The economic consequences of the pandemic

SHUTDOWN: How Covid Shook the World’s Economy by Adam Tooze (2021)

Adam Tooze is possibly the world’s foremost economic historian.  He wrote thick, comprehensive books on the Nazi economy (Wages of Destruction), the war debts crisis of the 1920s (The Deluge) and the 2008 financial crisis (Crashed!).  

His strengths are his international perspective (he is a British subject, educated in Germany who now teaches at Columbia University) and his deep understanding of high finance and how it affects society, politics and the overall economy.

Shutdown is not like his other books. It’s slim, and it is being published while the pandemic is still going on, not from the perspective of history.  This is because he thinks his message is too urgent to wait.

What is his message?

It is that we the public are on the brink of a new era, an era when our worst crises will not be the result of tyranny, corruption and human folly, but blowbacks from our natural environment.

And we are woefully unprepared for this. The coronavirus pandemic had taken 3.2 million lives, including half a million American dead, as of April, when Tooze completed his book.  The number is up to 4.5 million now.

The pandemic resulted in tens of trillions of dollars in economic loss. Yet only tens of billions has been spent on vaccine development, and much less than that on getting the vaccine to the public.

COVID-19 was not a black swan, a completely unpredictable event. It was a grey rhino, an event that many predicted, but were ignored. The climate crisis has bred other grey rhinos—devastating fires, floods, droughts and superstorms.

Tooze wrote that the reason we are unprepared is that the neoliberal policies of the past 50 years have stripped the governments of the USA, UK and much of the Western world of the capacity to respond to emergencies.

The neoliberal philosophy is that, in order to maximize efficiency, institutions should spend no more than they absolutely need in order to function. This means that there is no reserve capacity in case of emergencies, and hospital emergency rooms in the USA are overflowing with Covid patients.

What’s needed, he wrote, is something like the Green New Deal supported by Bernie Sanders, Alexandria Ocasio-Cortez and others.  Governments must spend whatever is necessary to be prepared for the predictable crises that lie ahead, and do it in a way that creates full employment and puts money in the pockets of working people.

The International Monetary Fund has estimated that a successful global vaccination program would add $7 trillion annually to the world economy by 2014.  Tooze said others estimate that such a vaccination program would cost $50 billion to $100 billion. Yet governments of rich countries, which have spent trillions of dollars on economic stimulus programs, say this is unaffordable.

Tooze quoted the great economist John Maynard Keynes: “Anything we can actually do, we can afford.”  

That is, if the human and physical resources to accomplish a goal exist, and the political will to accomplish the goal exists, the problem of finance can be solved.  People generally understand this in wartime.  Why not in peacetime?

The global rich and global climate change

Click to enlarge.

Click to enlarge.

The great economic historian Adam Tooze wrote an eye-opening article about how the global rich (the richest 10%) are the chief drivers of climate change.  What he should have noted is that, at least in the immediate future, they will suffer the least from living on a hotter planet.

Tooze noted that their consumption causes nearly half of the world’s carbon emissions, and the global middle class (the next 40%) cause nearly all the rest.  The global poor (the bottom 50%) are responsible for hardly any, yet they will be the hardest hit.

He said we need to think less about which nations are the chief cause of the problem, and more about the different economic classes.  Global warming has been affected even more by the super-rich (the top 1%) in the OPEC nations and in China than the super-rich in North America.

China accounts for half the increase in global emissions from 1990 to 2015.  One-sixth of the total global increase comes from China’s rich and one third from China’s middle class. 

The betterment of material living standards in China during that period is one of the world’s great positive achievements.  But it also, according to Tooze, is a big contributor to what may be the world’s greatest problem.

It is not just that the richest 10 percent consume so much.  They are the ones who make the investment decisions.  This is true not only of private investment decisions, but of government investment, to the extent that it is financed by borrowing.

Add to that the fact that the richest 10 percent are the dominant political class in most countries.

Adam Tooze did not spell out the implications of this, but they are important.

The richest 10 percent, along with the global middle class, will try to meet the challenge of global warming by investing in alternative technologies that will maintain their material standard of living.

