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Whither global capitalism?

Mainstream economists and commentators, it seems, are worried that the global economy is going to come crashing down as a result of the COVID crisis. That’s why they’re willing now to consider the possibility that the current crisis is more than a normal recession, more serious even than the so-called Great Recession; in their view, it’s an economic depression.

That, at least, is the argument they present up front. But there’s something else going on, which haunts their analysis—that capitalism itself is now being called into question.

But before we get to that alarming specter, let’s take a look at the logic of their analysis about the current perils to the global economy—starting with the Washington Post columnist Robert J. Samuelson, who is basically taking his cues from a recent essay in Foreign Affairs by Carmen Reinhart and Vincent Reinhart.*

Their shared view is that the current slowdown is both more severe and more widespread than the crash of 2007-08, and the recovery will be much slower. Therefore, they argue, the COVID crisis represents the worst economic downturn since the Great Depression of the 1930s.

This is a big deal: mainstream economists and commentators are uneasy about invoking the term “economic depression.” They certainly resisted it for the crisis that occurred just over a decade ago, eventually devising a Goldilocks nomenclature, dubbing it the Great Recession (not as hot as the Great Depression but not as cold as a normal recession). As regular readers know, I had no compunction about calling it the Second Great Depression. And, according to their own logic, neither Samuelson nor the Reinharts should have either.

According to Barry Eichengreen and Kevin O’Rourke, the financial crisis and recession had led to as big a downward shock to global industrial production in 2008 as the 1929 financial crisis, and had pounded stock market values and world trade volumes harder in 2008-09 than in 1929-30. Thus, from the perspective of the magnitude of the initial shock, the global economy was in at least as dire shape after the crash of 2008 as it had been after the crash of 1929.

Moreover, the downturn that began in 2007-08 was “largely a banking crisis” (as the Reinharts put it) only if they ignore the grotesque levels of inequality that preceded the crash (based on stagnant wages and rising profits)—which in turn fueled the need for credit on the part of workers and the growth of the finance sector that both recycled corporate profits to workers in the form of loans and led to even higher profits, creating in the process a veritable house of cards. At some point, it would all come crashing down. And, eventually, it did.

In any case, Samuelson and the Reinharts are now willing to take the next step and use the dreaded d-word to characterize current events. Here’s how the Reinharts see things:

In its most recent analysis, the World Bank predicted that the global economy will shrink by 5.2 percent in 2020. The U.S. Bureau of Labor Statistics recently posted the worst monthly unemployment figures in the 72 years for which the agency has data on record. Most analyses project that the U.S. unemployment rate will remain near the double-digit mark through the middle of next year. And the Bank of England has warned that this year the United Kingdom will face its steepest decline in output since 1706. This situation is so dire that it deserves to be called a “depression”—a pandemic depression.

And Samuelson does them one better:

In one respect, the Reinharts have underestimated the parallels between the today’s depression and its 1930s predecessor. What was unnerving about the Great Depression is that its causes were not understood at the time. People feared what they could not explain. The consensus belief was that business downturns were self-correcting. Surplus inventories would be sold; inefficient firms would fail; wages would drop. The survivors of this brutal process would then be in a position to expand.

Something similar is occurring today.

Clearly, Samuelson and even more the Reinharts are worried that the global economy—their cherished vision of the free movement of capital (but not people) and expanding trade according to comparative advantage—is currently being imperiled and may not recover for years to come. The volume of world trade is down; the prices of many exports have fallen; corporate debt is climbing; and the reserve army of unemployed and underemployed workers is massive and still growing. The prospects for a return to business as usual are indeed remote.

That’s pretty straightforward stuff, and anyone who’s looking at the numbers can’t but agree. What we’re witnessing is in fact a Pandemic—or, in my view, a Third Great—Depression.

But that’s when things start to get interesting. Because the Reinharts do understand (although I doubt Samuelson does, since he’s really only concerned about government deficits) that, when you resurrect the term depression and invoke the analogy of the 1930s, you also call forth widespread discontent, massive protest movements, and challenges to capitalism itself. Here’s how they see it:

The economic consequences are straightforward. As future income decreases, debt burdens become more onerous. The social consequences are harder to predict. A market economy involves a bargain among its citizens: resources will be put to their most efficient use to make the economic pie as large as possible and to increase the chance that it grows over time. When circumstances change as a result of technological advances or the opening of international trade routes, resources shift, creating winners and losers. As long as the pie is expanding rapidly, the losers can take comfort in the fact that the absolute size of their slice is still growing. For example, real GDP growth of four percent per year, the norm among advanced economies late last century, implies a doubling of output in 18 years. If growth is one percent, the level that prevailed in the shadow of the 2008–9 recession, the time it takes to double output stretches to 72 years. With the current costs evident and the benefits receding into a more distant horizon, people may begin to rethink the market bargain.

Now, it’s true, their stated fear is that “populist nationalism” will disrupt multilateralism, open economic borders, and the free flow of capital and goods and services across national boundaries. That’s as far as their stated thinking can go.

But the apparition that lurks in the background is that rethinking the “market bargain”—what elsewhere I have called the “pact with the devil,” that is, giving control of the surplus to the top 1 percent as long as they made decisions to create jobs, fund schools and healthcare, and be able to tackle problems like the novel coronavirus pandemic so that the majority of people could lead decent lives—will mean expanding criticisms of capitalism and the search for radical alternatives.

That’s the real specter that haunts the Pandemic Depression.

 

*Samuelson sees the wife-and-husband Reinharts as “heavy hitters” among economists:  “She is a Harvard professor, on leave and serving as the chief economist of the World Bank; he was a top official at the Federal Reserve and is now chief economist at BNY Mellon.”

