The economic crisis that caused the pandemic

The virus and capitalist society, Part 4: a note on the dialectic of cause and effect

The cause of the economic slump that has brought the world economy crashing down in recent weeks is almost universally attributed to the pandemic spread of the novel coronavirus which emerged in the Chinese city of Wuhan in the latter part of last year; it is assumed that the slump ultimately has a biological-medical cause, a virus. But while there is a grain of truth in that assertion, the real cause-and-effect relationship between the slump and the pandemic is not so simple. In fact, it is more accurate to say that the economic crisis caused the pandemic than the reverse. Grasping this fact is key to figuring out how to fight the simultaneous threats to health, jobs, and wages.

Steep fall of 2020 Stock Market Crash compared to 1929 crash. Graphic: The Independent

It is true that it was the pandemic that threw the world economy from an expansion phase into a recession phase, a turn marked by the stock market crash in February-March. Once the virus had spread beyond its city of origin and had clearly established itself in a series of other countries, the Dow Jones Industrial Average in the United States went from a record high in mid-February to losing 35% of its value within a month. The Guardian compared this to two previous crashes, the 2008 Global Financial Crisis and the 1929 crash that opened the Great Depression of the 1930s, noting, “In those two previous episodes, stock markets collapsed by 50% or more, credit markets froze up, massive bankruptcies followed, unemployment rates soared above 10% and GDP contracted at an annualised rate of 10% or more. But all of this took around three years to play out. In the current crisis, similarly dire macroeconomic and financial outcomes have materialised in three weeks.”

Hospitality workers file for unemployment benefits, Los Angeles, March 2020. Photo: Marcio Jose Sanchez, AP

While the stock market has since recovered part of its value, there has been no re-hiring of the workers left unemployed – some 26 million workers in the US alone, 16% of the workforce even at this early stage. This represents a catastrophic increase in competition among workers for jobs. Ordinary market mechanisms dictate that wages will be forced down by a corresponding degree. The 20% wage cut that many workers have been forced to accept in New Zealand in the lockdown period will become the starting line for further inroads when lockdown ends. One early indication of what’s in store is the terms of new hiring by KFC of delivery workers to deliver food as the Level 4 lockdown is lifted in New Zealand. The new workers will be ‘independent contractors,’ entitled to neither the legal minimum wage, nor holiday pay or sick leave.

Delta Air Lines jets parked up in Victorville, California on March 28. Vast amounts of capital are lying idle. Photo: AirTeamImages

In an immediate sense, the state-mandated lockdowns and restrictions on travel in response to the virus were the cause of this sudden tipping from boom to bust phase. The border closures and compulsory quarantine measures spelt death to airlines, hotels, cruise ships and all tourism-dependent businesses. The lockdowns spelt death to small retailers, restaurants, service industries, and even some of the larger retail chains that were required to shut down. In the US, restaurants alone employ 15.7 million people, 10% of the total US labour force. US airlines employed 750,000 people before the slump. These are substantial sectors of the workforce, and substantial amounts of capital locked up idle on airport runways and city mainstreets, and it seems unlikely that there will be any quick relief from the travel restrictions which have idled the planes. Tens or even hundreds of thousands of small businesses are bound to fail in New Zealand, millions in the United States. The Bank of New Zealand is already predicting a contraction of Gross Domestic Product (GDP) by 18% in the second quarter, followed by a 9% recovery in the third. The Westpac bank predicts negative interest rates by the end of the year. For comparison, in the 1930s Depression, GDP declined by about 30% over a period of three years in the worst-affected country, the United States.

Oil tankers waiting off the coast of California, unable to unload their cargo. Falling demand for oil has sent the price of oil through the floor.

