The unexpected reckoning

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By RADHIKA DESAI*

The current pandemic will certainly be different from previous ones, but not because it is more lethal (it is not), nor because it is wreaking havoc on financial markets (like most crises of the neoliberal era), but because it is exposing the weaknesses, distortions and imbalances in the productive apparatus that neoliberalism shaped over four decades

It is perhaps auspicious that the seriousness of the coronavirus threat hit most of the Western world on the Ides of March, just at the traditional time of reckoning outstanding debts in ancient Rome. The past week had been a real roller coaster. The World Health Organization (WHO) had finally declared the spread of the virus a pandemic; the governments, in sequence, hastened to give an answer. The virus came to dominate the new news cycle, a multitude of misinformation and even misinformation appeared on social media. Cities and even entire countries were shuttered, markets of every imaginable type plummeted, and companies announced layoffs and production halts.

It was clear that whatever the origins, paths and lethality of the virus, now called Covid-19, would seriously test Western capitalism in its coping mechanisms. Almost certainly, they would be surprised and fail. After all, problems and imbalances have accumulated in the Western capitalist system over the past four decades, apparently since it took the neoliberal path out of the crisis of the 1970s. and crises it engendered.

During these decades, as an important analyst has shown, the western capitalist world started to gain time, through the accumulation of debts, both public and private. It thus sought, with its weak and narrow markets, to avoid the final reckoning, a problem that neoliberalism, with its relentless downward pressure on real wages, only exacerbated.

The 2008 crisis was just an earlier moment when the truth was revealed. However, this did not lead to a serious political reorientation, only a socialization of mountains of private debt. Lo and behold, the banks, considered “too big to fail”, were bailed out. As their executives were considered “too big to go to jail”, they maintained their previous practices. Only ordinary mortals lost their homes and jobs and had to face the miserable imposition of austerity in the name of consolidating government finances.

The current pandemic will certainly be different from previous ones, but not because it is more lethal (it is not), nor because it is wreaking havoc on financial markets (like most crises of the neoliberal era), but because it is exposing the weaknesses, distortions and imbalances in the productive apparatus that neoliberalism shaped over four decades.

Supposedly, neoliberalism was supposed to reinvigorate capitalism, restore the “animal spirits” of entrepreneurs, which were deadened under the pressure of the “dead hand of the State”. However, he was not capable of the feat. Growth rates over the last four decades have remained consistently below those of the post-war “statist” period, the “Golden Age” of capitalism. Rather, the system of production governed by Western capitalism was strained in at least three ways. Spatially, it encompassed the world. Temporarily, it has become fragile due to production “just-in-time“, as it started to operate with little or no stock and little financial room for maneuver to deal with contingencies. Finally, socially, it squeezed workers and small companies that supply inputs. These had to provide labor and products for lower wages and prices so that they bore all kinds of social and financial risks.

It is true that the disturbances caused by the virus, as well as the fight against it, which have already occurred or are still being awaited, are and will be costly: a large part of the world economy cannot stop for months without high costs. However, a healthy structure, with just a little fat to spare, would have held up much better than the current productive structure, which looks efficient but was already well-worn and highly weakened even before this reckoning.

The second week of March, when the WHO declared Covid-19 a “global pandemic”, witnessed unprecedented stress on world markets. Stock markets in the US suffered sharp declines, the biggest in a day since the 1987 crash. And this despite the Federal Reserve cutting interest rates and the promise to inject trillions of dollars into the system, made in the previous week. This was not a comfortable “fix”. Unusually, equity markets, typically considered riskier, were not alone. Less risky bond markets also suffered, as did “safer” asset markets such as US Treasuries and gold markets, as investors sought liquidity.

Furthermore, the suffering was not just financial. As country after country has imposed shutdowns and restrictions on travel, airlines, cruise lines, airports and other travel companies, along with much of the service sector, which is primarily based on face-to-face production and consumption , suffered closures, cuts and layoffs. Supply chains were disrupted and collapsing markets put pressure on production. Also, on another fault line, disunity occurred between OPEC and its allies, which led to an oil price cut war. US shale oil production, one of the brightest stars in the American economic firmament, has become uneconomical, has seen a bleak future as it depends on oil prices remaining high.

While the scale of the economic stress pointed to causes beyond the pandemic, it proved unlikely that neoliberal governments would not come to blame for the crisis. After all, previously, George Bush Jr. he had blamed September 11 for the period's recession, which began months earlier, and then began asking Americans to demonstrate their patriotism by making more purchases.

