting to one-third of GDP in the major economies. IMF chief Kristalina Georgieva projected that “over 170 countries will experience negative per capita income growth” in 2020.8Ibid. Investment bank J.P. Morgan’s economists predicted that the pandemic would cost the world at least $5.5 trillion in lost output, greater than the annual output of Japan. And that would be lost forever. That is almost 8 percent of GDP through to the end of 2021. The cost to developed economies alone will be greater than that lost in the recessions of 2008–09 and 1974–75 combined. World trade was already falling at a 2 percent annual rate before the pandemic because of weakening economies and the US–China trade war. In 2020, trade fell 13 percent, faster than during the Great Recession of 2008–09.9 World Trade Report 2020, World Trade Organization, 2020, https://www.wto.org/english/res_e/publications_e/wtr20_e.htm.
Many larger economies in the Global South—such as Mexico, Argentina, and South Africa—were already in a recession when the pandemic hit. The IMF reckons that output in the so-called “emerging markets” fell by 2.4 percent in 2020, the first decline since reliable records began in 1951.10 World Economic Outlook Update, January 2021, International Monetary Fund, January 2021, https://www.imf.org/en/Publications/WEO/Issues/2021/01/26/2021-world-economic-outlook-update. And that figure includes the giant economies of China and India. Indeed, it was their growth during the Great Recession that prevented an aggregate contraction among developing economies then. This time it is different. The World Bank reckoned the pandemic pushed subSaharan Africa into recession in 2020 for the first time in twenty-five years.
More than ninety “emerging” countries, nearly half the world’s nations, have enquired about bailouts from the IMF—and at least sixty have sought to avail themselves of World Bank programs. These two institutions together have resources of up to $1.2 trillion available to battle the economic fallout, but only $50 billion of this can be deployed to “emerging markets,” and only $10 billion to low-income members. These figures are tiny compared with the losses in income, GDP, and capital outflows. In 2020, nearly $100 billion of capital flowed out of emerging markets, according to data from the Institute of International Finance (IIF), compared to $26 billion outflow during the global financial crisis a decade ago. Moreover, the last thing that distressed economies need is another loan from the IMF, as the example of Pakistan demonstrates. The IMF is still demanding austerity measures from the Pakistan government in the middle of this pandemic in return for previous loans.11 Ammar Ali Jan, “The IMF is Using the Debt Crisis to Hollow Out Pakistan’s Sovereignty,” Jacobin, April 14, 2021.
The IMF managed to persuade the rich member countries to agree to issuance of $650 billion worth of Special Drawing Rights (SDRs) to help poorer countries cope with financial distress during the global slump. But this is a drop in the ocean compared to the credit injections made by the major central banks to their own economies—some $9 trillion. Moreover, the larger and more developed economies get the biggest share of this credit and all that IMF chief Georgieva can say is that “the IMF is encouraging voluntary channeling of SDRs from countries with strong external positions to the poorest and most vulnerable nations.” So far, voluntary donations by rich countries from the SDR allocations total just $24 billion, of which $15 billion is from existing stocks. In any case, the SDRs are in effect loans and must be repaid or serviced down the road.
Meanwhile, nothing is being done to cancel the huge debts that the poorer countries of the world owe to the richer countries, as well as to the IMF. Public sector debt has rocketed during the pandemic as governments spent trillions of dollars on Covid support for businesses and households. But private sector debt also mounted and as much of this debt is denominated in US dollars, the burden of repayment has risen sharply for the poorest nations.
In these countries, there is little room to boost government spending to alleviate the hit. The “developing” economies are in a much weaker position than during the global financial crisis of 2008–09. In 2007, forty emerging market and middle-income countries had a combined central government fiscal surplus of 0.3 percent of GDP. In 2019, the same economies posted a fiscal deficit of 4.9 percent of GDP.
The International Labor Organization (ILO) reckons that the income earned by workers round the world fell 9 percent in 2020 because of the coronavirus pandemic—a loss worth more than $3 trillion, or 5 percent of world GDP. This is equivalent to 255 million full-time jobs, approximately four times greater than the number lost during the 2008–09 global financial crisis. More than four hundred million enterprises—made up of companies and self-employed people—are in “at risk” sectors such as manufacturing, retail, restaurants, and hotels.12 World Employment and Social Outlook: Trends 2021, International Labour Organization, June 2, 2021, https://www.ilo.org/wcmsp5/groups/public/—dgreports/—dcomm/—publ/documents/publication/wcms_795453.pdf. The strain on incomes resulting from the decline in economic activity will devastate workers close to or below the poverty line. Under the “mid and high” economic damage projections from the ILO, there will be twenty to thirty million more people in working poverty than the prepandemic estimate for 2020.