The disruption of commerce due to the lockdowns then aggravated the slump – the most obvious sign of which has been the collapse in the oil price, with storage facilities overflowing and oil tankers parked up off the US coast, due to the cessation of transportation on land and in the air. Farmers have had to dump milk and plough in produce due to the disruption of distribution and retailing. The disruption to industrial output due to lockdowns, especially of Chinese manufacturing, cut worldwide supply lines and idled further industries across the world for lack of inputs and spare parts. How deep this particular slump goes will depend on the degree to which China gets dragged down by it. China largely managed to ride out the storm of the 2008 crisis. But the effects on world trade are already far greater in this crisis, and China’s industry is heavily geared towards exports.

Onions about to be buried in Idaho, US. While many are hungry, food is being wasted due to disruption of commerce. Photo: Joseph Haeberle, NYT

Underlying all these factors, correctly attributed to the pandemic and government responses to it, is the increasing long-term instability of capitalist production and commerce in recent decades, which have already been in a kind of smouldering depression conditions, at least since the 2008 financial meltdown. Were it not for the virus, something else would soon have triggered the crash – a drought or crop failure, the collapse of a big bank, a war. The sudden change in the mass psychology of the investors on the world’s stock markets, where the usual motivator of greed abruptly switches to fear, had a clearly identifiable viral reason in this case. Usually the trigger for a stock market crash is more diffuse – but that doesn’t stop it happening. The crash doesn’t take place in a vacuum.

Steel mills in Lioaning province, northeast China. World manufacturing is increasingly centred on – and dependent on – China. Photo: Andreas Habich

On the contrary, it takes place in a world where the accelerating development of capitalist social relations in the semi-colonial countries and the increasing integration of the world market means that every country is instantly drawn into the vortex of depression. Where the concentration of world manufacturing in China increases the dependence of every national economy on China. And where the universal adoption of just-in-time cost-cutting practices by capitalist industry worldwide has increased the vulnerability of national economies to shocks of this kind. This fragility was starkly exposed by the inability of the wealthiest economies in the world to produce and distribute simple items like face masks and plastic protective gowns when they were needed.

On top of these, the most de-stabilising factor of all is the historically unprecedented level of debt, which threatens to engulf the world banking system. Global debt hit a record high of over $250 trillion in 2019, led by a surge in borrowings in the U.S. and China. (By comparison, total global debt was about $100 trillion in the year 2000. In the same period, world GDP has grown about 50%.) The total US federal government debt is just over $23 trillion, or 103.2% of GDP.

Banknotes issued in Zimbabwe during the course of a single year, from July 2007 to July 2008 – in denominations of 10 dollars to 100 billion dollars. Hyperinflation like this is likely to ravage many other countries, as capitalism totters under the weight of debt. Image: Wikipedia

Vast regions of the semi-colonial world, especially in Africa, and in this region, the Pacific nations, remain mired in unpayable debts. China’s ‘aid’ to Africa, just like that of the old imperialists, come with strings attached. Already in 2008, Zimbabwe experienced a period of catastrophic hyperinflation, during which the monthly salaries paid to teachers and civil servants were worth less than the price of a local bus fare. In February 2020 inflation hit 500% once again; Zimbabwe appears to be entering a second round of hyperinflation.

The corporate world was already awash with debt as the result of a decade of Quantitative Easing programmes; it now gets further massive loans. Matt Taibbi quotes financial analyst Dennis Kelleher in an article in Rolling Stone: “ ‘Corporate debt since the [2008] bailout has grown to $10 trillion,’ says Kelleher. ‘Of that, $3 trillion is a notch above junk level, what I’d call on the bubble of junk.’ It’s been estimated, for instance, that as many as 16% of American companies are ‘zombie companies,’ i.e., they don’t have enough revenue to even pay interest on their debt. As Kelleher points out, many of these firms might not have survived even a mild economic downturn. Propping up this freak show, even if indirectly, is now going to become part of the War on the Virus… The notion that the Fed can endlessly pump new money into the economy once inspired fears of inflation, but the COVID-era mantra is that “Unlimited QE” or “QE infinity” no longer carries such dangers,” Taibbi adds.