There are at least four distinct elements that Western capitalist societies ultimately need to recognize in the midst of “the worst public health crisis in a generation”.

The demand problem and monetary policy solutions

Most fundamental of all is the low level of aggregate demand – whether consumption or investment – ​​relative to productive capacity, which caused growth to slow down in the 1970s. Neoliberalism, as a favored solution in the West, not only failed to faced the problem, but made matters worse by facilitating financial “investment”, by reducing wages and government spending, ultimately increasing inequality. Public spending has only put money in the pockets of those who neither spend it on consumption nor invest it productively, but only further increase the vast sums circulating in the speculative asset markets. Reckoning with this problem was postponed, first, by increasing government borrowing to finance not much-needed social or welfare spending, but to increasingly obscenely reduce taxes on the rich and vast increases in spending. military, as well as increasing subsidies to companies. It was also postponed through the private debt that culminated in the 2008 crisis.

This economic growth brought about by these neoliberal policies was mainly due to the “wealth effect” created by asset price bubbles. This effect allowed only a small elite to increase their consumption. In the last twelve years in which the “austerity” regime prevailed, even this growth dried up, in such a way that the West recorded the lowest growth rates of the last four decades, a period in which neoliberalism prevailed. The neoliberal option has exhausted itself even as an anemic growth strategy. Demand forces in recent decades have been weak; new consumer and even investment demand emerged in China and other non-Western countries.

The demand shock caused by the current pandemic has worsened this already very bad situation. The inequalities accumulated over the neoliberal decades aggravated the spread of the pandemic. Now this, in turn, will deepen inequality and exacerbate the problem of effective demand.

Over the past decade, Western governments and central banks have found a new way to buy time for the capitalist system: the spectacle that is created by addressing growth problems through monetary policy alone. So they keep the public mesmerized while policymakers and pundits pull monetary rabbits out of their hats in ingenious, even bizarre ways – ever-lower interest rates, negative interest rates, quantitative easing (QE), bank policy guidance. central and other things – thus creating the impression that they are clearing the ground to save the world economy. However, it is all a trick: John Maynard Keynes long ago warned that the time would come when monetary policy would not be “sufficient by itself to determine an optimal rate of investment”, that is, an acceptable rate of growth. . Its effectiveness would become equivalent to the act of “pushing a rope”.

Now, all this talk about monetary policy only distracts the public's attention from fiscal policy, that is, increases in government spending and investment. While part of the financial press recognizes this problem, it fancifully imagines that a little fiscal effort in this regard will suffice. They forget that Keynes also bequeathed the following sentence: “I believe, therefore, that a comprehensive socialization of investment will be the only means of guaranteeing an approximation to full employment”. For Keynes, as is well known, full employment was the main objective of economic policy; well, it would not be an exaggeration to think that this would be a first step beyond capitalism and towards a better society.

It seems unnecessary to explain that what Keynes coyly called “a rather comprehensive socialization of investment” actually amounts to some kind of socialism. In it, governments struggle to make investments for the simple reason that the private sector is unable or unwilling to do so. In other words, the scale of fiscal activism needed to restore an acceptable level of growth, employment and demand will prove so effective that it will raise some fundamental questions. If capitalists are unable and unwilling to do the one thing that makes them tolerable, namely invest and produce employment, what is the use value of the capitalist class? Why should our democratic states leave them in control of the economy? Capitalism already reached this point at least a decade ago. The current crisis may make this point impossible to ignore.

Monetary policy misguided

While current monetary policy has diverted public attention from much-needed fiscal activism, it has done a great deal of damage in its own right. Lo and behold, it now seems to have exhausted even its perverse usefulness. The financial sector was the biggest beneficiary of neoliberalism's deregulation drive. It created adverse demand conditions as it sent funds to asset markets rather than to productive investments. Now, he faces the ruin of even his main accumulative objective.

The 1987 stock market crash was the first major financial crisis of the neoliberal era. Then-Federal Reserve Chairman Alan Greenspan responded to her by making an infamous play (called the “greenspan put”), whereby he essentially responded to the disappearance of liquidity. He refilled the cauldron with the precious liquid so that the speculation party could continue. Since then, the Federal Reserve and its western central banks have responded to financial crises with additional injections of liquidity, both through lowering interest rates and through more direct means of buying the banks' less liquid assets, an operation known as " quantitative easing”.

