Pandemic Insolvency: Why This Economic Crisis will be Different (updated)
Many states — now including the UK and US — are beginning to act in ways that contradict not just the neoliberal script, but the crisis management strategies of the global financial crisis. This text explores why.
By Bue Rübner Hansen, @buerubner
This is an updated version of a text first published by Novara Media. Updated elements are highlighted in bold.
Things are moving incredibly fast. A week ago, Denmark’s Social Democratic government announced it would cover 75% of the wages of workers who would otherwise be laid off. I had hoped it would give ammunition to those trying to put pressure on the social Darwinist Conservative government in the UK. But I don’t think anyone expected the UK to announce, just a few days later, a policy that would cover 80% of the wages of workers who were about to be sacked.
What happened? Why are right wing governments considering, and in some cases implementing policies they called impossible and undesirable, when the left suggested them?
To put it briefly, the sight of governments bailing out not only banks but also consumers and mortgage holders isn’t a sign they have grown soft, but rather a sign of the kind of crisis we are entering. This crisis is very different from the last, and so it demands a new range of government actions. This is likely to reshape politics and economics across the Global North for years to come.
A greater depression.
How bad is it exactly? Economist Nouriel Roubini, famed for predicting the last financial crisis, puts it boldly: “The risk of a New Great Depression, worse than the original — a Greater Depression — is rising by the day.”
In March, the financial behemoths JP Morgan and Goldman Sachs predicted US GDP in the next three months to fall 14% and 25% respectively. They optimistically predict a fast rebound, but it’s hard to see how there’s a quick way back from a crash that will force millions of firms and individuals to default on their debts and rental payments. But predictions are always hard, and these days they are much harder than usual. But we can discern the outline of the crisis we’re now entering and how it’s different from the great financial crisis of 2007–08.
Financial markets are acting weird on a level not seen since 2008. Money is flowing out of stocks — but without flowing into more secure assets like bonds or gold as they usually would. But if money isn’t flowing, it’s not because money is tied up in investments or stuck in savings. The problem is that money simply isn’t there. In other words, this isn’t a crisis of liquidity, but of solvency. The number of companies, workers and consumers unable to pay their debts and expenses is rising rapidly.
This makes the present crisis a very different affliction from the mostly financial liquidity crisis that started in late 2007. Of course, the latter was rooted in a narrower solvency crisis among subprime mortgage holders, rooted in extraordinarily high oil prices, but this time the problem of solvency is ubiquitous. This generalised condition of insolvency has created the conditions for a radically different political response than in 2008–2010.
In 2008 liquidity froze up as financial firms became unwilling to lend and invest. Now, no matter how many trillions the US Federal Reserve and other central banks pump into the feverish economy, it will not magically make up for the work hours that are not happening and the goods and services that are not being produced and consumed right now. In the words of James Meadway: “There is no amount of money that can simply conjure products into existence.”
To understand this crisis of supply and demand, and ultimately of solvency, we have to look at the lockdowns, the resulting labour scarcity, and the pre-existing weaknesses of the global economy.
The initial shocks came from the lockdowns in China, which hurt global commodity chains. With just-in-time management, companies don’t have inventories that can make up for even temporary work stoppages be they from strikes or mass contagion. Now, an increasing number of cities, regions and countries — including India with its 1.3bn population, crowded living conditions and immense informal sector — are attempting to shut down ‘non-essential’ parts of the economy. As always the poorest will be least able to find security, and more likely to suffer.
Lockdowns immediately hit consumption, as people have stopped going to cafés, bars and restaurants, cinemas, cruises and holidays. Most have stopped flying.
But more importantly, quarantines, illness and lockdowns are withdrawing a great mass of labour power from workplaces. Wildcat strikes by workers unwilling to work in hazardous conditions add to that number. Many are working from home with their children, unproductively when looking after them and painfully when ignoring them. Border closures hamper international trade and flows of migrant labour, which is essential to food production and the health and care sector in many countries. Quarantined or laid-off workers are consuming less, and will soon be struggling to pay rents or mortgages.
In short, Covid-19 has given global capitalism a labour scarcity shock, which is hitting demand and supply simultaneously. Workers cannot work during quarantines and lockdowns, and so firms cannot produce and workers cannot consume*. Capitalists and workers are becoming insolvent simultaneously. The 2007–08 mortgage debt crisis was exceedingly narrow compared to the generalised debt crisis which is on the horizon.
The result is the destruction of a huge amount of value. The destruction of the value of debt repayments will be felt first of all — while the depreciation of capital stocks and ‘human capital’ will unfold more subtly — as production lines gather dust and rust, and routines and skills atrophy. In short, pandemic insolvency signals a full blown crisis of capitalist and social reproduction.