Growth of global debt since 1999. Graphic: International Institute of Finance

And finally there are unprecedented levels of consumer debt – also promoted by historically low interest rates – the home loans, cars and appliances bought on credit, credit card debt and more. New Zealand has among the highest levels of consumer debt in the world.

In a slump, ‘good’ debts can rapidly turn ‘bad’, and when that happens, this mountain of debt threatens to collapse in a credit and banking crisis, causing economic activity of all kinds to seize up. Already in 2019, the International Monetary Fund (IMF) warned that almost 40%, or around $19 trillion, of the corporate debt in major economies such as the U.S., China, Japan, Germany, Britain, France, Italy and Spain was at risk of default in the event of another global economic downturn.

Hence the frantic efforts of governments the world over to pour funds into the black hole to stave off such a collapse. Federal Reserve Chairman Jerome Powell seeks to assure the capitalist class that they can continue to do this indefinitely with ‘running out of ammunition.’ But at some point, the divergence between the amount of money in circulation and the total value of goods and services being produced must be resolved. The way this happens in the capitalist market is that the value of money becomes devalued – that is, by inflation. Some economists were warning of the dangers of inflation and hyperinflation years ago, resulting from the Quantitative Easing measures taken in response to the 2008 financial meltdown.

A similar warning note was sounded as recently as November 2019. “A solution some countries with high levels of unsustainable debt have tried is printing money. In this scenario, the government borrows money by issuing bonds and then orders the central bank to buy those bonds by creating (printing) money,” wrote two economists from the US Federal Reserve. “History has taught us, however, that this type of policy leads to extremely high rates of inflation (hyperinflation) and often ends in economic ruin.”

Now “this type of policy” has just been massively expanded. The capitalist class has no other solution to offer.

Karl Marx. At the root of all these morbid symptoms lies an ordinary law of capitalism discovered by Marx: the tendency of the rate of profit to fall.

At the root of all these morbid economic symptoms lies an ordinary law of capitalism described by Marx 150 years ago: the tendency of the rate of profit to fall. It works something like this: Competition constantly drives a capitalist to invest in more productive machinery, replacing workers with machinery. Doing so allows that capitalist to reap bigger profits than his rivals – for a while. But eventually, all the other capitalists are forced to do the same, and thereby a new, lower average labour time for the production of that commodity becomes established. The price of the commodity consequently falls, and our capitalist’s profit is reduced to the same level as before. Except that now, in order to obtain that profit, he has more capital invested in machinery per worker employed. His rate of profit to capital invested has fallen.

In the long capitalist boom that followed the Second World War, the rate of industrial profit peaked quite early – in 1950 in the US – but for a long time a slow fall in the rate of profit was offset by a huge growth in their mass of profits. Industrial capacity was greatly expanded, and great new markets emerged for cars, refrigerators, televisions, and more. By the 1970s, growing inflation and stagnation indicated that this long expansion reached it limits, and the 1987 stock market crash signaled a clear turn in the curve of capitalist direction in a downward direction.

Worker on car assembly line,  United States, 1950s. New markets for cars, domestic appliances fueled a long industrial expansion, which ended definitively with the 1987 stock market crash. Photo: University of Wisconsin Libraries

The declining rate of industrial profit had by that stage already produced a growth of speculation in fictitious capital – stocks, corporate and government bonds, and newer “financial products” – futures, derivatives, and an ever-widening array of paper securities. This was a major factor in the ’87 stock market crash itself. But in the period since 1987 these forms of speculation have mushroomed anew, along with speculation in currency and real estate – anything but investment in expanding productive capacity in industry.  Capitalist investors, faced with declining rates of industrial profit, seek higher returns in these forms of gambling and speculation – none of which actually creates any new value. Quantitative Easing and low interest rate policies pursued by governments and central banks to overcome the effects of the 2008 financial crisis have amplified the scope of all of these forms of speculation. One major result in New Zealand, for example, has been skyrocketing real estate prices, driven by speculation and fuelled by historically-low interest rates. Consequently, there is a major housing crisis.

