The state has had to pump in money to prop up a system in which too many people were hanging on by their fingertips
When the market breaks down it returns to Keynesianism
Larry Elliott Wed 15 Apr 2020
Larry Elliott Wed 15 Apr 2020
Larry Elliott is the Guardian’s economics editor
But this is not just a big-picture story. The reason the UK government has been pumping so much money into the health service, into wage subsidies, into support for the self-employed and for small businesses is that they were all only just managing before the crisis broke.
Other reforms look tougher. There is a need for a stronger international system to both manage the fight against the pandemic and minimise the economic damage it has caused. No country can operate a go-it-alone approach to Covid-19, despite what Donald Trump might think.
Ultimately, the shock from the banking crisis was not big enough to effect real change. This one might be different, and not simply because people are losing their lives in such numbers. Avowedly free-market governments like the UK’s have not gone a long way to nationalising their labour markets because they have had a Damascene conversion to socialism: they have done so because of the inherently fragile nature of their economies. The best argument those pressing for capital controls, wealth taxes and – like me – a green new deal, is that they will make the world more resilient in the next time of crisis. Because, as things stand, there will be a next time.
‘It would be an act of supreme folly to write off 2020 as an aberration and assume that everything can return to normal.’ Closed shops and businesses in Cardiff, March 2020. Photograph: Matthew Horwood/Getty Images
The financial markets think the worst is over. Share prices have largely been rising for the past week (although on Tuesday they went down) on the basis that some countries are starting to lift the lockdown restrictions imposed to limit the Covid-19 pandemic. Amid sighs of relief all round on Wall Street, the hope is that it will soon be business as usual.
In one sense, it’s not an unreasonable thought because the virulence of this particular strain of the coronavirus could not have been predicted. It was what economists call an exogenous shock: something that has a big impact, but comes from outside the system itself.
So, the argument goes, when the International Monetary Fund says that the global economy is going to suffer its worst year since the Great Depression or the UK’s Office for Budget Responsibility pencils in a slump unmatched for three centuries, that has absolutely nothing to do with the way the world economy is organised or run. Covid-19 does not mean the end of globalisation: it is a freak of nature, that’s all.
The view that nothing fundamental will change as a result of the twin health and economic emergencies may be right. There was, after all, much talk of how global capitalism was going to be fundamentally reformed after the banking crisis of 2008, but that’s all it turned out to be: talk.
In retrospect, the big lesson to be learned from 2008 was that the global economic system was operating on terrifyingly thin margins. Banks were taking ever-bigger bets on products they didn’t really understand but had very little capital in reserve to cover any losses. There was virtually no slack in the system and this almost proved fatal when the bets went spectacularly wrong.
The same applies now, only on a much bigger scale. The financial system may perhaps be more resilient than it was in 2008 but the global economy as a whole operates with the scantiest of safety buffers and with no margin for error. And that’s true from top to bottom: from the ultra-low interest rates that have been keeping the global economy afloat for the past decade to the scramble to find intensive-care beds in the NHS. When politicians say that the fundamentals of the economy are sound, they could not be more wrong.
Here’s the real picture. The past 30 years have seen global markets – especially global financial markets – increase in both size and scope. Long and complicated supply chains have been constructed: goods moving backwards and forwards across borders in the pursuit of efficiency gains; hot money flowing into emerging markets looking for high returns and flowing out again just as quickly at the first sign of trouble.
The development of stronger global institutions might have acted to constrain some of the excesses of transnational capital but not since the 1930s has multilateral cooperation been so lacking. The only effective form of international coordination comes from central banks, which ensure that money is cheap and plentiful. Any attempt to raise interest rates to what would once have been considered more normal levels is met by stock market panic and is quickly reversed.
The financial markets think the worst is over. Share prices have largely been rising for the past week (although on Tuesday they went down) on the basis that some countries are starting to lift the lockdown restrictions imposed to limit the Covid-19 pandemic. Amid sighs of relief all round on Wall Street, the hope is that it will soon be business as usual.
In one sense, it’s not an unreasonable thought because the virulence of this particular strain of the coronavirus could not have been predicted. It was what economists call an exogenous shock: something that has a big impact, but comes from outside the system itself.
So, the argument goes, when the International Monetary Fund says that the global economy is going to suffer its worst year since the Great Depression or the UK’s Office for Budget Responsibility pencils in a slump unmatched for three centuries, that has absolutely nothing to do with the way the world economy is organised or run. Covid-19 does not mean the end of globalisation: it is a freak of nature, that’s all.
