One week before the Great Crash of October 1929- which precipitated the Great Depression- Irving Fisher of Yale University, perhaps the most distinguished US economist of his time, claimed that the American economy had attained a “permanently high plateau”. Three years later the national income had fallen by more than 50 per cent. No one, not a single economist, had seen it coming.
The usefulness of economics, observed that wittiest of economists, John Kenneth Galbraith, is that it provides employment for economists.
I gave the above example in my Blog post of 26 November 2011, in the aftermath of the so-called financial crisis of 2008-9. Nothing seems to have changed since. Will the Covid-19 crisis spell a similar return to “business as usual” on the part of politicians, bankers and economic “experts’; or will it lead to a radical overhaul of the world’s economic and financial systems and the shallow assumptions about human behaviour on which such systems have been built?
There is no doubt that the global spread of Covid-19 has exposed the lies, hypocrisies and fault-lines that run through many of our societies. If the virus had been confined to the non-Western world, it is unlikely to have become the #1 headline in the world’s media for days on end, as has been the case since first Europe, and then the US, became the epicentre of the pandemic. Just as a receding tide exposes the debris that we would rather not see, the virus has exposed the deep health and economic inequalities within rich nations, as well as between nations. Poor economies are on the brink of collapse. And it is the poor and vulnerable communities within the rich nations that have been disproportionately affected.
It was Franklin Roosevelt’s New Deal that lifted the American economy our of economic ruin following the Great Depression. This was a massive program of government investment in public works which put people back into work; social security for farmers and the unemployed; pension and housing schemes for the elderly; and financial reforms of Wall Street such as the Glass-Steagall Act which separated the operations of high-street banks from merchant houses (an Act that was repealed in 1999 as a result of financial lobbying).
When Bernie Sanders, in his election campaign, proposed an updated version of the New Deal, he was uniformly derided by conservative economists and politicians. “Where will the money for all this come from?” they jeered. Even his fellow-Democrats, such as the archetypal establishment figure Joe Biden, spent so much TV time portraying a vitriolic caricature of Sanders as an angry, obdurate old man who posed a socialist threat to the US’s “thriving” economy. Similarly, in the UK, the Labour Party’s election manifesto, promising increased investment in the National Health Service, a return to free university education and an end to the austerity measures of the past decade, was ridiculed by Tory campaigners who again claimed to be on the side of economic “reality”.
As soon as Covid-19 sent waves of panic across the United States, Donald Trump and his cohorts rushed through a Bill injecting a staggering $2 trillion into the economy. A quarter of that, predictably, goes to the least needy (the wealthy corporations with sufficient assets to borrow without government aid) and less than ten per cent to public services. Nevertheless, “Spend, spend, spend!” seems to be the new socialist mantra of the Right. But nobody is asking the question they put to Sanders, “Where is this money coming from?”
Similarly, in the UK, by a grim irony, Boris Johnson contracted the virus, was treated by the very health service he had planned to sell off to American “investors”, and promptly halted his pre-election Brexit tirade against foreigners (Britain’s health service is heavily dependent on foreign-born doctors and nurses). Criticism of Labour’s “inefficient” plans to revive public services that had steadily been robbed of resources by successive conservative regimes is an embarrassment to the many voters who are now belatedly expressing thanks for a public health service that is the envy of the world.
So, where does money come from? In an earlier age, money was a commodity, a precious substance used in economic exchange. Today, money is a more abstract concept. In rich nations, money is largely credit. When you go to a bank and ask for a loan, the bank doesn’t first check its deposits and reserves to see if it has enough to lend. It is not deposits that generate loans, but loans that generate deposits. Money is created by private banks “out of thin air”. The main function of a Central Bank (like the Bank of England or the Federal Reserve in the US) is to set the interest rate- to determine how much private banks can charge for the money they create. So, when governments justify public austerity by claiming that public spending diverts money from the private sector, they show that they don’t understand money. Government borrowing creates money that did not exist before.
Covid-19 has also exposed how dependent we are on those on the “underside” of our societies. The people at the frontline of the fight to protect us from the pandemic are the very people whom we routinely ignore, sometimes even revile, and- if the hiTech companies have their way- will soon be replaced by robots: those involved in social care, nurses and hospital orderlies, janitors, sales assistants, garbage collectors, undertakers, mental health workers and migrant labourers on farms and in the food industry. The bankers, CEOs, and celebrities whom the mass media normally fawn over steal way in their private jets to their private estates where they can self-isolate in luxury.
Sanders’ political career is over, but the challenge that invigorated his two unsuccessful campaigns for the presidency – that governments must use wealth not to serve as Nanny to business elites but to help those people who actually need help – has to become central to economic and political thinking in the post-Covid world.
As I mentioned in my last post, the Covid-19 crisis should also shake us out of our nationalist biases and lethargy to realise the importance of working for the global common good. The same selfish inertia which has made governments pay only lip-service to the threat of global warming also lay behind those governments’ under-funding of institutions such as the WHO which has been warning us against pandemics like the present one for some time now.
When Greta Thunberg spoke at the World Economic Forum in Davos, Switzerland in January 2020, she was rudely rebuffed and scorned by the US Treasury Secretary who told her to go to college and first get an education on how business runs. Who now needs to learn how business actually runs?