Our normality is not returning
by Adam Tooze
[This article published in May 2020 is translated from the German on the Internet, Unsere Normalität kehrt nicht zurück | Blätter für deutsche und internationale Politik. Adam Tooze is a professor of history at Columbia University.]
The first impulse at the beginning of the corona-induced lockdown was a search for historical analogies - 1914, 1929, 1941? But in the weeks that have passed since then, one thing has become increasingly clear: the historical novelty of the shock we are experiencing. The economy is currently in almost free fall. If it continues to shrink at its current rate, in twelve months Gross Domestic Product (GDP) would be one-third lower than at the beginning of 2020. This rate of contraction is four times faster than during the Great Depression of the 1930s. Never before has there been such a crash landing. There is something new under the sun. And it is terrible.
Just a few weeks ago, in early March, unemployment in the USA was at a record low. But by the end of March it had already shot up to about 13 percent. That is the highest level recorded since the Second World War. The exact figure is unknown because the American system for registering unemployment was not designed to register such a rapid increase. For three consecutive Thursdays, the number of those who first applied for unemployment benefits jumped first by 3.3 million, then by a further 6.6 million and finally by 6.6 million in mid-April. At the current rate, according to economist Justin Wolfers, unemployment in the U.S. is rising by 0.5 percent per day[1] It is no longer inconceivable that it could have risen to 30 percent by the summer.
The Western economies are thus facing a far deeper and more brutal economic shock than they have ever experienced before. Normal business cycles usually begin with the more vulnerable sectors of the economy - real estate and construction, for example, or heavy industry that depends on corporate investment - or sectors that are in global competition, such as the automobile industry. Together, these sectors employ less than a quarter of the US workforce. Therefore, the cumulative downward trend in these sectors is only transmitted to the rest of the economy as a muted shock.
But the corona lockdown directly affects the services - retail, real estate, education, entertainment, restaurants - where 80 percent of Americans now work. So the result is immediate and catastrophic. In sectors like retail, which has recently come under severe pressure from online competition, the temporary lockdown could prove to be a permanent one. In many cases, the stores that closed in early March will not reopen. The jobs will be lost permanently. Millions of Americans and their families are facing a catastrophe.
Shocking prospects
This shock is not limited to the United States. Many European countries are cushioning the effects of the downturn with short-time working benefits. This will dampen the rise in unemployment. But the collapse of economic activity cannot be hidden. The north of Italy, for example, is not just a luxury tourist destination, but generates 50 percent of the national GDP. Germany's GDP is predicted to shrink more than that of the United States because Germany is being pulled down from its dependence on exports. In general, the latest forecasts of the Organization for Economic Cooperation and Development (OECD) are apocalyptic throughout. Japan could be hit hardest, although the virus had only a moderate impact there as of mid-April.
In rich countries like these, we can at least try to estimate the damage. China was the first country to issue a shutdown on 23 January. According to the latest official figures, China's unemployment is 6.2 percent, the highest figure since records began in 1990, when the Chinese Communist Party hesitantly admitted that unemployment is not just a problem of the capitalist world. But this figure is clearly a gross understatement of the crisis in China. Unofficially, no less than 205 million migrant workers may have been sent on forced leave, more than a quarter of the Chinese workforce.[2] How to quantify the damage to the Indian economy caused by Prime Minister Narendra Modi's abrupt shutdown remains to be seen. Of India's 471 million working population, only 19 percent are entitled to social benefits, two thirds do not have a formal employment contract, and at least 100 million are migrant workers[3] Many of them were sent back to their villages in a hasty flight.
Since the division of the country in 1947 there has been nothing comparable.
The economic aftermath of these enormous human dramas defies all calculation. All that remains is the monotonous but no less remarkable statistic that this year - the first time since the Second World War that reasonably reliable records of GDP have been calculated - the emerging markets will shrink. A whole model of global economic development has come to a sluggish halt.
Averting the financial crisis
This collapse is not the result of a financial crisis. It is not even the direct result of the pandemic. Rather, it is the result of a deliberate political choice, which is itself a radical novelty. It shows that it is easier to stop an economy than to stimulate it. But the efforts being made to cushion the impact are also unprecedented in history. In the United States, in the very first days of the shutdown, Congress passed a stimulus package that is by far the largest that America has ever seen in peacetime. Worldwide, the money tap was turned on. Fiscally conservative Germany has declared a state of emergency and lifted its limit on public debt. All in all, we are seeing the greatest combined financial effort since World War II. Its effects will become apparent in the coming weeks and months. But it is already clear that the first round may not be enough.
An even more urgent task is not to let the lull turn into a huge financial crisis. It is generally said that the US central bank, the Federal Reserve (Fed), under its chairman Jerome Powell, is following the script of 2008. That is true: Day after day, it creates new programs to support every corner of the financial markets. But what is new is the extent to which the Fed intervenes. To compensate for the epic shock of the shutdown, it has mobilized a huge wave of liquidity. At the end of March, the Fed bought billion worth of assets every day. That's more per day than it bought in under Ben Bernanke, who ran it during the financial crisis, in most months. Every single second, the Fed converted nearly one million dollars worth of government bonds and mortgage securitizations into cash. On the morning of April 9, when another shocking unemployment figure was released, the Fed announced that it would buy assets for an additional .3 trillion.