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The Coronavirus depression: here are some photos they may be looking at in 50 years

In 2011, the Business Insider Australia put together a gallery of photos from the Second Great Depression. Their justification was that, “In 50 years, when historians write about this period. . .it will be photos like these that tell the story.”

Their idea was to assemble a collection that would serve the same purpose as the iconic photos of the first Great Depression (many of them having been carefully staged, edited, and cropped), which tell a particular story of that time and the people who fell victim to its widespread, dramatic, and devastating economic and social crises.

I decided to do the same for the current economic depression—even though, I fully understand, it’s far from being over. Actually, I started out by musing about the bread lines in the 1930s in comparison to the long lines outside food banks in recent weeks. Later, the idea expanded and I ended up with the following fifteen photos.

Clearly, these do not rise to the level of many of the photos from the first Great Depression, by such famous photographers as Dorothea Lange, Walker Evans, and Marion Post Wolcott. They’re all, with one exception (by Tom Barrett, the tenth one in the sequence, in Milwaukee), copied from online news media.

But together they do tell a story of these times. . .

G.E. employees and their families protest outside of Appliance Park in Louisville, KY

Cars line up in the parking lot at a drive-through food pantry at Woodland Mall in Grand Rapids, MI

A food bank at the Open Door Church of God in Christ in Brooklyn, NY

Amazon employees hold a protest over conditions at the company’s distribution facility on Staten Island, NY

Hew Kowalewski, a furloughed employee of Disney World, stands next to a window of his home in Kissimmee, FL

People who lost their jobs wait in line to file for unemployment benefits at an Arkansas Workforce Center in Fayetteville

Cashiers at a grocery store in Brooklyn, NY

A worker carries Amazon boxes in New York City

A tired healthcare worker is seen by the Brooklyn Hospital Center

Downer Theatre in Milwaukee, WI

34th Street in New York City

Passengers on the 24 Divisadero bus in San Francisco, CA

Central American migrants seeking asylum return to Mexico over the border bridge between El Paso and Ciudad Juarez

A pedestrian walks past graffiti that reads “Rent Strike” in Seattle’s Capitol Hill neighborhood

Milwaukee resident Jennifer Taff holds a sign as she waits in line to vote at Washington High School in Milwaukee, WI

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How to turn a recession into a depression

Greece is a perfect example of how to turn a bad economic situation into something even worse. As Reuters reports,

Rescue funds from the European Union and International Monetary Fund saved Greece from bankruptcy, but the austerity and reform policies the lenders attached as conditions have helped to turn recession into a depression.

As a result, the poverty rate in Greece almost doubled (between 2008 and 2015), rising from 11.2 percent to 22.2 percent.

And average (per adult) GDP has fallen below what it was three decades ago.

Meanwhile, IMF and European institutions are demanding further austerity measures (equivalent to 2 percent of gross domestic product) before agreeing on a new deal to aid Greece.

Chart of the day

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As Joseph Stiglitz has observed,

the economics behind the program that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences

Once again on the Great Gatsby curve

This week, we taught The Great Gatsby and the so-called Great Gatsby curve in our course, A Tale of Two Depressions.

The next day, Raj Chetty et al. went public with their own study of income mobility. The corresponding newspaper headline was “Upward Mobility Has Not Declined.”

And that was a bit of a surprise, since the original Great Gatsby curve studies had found a positive relationship (across countries) between income inequality and income immobility. Clearly, inequality has increased in the United States since the mid-1980s but income mobility hasn’t much changed.

For example, the probability that a child reaches the top fifth of the income distribution given parents in the bottom fifth of the income distribution is 8.4% for children born in 1971, compared with 9.0% for those born in 1986. Children born to the highest-income families in 1984 were 74.5 percentage points more likely to attend college than those from the lowest-income families. The corresponding gap for children born in 1993 is 69.2 percentage points, suggesting that if anything intergenerational mobility may have increased slightly in recent cohorts.

However, what the study does reveal—which is missing from the headline accounts of the study—is that (a) income inequality did in fact increase over time in the sample (which means the consequences of the “birth lottery” are larger today than in the past) and (b) the major source of inequality over the course of the past three decades is the growing gap between the top 1 percent and everyone else (which is not, in fact, correlated with intergenerational immobility among quintiles).

And so, unless and until things change, we remain pretty much where F. Scott Fitzgerald left us back in 1925: falling further and further behind the “careless people,” who

smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together, and let other people clean up the mess they had made. . . .

Old trails of the New Deal

We often forget how important New Deal programs were for unemployed workers then, and what a legacy they left for us today.

One of those programs was the Civilian Conservation Corps, which cut ski trails in New England (such as Nose Dive, above, which can still be enjoyed on Mt. Mansfield in Vermont):

From 1933 until 1942, the C.C.C. deployed almost 3 million unemployed men between the ages of 18 and 25 across the nation to plant trees, hew trails and build roads, bridges and park structures. Workers lived in camps run by the Army, were clothed and fed, and received $30 a month. Communities across the country benefited from new state parks and infrastructure.

The program also helped catalyze the nascent ski industry in the United States. Many New England ski resorts were built around trails first cut by the C.C.C. “In the scope of what the C.C.C. did, it was a real drop in the bucket,” said Jeff Leich, director of the New England Ski Museum. “And yet you think about Cannon, Wildcat, Stowe and what that’s meant for the economy of the region.” The winter tourism industry they helped spawn remains an important source of revenue throughout Vermont, New Hampshire and the Berkshires.

I’m now going to have to go in search of some of those trails.