This week governments around the world have suddenly unleashed the fiscal faucets and begun pouring money into their economies. The idea is that this will, at least in part, offset the crushing economic effects of the Covid-19 pandemic and – if targeted properly – will help those in need.
This surely must be why we have governments: they are, ultimately, there to help, not hinder, the people who vote them into power. And, with luck, these efforts will alleviate some of the many difficulties that are being faced – and which will be faced, in coming months – because of the effects of the pandemic and the efforts being made to control it. It will help those whose misfortune is no fault of their own.
There is, however, also a deeper lesson to be learned. When the dust settles – when the current humanitarian crisis is over – what then? Will everything flip back to the ‘neo-liberal business as usual’ mode we’ve become accustomed to since the 1980s? That mind-set has broadly framed thinking and policy-making across the world for two generations and, in general, hasn’t been deeply questioned. Even governments that have shifted away from some of the more ridiculous extremes still operate according to the general principles of a policy-mix established during the late 1980s-early 1990s.
The thing is that this mix actually reflects only one aspect of the broader capitalist system that has evolved over the past couple of centuries; and as a result of it, we keep staring down the barrel of an economic crisis. The GFC, over a decade ago, should have set alarm bells ringing. It didn’t; and the world has been ripe and ready for a worse crisis for some time. The Covid-19 coronavirus appears to be the trigger. Now, there’s no question that money has to be spent on this. People are going to be hurting.
But beyond that I wonder. Will governments now start to question the mind-set that has led the global economy to crisis point? That has provoked a culture of over-consumption that is helping drive a climatic and environmental crisis? Earlier efforts to find ways of moderating the extremes haven’t worked: anybody who tries risks being demonised.
There’s also the issue of what happens when government pours money into an economy. The idea that fiscal stimulus helps an economy was prevalent in the early-to-late twentieth century, and was broadly effective. But this was generally not done as an emergency measure; it came through public works programmes – often designed to improve the production bases – early welfare initiatives, and so forth, as longer-term policy. To suddenly pour a vast sum into an economy is a different matter. Now, this has happened before; it’s how western governments purchased their way out of the General Financial Crisis in 2008-09. Back then I was working in New Zealand’s central bank, in communications, and in the front line of the local effort. I remember the Governor, Alan Bollard, holding an all-staff meeting and explaining that nobody knew what would happen when this much money was pumped into the system, in that quantity and with that speed. The usual lags of economics meant it would take time to show its effect – and what then?
We know now: the money went into fixed asset prices such as housing. And it didn’t fix the structural problems driving the GFC, which were primarily caused by deregulation. I’d better explain. The neo-liberal ‘revolution’ of the 1980s and 1990s allowed banks to trade in hedge-funds and derivatives. What are those, you ask? These are abstract ‘products’, in which money – itself – becomes a commodity with a ‘price’. A ‘derivative’ is a contractual arrangement that relates to an asset, stock, bond, money or a commodity – anything transactable, basically – in which a buyer commits to purchasing it at a specific price and on a specific timing.
The thing is that money – which is an abstract human construct – can also mean ‘negative money’. Debt.
Back in the early 2000s, one way to fund trade in derivatives was through creating money in the form of loans. There was nothing to stop banks doing it – regulations had been lifted. That funded the trade in derivatives, with everybody taking their cut along the way. The problem, particularly for the United States, was that in 2004 the Federal Reserve began raising interest rates. Eventually the interest on loans became unaffordable, which dried up the cash-flows that had been fuelling the whole edifice.
Just to add spice to the mix, many of these loans had been packaged up and ‘securitised’, and were then sold as ‘derivatives’ of themselves. ‘Securitisation’ meant they were given a credit rating, based on the mortgages within the package. If anything went wrong – well, there was always a ‘credit default swap’, aka insurance policy, issued by large insurance companies.
All of this was portrayed as ‘capitalism’, which had won the war against ‘communism’. Actually, it was an extreme edge of the capitalist system, because it intentionally steered away from the more moderated capitalism of the twentieth century. And the whole lot went bang in 2008, throwing the world right to the edge of a second Great Depression. Words such as ‘contagion’ – meaning one failed economy dragging down another, like dominoes, became routine jargon.
I still remember the day in October 2008 that a government guarantee was thrown across New Zealand banks, not because they were in trouble of themselves, but because Australia had just offered one and the banking systems were intimately inter-linked. That day I ended up as one of a whole raft of central bank staff – including senior management – formed into relay teams working an improvised help-line to deal with an alarmed public, with updates flowing through every few minutes from the policy teams.