The World Bank reckons that the pandemic will push between eighty-eight and 115 million people into extreme poverty, which the Bank defines as living on less than $1.90 a day (a ridiculously low threshold). More than 80 percent of those who will fall into extreme poverty are in middle-income countries, with South Asia the worst hit region, followed by subSaharan Africa. Progress in reducing poverty had been slowing before the pandemic anyway. About fifty-two million people worldwide rose out of poverty (as defined by the World Bank) between 2015 and 2017, but the rate of poverty reduction had slowed to less than half a percentage point a year during that period, after reductions of about 1 percent a year between 1990 and 2015. And all the reduction in poverty rates have been in Asia, especially East Asia and China. Strip China out, and there has been little or no improvement in absolute poverty in thirty years.
Why was the pandemic slump of 2020–21 so much deeper than the Great Recession of 2008–09? Clearly, it was due to governments being forced to close large sectors of the economy and stop trade and travel. But it was also because the major capitalist economies were already heading into a new economic recession when the pandemic hit.
Before the pandemic, the world economy had been slowing down. Real GDP growth rates in the G7 countries had dropped to just 1 percent or lower; and the so-called emerging economies had growth rates as low as 3 percent (hardly enough to cover increases in population). World trade was declining. Even the giant economies of China and India had slowed. Behind the slowdown was the slowing of investment into productive (value-creating) assets. Investment and productivity growth are key to developing the productive forces of modern capitalist economies. They were failing in 2019 because under capitalism, profitability is the driving force behind investment.
The capitalist mode of production is supposed to be the most successful of all previous modes of social organization in expanding the “productive forces,” that is, the production of things and services from human labor, technology, and natural resources. But it has an Achilles’ heel: raising the productivity of labor (reducing the time it takes to produce the things and services that humans need to improve their lives) comes into conflict with the profitability of the owners of the means of production in employing the human labor force.
Figure 3: US Nonfinancial Sector Rate of Profit (percent)
Source: Federal Reserve, author’s calculations
As capitalists compete with each other to extract a greater share of profits from human labor, they introduce machinery and technology that reduces the cost of human labor power. But in so doing, because only labor creates value (or profit), the increase in profits relative to the investment costs of mechanization tends to fall. Thus, capitalist production engenders regular and recurring slumps in investment and output. After the 2008–09 Great Recession, global capitalism was about to enter another slump in 2020. According to best estimates, US and global profitability levels had reached historic lows before the pandemic (Figure 3).
At first sight, this result seems strange when we read of the huge profits being made by the likes of the so-called FAANG companies (Facebook, Amazon, Apple, Netflix, and Alphabet, parent company of Google.) But these are the exceptions that prove the rule. On average, the profitability of firms in the productive sectors of capitalist economies are low (Figure 4). Indeed, globally, the total mass of corporate profits in the major economies had also stopped growing.
Figure 4: Global Corporate Profits from Six Major Economies
(weighted mean, percentage year-on-year, Q4 2019 partially estimated)
Source: National statistics, author’s calculations.
That’s partly why profits have been reinvested into financial and other unproductive sectors like property where profitability is higher. Indeed, it is estimated that before the pandemic, about 15 to 20 percent of companies in the major economies were what are called “zombies,” that is, not making enough profit to invest or expand, but just enough to pay wages and service their debts. They are the “living dead” in capitalist terms. These firms have survived because central banks have driven interest rates down to near zero or below, and firms have been able to borrow more and more.
Most important, far from helping to restore productive investment and productivity growth during the Long Depression, all that zero interest rates and quantitative easing (QE) have done is boost stock and bond market levels to all-time highs. As one empirical study concluded: “output and inflation, in contrast with some previous studies, show an insignificant impact providing evidence of the limitations of the central bank’s programs” and “the reason for the negligible economic stimulus of QE is that the money injected funded financial asset price growth more than consumption and investments.”13 M. Balatti et al., “Did Quantitative Easing Only Inflate Stock Prices? Macroeconomic Evidence from the US and UK,” January 2017, http://reparti.free.fr/balatti17.pdf.
All the monetary injections have done is allow banks and financial speculators to build up massive amounts of what Marx called “fictitious capital,” meaning investment not into value-creating assets in the “real economy” but into stocks and bonds and cryptocurrencies—a fantasy world where a very few become billionaires while working people who don’t have stocks or even houses of their own see no increase in real incomes or wealth. QE has been a major contributor to rising inequality of incomes and wealth in the G7 economies in the last ten years (Figure 5).14 J. Connor, “Does Quantitative Easing Contribute to Income Inequality?” Seven Pillars Institute, August 26, 2013, https://www.sevenpillars institute.org/does-quantitative-easing-contribute-to-income-inequality/.