These practices were justified as necessary to restore investment, economic activity and employment. However, the only thing they restored was the ability of the financial sector to continue unproductive and inequality-exacerbating speculation. The result was a series of asset bubbles, which increased the fortunes of the top 1% and, to a lesser extent, the next 10%, causing great economic hardship for the 90% that stayed out, especially when they burst. The infamous sequence of outbreaks includes the stock market crash of 1987, the various financial crises of the early to mid-1990s that culminated in the East Asian financial crisis of 1997-8, the dot-com crash of 2000, and the from 2008.

As monetary policy continues to refuel the financial melting pot, the party has clearly become less merry. International capital flows, for example, remain 65% below their previous peak in 2008 – and this is despite central bank largess. Banks and financial institutions are now burdened by higher reserve requirements resulting from regulations that emerged in the wake of crises, despite their ineffectiveness in containing new crises. How much money would it take to turn the financial wheel today? The sheer scale of capital seeking returns can only reduce the margins they can earn – well, even weak regulation has already affected financial sector profits.

Even so, the past decade has seen a sizable stock market bubble that now appears to have burst. The emergency cut in interest rates made in the first week of March by the Federal Reserve, as well as the promise to inject trillions of dollars into the system, does not seem to have worked. As a result, he announced a further reduction in interest rates to near zero, as well as more asset purchases and the usual promise to “use your full range of tools”. With that move, the Fed used up all its ammunition. Since 2015, it had raised interest rates with the explicit aim of maintaining some firepower against the next crisis; when this happened, he would have room to reduce rates. In the last six months, it has used up all the accumulated ammunition, especially in March 2020. There is nothing left. Negative interest rates are hot winds. Even the most daring Europeans did not venture beyond -0,5%. Until recently, the Fed was unwilling to enter this desert. Even so, markets refused to respond the next day; they fell like stones in the morning in the east and at night in the west. All this has delivered a frightening verdict on the possibilities of monetary policy.

No matter how high asset valuations become in any speculative frenzy, no matter how much the Federal Reserve is able to create incentives, they are governed by the gravity exerted by the productive economy, by its objective needs and desires. The dot-com bubble had to burst due to the lack of value of many of its shares. The housing and credit bubbles burst in 2008 when interest rates had to be raised to preserve the value of the US dollar amid rising commodity prices. Now this has led to increases in house prices and thus to more and more mortgages, which have come to be worth more than the houses themselves. Currently, the fragile leverage of the stock market may have been revealed by the pandemic, but there are surely even deeper underlying problems.

Asset markets, which support speculation about the value of assets already produced, have grown in size over the last few decades and thus have far outstripped any reasonable proportion to productive activity – that is, to investment in production of new goods and services (which some call the “real” economy). In the current crisis, the relevant form of business consists of the following: Banks and financial institutions accept deposits from productive companies on the basis of the high quality of their financing. Under the impact of supply and demand shocks, however, productive companies have been withdrawing these deposits, even starting to take out loans. What's more, all the big corporations are doing all of this together, at once.

While this move did not trigger an immediate banking crisis, the problems may not be far off: as a Financial Times columnist recently noted, the very tightening of the Dodd-Frank Act and other post-2008 regulations, which made banks more resilient , require them to have a minimum level of such quality deposits. “The loss of these deposits strongly threatens the liquidity profile and regulatory compliance of the banks themselves. And this is happening even before the peak of downgrades from corporate standards arrives, which will create even more funding pressure.”

The Fed's liquidity supply is no longer working because what the economy needs is demand creation, both from the consumer and from investment; and this demand is necessary to restore and expand production. In the current circumstances of low spending and small private investment, the additional demand can only be provided by governments. Now, here is a problem for capitalism. On the one hand, without it, a widespread financial and economic crisis will not be far off. And it will go much deeper than the temporary drop in production and consumption that the pandemic alone could cause. On the other hand, if the government steps in and actually does what seems necessary, it will put a question mark over the future of capitalism.

A purposeful productive economy

As noted at the beginning, the productive system is very tense temporally, spatially and socially after four decades of neoliberalism; now he is reaching the point of reckoning. For about a decade after 1995, Western supply chains stretched endlessly and thus heavily included China. However, its growth was already slowing well before the 2008 crisis, thanks to a complex of factors, including the saturation of Western markets strangled by neoliberalism and rising wages in China. After 2008 and with the beginning of the austerity policy, moreover, the “free trade agreements” that were, in reality, agreements to facilitate foreign investment free of labor, environmental and other norms, began to be undone. Production began to return to the West. Despite the production of reams of literature arguing that Western wage and employment levels had nothing to do with trade, in reality trade agreements were affecting both, particularly for blue-collar workers in the West.