The view that nothing fundamental will change as a result of the twin health and economic emergencies may be right. There was, after all, much talk of how global capitalism was going to be fundamentally reformed after the banking crisis of 2008, but that’s all it turned out to be: talk.
In retrospect, the big lesson to be learned from 2008 was that the global economic system was operating on terrifyingly thin margins. Banks were taking ever-bigger bets on products they didn’t really understand but had very little capital in reserve to cover any losses. There was virtually no slack in the system and this almost proved fatal when the bets went spectacularly wrong.
The same applies now, only on a much bigger scale. The financial system may perhaps be more resilient than it was in 2008 but the global economy as a whole operates with the scantiest of safety buffers and with no margin for error. And that’s true from top to bottom: from the ultra-low interest rates that have been keeping the global economy afloat for the past decade to the scramble to find intensive-care beds in the NHS. When politicians say that the fundamentals of the economy are sound, they could not be more wrong.
Here’s the real picture. The past 30 years have seen global markets – especially global financial markets – increase in both size and scope. Long and complicated supply chains have been constructed: goods moving backwards and forwards across borders in the pursuit of efficiency gains; hot money flowing into emerging markets looking for high returns and flowing out again just as quickly at the first sign of trouble.
The development of stronger global institutions might have acted to constrain some of the excesses of transnational capital but not since the 1930s has multilateral cooperation been so lacking. The only effective form of international coordination comes from central banks, which ensure that money is cheap and plentiful. Any attempt to raise interest rates to what would once have been considered more normal levels is met by stock market panic and is quickly reversed.
But this is not just a big-picture story. The reason the UK government has been pumping so much money into the health service, into wage subsidies, into support for the self-employed and for small businesses is that they were all only just managing before the crisis broke.The weakest decade for real-wage growth since the 19th century meant that millions of workers are only one payday away from penury. For most, self-employment is a daily struggle to make enough to live on. Small businesses, such as family-run restaurants, operate on wafer-thin margins. For them, the cost of taking out an emergency government-backed loan (assuming they could get one) would wipe out their profits for the next two years.
What this amounts to is a world clinging on by its fingertips, even in what passes for the “good times”. Anybody who seriously believes that there are no lessons to be learned from what has happened globally since China warned the World Health Organization on New Year’s Eve that it might have a problem on its hands is living in a bubble. It would be an act of supreme folly to write off 2020 as an aberration and assume that everything can return to normal.
Some changes look inevitable. Companies will shorten their supply chains as a result of the disruption caused by the pandemic. Extra money will have to be found for health systems so that they can operate with more spare capacity. Covid-19 has exposed the risks of a country such as Britain running down its domestic manufacturing base and relying so heavily on financial services. Investment bankers are surplus to requirements when the country is short of testing kits and PPE.
Other reforms look tougher. There is a need for a stronger international system to both manage the fight against the pandemic and minimise the economic damage it has caused. No country can operate a go-it-alone approach to Covid-19, despite what Donald Trump might think.
Ultimately, the shock from the banking crisis was not big enough to effect real change. This one might be different, and not simply because people are losing their lives in such numbers. Avowedly free-market governments like the UK’s have not gone a long way to nationalising their labour markets because they have had a Damascene conversion to socialism: they have done so because of the inherently fragile nature of their economies. The best argument those pressing for capital controls, wealth taxes and – like me – a green new deal, is that they will make the world more resilient in the next time of crisis. Because, as things stand, there will be a next time.
Some changes look inevitable. Companies will shorten their supply chains as a result of the disruption caused by the pandemic. Extra money will have to be found for health systems so that they can operate with more spare capacity. Covid-19 has exposed the risks of a country such as Britain running down its domestic manufacturing base and relying so heavily on financial services. Investment bankers are surplus to requirements when the country is short of testing kits and PPE.
Ultimately, the shock from the banking crisis was not big enough to effect real change. This one might be different, and not simply because people are losing their lives in such numbers. Avowedly free-market governments like the UK’s have not gone a long way to nationalising their labour markets because they have had a Damascene conversion to socialism: they have done so because of the inherently fragile nature of their economies. The best argument those pressing for capital controls, wealth taxes and – like me – a green new deal, is that they will make the world more resilient in the next time of crisis. Because, as things stand, there will be a next time.
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