Figure 5: Billionaires’ Wealth as Percent of GDP
Source: Ruchir Sharma team research using data from Forbes world’s billionaires list © FT
Like the central bankers, mainstream economists are divided over whether continuing with government borrowing and quantitative easing is needed or whether it will lead to financial disaster. The Keynesians and postKeynesians (including Modern Monetary Theorists) remain strongly in favor. There is no need to worry about rising government or even corporate debt. If governments resort to austerity policies, cutting back debts as they did during the Long Depression (without much success), they will only delay economic recovery and even reverse it. The Keynesians ignore the evidence that government spending and deficits have had little effect on achieving economic recovery anyway.15 Michael Roberts, “Multiplying Multipliers,” The Next Recession, January 13, 2013, https://thenextrecession.wordpress.com/2013/01/13/multiplying-multipliers/.
In the advanced economies, the IMF estimates that the government debt-to-GDP ratio went from under 80 percent in 2008 to 120 percent in 2020. The interest bill on that debt nonetheless went down over the period, encouraging a Panglossian belief that the debt must be sustainable. A similar surge in the global nonfinancial corporate sector led to debt hitting a record high of 91 percent of GDP in 2019 (Figure 6).
Figure 6: US Nonfinancial Corporate Sector Debt, $bn 1948–2020
Source: BEA, Federal Reserve, author’s calculations
Over the past decade characterized by record low or even negative interest rates, companies have been on a borrowing binge. Everywhere corporate debt has soared during the long and weak “expansion” since 2009. Huge debt, particularly in the corporate sector, is a recipe for a serious crash if the profitability of capital drops sharply. According to the IIF, the ratio of global debt-to-GDP hit an all-time high of over 322 percent, close to $253 trillion, in the third quarter of 2019. The rise in US nonfinancial corporate debt is particularly striking (Figure 7).
Figure 7: US Nonfinancial Corporate Sector Debt Servicing Ratio (percent)
Source: Federal Reserve, author’s calculations
A recent OECD report said that, by the end of December 2019, the global outstanding stock of nonfinancial corporate bonds had reached a record high of $13.5 trillion, double the level reached in real terms in December 2008. The rise is most striking in the US, where the Federal Reserve estimates that corporate debt had risen from $3.3 trillion before the financial crisis to $6.5 trillion last year. Given that Apple, Facebook, Microsoft, and Google parent Alphabet alone held net cash of $328 billion at the end of last year, much debt is concentrated in old economic sectors where many companies are less cash-generative than big tech. Debt servicing has thus become more burdensome.16 John Plender, “The Case for Continuing Quantitative Easing is Hard to Fathom,” The Financial Times, August 19, 2021.
Rising government debt and even rising corporate debt do not have to be problems if economies recover to and sustain a healthy rate of real GDP growth and profits for companies. Government debt-to-GDP ratios can be reduced or at least managed if GDP growth is higher than the going interest rate. But the continual rise in fictitious capital rather than investment in productive capital is laying the basis for an eventual crash if economic recovery should falter. Once a drug user is addicted, it is difficult to wean the user off the drug, while “cold turkey” could kill the patient.
Down the road, rising debt cannot be ignored. And it is not so much public sector debt, which in the US is now well above 100 percent of GDP; more important is corporate debt. If interest rates for firms do start to rise because of increased inflation, then debt servicing costs for a whole swathe of “zombie” companies will become an excessive burden, and bankruptcies will ensue. According to Bloomberg, in the US, almost 200 big corporations have joined the ranks of such firms since the onset of the pandemic, and now account for 20 percent of the top three thousand largest publicly traded companies, with debts of $1.36 trillion. That is, five hundred and twenty-seven of the three thousand companies didn’t earn enough to meet their interest payments!
The IMF’s latest Global Financial Stability report amplifies this point with a simulation showing that a recession half as severe as that in 2009 would result in companies with $19 trillion of outstanding debt having insufficient profits to service that debt.17 Fiscal Monitor, International Monetary Fund, April 2021, https://www.imf.org/en/Publications/FM/Issues/2021/03/29/fiscal-monitor-april-2021. If these heavily indebted companies keel over, that would hit credit markets and banks, triggering a financial collapse.
A Sugar Rush Recovery?