In infecting the global economy, Covid-19 found an already weakened victim. Thus the effects of the lockdowns are greatly amplified by the longer-term decline of profitability and growth. Moreover, the immune response to the last crisis — unprecedented amounts of cheap credit — has created a huge number of zombie businesses who only survive by constantly replacing old debt with new. Over the coming weeks and months, innumerable companies will be incapable of rolling over their debts. Indebted and with slim bottom lines, companies and worker-consumers have long been unable to make buffers out of savings. The system was already vulnerable to shocks.
In some ways the situation is analogous to the crisis of post-war capitalism, which was given a fatal blow by the 1973 oil shock precisely because it was already weakened by falling profits and unsustainable debts. Just as that crisis gravely harmed the prestige and utility of Keynesianism, the present crisis is pushing policy makers to look for tools beyond the neoliberal playbook, as they had already started doing in 2008. The crisis of neoliberalism is most obvious when we look at those who stick to it, by reaffirming the private responsibility of health care, and, necropolitically, by forcing workers to work at the risk of the mass death of the immuno-compromised, the already sick, and the old.
Work and let die.
The latter path was has partially been taken by Italy, the UK and the US, which have attempted to maintain industrial production despite the lockdown in order to keep the economy running. In Italy, the confederation of industrialists, Confindustria, has lobbied to define a vast range of industries as ‘essential’ — including call centres and Sports Direct, and the government, facing the third largest per capita debt load in the world and growing bond yields, had been compliant until recently. Only after surpassing China in total dead count, and under threats of wildcat strikes at Fiat and whispers of a general strike from trade unions, has Italy begun to shut down industry.
The UK, meanwhile, is facing Brexit and led by a prime minister whose concern for life isn’t much greater than the Viceroy of India’s in times of famine. Now, the strategy of herd immunity and “taking it on the chin” has been replaced by a reluctant lockdown, after it became clear that this line of action would result in hundreds of thousands of deaths. In the US, the general incompetence of a decadent empire is on full display. The lockdowns, often initiated by state rather than federal authorities, have happened at a later point than in most other countries. The US and the UK are currently (April 4th) on their way to overtake Spain and Italy in death count, and the US already has the highest number of case counts on the basis of a comparatively low number of tests per capita.
Will workers there be willing to sacrifice their health and the lives of their parents, grandparents and vulnerable friends and relatives for the sake of the economy? The arguments for such mortal requests are already being floated. “WE CANNOT LET THE CURE BE WORSE THAN THE PROBLEM,” tweeted Trump, while Thomas Friedman asked in the New York Times: “Is our fight against the coronavirus worse than the disease?” The most frank example of this reasoning came from Lieutenant Governor of Texas, Dan Patrick, who told Fox viewers that grandparents would be willing to die to save the economy for their grandchildren. (Whether they will sacrifice wealth to help save the planet remains to be seen.)
Such crass social Darwinism has long been applied to the Global South in defence of structural adjustment programmes that would sacrifice public health care for the sake of economic growth (in this respect, neoliberalism never was that different from the classical liberalism of Herbert Spencer and the Late Victorian Holocausts). But politically and economically, it is more difficult for governments to apply necropolitical abandonment to their own populations. No matter how great the desire to avoid labour scarcity and an insolvency crisis, there currently seems to be no politically palatable way to avoid lockdowns.
Breaking with the script.
Historian Adam Tooze has noted that Covid-19 has put economic rationality in second place, as countries shut down economies in the name of public health. But just as importantly, it is reshaping our ideas of what economics is — and bringing back some pre-neoliberal insights into the economics of public health. Already in the 19th century it was known, that there is no way to avoid economic disruptions in an epidemic, but planned and coordinated disruptions will ultimately be less costly.
We already see this in East Asia, where countries are softening lockdown measures. Thus, it is likely that the countries that crashed their economies most resolutely will have a greater chance of weathering both the economic and epidemiological storms. In the pandemic, the biopolitics of populational health fares better than the necropolitics of abandonment and private health insurance. Thus, the current crisis may lead to a break with decades of public health austerity in Europe, and opposition to socialized healthcare in the United States.
Moreover, while many of the economic measures like sick pay and quarantine transfers may look like pure public health spending to encourage observance of the quarantine, these are also designed to address pandemic insolvency. This is why we are seeing mortgage and eviction moratoriums (but no rental holidays yet) in Italy and the UK, and extraordinary extensions of sick pay in Ireland. In the US, the Democrats are adopting policies previously only defended by the left wing of the party. These policies aim to enable people to comply with public health measures, as well as to prop up the economy. Rather than disaster socialism this may be characterized as life-support Keynesianism**: neither a doctrine nor a paradigm of governance, but a set of emergency measures aimed to shore up capitalist reproduction.