These enormous and immediate compensation measures have so far prevented an immediate global financial collapse. But now we are facing a protracted period where falling consumption and declining investment will lead to further contraction. 73 percent of American households report having suffered a loss of income in March. For many, this loss is catastrophic and plunges them into acute distress, late payments and bankruptcy. Late payments on personal loans will undoubtedly rise sharply and lead to ongoing damage to the financial system. All unnecessary expenditure will be postponed. Fuel consumption in Europe has fallen by 88 percent. The car market is dead as a doornail. Car manufacturers in Europe and Asia are sitting on gigantic amounts of unsold vehicles.
The longer the lockdown lasts, the deeper the scars it will leave on the economy and the slower the recovery will be. In China, regular economic activity is slowly returning. But with the threat of second and third waves of infection outbreaks, no one has any idea how far and how quickly a return to normal life can be achieved without danger. Unless there is a dramatic medical breakthrough, movement restrictions will probably have to be maintained to regulate the unevenness of containment. A protracted and faltering recovery therefore seems much more likely than a robust V-shaped upswing at the present time.
The coming debt dispute
Even if production and employment have restarted, we will be dealing with the financial burdens of the past for years to come. In the heat of the moment, there is rarely a committed dispute about financial policy, as it is easy to agree on how to spend money in the crisis. But this battle will come. We are witnessing the largest ever increase in public debt in peacetime.
Right now we are parking this debt on the balance sheets of the central banks. They can also keep interest rates low, so debt servicing will not be exorbitant. But this only postpones the question of what to do with the debt.
According to the conventional view, debt must be repaid at some point by generating surpluses, either through tax increases or through spending cuts.
However, history shows us that there are more radical alternatives. One would be an outbreak of inflation, although under the prevailing economic conditions it is not obvious how this could be achieved. Another would be an indulgence year, which is a polite name for not paying off government debt (which is less drastic than it sounds as long as it concerns debt to the central bank). Some have even suggested that central banks should stop buying government bonds and instead simply credit governments with huge cash balances[4].
And on April 9, the Bank of England announced just that. This means in every sense that the central bank is just printing money. That this is even being considered, and under a Conservative government to boot, shows just how extreme the situation is. It is also symptomatic that the Bank of England's decision has so far not led to a storm of indignation or panic selling, but has been met with little more than a shrug of the shoulders in the financial markets. The financial markets have little illusion about the current acrobatics of the central banks.
This resigned attitude is helpful in combating the crisis. But one should not expect the calm to last. If the lid is lifted, politics will return and with it the dispute over "debt burdens" and "sustainability". And given the liabilities that have already accumulated, it is likely to become ugly.
Radical uncertainty
Everything we thought we knew about economics and finance has been radically confused. Since the shock of the 2008 financial crisis, there has been much talk about the need to reckon with radical uncertainty - the kind of risk for which there is no mathematical probability. In fact, it would probably even lead to complacency and a false sense of omniscience to state a specific probability here.
After the shocks of Brexite and Donald Trump's election, there was much talk about the unpredictable politics of populists. Trump's aggressive trade policy and the escalation towards geopolitical rivalry with China shook common assumptions about the future of globalization. By 2019, this uncertainty had reached a point where it affected investment and triggered a recession. As central banks looked to normalize and unwind the dramatic interventions after 2008, they were forced to turn around and continue a policy of ultra-low interest rates. This in turn led to a hand-wringing over a new era of dependence on central banks. Would we ever return to "normal" times, with markets freed from their dependence on expansionary monetary policy and businesses and trade not bothered by unpredictable elections?
After the Corona pandemic, such appeals will just sound bizarre. Because now we know what true radical uncertainty looks like. For a large part of the world's population, the basic processes of their lives have been radically disrupted. None of us can say with certainty when we can return to our pre-Corona lives. We may hope that everything "returns to normal". But how will we know? After all, everything seemed normal in January, just weeks before the world stopped. If radical uncertainty was a concern before, it will now be an ever-present reality. Every flu season will be watched anxiously. To confuse medical metaphors: how long will it be before we can explain ourselves symptom-free?
It is possible that there will be a renewed increase in expenditure following the lockdown. But will this continue? The most obvious reaction to a shock like the one we are experiencing right now is withdrawal. One of the most remarkable developments since 2008 has been the reduction of household debt in the United States. The American consumer, the largest source of demand in the global economy, has become much more prudent. Business investment has been weak, as has productivity growth. The economic slowdown was not limited to the West, but also affected the emerging markets. We called it a "secular stagnation" [5].
If the response of companies and private households to the unprecedented corona shock is to flee to safety, this will increase the forces of stagnation. And if the government's response to the debt accumulated during the crisis is austerity, it will make the situation even worse. It is therefore right to call for a more active and visionary state policy that shows a way out of the crisis. But that, of course, raises the crucial question: What form will these policies take - and what forces will control them?