After amazing work by scientists (mostly publicly funded), vaccines that provide effective immunity (at least for a while) have been developed in record time. Now governments are full of optimism that lockdowns and various social distancing measures can be removed, and business can “return to normal.” Governments in the major advanced capitalist economies are ending the special support benefits and programs they were forced to provide for people and small businesses during the height of the pandemic. Instead, they are relying on a sharp rise in consumer spending as better-off households spend savings built up during the lockdowns, and companies resume investing for increased production.
But all this has the aspect of a “sugar rush.” The “sugar” of fiscal stimulus and historic levels of easy credit has infused capitalist businesses and household spending with an energy boost. Indeed, during the pandemic slump, many sections of capitalism did not suffer at all; on the contrary, they gained hugely—for example, the social media and tech sector like Netflix or Facebook, the mega-distribution companies like Amazon, and of course, Big Pharma. Better-off households also suffered less (at least materially) as they could work at home, continue to be paid, and save income significantly. This has led to a house purchase boom as these households looked to change their lifestyles. At the same time, zero percent interest rates and cheap credit allowed financial institutions to make hay, and billionaire wealth rocketed as stock and bond markets hit historic highs.
But for most manual workers in the cities and youth in low-paid service industries, the pandemic slump was a disaster and the “recovery” offers little prospect of returning to “normal.” And it’s the advanced capitalist and East Asian economies that are recovering best in 2021–22. The Global South suffered hugely in the pandemic, with record levels of excess deaths and a massive rise in unemployment and poverty levels. Fiscal support from governments was limited, and the rollout of vaccines to get economies going is grossly inadequate. Estimates are that the target vaccination levels in these countries will not be achieved until 2023–24! So, what we are going to see is the major capitalist economies of the West and China returning to prepandemic levels of national output by the end of this year or in 2022, but Latin America, Africa, and South Asia failing to do so.
But it’s in the nature of a sugar rush that, once the energy burst expires, you slump back into exhaustion. And that is likely to happen to the major economies. The pandemic fiscal packages introduced by various G7 governments including, of course, by the Biden administration, were emergency measures to avoid complete meltdown. Biden’s fiscal packages have been heralded as a sea change in government policy, a return to Keynesian macro-management and stimulation of capitalist economies. In addition, an idea long excluded by mainstream policy has now become acceptable: fiscal spending financed not by the issue of more debt (government bonds) but by simply “printing money” (that is, by a central bank depositing money in the government’s account).
But this fiscal stimulus does not signify a major change of ideology or policy by major governments. Leave aside the fact that Keynesian stimulus and macro-management was mainly a myth anyway, and really the product of a war economy after 1945 which was ditched in the mid-1970s. Instead, consider the actual impact of the Biden packages. The latest estimate by Goldman Sachs is that, after all the machinations of Congress by the end of this year, the Biden package will be equivalent to less than 1 percent of US GDP each year for the rest of Biden’s term. And Biden is going to pay for these partly by increasing taxation by 0.75 percent of GDP a year.18 “US Economics Analyst: A Status Check on Fiscal Policy (Phillips),” Goldman Sachs, June 21, 2021, https://www.gspublishing.com/content/research/en/reports/2021/06/21/58f27ab1-0136-47bd-bba7-ccff558c4a71.html.
Given that the best estimates of so-called multiplier effects on GDP from fiscal stimulus are about one,19 Editors Note: A multiplier effect of one means that every dollar of additional government spending generates roughly one additional dollar in economic output. the net effect of the Biden packages, if fully implemented, might boost US real GDP growth by 0.25 percent a year. The current forecast for long-term US real GDP growth is just 1.8 percent a year. Indeed, in a very recent study, the multiplier effect of fiscal stimulus packages only reduced the global output loss from the pandemic slump by 8 percent.20 Pierre Olivier Gourinchas et al., “Fiscal Policy in the Age of Covid: Does it ‘Get in All of the Cracks?’” August 2, 2021, https://www.kansascityfed.org/documents/8325/JH_paper_Gourinchas_2.pdf. “Fiscal policy from all countries lifted real output by close to 1 percent of GDP in advanced economies and by only 0.23 percent of GDP in emerging markets. Since real output declined by close to 7.9 percent from Non-Covid to Covid with policy … this number tells us that fiscal policy offset only 0.67/(7.9+0.67) = 7.8 percent of the decline in real output due to Covid (10.8 percent for AE and only 3.9 percent for EM).”
What Keynesian fiscal stimulus theory ignores is the crucial factor: the social structure of capitalism. Under capitalism, production and investment is for profit, not to meet the needs of people. Profit, in turn, depends on the ability to exploit the working class sufficiently compared to the costs of investment in technology and productive assets. It does not depend on whether the government has provided enough “effective demand.”
