On March 3, the US financial markets officially entered a bear market. A bull market is up. A bear market is down. CBS News declared “the 11-year bull market is dead”.
There is no doubt that the coronavirus pandemic marks the moment when it happened. There is little doubt that a recession will follow. A recession is technically defined as a decline in GDP that lasts more than a few months.
In six months, we will, in all probability, look back and say that it started now. Politicians, pundits, and especially economists, will say the virus was the cause of both.
Some will blame China, Donald Trump; others, like Trump himself, will blame Barack Obama. Yet, all will still put COVID-19 at the centre.
The attempts to bring the pandemic under control by these quasi-quarantines of everything, of entire countries, will have real effects. Predictions are that airlines could lose over $100bn.
US tourism could lose $24bn, with a possible cut of 825,000 jobs.
The job losses will ripple out to everything the newly unemployed would use or buy. The music business could lose five billion dollars.
Disruption in one nation becomes a disruption of business in other countries.
For example, Hyundai stopped making cars in South Korea because they can’t get components in China. On and on. Until it adds up to a loss of $1.5 trillion just in the world stock markets. It could cost the world economy some $2.7 trillion.
Still, it would be more accurate – and therefore more useful – to say that the market crash followed by a recession – was the inescapable result of economic policies. If not COVID-19, then something else could have cued it. Maybe less dramatic. Maybe less severe. But still inevitable.
We have a whole set of bubbles: stock market, corporate borrowing, real estate, student debt, and government debt. Combined, they are a bubble so big they had to pop.
They were created by tax cuts, most recently by Trump’s, on top of Bush’s, which lingered on through the first six years of Obama, and then were only slightly modified. The Federal Reserve, and also other central banks, released a flood of cheap money as a response to the financial crash of 2008. Notably, it went only to the financial sector and to the biggest institutions. And it never stopped.
The delusional chimaera of austerity led to lower investment in the public good, while its companion beast, privatisation, promoted profiteering and borrowing – in the US, particularly for higher education.
Not only did this create vulnerability, but it also left governments, especially in the US, without the resources – financial, institutional, and intellectual – to respond in the most meaningful ways and with enough power to counteract the economic weight of the pandemic.
Trump’s stumbling, mumbling, prevaricating responses to the crisis have revealed that America had disinvested in science and medicine. This was, of course, partly to give more money to corporations and the rich. It was also because science, especially medical science, was seen as a threat to specific industries like coal, oil, guns, chemicals, and so on.
Those specific resistances created a general disposition among pro-business politicians and right-wing ideologues to diminish and disregard science.
There have been long-standing warnings of the likelihood – almost to a certainty – of a pandemic, as well as movies about them. In 2014, in response to the Ebola epidemic, Obama created a new office and committed funds to develop federal and international responses. Along came Trump and the Republicans, the office was closed and the funds taken back.
More long-standing is the belief on the part of Republicans and some Democrats and most mainstream economists that government spending takes money from the real economy and that the only good fiscal stimuli are tax cuts and low interest rates. These are the policies pursued even by Obama, with only the most minimal stimulus by spending. It increased income inequality under him, and it helped build the bubble that is bursting now.
The intellectual and theoretical set of beliefs that say that cutting taxes for the rich is wrong – not morally wrong, but wrong for a successful economy – barely exists. A set of ideas on how public spending can improve the economy and how to do it, barely exists. Where it does, it is laden with moral rhetoric and treated with contempt.
The most obvious way to keep the economy afloat is for the government to spend money, investing in it. This idea was proposed by British economist John Keynes during the Great Depression. He argued that putting public money into the economy, creating jobs and maintaining workers’ income are the best way to stimulate demand and encourage economic activity of the private sector in a time of recession.
This requires deficit spending. Deficits are a side effect to be tolerated, not the goal.
Since then, some have flipped the idea, saying that it is the deficits themselves that make the magic of stimulating economies and, therefore, it is just as good, probably better, to create them by cutting revenue.
They came to believe this because it does not matter if the deficits are created by subtracting from the revenue side or adding to the spending side in an equation. However, in the real world, where the money goes does matter. With tax cuts, it always goes to the top. It has been tried multiple times, and it always creates bubbles.
Republican political theology is that deficits caused by spending on the public good are The Road to Serfdom, the highway to hell, and must be fought to the death. Deficits produced by reducing revenue, however, do not matter. They can be applauded, lauded, and loved. Under Trump, previously unimaginable deficits have already been created, topping one trillion dollars in 2019.
Many policymakers believe that the way to goose the economy amid crisis is to pump out lots of money.
The Federal Reserve has already announced that it will make an extra $1.5 trillion in loans available to anyone big enough to talk to them. It has also cut the interest rate to a range of 0.25 percent to 0.0 percent. Free money. For the biggest institutions.
We have been doing that since 2008, and it all goes to the big banks and then to speculators.
But there is also recognition, at least in some circles, that it does all go to the top and there is not much more goosing left in doing it.
In the light of this, it is remarkable that House Speaker Nancy Pelosi has been able to work with Secretary of the Treasury Steven Mnuchin to produce a bill that is both useful and sane.
It directs relief and support almost entirely to the bottom – in the US that means the bottom 90 percent. It will pay for testing, food for children out of school and sick leave for a wider range of workers, although not all. All of that is very good and should be commended.
However, it is nowhere near enough to rescue the American and world economies from the costs of containing COVID-19. Some 40 percent of Americans cannot cover a $400 emergency, and 17 percent already cannot cover their monthly bills.
How many of them are going to be put out of work, or have their hours cut, or need to pay for child care when schools are closed or the relatives they depend on get sick? How many small businesses that depend on big businesses and their employees as paying customers will fail?
Yes, COVID-19, is a real disaster. Yes, attempting to contain it will be unbelievably costly.
The coronavirus is the moment. But the crash was coming even if COVID-19 had not. There needs be a bubble for a bubble to pop, and that bubble was created by economic policies.
It seems that a recession, a severe one, must necessarily follow all these stoppages and quarantines. It will, therefore, require extraordinary measures to counter it, including rapidly expanded healthcare, immediate supplemental income for lost employment, massive public employment to make up for the lost jobs and failed businesses.
If the American response to the Great Recession – trillions to the bankers, nothing to people – and the European response – austerity – are any guide, not nearly enough of the right stuff will happen.