The crisis has renewed the importance of the contingency measures invented to deal with the last crisis, and brought with it new ones. Most dramatic is the US Federal Reserve’s policy, announced on 23 March, to buy up unlimited amounts of corporate bonds. Large sums are thrown directly at companies, workers and consumers. Neoliberal poster-boy and French president Emmanuel Macron has extended unemployment benefits significantly and suspended gas and electricity bills. Donald Trump is toying with a basic quarantine income and the UK will now cover up to 80% of wages of employees threatened by layoff. Benevolent as they are, compared to the austerity regime of the last decade, the money involved will mostly go to keep companies, landlords and mortgage owners afloat.
Flooding markets with cash while output declines may seem like a recipe for stagflation, but a decade of below-target inflation has put aside such fears for the time being. These measures ignore classical neoliberal obsessions with public debt and inflation, expressing a class politics that has no essential loyalty to any school of thought or mode of governance (an important exception to this is Germany, which is resisting issuing the eurobonds that are needed to save Italy and perhaps Spain from financial ruin and keep the euro together).
The logic of what governments are now forced to do is not just different, but contrary to much of what they have practiced and preached over the last decades. Whereas crisis management after 2008 was concerned with liquidity, the key concern is now solvency. And this generalisation of bailouts and ‘helicopter dumps’ of money — however uneven and unequal they are — makes for a very different crisis in political and moral terms.
That governments are faced with the problem of pandemic insolvency doesn’t mean they will tackle it in time. Hesitating, the US has seen an unprecedented vertical rise in unemployment claims —adding millions to the millions of Americans without health insurance. Apart from accelerating the public health crisis, a failure to stop unemployment growth will, as corporate and private debtors default, expand the crisis of insolvency into a crisis of financial liquidity much greater than in 2008.
A new terrain of struggle.
In many countries, media and opposition parties have so far held back criticisms of governments, prioritising national unity and coordination. However, as the crisis starts to bite and lockdowns become economically unsustainable, conflict is certain to increase.
Who will pay the inevitable costs of the lockdown and ensuing crisis? Will efforts to sacrifice people on the altar of growth be successful, and how many workers will volunteer for this treatment, when they can no longer pay their bills and feed themselves? Much of this depends on the policies that are currently being enacted to deal with public health and the worsening recession.
Pandemic insolvency presents us with a different terrain of struggle from the morality play of bank bailouts and austerity we’re familiar with. Bailouts will be part of the deal, but rather than just banks, states will have to bail out consumers and companies (most egregiously of batshit industries such as airlines and shale gas). Many in the elites will push for austerity once more, but given the scale of insolvency compared to the subprime defaults of 2007–2008, recovery will be more fragile, and austerity more counterproductive.
Through all this, governments are scrambling to find ways to avoid economic collapse, and what they have to do often doesn’t align with their experience or sense of expertise. These policies are ad-hoc and designed to be short term measures, like the doctor of Hippocratian medicine whose decision (krino) acted on the turning point (krisis) in the patient’s health. However, in all likelihood, Covid-19 isn’t a temporary exogenous shock. With the pre-existing economic weaknesses and the bankruptcies and mass unemployment that are beginning to unfold, a quick bounce-back may be impossible. If the patient recovers from Covid-19, it will be in a much weakened form, and likely dependent on the continuation of the life-support that was meant to be temporary.
Under such conditions, short-term measures from state subsidies to unprofitable labour to new measures of surveillance and control are likely to persist for better or worse. But the economic collapse may render life-support Keynesianism unsustainable, and Leviathan is often inept. The state of exception isn’t some total condition turned on by a switch. Biopolitics can also be democratic. Both are contested, and depend on institutional capacities and political competence, and measures of popular consent.
In Spain, where housing rights, feminist and municipalist movements grew massively in the ‘great recession’, the state of exception has played out somewhat differently than elsewhere. For instance, in Barcelona where I am quarantined, private hospitals have been taken over by the PSOE/Podemos government (but not nationalized as rumours had it), migrants have been released from crammed detention centers, and the city of Barcelona is aiming to temporarily abolish homelessness by transforming the city’s convention centre into living space with individual bathroom facilities, and taking over 200 tourist flats to host victims of gendered violence.
However, even non-leftist governments are being forced by the pandemic to take equally unusual steps. In the US, New York governor Andrew Cuomo is planning to use the national guard to seize ventilators needed in New York City from upstate hospitals, while Attorney General Barr is expanding early release of prisoners in prisons hit by the virus.
Livelihood or health.
The leverage of labour may have increased with its scarcity. Some workers have been officially declared essential: nurses, doctors, care workers, supermarket and logistic workers, agricultural workers, cleaners and sanitation workers, etc. In northern Italy and Austria, a very large proportion of the eastern European care workers who keep the care sector together both in elderly homes and as live-in carers have gone to their home countries, and are unlikely to return in the foreseeable future. Now they’re scrambling — and failing — to find staff and volunteers locally (itself a risky effort given the low capacity for testing even of workers who will care for vulnerable people). In the UK, Brexit-induced scarcities of medical staff, cleaners and farm workers has been further exacerbated by the virus.