As Michael Pettis put it: “If the government can spend these additional funds in ways that make GDP grow faster than debt, politicians don’t have to worry about runaway inflation or the piling up of debt. But if this money isn’t used productively, the opposite is true.” He adds:
creating or borrowing money does not increase a country’s wealth unless doing so results directly or indirectly in an increase in productive investment… If US companies are reluctant to invest not because the cost of capital is high but rather because expected profitability is low, they are unlikely to respond to the trade-off between cheaper capital and lower demand by investing more.21Michael Pettis, “MMT Heaven and MMT Hell for Chinese Investment and U.S. Fiscal Spending,” Carnegie Endowment for International Peace, October 11, 2019, https://carnegieendowment.org/chinafinancialmarkets/80054
You can lead a horse to water, but you cannot make it drink. The historical evidence shows that the so-called Keynesian multiplier has limited effect in restoring growth, mainly because it is not the consumer who matters in reviving the economy, but capitalist companies.22 Veronica Guerrieri et al., “Macroeconomic Implications of Covid–19: Can Negative Supply Shocks Cause Demand Shortages?” MIT Economics, April 2, 2020, https://economics.mit.edu/files/19351. There is little reason to believe that it will be more effective this time round.
If the Biden package will have a limited effect on the US economy, any spillover effect into other economies will be even less. The EU is also planning an economic recovery package that will boost government funds in EU countries with already large debt burdens like Italy and Spain. But again, the impact on the capitalist sectors of these economies will be minimal. Japan is about to announce a fiscal package that aims to “balance the books” over the next decade—hardly stimulus then!
Apart from China, Vietnam, and the small East Asian states, the Global South has little prospect of any fiscal stimulus or economic recovery. Most estimates from international agencies are that these economies will not recover to prepandemic GDP levels before 2023 and will never recover to prepandemic trajectories of economic growth. There is a permanent “scarring” of these weak peripheral capitalist economies.
Roaring Twenties or Long Depression?
There is much talk in optimistic mainstream economic circles that after Covid, just as after the 1918 flu epidemic and the end of the first world war, there is going to be another Roaring Twenties. Like Covid, that flu was a virulent contagion which not only killed hundreds of thousands of Americans from the fall of 1918 to the spring of 1919, but also shuttered businesses from coast to coast. Just like Covid now, this calamity plus the end of the first world war laid the basis for a severe recession in the US and other major economies in Europe during 1920 and 1921.
The 1920–21 slump was hard, but it was efficient in creating the conditions for a new period of fast growth—the deadwood of capital was burnt and cleared, and new shoots emerged. After 1921, the US not only recovered but entered a decade of growth and prosperity. The Roaring Twenties was on. From 1921 to 1929, real GDP rose 42 percent; and real GNP per capita grew 2.7 percent per year between 1920 and 1929.
By both nineteenth and twentieth century standards, this was a relatively rapid rate of growth—and certainly rapid by twenty-first century standards. There was a wave of technological advances—widespread electrification of homes and factories, the introduction of household appliances like refrigerators and washing machines, rapid adoption of the automobile, the growth of commercial radio stations and cinemas. All these technologies had been on the horizon during World War I and now they took off in commercial application. Labor productivity grew more rapidly during the 1920s than in the previous or following decade. Similarly, “capital productivity” (that is, output per unit of investment in means of production) had declined in the decade previous to the 1920s. But it increased sharply during the 1920s as, particularly, developments in energy and transportation accelerated. In that decade, labor productivity growth averaged over 5 percent a year and capital productivity rose over 4 percent a year (Figure 8).
Figure 8: Average Annual Rates of Labor Productivity and Capital Productivity Growth
Average Annual Labor Productivity Growth
Average Annual Capital Productivity Growth
Source: Devine (1983), Table 2. The average annual percentage rates of growth are calculated as instantaneous rates of change.
However, the 1920s investment and productivity boom resulted from some key factors that may not emerge now. First, there was a significant rise in the profitability of capital after the slump of 1920–21, incentivizing capitalist firms to introduce the new technologies and to expand commercial production of new use-values (consumer products). Duménil and Lévy, from their historic work on profitability in the US since the American Civil War, show that during the deep recession of 1920–21, the profitability of capital fell 44 percent in the UK, 38 percent in Sweden and just 9 percent in the US. But in the Roaring Twenties, profitability rose 14 percent in the US, 75 percent in the UK, 8 percent in the Netherlands and 31 percent in Sweden (Figure 9).23 Gérard Duménil and Dominque Lévy, “The Historical Trends of Technology and Distribution in the U.S. Economy. Data and Figures (Since 1869),” Centre pour la recherche économique et ses applications, http://www.cepremap.fr/membres/dlevy/dle2016e.pdf.
