On the economy, the hammer and the dance - Adam Tooze in LRB:
'Meanwhile, people who actually do the sums were arriving at terrifying conclusions. If this was a true pandemic the entire world economy was heading over a cliff. Industry, services and the transport network that connects them would come to a standstill. The common denominator in this system is energy. As 2020 began, amid the clamour about climate change, the major oil producers had reason to believe they were entering the endgame for fossil fuels. Anticipating a big fall in demand because of the shutdown in China, Riyadh spent February pleading with Moscow for a cut in production. The Russians refused. Who, after all, would benefit if they and the Saudis cut output? It would be America’s upstart shale industry – on which the hawks in Washington DC rest their hopes of ‘energy dominance’. Faced with that prospect, Moscow was only too happy to see America’s oil industry broken on the anvil of the pandemic. On Saturday, 7 March Riyadh announced that it was opening the taps. Prices plunged.
It was over that weekend that confidence in the market finally snapped. The historic collapse in oil prices drove home the magnitude of the coronavirus shock. As trading began in Asia on the morning of Monday, 8 March it was clear that a massive sell-off was underway. Over the next two weeks markets collapsed. Everything sold. The dollar surged, threatening to crush those who had borrowed dollars. To halt the wave of panic-stricken selling, the Fed has propped up every major domestic credit market. At the same time it has extended dollar liquidity to the major centres of global finance through the network of liquidity swap lines, which enable an inner circle of 14 central banks to swap their currencies for dollars. In addition, central banks around the world will now be allowed to borrow against Treasuries they hold in their foreign exchange reserves – anything to prevent central banks selling them off. After initial hesitation, the ECB has unleashed a huge asset-buying programme. Both the ECB and the Fed are making interventions at a far greater rate than at any time since 2008. For the Bank of England, the critical moment came on 17-18 March. As the UK government floundered for a policy, sterling plunged and the gilt market became disorderly. To stabilise prices and push down yields the bank adopted a massive discretionary bond-buying programme. In 2012 Mario Draghi’s admission that the ECB would do ‘whatever it takes’ to save the euro was the climax of more than two years of political and economic struggle. This time around it was the first principle of central bank intervention.
The massive response of the central banks has stopped the panic. But we are only at the start of the shutdown. Every day brings news of corporate downgrades, which will progressively tighten the supply of credit. The recessionary spiral is only just beginning. In the US the unemployment numbers released on 26 March and 2 April were unlike anything seen before: 3.3 million people registered for benefits in the first week and 6.6 million in the second. Even worse is expected in the days and weeks to come.
Forecasting at this point is little more than a guessing game. What is clear is that the virus has become a brutal test of the ability to formulate, design and implement a coherent response to crisis. One measure of success will be the economic cost, as measured in jobs lost and GDP foregone. The other will be Covid-19 deaths per head of population.
The strategy of hitting the epidemic hard and fast, then seeking to curtail further outbreaks over the longer term – ‘the hammer and the dance’, it has been called – is what has actually been achieved so far in China, South Korea, Hong Kong, Taiwan and Singapore. As laid out in Xi’s address to the Politburo on 3 February, China’s response has amounted to a comprehensive mobilisation of the entire technical, economic, political and social apparatus of the regime. Its effort to enforce social distancing involved an army of supervisors, monitors and paramilitary police forces. Scaled to the size of a city like London or New York, the equivalent would be a force of fifty thousand underlings – something like the entire uniformed strength of the NYPD including auxiliaries – devoted exclusively to controlling the epidemic. South Korea, Singapore and Taiwan have deployed more high-tech, less suppressive approaches. All these countries have markedly slowed the epidemic and begun the return to normality. How far this return can proceed depends largely on the locomotive power of the Chinese economy. So far China’s stimulus has been muted, especially when compared to its heroic effort in 2008. The country today is richer but more constrained than it was then. The anxieties that dogged its policymakers before Covid-19 have not gone away. They still have to contend with a fragile banking system, over-indebted corporations and the burden of unproductive infrastructure – and they remain haunted by the memory of 2015, when the Chinese currency was under serious pressure.'
The options for the EU are grim. Those facing the US may be even worse. To fight the implosion of the economy Congress passed a truly remarkable $2 trillion stimulus package – far larger than the resources mobilised in 2008-9, and arranged far more quickly. The cheques to be sent to most families in America are a watered down and temporary form of universal basic income. The loan schemes include provisions to protect workers who are still in their jobs, and to cap the excessive management compensation and share buy-backs with which corporate America has been rewarding the wealthiest in society. But more radical and systemic proposals, which might actually have gone some way to covering the trillions of dollars in lost income suffered as a result of the shutdown, were stymied. No doubt such proposals fell victim to the bargaining between Nancy Pelosi, the Speaker of the House, and her Republican counterparts, but the truth is that they were unrealistic given the workings of America’s administrative machine, whose inadequacies are themselves a result of America’s divided politics. Why, for instance, does the US not have a national unemployment insurance system? To avoid attacks by conservatives, states and judges. Instead, it makes do with a patchwork of state-level systems, many of which are carefully designed to hold the ‘recipiency rate’ below 20 per cent of those who should in principle qualify for benefits. It is not a system on which you would want to rely when your economy is on life-support.
The crisis once again confirms the position of the Federal Reserve at the centre of economic governance. There is a new mechanism for co-operation between the Fed and the Treasury that can absorb up to $450 billion in losses on Fed lending. Given that most loans will be repaid, this provides the Fed with enormous firepower. But it cannot address what is actually the decisive force in the crisis, namely the epidemic. Less than 10 per cent of the stimulus spending is for the healthcare sector, yet funds are desperately needed to patch up a system which, even as it is driven beyond maximum capacity, is threatened with financial collapse. America’s best hospitals are good at high-tech, high-fee medicine. But fighting the coronavirus requires comprehensive suppression and mass treatment of respiratory disorders. That is not what America’s overly bureaucratic system is designed to deliver. States like California and cities like New York are rich and relatively well equipped to respond to the emergency. But next in line are impoverished, beaten-up New Orleans, and Detroit, only recently escaped from bankruptcy. Individuals are resorting to solutions of their own. As the epidemic exploded in New York, Manhattan’s Upper East Side emptied out, as the rich fled to their beach houses or country estates in the hills upstate. In red states there has been a run on ammunition stores. It’s not for killing the virus: the Twitter feeds of the gun lobby warn of marauding bands of prisoners being released by liberal governors from America’s overcrowded, unsanitary prisons.'
'Trump thus personifies something that is in fact common to Europe and the US: a lack of leadership at the level appropriate to dealing with a pandemic. Instead, the job has devolved to regional governors in the US and national governments in Europe, to desperately overstretched medical services, on the one hand, and the technicians of economic policy and social relief, on the other. Meanwhile, hundreds of millions of individuals and their families cope as best they can. As with climate change, we are left praying for a deus ex machina in the form of a scientific breakthrough.'
Read the article here.
Creative destruction, I'm afraid are just other words for deus ex machina. Yes, there are victims, thanks also to the incompetent leaders put in power by an electorate that appears to love incompetence - the alternative, Chinese authoritarianism, is worse.