Covid-19 Economics: Beyond Austerity and Debt-Finance

Talk has already turned to how we’ll deal with the almighty economic blowback impending from the Covid-19 pandemic. The nearest parallel is the financial crisis of 2008 – a story of unregulated market failure that here in the UK the Conservative government somehow succeeded in turning into a story of state failure in the form of the allegedly spendthrift Labour government preceding them. This enabled it to follow low-spending, deficit-cutting austerity policies that, it’s widely acknowledged, only prolonged the economic pain – though it did have the desired effect from the government’s perspective of most hurting the people it cared least about, and generally weakening public institutions to which it was ideologically opposed.

Justifications for austerity are often informed by the so-called ‘household analogy’ that a country’s finances are just like those of an individual, debt-averse household – the idea that ex-Prime Minister Theresa May had in mind when she said “there is no magic money tree” to increase frozen public sector wages. This time around, plenty of commentators are warning against the siren song of austerity and the ‘economically illiterate’ household analogy as a response to the forthcoming economic crisis. But there are plenty on the right still trying to sing it. If they succeed once again in pinning the economic storms to come on lazy employees and install another round of austerity, I think I’ll give up whatever vestigial faith I still have in electoral politics.

But the anti-austerity view is interesting, no? If it’s right, then it seems that maybe there is a magic money tree after all, which will surely solve a lot of our problems. In this view, debt is nothing to be feared, but is merely another tool sovereign nations can use to oil the wheels of economic action. Economic historian Adam Tooze, whose magnum opus on the 2008 crash was reviewed on this site a while back by Michelle Galimba, unpicks the threads of this argument in this short and interesting essay. Tooze argues that, beyond the household analogy, the circular logic of a sovereign national citizenry as both its own creditor and its own debtor is “an illusion achieved by removing the real politics of debt – which are about class, not nationality”. So part of the tussle over debt is about who proportionately bears the brunt of government income-raising efforts. Generally, policies over the past forty years in the rich countries have benefitted (wealthy) rentiers such as property-owners, investors and shareholders over (low paid) employees and unemployees. They’ve also benefitted the financial sector over productive economic sectors – currently in the UK only about £1 in every £10 lent by the banks goes to non-financial firms, according to Josh Ryan-Collins (co-author of the must-read Rethinking the Economics of Land and Housing).

Another part of Tooze’s argument bears on central banks like the US Federal Reserve, which defang debt by creating money, lowering interest rates and managing inflation. By thus removing government IOUs from private portfolios and putting them on the central bank’s balance sheet debts become “literally claims by the public on itself”.

A national economy that works in this way indeed seems very different to the economics of an indebted individual household beleaguered by hungry creditors. But Tooze mentions in passing national economies that are like this – namely those of “impoverished and desperate” countries dependent on foreign creditors who will lend only in strong international currencies like US$. The idea that a country like Burundi, for example, could pay its way out of an economic downturn by increasing its debt and repackaging it as an asset doesn’t really work.

This has several significant implications. For one thing, we tend to think of the vast sums accrued in the financial sectors of the rich countries as somehow sui generis, unconnected to poverty elsewhere. But, as argued by people like Cédric Durand in his book Fictitious Capital (or Intan Suwandi in her Value Chains), there’s a causal chain in this money-grubbing that can be traced back to the real, productive economy in the form of poorly-paid industrial labour in the Global South, particularly in ‘workshop of the world’ Asian countries like China, India, Indonesia and Vietnam. In yet poorer countries – many in sub-Saharan Africa, like Burundi – there’s little chance of creating even such subordinate industrial infrastructures, resulting in extreme rural and slum precarity.

So maybe we can resurrect the household analogy for national economies after all, simply by adding a little extra nuance. Poor-country economies are like poor households, subject to endless economic disciplining, scrutiny and moralising the moment they make economic claims upon richer creditors beyond their present means, and yet providing the foundation for the wealth of those richer creditors. Rich-country economies are like richer, middle-class households, mortgaged up to their eyeballs and buying easy credit from all takers without a whiff of moral censure.

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This indebtedness of the rich works very well so long as there’s confidence in the wider economy that they’ll stay rich, and therefore that their debt will remain a useable asset – so long, in other words, that enough people believe in the magic of the money tree. It’s easy to believe the magic if the economy is growing and property prices are rising, or if the household earners are still pulling big salaries. It gets harder if those things are no longer true – and one thing we learned during the last financial crisis with its sub-prime mortgages and credit default swaps is that it’s all too easy for our human credulity to get away from us, allowing us to believe we can financialize our way out of bad debt. But once enough people stop believing in the magic of the money tree, things start falling apart.