Figure 9: Rate of Profit on Capital Stock (percent change)
Source: http://www.cepremap.fr/membres/dlevy/dle1994e.pdf; author’s calculations
Rising profitability for capital boosted investment into new technologies that raised the productivity of labor. But surprise! Surprise! This did not translate into a Roaring Twenties for labor. Indeed, this was the second factor that drove up profitability: increased exploitation at the expense of real wages. While labor productivity grew over 5 percent a year, average real wages for skilled and unskilled workers rose just 3 percent a year from 1921 to 1929, and if you include the recession years 1920–21, then real wages rose only 1 percent a year during the 1920s. At the same time, union membership plummeted, leaving workers exposed directly to “free market” forces in the labor market. Indeed, inequality of income and wealth rose sharply. Per capita GDP rose from $6,460 to $8,016 per person, but this prosperity was not distributed evenly. In 1922, the top 1 percent of the population received 13.4 percent of total income. By 1929, it earned 14.5 percent.
Then there is the third factor peculiar to the US in the 1920s compared to the 2020s. The US was by far the strongest capitalist economy after World War I.24Gene Smiley, “The U.S. Economy in the 1920s,” Economic History Association, https://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/. During the war, the federal government poured money into the economy, and the country avoided devastation, unlike Europe. Previously a debtor nation, the US emerged from the war as the chief global lender and arguably the strongest and most vibrant economy in the world. During the 1920s, the US produced almost half the world’s output.
Despite all these positives for capitalism in the 1920s, the boom came to an end—not with a whimper but with a bang in the financial crash of 1929, heralding the Great Depression of the 1930s. There was no permanent expansion. As Marxist economic theory argues, capitalist production does not proceed in a harmonious way and with sustained expansion, but instead is subject to regular and recurring crises because of the contradictions in capitalist accumulation expressed in the profitability of capital. In the US, the profitability of capital peaked in 1924, thereafter falling over 13 percent by 1929. As a result, capitalist investment switched from productive capital into “fictitious capital.” Just as in the credit boom leading up to the global financial crash of 2008–09, much of the skyrocketing wealth of the 1920s was increasingly built on a shaky foundation of easy credit and stock market speculation. This fictitious capital crashed in 1929, and a major slump ensued with many banks going under.
Creative Destruction or a War Economy
Can the Roaring Twenties after the 1918 flu epidemic be repeated in the 2020s after Covid? Will there be a new lease on life for the major capitalist economies that ends the “secular stagnation” (Keynesian) or the Long Depression (Marxist) of the last decade since 2010? Let us consider a Marxist model for creating a longish boom in capitalist production. A long boom would only be possible if there was a significant destruction of capital values, either physically or through price devaluation, or both.
Joseph Schumpeter, the Austrian economist of the 1920s, taking Marx’s cue, called this “creative destruction.” By cleansing the accumulation process of obsolete technology and failing, unprofitable capital, innovation from new firms could prosper. Schumpeter saw this process as breaking up stagnating monopolies and replacing them with smaller innovating firms. In contrast, Marx saw creative destruction as creating a higher rate of profitability after the small and weak were eaten up by the large and strong.
For Marx, there were two parts to “creative destruction.” There was the destruction of real capital “in so far as the process of reproduction is arrested, the labor process is limited or even entirely arrested and real capital is destroyed” because the “existing conditions of production…are not put into action.”25 Vladimiro Giacché, “Marx, the Falling Rate of Profit, Financialization and the Current Crisis, International Journal of Political Economy 40, no 3, Fall 2011. That is, firms close down plants and shutter equipment, lay off workers, and/or go bust. The value of capital is “written off” because labor, equipment and so forth are no longer used.
In the second case, it is the value of capital that is destroyed. In this case “no use value is destroyed.” Instead, “a great part of the nominal capital of society, i.e., of exchange value of the existing capital, is completely destroyed” and there is a fall in the value of state bonds and other forms of fictitious capital. This leads only to a “simple transfer of wealth from one hand to another” (from those who lose from falling bond and stock prices to those who gain). But it can also lead to the destruction of real capital, when it leads “to the bankruptcy of the state and of joint stock companies.”26Ibid.
Can we say that, in 2021, the Covid slump has sharply increased the profitability of capital in the major economies, or that it will continue to do so? At best, this remains a question unanswered; more likely, there will be no sustained rise in the profitability of capital in the major economies as there was after 1919. Second, far from the pandemic slump clearing away capital values so that new capital could sprout since 2009, there has been an unprecedented expansion of cheap credit money to support businesses, large and small.