Economists I knew were deeply worried that the looming depression would match that of the 1930s but last a generation. (Go here for my peer-reviewed historical-economic paper on the New Zealand Great Depression experience of the 1930s). And then one western government after another began dumping money into the world economy, in monstrous quantities.
The problem was that the key drivers of that crisis – a combination of neo-liberal deregulation and human greed, intellectualised and abstracted through the financial system – weren’t cured. Instead, the attitude was ‘hey, the world nearly collapsed, but we switched on a bit of Keynesianism for a month or two, and now we’re back to making money again, as normal, ha ha, look at how clever we are’.
The framework of neo-liberalism and much of its operation wasn’t questioned, although the GFC should have shown up what was wrong with that particular extreme of the capitalist system. And by historical measure, neo-liberalism is an extreme, based in part on the supposition that human societies are ‘rational’; and on the Randian-style misconception that ‘the market’ – meaning any system to facilitate exchange between people or their institutions – functions as an independent and rational entity of itself, whose judgements are trusted and final. You know – ‘The Market has Spoken‘.
In fact ‘the market’ is simply an intellectual construct, built around an emergent property of human society; and human societies – en masse – are anything but rational. Tried to buy any toilet paper lately, with all those empty supermarket shelves? And how, precisely, will 500 rolls of it, frantically bought in a panic, help anybody with Covid-19? See what I mean.
There’s also the question whether ‘the market’ as developed under neo-liberalism is actually the system described by Adam Smith, back in the eighteenth century. His reference to the ‘invisible hand’ was actually made but once, in association with a description of the relationship between a community of small shopkeepers and the export market. And there is the supposition that ‘anybody’ can get ahead, if only they are enterprising enough – which, it seems, is based on a faulty assumption about how societies work. But I digress. More on that another time.
The problem with the GFC was that it should have prompted questions about the deregulated financial system; and whether the neo-liberal edge of capitalism was sustainable if pursued alone. But it didn’t. Instead, after 2010 – the putative ‘end’ to the crisis – financial markets carried on as they had before. Money continued to transfer from the poor to the rich, without much in the way to make sure that the production base was left with enough to keep functioning. By the mid-2010s even the middle classes were beginning to struggle, while it was becoming increasingly clear that global wealth was accumulating in the hands of, literally, a few individuals.
Meanwhile the abstract financial markets continued to barrel along, and last year various economists who I know were telling me that the world was, once again, ripe and ready for another economic crisis. This time bigger. The ‘stimulus packages’ of the GFC era hadn’t actually fixed the structural problems. They’d merely kicked the can up the road, and the behaviours that drove that crisis hadn’t changed.
At that time nobody knew what might trigger such a crisis – although a pandemic is an obvious one, and something that had featured in economic modelling.
Now it’s happened.
The question is what happens next. The government support packages are, of course, essential. People are suffering through no fault of their own. And the pandemic will end, sooner or later. Hopefully without too much more tragedy than has already befallen humanity over it. But what then? Back to business as usual under the current approach, this time with another government loan-driven ‘stimulus package’ (meaning it is funded by taxpayers of the future) to offset the problems?
I hope not. I hope that thought will be given to other ways ahead – ways that can nurture capitalism while at the same time producing systems that also nurture the society on which that system rests. Will that happen? Will Covid-19 be enough? It’s sad to think that it might take a human calamity such as the Covid-19 pandemic, or worse, to prompt governments to properly question an ideological lurch framed originally by Cold War politics that – after forty years and more than one economic crisis – seems well past its use-by date. This extreme edge of the much broader capitalist system has served to make a few people rich and push the rest of the world to the edge of the economic precipice. But I am cynical that anything much will change. Those who have prospered from this system will, I fear, merely shrug – like Atlas – and carry on pushing the rest of us over the cliff.
Maybe I am being too cynical. But it worries me. I like the capitalist system, generally. I like the western democratic system, which to my mind remains the best of all the governmental systems human societies have come up with. When all this works properly, it works well. The question has always been finding a balance where enterprise and personal endeavour are both possible and rewarded, but which also supports general well-being and social equity. This is the key to keeping the whole edifice going in the longer term. I also think the longer-term path to that balance will be found through reasonable and tolerant discussion, underpinned by a basic ethic of kindness to each other.
Copyright © Matthew Wright 2020