The coronavirus (COVID-19) public health emergency is rapidly turning into an economic crisis engulfing both core and periphery of the world economy. The unfolding economic crisis casts a harsh light on contemporary capitalism. It has dramatically changed the balance between state and market, once again exposing the emptiness of neoliberal ideology.
This crisis has deeper roots in the diseased workings of financialised and globalised capitalism over the past decade. The Great Crisis of 2007–9 brought an end to the 1990s-2000s “golden era” of finance, and the years that followed were marked by poor growth at the core of the world economy. Profitability was weak, productivity growth was low, and investment showed no dynamism at all. Finance was also in trouble, exhibiting lower profitability and none of the extraordinary dynamism of the previous decade. Where the historically unprecedented crisis of 2007-9 marked the peak of financialisation, the coronavirus crisis crystallises its deterioration.
The immediate spur for the crisis owed to nation-states’ actions when faced with the epidemic. Having initially ignored the medical emergency, several states frantically locked down entire countries and geographical areas, restricting travel, closing schools and universities, and so on. This hit hard the already weakened core economies by inducing a wholesale collapse of demand, disruption of supply chains, falling production, millions of worker lay-offs and loss of corporate revenue. All this spurred an unprecedented nose-dive of major stock markets and panic conditions in the money markets.
It is remarkable that several advanced countries lacked the basic health infrastructure to treat those who became seriously ill with the coronavirus, while also being short of equipment to test the population on a large scale and to protect those most likely to catch the disease. The lockdown and wholesale isolation of huge sections of society are, moreover, likely to have very severe implications for wage workers as well as the poorest, the weakest, and the most marginal layers of society. The mental and psychological repercussions will be devastating.
Equally striking, however, have been even powerful states’ actions after the magnitude of the unfolding economic collapse became clear. In March, the central banks of the USA, the EU, and Japan engaged in massive liquidity injections and brought interest rates down to zero, attempting to stabilise stock markets and assuage the shortage of liquidity. The US Federal Reserve, for instance, announced that it would buy unlimited volumes of government bonds and even freshly issued private corporate bonds. Governments in the USA, the EU and elsewhere, meanwhile, planned massive fiscal expansions, taking the form of loan and credit guarantees for companies, income subsidies for affected workers, tax deferrals, social security deferrals or subsidies, debt repayment holidays, and so on.
In an extraordinary move, the Trump administration announced plans to provide $1,200 per adult, or $2,400 per couple, with additional payments for children, starting with the poorest families. This disbursement was part of a package which could exceed $2tr — roughly 10 percent of US GDP — further providing $500bn of loans to stricken businesses, $150bn to hospitals and healthcare workers, and $370bn of loans and grants to small and medium enterprises. In an equally extraordinary move, Britain’s Tory government declared its intention effectively to become the employer of last resort by paying up to 80 percent of workers’ salaries, if companies kept them on their payroll. These payments would be worth up to a maximum of £2,500 per month — just above the median income. The British government also effectively nationalised the railways for six months.
Just days earlier, even left-wing academics would have considered these measures to be radical. The shibboleths of the neoliberal ideology of the last four decades were rapidly swept aside, and the state emerged as the regulator of the economy commanding enormous power. It was not difficult for many on the Left to welcome such state action, thinking that it indicated the “return of Keynesianism” and the death knell of neoliberalism. But it would be rash to come to such conclusions.
The nation-state has always been at the heart of neoliberal capitalism, guaranteeing the class rule of the dominant corporate and financial bloc through selective interventions at critical moments. Moreover, these interventions were accompanied by strongly authoritarian measures, shutting people inside their homes en masse and locking down enormous metropoles. The state has also demonstrated its vast power to police society by collecting information through big data. And, it remains unclear what direction global capitalism will take as it reels under the shock of coronavirus. The colossal power of the state and its ability to intervene in both economy and society could result, for instance, in a more authoritarian form of controlled capitalism in which the interests of the corporate and financial elite would be paramount. We will have a better idea as the crisis unfolds in the next few months.
This blog is an abridged version of https://jacobinmag.com/2020/3/coronavirus-pandemic-great-recession-neoliberalism
- Professor Costas Lapvitsas is a Professor of Economics at SOAS.