Under my last post, Joe Clarkson wrote “How long will others accept money that the fed creates out of thin air? I think the answer is a long, long time.” I agree. The USA isn’t going to turn into Burundi tomorrow. Or the day after. But if you take a long historical perspective, I think that long, long time might turn out to be shorter than a lot of people expect. The extreme financialization of the rich countries isn’t economically sustainable. You can convince people that you’re wealthy by saying that you’re wealthy and behaving like you’re wealthy for a while – even more so if you have the institutional power to keep leveraging wealth created by others – but in our present world of stagnant incomes and sluggish growth ultimately reality catches up with you. The magic money tree turns out to be just another tree.

Likewise, inasmuch as the genuine wealth of the rich countries accrues by extracting much of it from the industrializing poorer ones, there’s a limited historical window before the latter find ways of keeping the wealth at home. One way of extending that window is by affecting lofty civilizational aspirations and a kind of noblesse oblige that makes economic power seem culturally attractive. This is something that the USA achieved historically with its democratic, anti-colonial revolution and its ‘American dream’, a veneer that still renders centrist commentators nostalgic about the “democratic and rights-based push” of US power in the face of today’s “authoritarian pull exerted by China”. As I see it, any such veneer started cracking with the Vietnam war and pretty much expired with the presidency of George W. Bush, rallying only half-heartedly under Barack Obama, and has now been buried for good with Donald Trump.

Wang Xiuying writes,

Liberal sentiment in China is at a low ebb. The pro-democracy cause has been weakened drastically since Trump took office. How do you defend a system that gives power to a celebrity with no knowledge of international relations who filed for corporate bankruptcy half a dozen times? Trump’s early attempts to wave away the threat of the virus looked dangerously short-sighted to people here; his bid for an America-only vaccine grotesque. As racist attacks against Chinese-Americans have surged in the US, along with the virus, it has become impossible to argue for a Western model of freedom and democracy.

Beyond the charmed precincts of western self-regard, I suspect people in many countries now fear China’s ‘authoritarian pull’ less than they fear the ‘democratic push’ of the USA.

All in all, it seems likely that turbulent times lie ahead – not only for the poor households of the world (real and metaphorical) but also for the (real and metaphorical) rich ones that are trying to keep up appearances in the straitened circumstances of the present. The USA (and its pint-sized outrider, Britain) are still thundering their importance in the world and the virtues of their economic models. But fewer people are listening.

Meanwhile, something interesting seems to be afoot in China. Its post-1978 modernization was built on the back of rural entrepreneurialism, but state policy since the 1990s has largely favoured urbanization and urban industrial development at the expense of the countryside – the familiar western model of economic development prescribed for post-war ‘developing’ countries by economists like Arthur Lewis.

Shaohua Zhan writes:

Lewis’s model was premised on the assumption that urban areas would provide livelihoods for rural labourers displaced by the industrialization of capitalist agriculture. This may have been the case for early-industrializing economies, but it was never a reality for the majority of countries in the Global South, where jobs in the city were poorly paid and often too scarce to absorb the total amount of excess labour, forcing peasants into the informal sector where they eked out a living in urban slums. Since the late 1970s, the model has ceased to apply even to developed countries. As neoliberal reforms led to the gradual replacement of secure jobs in the formal economy with precarious work in the informal sector, unemployment and under-employment surged, giving rise to social polarization and a swelling underclass

Thus,

By pushing for the financialization of rural land, the consolidation of farms and urban expansion, both state and capital intended to extract maximum surplus from China’s land and sustain high rates of economic growth. However, this mode of development has proved unable to provide secure livelihoods for the majority. Rising urban precarity has lent credence to those advocating for the protection of small-holder farming.

Sure enough, in 2017 the Chinese Government rowed back on its urban bias and introduced a policy of ‘Rural Revitalization’, while a 2018 government report remarked that a large rural population would continue to be a “basic reality in China”¹.

Where this blog leads, the governments of the world are apt to follow…

OK, so I accept that Chinese policy isn’t (yet) fully in line with the vision for a small farm future I articulate here. Nevertheless, as we contemplate the global economic landscape in the wake of the pandemic, I’d suggest it’s wise to avoid both the ‘poor household’ economic analogy of austerity and the ‘rich household’ economic analogy of quantitative easing and endlessly deferred debt. Instead, another household analogy presents itself – household responsibility. So to the question ‘how will humanity’s collective household pay for Covid-19?’ my answer is neither to squeeze the poor, nor to squeeze the future by closing your eyes and believing in the magic of the money tree. Instead, I’d suggest you look out your old spade and hoe from the back of the garden shed. There’s work to be done.

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