The Long Depression since 2009 has been one where there has been no “creative destruction.” And this trend has continued during the pandemic phase. There has been no collapse in stock and bond prices or massive corporate bankruptcies. On the contrary, new record highs in financial and property assets have been reached nearly every week, while bankruptcy rates are near historic lows.
The pandemic slump has not led to the destruction of weak and unprofitable “joint stock companies” but to the opposite. There are yet more unprofitable, mainly small, businesses, staggering on and kept afloat by a wave of zero-interest cheap money pumped in by central banks. While these firms remain, they keep average profitability low, labor productivity growth weak, and unemployment down.
That is not the capitalist recipe to start a long boom. It’s true that the replacement of sectors of labor by robots and AI, and the reorganization of work to reduce costs could provide the ground for new investment and productivity growth. But it is likely to require another major slump before the end of the 2020s to deliver the prospect of increased profitability and the conditions to impose “disruptive technologies” on behalf of capital.
Given the likely failure of capitalist investment to deliver, what is needed to revive output, investment, and employment is something like a war economy. This slump can only be turned into a long boom with wartime-like measures, namely massive government investment, public ownership of strategic sectors, and state direction of the productive sectors of the economy. Keynes himself said that the war economy demonstrated that “it seems politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case—except in war conditions.”27 Quoted in Patrick Renshaw, “Was there a Keynesian Economy in the USA between 1933 and 1945?,” Journal of Contemporary History, July 1, 1999.In 1940, private sector investment was still below 1929 levels and actually fell further during the war. So, the state sector took over nearly all investment, as resources (value) were diverted to the production of arms and other security measures in a war economy.
But that is not what the Biden programs aim to do or what Roosevelt did with the New Deal in the 1930s. The historical evidence is that the New Deal did not restore a long boom for US capitalism. It took World War II to do that. Bossie and Mason explain that at the start of the war, all sorts of loan guarantee, tax, and other incentives were offered by the Roosevelt administration to the capitalist sector to begin with.28 Andrew Bossie and J.W. Mason, “The Public Role in Economic Transformation,” Roosevelt Institute, March 2020, https://rooseveltinstitute.org/wp-content/uploads/2020/03/RI_WWII_Working-Paper_202003-1.pdf. But it soon became clear that the capitalist sector could not do the job of delivering on the war effort as they would not invest or boost capacity without profit guarantees. Direct public investment took over and government direction was imposed.
The war economy did not “stimulate” the private sector, it replaced the “free market” and capitalist investment for profit. To organize the war economy and to ensure that it produced the goods needed for war, the Roosevelt government spawned an array of mobilization agencies which not only often purchased goods but closely directed those goods’ manufacture and heavily influenced the operation of private companies and whole industries. Federal spending rose from 8 to 10 percent of GDP during the 1930s to an average of around 40 percent of GDP from 1942 to 1945. And most significant, contract spending on goods and services accounted for 23 percent, on average, during the war.
Currently in most capitalist economies public sector investment is about 3 percent of GDP, while capitalist sector investment is 15 percent-plus. In the Second World War, that ratio was reversed. The Biden plans would just raise the government investment ratio (over ten years) to about 4 percent of GDP, even if fully implemented. Bossie and Mason conclude that:
the more—and faster—the economy needs to change, the more planning it needs. More than at any other period in US history, the wartime economy was a planned economy. The massive, rapid shift from civilian to military production required far more conscious direction than the normal process of economic growth.29Ibid.
As the Financial Times put it in an editorial entitled, “Bidenomics can preserve support for capitalism”:
Since John Maynard Keynes, the best case for state intervention has not been to abolish the market, but to preserve public support for it”;
“if implemented, Bidenomics would make life more burdensome for business and for high-earners, it might also avert a larger reckoning further down the line.”30 Editorial Board, “Bidenomics Can Preserve Support for Capitalism,” The Financial Times, October 22, 2020.
That’s the real aim of Bidenomics.
- The Economist, May 15, 2021.
- Robert Verity et al., “Estimates of the Severity of Coronavirus Disease 2019: a Model-based Analysis,” The Lancet 20, no. 6, June 2020: 669–77.
- A World at Risk, Global Preparedness Monitoring Board 2019 Annual Report, September 16, 2019.
- “In the Name of Innovation,” Corporate Europe Observatory, May 25, 2020,https://corporateeurope.org/en/in-the-name-of-innovation.
- “In the Name of Innovation: Executive Summary,” Corporate Europe Observatory, May 25, 2020, https://corporateeurope.org/sites/default/files/2020-05/IMI-BBI-executive-summary-final_2.pdf.