Bangladesh clothing workers. The drive for cheaper sources of labour has resulted in the shift of world manufacturing from the imperialist countries to Asia. Photo: Bangladesh Daily Star

The falling rate of profit was also the driver of the shift of the centre of gravity of world manufacturing from the old imperialist centres of Europe and North America to the more industrialised countries of the semi-colonial world like Mexico and Brazil, Korea, and of course, China. Capitalists attempted – and partly succeeded, for a couple of decades – to compensate for the falling rate of profit by finding cheaper sources of labour in China, thereby regaining a larger share of the value produced. Industries like the clothing industry, where the only machinery needed was a sewing machine and an electricity supply, went beyond China to the even cheaper labour of Cambodia, Vietnam and Bangladesh.

The shift to cheaper-labour countries is not the only way in which the capitalist class seeks to counteract the falling rate of profit. There is also an unrelenting drive to cut back on any expenditure that doesn’t turn an immediate profit, from warehousing (hence the adoption of just-in-time practices), to social services and hard-won social welfare benefits, to state expenditure on necessary infrastructure like roads. Finally, there is a drive to free capital from any regulation which impinges on profit margins, such as safety and environmental protections. Regulatory agencies overseeing safety, such as the Federal Aviation Administration (FAA) which is supposed to guarantee safety in the skies, and the Food and Drug Administration, which supposedly regulates the pharmaceutical industry, are brought under the direct control of the very capitalists who they are supposed to be regulating, and become agencies of cover-up, gambling with people’s lives on a colossal scale. A recent example is the scandal surrounding the collusion of the FAA in certifying and rushing into service the major modifications to the Boeing 737 Max, resulting in hundreds of deaths in plane crashes.

The situation is epitomised by the fate of a pandemic preparation plan in California. A decade ago, the State of California spent $200 million on pandemic preparations that included assembling the materials for three 200-bed hospitals, capable of being deployed to wherever needed on flatbed trucks, a stockpile of 50 million N95 respirators, 2,400 portable ventilators, and 21,000 additional hospital beds. But the fallout from the financial crisis intervened; the relatively small funds needed just to maintain those resources were cut in a budget-trimming exercise in 2011. The entire plan was abandoned and the materials given away or dumped.

Such economic conditions, which could be characterised as a smouldering depression from 1987, and which deteriorated further after 2008, also saw the resurgence of infectious diseases such as tuberculosis in the 1990s – a disease for which there are both vaccines and cures – as well as epidemics in which there was no microbial agent at all, such as the current epidemic of opioid addiction in the United States. Up to the time the Covid-19 pandemic struck, the opioid epidemic had taken the lives of nearly half a million people in the US, 130 each day (and as the two afflictions intertwine, that daily toll is bound to rise.) As an article in the New York Times explains, “Several studies have pointed to Purdue [Pharma, the drug manufacturer]’s aggressive marketing of OxyContin as a significant contributor to the opioid epidemic. The marketing took various forms, including calling and visiting doctors; paying them for meals and travel; providing gifts; and funding pain treatment groups that urged liberalization of opioid prescribing. Some of the company’s marketing messages minimized the potential for OxyContin to lead to addiction, for which it paid over $600 million in fines in 2007.” It is corporations like this which are now being entrusted with the task of developing a vaccine for Covid-19.

It is the totality of this long-drawn-out, slow-burning depression which created the conditions in which the Covid-19 virus could become a pandemic – in other words, caused a disease to transform into a pandemic. In Wuhan, cause and effect reversed their respective positions, as they frequently do in a dialectical development: the disastrous health effects of the slow-burning depression became the cause of a dramatic acceleration and deepening of that depression.

This, then, is the problem that dares not speak its name.

So unstable is the world capitalist economy that not a single capitalist politician dares to discuss these questions honestly – in public at least. (You can be sure that right now there is a lot of frantic whispering going on in the back rooms of the stock exchanges and parliamentary chambers). This is not so much because they are ignorant of the situation, but rather because they are terrified that if they lift the lid on the problem in public, it might be their own loose-lipped press statement that sends the stock market into a new freefall, or their own op-ed in the New York Times that triggers a stampede on bank deposits.