This discontent should have been mobilized by progressive factions, but it did not. What happened were decades of defamation of the left by the rising neoliberal right, as well as decades of contamination of traditionally left parties by right-wing ideas, possibly thanks to their own historical limitations. Thus, right-wing populism can exploit workers' dissatisfaction and suffering. Electoral tricks like Brexit and the trade wars, while doing nothing to solve the problems, further destabilized the already weakened global productive arrangements. The coronavirus epidemic has only accelerated the advance towards reckoning.

The Crisis of Crisis Management

The final component of this unpleasant cocktail concerns the mechanisms by which crises in capitalism are historically managed by the state and economic policy. Decades of neoliberalism have eroded both state political capabilities and broader reactionary forces in Western societies. Now, they can no longer be trusted to produce a coherent response to the current crisis, whether in controlling the pandemic in the short term or in reorienting the economy in the long term.

This can be well observed in the slowness of Western responses to the spread of the pandemic. After spending months looking for flaws in China's response, the West's response pales in comparison to that given by Beijing. The WHO-China Joint Mission Report on Coronavirus Disease 2019 (Covid-19) concluded the following:

Faced with a previously unknown virus, China launched perhaps the most ambitious, agile and aggressive effort to contain this type of disease in history. The strategy that supported this containment effort initially included a national approach through which universal monitoring of temperature, masking and hand washing was promoted. However, as the outbreak evolved and knowledge was gained, a broader approach based on science and implementation that considered the risks of spread was adopted. Specific containment measures were designed and implemented according to the provincial, municipal and even community context, the capacity of the environment and the nature of the new local transmission of the coronavirus.

In contrast, what we saw in the West couldn't have been darker. Consider the two leading neoliberal countries, the United States and the United Kingdom. In these two nations, four decades of neoliberalism have reduced state capacity, destroyed critical health institutions, and lost the best-prepared people. In both, the political classes lost their credibility and the political systems were disordered to such an extent that they allowed charlatans to occupy their highest political offices. How can these exhausted systems build political will and state capacity to deal with the unfolding crisis? Now, it is possible to conjecture that the pandemic is also testing the architecture of the euro zone.

In the USA, with a private medical system, based on private insurance and high costs, more commercial than scientific, they continue to give a random response, in which even the tests remain irregular, leaving the true scale of the pandemic a mystery. The UK, where decades of austerity had already left the National Health Service (NHS) unable to cope with annual flu outbreaks, sought to postpone containment measures, claiming it was seeking “herd immunity”. Now, that tactic was nothing more than a sanitized declaration of bankruptcy with a strong whiff of genocide. Considering that the pandemic would hit the poor the hardest, accepting that the virus would spread and that dozens of “beloved ones” would die, it was thought that only the strongest should survive. The logic of “let the poor devil get the worst of it” then followed. Throughout the Western world, the dominance of information systems based on private media has produced an enormous level of misinformation and misinformation, which has compounded the problems.

In addition, national-level disabilities are compounded by international rivalries and tensions, which make an internationally coordinated response difficult. The roots of the rivalries that characterize the XNUMXst century lie, of course, in the shift in the world's economic center of gravity away from the West. It was, of course, compounded by the West's slow growth in the neoliberal decades and the ability of China and other governments to escape or adapt to existing constraints. Long ago, the West began to react badly to this change: intensifying military and economic warfare against rivals. The rise of populism has only made matters worse.

Although the level of international cooperation after 2008 was exaggerated as the G20 efforts did little to alleviate the crisis. The coming of “America First” and Brexit certainly raised the level of discord. Trump's attempt to offer pharmaceutical companies "huge sums" for exclusive access to a coronavirus vaccine appears to be a downgrade in the behavior of Western nations. And it happened in the midst of a global crisis. Even learning from China's success has been resisted by most Western politics and media. Medical advances to arrive at successful treatment are not reported, much less discussed or adopted. Meanwhile, international sanctions regimes prevent demonized governments, such as those in Venezuela, from purchasing drugs for treatment.

If the coronavirus pandemic hit a healthy and harmonious world economy, it would have caused great damage, but the damage would be limited in time and space. However, it hits a world economy and a capitalist system already weakened by decades of neoliberalism. Its effect is, and will remain, inextricably linked to these underlying weaknesses. It should be clear from what has been exposed here that the situation contains great possibilities for progress to the left, a topic that I must leave for another time.

*Radhika Desai is a professor in the Department of Political Studies at the University of Manitoba (Canada).

Translation: Eleutério Prado.

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