The problem is that making windmills, solar panels or electric vehicles is energy-intensive and uses up non-renewable resources.  Probably there is a net benefit at some point; I’m not qualified to say. The point is, you have to burn a lot of fossil fuels to create the alternatives to fossil fuels. 

What the global rich, and the global middle class, are not considering, is austerity for themselves.  Nobody that I know of advocates giving up air travel, for example. 

Adam Tooze on the Biden administration

For some Joe Biden has already exceeded expectations. For others his economic program is nowhere near enough to address the climate crisis and American decline.  While his Covid relief package has seen billions dispensed immediately, the Jobs Plan proposes to invest $35 billion in green R&D over eight years – less than Americans spend annually on pet food. 

So how radical is President Biden? Is there such a thing as ‘Bidenomics’?  And does the new President represent a break with the orthodoxy of Democrat predecessors such as Bill Clinton and Barack Obama?

Discussing all those questions on the UK’s Downstream with Aaron Bastani is Adam Tooze, Professor at Columbia University.

He is the author of The Deluge: The Great War, America and the Remaking of Global Order, 1916-1931; The Wages of Destruction: the Making and Breaking of the Nazi Economy and Crashed: How a Decade of Financial Crises Changed the World —all outstanding books.

The video interview runs about an hour, which is long to watch something on a computer screen, but I think it is worth taking the time.  Tooze has a wide range of information, a powerful analytical mind and a sharp tongue.  He takes a global view rather than an American view.

All this makes him interesting.  He is, possibly, a little more inclined than I am to regard politics as a clash of opinions than a struggle for power or a conflict of interests.

The economic consequences of the lockdown

Adam Tooze is one of the world’s outstanding economic historians.  He is the author of The Deluge: The Great War, America and the Remaking of Global Order, 1916-1931; The Wages of Destruction: the Making and Breaking of the Nazi Economy; and Crashed: How a Decade of Financial Crises Changed the World.

In the interview above, he talks about the impact of the coronavirus on the global economy.  The actual interview begins about four minutes in.

He points out that ending the lockdowns won’t automatically restart the economy.  Ford and General Motors closed their plants without any lockdown order.

Labor unions that represented their workers protested working under unsafe conditions.  Suppliers were unable to provide necessary components on schedule.  And the automobile sales collapsed.  So what was the point of staying open?

Tooze also says that the talk of being in a war economy is wrong.  In a war economy, the objective is to mobilize everyone to produce war materials.  In a pandemic economy, the objective is to limit production to what is absolutely necessary. People should be paid to stay home to help limit the spread of the virus.

He doesn’t predict a second Great Depression, but neither does he rule it out.

Adam Tooze on the global financial crisis

The great economic historian Adam Tooze, in his just-published book, CRASHED: How a Decade of Financial Crises Changed the World, showed me things I hadn’t known, and made me rethink things I thought I understood.

Above all, he jolted me out of thinking of the 2008 financial crisis as primarily an American crisis.  It was global in nature, its consequences are still rippling through the world economy and its basic causes have not been dealt with

It is a kind of bookend to his earlier book, THE DELUGE: The Great War, America and the Remaking of Global Order, 1916-1931. 

In the earlier book, Tooze described the continuing debt crisis following World War One, with Germans unable to pay reparations and the Allies unable to pay their war loans, and how the ongoing debt crisis shaped international relations and governmental policy in that era.

The United States, as the world’s top industrial power and top creditor nation, dominated the world financial system, but American leaders lacked both the understanding and the political means to resolve the crisis.  All the United States could think to do was lend money to Germany to keep the system from crashing.  In the end the financial system crashed anyhow..

Prior to the 2008 crash, the United States was in the opposite situation.   U.S. industrial power had been hollowed out and the United States was the world’s top debtor nation.  Economists feared the “twin deficits”—the U.S. trade deficit and government budget deficit—would cause runaway inflation.

This didn’t happen.  The U.S. dollar continues to be the medium of world trade, and the financial markets continue to consider U.S. Treasury bonds the world’s safest financial asset.