All this creates space for unions, social movements and the left. Mutual aid initiatives are appearing, spreading experiences and ethics of solidarity, creating trust and reshaping expectations. While the material capacity to organise and protest is severely limited by the shut-downs, strikes of labour and rent remain options for many. Wildcat strikes have already swept northern Italy, and in the US, the number of workers walking out is on the rise.
For many, the refusal of rents or work are not matters of choice, but necessity. If such needs are organised, they can become a mighty force facing a vulnerable system and elites divided between abandoning their failing policy script or doubling down on murderous negligence. But the window of opportunity is brief. Just as many types of labor are being recognised as essential, a great mass of workers are thrown into unemployment.
When the reality of unemployment sets in, workers will face a contradiction between health and livelihoods. If the moment is not seized, social Darwinism will begin to gain support among those who may have little choice but to work and become carriers of death. The challenge for unions is to act now, while the management of the crisis of health and economy calls for policies that soften the threat of unemployment and enable people to quarantine. After that, the choice will be between capitulating to the logic of social Darwinism — or posing much more radical demands.
After death, paradise or purgatory
The coronavirus is likely to pass through the global population for a long time coming, with great human and economic consequences. Destruction of wildlife habitats and industrial animal farming are certain to bring about new epidemics. Droughts, floods, fires, ocean acidification and ecosystem collapse related to global warming and capitalist extractivism will continue to add to the instability of our newly multipolar world. Under these conditions, economic and public health planning becomes both more pressing and more difficult.
Many of those who have found themselves abandoned by the state, or, conversely, suddenly given rights that hitherto belonged in the domain of the impossible, may refuse to go back to normal. Life and our awareness of it has changed. More radically, there may be no normal to return to, given the scale of the economic, political and social crises. Perhaps crisis — the need to decide on matters of life and death — isn’t a phase, but the permanent condition of our time.
Times like these call for an interventionist state to keep the system together, or for mutual aid and solidarity, especially among people abandoned or targeted by the state. In some countries, the legitimacy of state administration and planning will grow, in others political legitimacy will fall precipitously, leading not just to mutual aid networks, but to attempts to build dual power.
A great struggle is about to happen over when and how economies are reopened, and how to exit the likely depression. We’re entering an interegnum, in which political and economic elites are internally split and the mobilization or demobilization of ordinary people can sway the balance or insurrections sweep away the contending fractions. In some cases the interregnum may open for a Green New Deal — and a struggle over its meaning and implementation — in others, we may see revolutionary crises, as the public health crisis, mass unemployment and shortages accelerate preexisting crises of institutional and political legitimacy. If the quarantine makes it hard to imagine the latter, it may be because we still haven’t reckoned with the economic fallout of Covid-19, nor with the fact that already 2019 was a year of global uprisings comparable to 2011 and 1968.
What economic paradigm — if any — may become dominant isn’t clear. The prestige of Chinese-style state capitalism is growing. Keynesian and Modern Monetary Theory economists will find jobs in high places, and market socialism-with-nationalisations will continue to strengthen its position as the dominant economic doctrine on the left. Much intellectual effort will go into retrospectively justifying and providing more lasting rationales for life-support Keynesianism. Importantly, there it is an open question whether the more interventionist state will be shaped by the right (in a register of control) or the left (creating spaces of freedom from wage labour and commodification of basic needs).
However, the economic and ecological unsustainability of growth will raise hard questions of how to distribute or redistribute the losses in a non-growth world. Fascism and populist welfare chauvinism will offer the false security of disaster nationalism, national hoarding and resource wars. Degrowth’s offer of a planned and willed exit from growth will continue to gain followers, and communist strategies will grow in importance, as the surpluses that can be divided between contending classes shrink.
Ecological breakdown and an absence of growth will pose questions that are already imposing themselves in the intense isolation of the lockdown: what are the joys of deceleration, what to do with an abundance of time and interdependence? And, more forcefully, it will radically narrow the space for social and political compromise.
Struggle is unavoidable. The question is who will organise it and how.
What will and can happen varies, as always, with context. Much will depend on how the economic, ecological and public health crises unfold and intertwine. The relations of political, organisational and class forces all matter, and so does the quality and strength of intellectual interventions. In other words, the outcome of the coming years will partly, and perhaps largely, depend on what we do in the coming months.
*Thanks to Nic Beuret for insisting on the centrality of the problem of labour scarcity to capital in this crisis.
**This coinage emerged in a conversation between and with Robert Knox and Chris O’Kane.
Bue Rübner Hansen is an editor at Viewpoint magazine, and writes about political theory, social movements and political economy. He has a PhD from Queen Mary University.
Published 26th March, updated 4th of April 2020.