And so, at the very moment that unprecedented sums of public money are being committed to the most dubious of causes, a weird silence descends in bourgeois political forums. The noisy US presidential election primaries fall silent. Parliaments decide that their highest civic duty is to pack up and disperse in lock down. News media run detailed daily reporting of the pandemic – to the exclusion of all else. In the place of debate of government policies, there is a complicit ‘wartime’ consensus among the bourgeois parties; in place of journalistic investigation and questioning, a rapt audience for the daily pandemic press conferences of the national leaders. Bonapartist dictators and demagogues, like Duterte in the Philippines and Modi in India, step forward with renewed confidence. Rightist and fascist currents begin stepping out of the shadows.

Nurses block Westminster Bridge, London, 30 April 2020. Workers are resisting the simultaneous assaults on our health and wages.

It is in this situation that the working class needs to begin organising its forces and clearing its head to fight for its own interests, not just against the pandemic but also against the economic conditions that caused the pandemic, and the class which seeks to take advantage of both to make further inroads. The capitalist class has been weakened, not just economically but also politically and morally, by the slow-burning depression – a fact perhaps best illustrated by the theatre of recent White House press conferences.

The same is not true of the working class. Numerically, and therefore economically, the class worldwide is stronger than ever before in its history, strengthened immeasurably by the new contingents in Wuhan, Dhaka, Mumbai, Sao Paolo, Seoul, Lagos, and elsewhere.  These new contingents are already leading the way, like the clothing workers of Dhaka. They are being joined by a new generation of workers in the imperialist countries, above all in the United States, who are re-joining the struggle after a long period of quiescence. Our weakness is organisational and political, and unlike the weakness of the capitalist class, those weaknesses can be overcome.


Footnote: In thinking about these questions, I was reminded of some comments made in the 1990s by the biologist Richard Lewontin about another respiratory disease which accompanied the formation and earliest struggles of the working class – tuberculosis. Lewontin tells us that “Any textbook of medicine will tell us that the cause of tuberculosis is the tubercle bacillus, which gives us the disease when it infects us. Modern scientific medicine tells us that the reason we no longer die of infectious diseases is that scientific medicine, with its antibiotics, chemical agents, and high-technology methods of caring for the sick, has defeated the insidious bacterium.” But then he points out that tuberculosis was extremely common in the sweatshops and miserable factories of the nineteenth century, whereas tuberculosis rates were much lower among country people and in the upper classes.

Furthermore, “The death rates from the major killers like bronchitis, pneumonia, and tuberculosis fell rather regularly in the nineteenth century, with no obvious cause. There was no observable effect on the death rate after the germ theory disease was announced in 1876 by Robert Koch. The death rate from these infectious diseases simply continued to decline as if Koch had never lived. By the time chemical therapy was introduced for tuberculosis in the earlier part of this [20th] century, more than 90 percent of the decrease in the death rate from that disease had already occurred.”

Lewontin comments, “As far as we can tell, the decrease in death rates from the infectious killers of the nineteenth century is a consequence of the general improvement in nutrition and is related to an increase in the real wage…The immense betterment of nutrition also explains the drop in the higher rate of tuberculosis among women than among men. In the nineteenth century, and even long into the twentieth in Britain, working men were far better nourished than home-bound women. Often if meat could be afforded for the table in an urban working-class family in Britain, it was saved for the man.  … Although one may say that the tubercle bacillus causes tuberculosis, we are much closer to the truth when we say that it was the conditions of unregulated nineteenth century competitive capitalism unmodified by the demands of labor unions and the state, that was the cause of tuberculosis.”  (R C Lewontin, The Doctrine of DNA – Biology as Ideology pp. 41-44).

One response to “The economic crisis that caused the pandemic

  1. Pingback: New Zealand Labour Party re-elected on an anti-labour course | A communist at large·

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