American financial leaders such as Ben Bernanke, Timothy Geithner and Larry Summers acted boldly to meet the crisis. They bailed out banks, stabilized the financial system and averted a 1930s-type great depression, which was a real possibility.

That was no small achievement.  What they failed to do was to reform the system so as to reduce the possibility of a second crash.

∞∞∞

I had put the blame for the crash on Clinton-era deregulation, which gave free rein to speculation and to unethical and illegal (but unprosecuted) manipulation of the subprime mortgage market.   Financial markets have always been subject to cycles of expansion and recession, but removing the brakes made the crash a disaster instead of just a problem.

What I learned from Crashed is that deregulation was international.  Prime Minister Margaret Thatcher’s government completely deregulated British financial markets in 1986, in what was called the “Big Bang.”  Her hope was to make the City of London, the British equivalent of Wall Street, the world financial center, and she succeeded.  American, European and Asian banks all made London their major hub, even though they did business in dollars.   The purpose of Clinton-era regulation was to enable Wall Street to catch up with the City of London.

Trade power and financial power

Source: Bank of England

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Source: Bank of England

The international trade in goods is one thing and the international flow of money is another.

I came across these two charts showing how China is at the center of world trade in goods, and the United Kingdom is at the periphery, and the UK is at the center of world banking and China is at the periphery.

Economic historian Adam Tooze said that the UK is trying to make itself China’s financial gateway to the world.  It is well positioned to do that.   The danger is that the greatest current threat to the world economy is a Chinese meltdown, he wrote, and the UK is even more exposed than the rest of the world.

LINK

Trade and Finance – Two Very Different Visions of the Twenty-First Century Economic Condition by Adam Tooze.

 

How America shaped the early 20th century

Adam Tooze in THE DELUGE: The Great War, America and the Remaking of the Global Order, 1916-1931, which I just got finished reading, traced the impact of the emergence of the United States as the world’s dominant superpower and arbiter of world affairs.

He described in great detail the struggles in Britain, France, Germany, Russia, China and Japan for security and economic stability, and how they all hinged on the action and inaction of the USA.

Leaders of the USA today call our country the “indispensable nation”, and assert the right and the power to be the arbiter of the world.  Tooze’s book shows how this self-appointed role began.

The early 20th century USA was a new kind of world power, Tooze wrote.  It had a greater area and greater population than any European country except Russia.  It was uniquely invulnerable to invasion.  It was the world’s leading manufacturing nation, agricultural producer and oil exporter and, as a result of the war, the world’s leading creditor nation.  No other country could even come close to matching American power.

Tooze began his history in 1916 because that was when Britain, France and their allies came to realize how much they depended on the United States, not just for supplies, but even more for financing of the war.

Woodrow Wilson’s policy was to use this leverage to dictate a “peace without victory,” a compromise peace based on liberal democracy, international law and—most importantly—a worldwide open door for U.S. commerce.

The United States was not interested in new territorial acquisitions because it didn’t need them.  All it wanted was access to other nations’ territories by American business.

Wilson’s neutrality became politically unsustainable because of German attacks on U.S. shipping, and the Zimmerman telegram to Mexico urging reconquest of Texas, New Mexico and Arizona, but he still tried to maintain U.S. position as an arbiter above the fray.

His Fourteen Points encouraged liberal democrats around the world.  According to Tooze, with better decisions and better luck, there might have been a compromise peace between the pro-democratic Provisional Government of Russia, which came to power in March 1917, and a German government forced to yield to pressure from liberals and socialists in the Reichstag.

But the USA and the other allies pressured Russia’s Provisional Government to go on fighting, and the German army successfully counterattacked.  The Russians ceased to hope for peace and the Germans ceased to see a need for peace.   Wilsonian liberal movements in China and Japan also received no support, partly because of Wilson’s racism.

Tooze pointed out that the Fourteen Points were all highly consistent with American national interests.   The first three points were (1) no secret treaties, (2) freedom of the seas and (3) removal of barriers to equality of trade, all policies that advanced U.S. economic interests.