- Jacob Assa and Cecilia Calderon, “Privatization and the Pandemic,” Developing Economics, June 21, 2021
- “Weekly Trends,” Worldometer, https://www.worldometers.info/coronavirus/#countries.
- Clive Cookson, “‘Long Covid’ Symptoms Can Last for Months,” The Financial Times, October 15, 2020.
- World Economic Outlook Update June 2020, International Monetary Fund, June 2020, https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020.
- World Trade Report 2020, World Trade Organization, 2020, https://www.wto.org/english/res_e/publications_e/wtr20_e.htm.
- World Economic Outlook Update, January 2021, International Monetary Fund, January 2021, https://www.imf.org/en/Publications/WEO/Issues/2021/01/26/2021-world-economic-outlook-update.
- Ammar Ali Jan, “The IMF is Using the Debt Crisis to Hollow Out Pakistan’s Sovereignty,” Jacobin, April 14, 2021.
- World Employment and Social Outlook: Trends 2021, International Labour Organization, June 2, 2021, https://www.ilo.org/wcmsp5/groups/public/—dgreports/—dcomm/—publ/documents/publication/wcms_795453.pdf.
- Balatti et al., “Did Quantitative Easing Only Inflate Stock Prices? Macroeconomic Evidence from the US and UK,” January 2017, http://reparti.free.fr/balatti17.pdf.
- Connor, “Does Quantitative Easing Contribute to Income Inequality?” Seven Pillars Institute, August 26, 2013, https://www.sevenpillars
- Michael Roberts, “Multiplying Multipliers,” The Next Recession, January 13, 2013, https://thenextrecession.wordpress.com/2013/01/13/multiplying-multipliers/.
- John Plender, “The Case for Continuing Quantitative Easing is Hard to Fathom,” The Financial Times, August 19, 2021.
- Fiscal Monitor, International Monetary Fund, April 2021, https://www.imf.org/en/Publications/FM/Issues/2021/03/29/fiscal-monitor-april-2021.
- “US Economics Analyst: A Status Check on Fiscal Policy (Phillips),” Goldman Sachs, June 21, 2021, https://www.gspublishing.com/content/research/en/reports/2021/06/21/58f27ab1-0136-47bd-bba7-ccff558c4a71.html.
- Editors Note: A multiplier effect of one means that every dollar of additional government spending generates roughly one additional dollar in economic output.
- Pierre Olivier Gourinchas et al., “Fiscal Policy in the Age of Covid: Does it ‘Get in All of the Cracks?’” August 2, 2021, https://www.kansascityfed.org/documents/8325/JH_paper_Gourinchas_2.pdf. “Fiscal policy from all countries lifted real output by close to 1 percent of GDP in advanced economies and by only 0.23 percent of GDP in emerging markets. Since real output declined by close to 7.9 percent from Non-Covid to Covid with policy … this number tells us that fiscal policy offset only 0.67/(7.9+0.67) = 7.8 percent of the decline in real output due to Covid (10.8 percent for AE and only 3.9 percent for EM).”
- Michael Pettis, “MMT Heaven and MMT Hell for Chinese Investment and U.S. Fiscal Spending,” Carnegie Endowment for International Peace, October 11, 2019,
- Veronica Guerrieri et al., “Macroeconomic Implications of Covid–19: Can Negative Supply Shocks Cause Demand Shortages?” MIT Economics, April 2, 2020, https://economics.mit.edu/files/19351.
- Gérard Duménil and Dominque Lévy, “The Historical Trends of Technology and Distribution in the U.S. Economy. Data and Figures (Since 1869),” Centre pour la recherche économique et ses applications,http://www.cepremap.fr/membres/dlevy/dle2016e.pdf.
- Gene Smiley, “The U.S. Economy in the 1920s,” Economic History Association, https://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/.
- Vladimiro Giacché, “Marx, the Falling Rate of Profit, Financialization and the Current Crisis, International Journal of Political Economy 40, no 3, Fall 2011.
- Quoted in Patrick Renshaw, “Was there a Keynesian Economy in the USA between 1933 and 1945?,” Journal of Contemporary History, July 1, 1999.
- Andrew Bossie and J.W. Mason, “The Public Role in Economic Transformation,” Roosevelt Institute, March 2020, https://rooseveltinstitute.org/wp-content/uploads/2020/03/RI_WWII_Working-Paper_202003-1.pdf.
- Editorial Board, “Bidenomics Can Preserve Support for Capitalism,” The Financial Times, October 22, 2020.