The Coronavirus Crisis Exposes How Fragile Capitalism Already Was
When this is all over, will we be able to patch up the economy and get things back to normal? Trump certainly claims so. But he’s wrong.
Weak attempts to patch up the problems of capitalism—as much as the coronavirus itself—are what got us into the current economic meltdown in the first place.
Let’s define some terms. When we talk about the health of the economy, there are two parts: the “real economy,” which includes all the goods and services that we produce, and the “financial economy”: money, stock markets, banks, and credit.
The coronavirus has affected the economy in stages:
First, we saw the impact on the real economy as the spread of the virus in China led to slowed production in January 2020. China shut down factories across the country to prevent the spread. Suddenly all kinds of products were not being manufactured, and other countries that buy from China saw the ripple effect. Apple began moving some production from China to other countries. Ford and Toyota shut down some plants. FedEx and UPS changed some delivery routes.
Next, we saw the delayed impact on the stock market. That did not happen right away, as some politicians (like President Trump) asserted that the virus was under control. The stock market continued to flourish through February.
But stock markets operate based on prediction, and investors were soon weighing the virus’s effect on production and consumption against the likelihood of government bailouts. From late February to the end of March, the Dow Jones recorded its worst first quarter performance since 1987.
By March, we began to see the impact on the real economy in much of the rest of the world, beyond China. Businesses stopped production or stopped providing services; restaurants closed; dry cleaners closed. A few industries did more business, such as pharmacies and grocery stores. But for the most part, huge numbers of people lost their jobs or lost hours. By April this had spread to much of the world.
The stock markets kept fluctuating as investors waited to hear the size and nature of government stimulus packages. When Congress passed a large stimulus in mid-March, the stock market rebounded for a bit, but then dropped again once unemployment numbers were released. We are likely to see continued fluctuations in the months ahead as the world adjusts to the realities of coronavirus.
DYSFUNCTION ISN’T NEW
The pandemic is exposing just how dysfunctional our economic system was to begin with. Capitalism is ideologically based on the principles of individualism and competition, but it becomes completely clear in a pandemic that what’s needed is solidarity: collective solutions that help everyone.
For example, if we assume profit should guide health care decisions, millions of people won’t be able to afford treatment, or even testing, and the virus will just continue to spread. The market solution would let rich people buy ventilators for themselves, just in case, while hospitals need them. So far, the U.S. has made no promises that a vaccine will be free or affordable.
In addition, the pandemic has exposed weaknesses that were already there in our economy. The real economy has been struggling since the 2008 crash. The virus didn’t cause the stock markets to falter in February: it was only a trigger. You could say that the real economy was already immune-compromised and had little ability to withstand disruption.
One possible path out of the 2008 crash would have been for governments to try “managed capitalism,” where governments make long-term plans to build and support certain industries, such as “green production”; invest in those industries; put money into rebuilding infrastructure; and regulate what investors can and cannot do (such as making corporations pay taxes so that some of their profit is used for public goods like schools rather than for speculative investing), so the economy is not so vulnerable to bubbles and recessions. That didn’t happen.
But it is not even clear whether that path would have worked. In fact, economic growth in most of the rich countries slowed in the 1970s and has never recovered since then. And even where we have seen some growth, such as a steady and strong growth in productivity, it has not brought about an increase in the standard of living for the average worker.
‘SOLUTIONS’ MADE THINGS WORSE
Capitalism has managed to limp along through a series of reflexive actions that were meant to be solutions. Mostly these “solutions” were short-term patches that just made things worse:
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One patch was private credit and debt. Since the 1970s, the average worker has had a harder time maintaining a middle-class lifestyle. When “The Simpsons” first aired, a worker with a high-school education owning a house and supporting a family on one income wasn’t unusual; today that’s an unattainable dream to many people with a college degree.
So many workers have relied more on borrowing and credit cards just to survive. This created personal debt crises and tremendous instability. Forty percent of Americans say they don’t even have $400 in savings for an emergency—and that was before the pandemic.
But this debt was also a patch for the global economy, as it allowed consumers to keep buying things even if they didn’t have the wages to support their consumption. The economy can’t run if no one is able to buy the goods and services that are produced.
Another patch was government debt. Governments have been lowering taxes on corporations and the wealthy since after WWII, leaving the public coffers with less revenue. When economic growth slowed dramatically in the 1970s, governments then had to stretch their budgets and borrow more money. Government debt is not necessarily a problem, but it was used as an excuse to cut public jobs and public programs, from food stamps to national park staffing to the postal service and more.
Another patch, beginning in the early 1980s, was to change the rules for banks and investors, allowing them to make riskier and riskier investments with little accountability if those investments went bust. For example, mortgages stopped being simply mortgages and became complicated financial products that even Wall Street didn’t understand. When these products collapsed in 2008-09, bringing the real estate market down with them, the government bailed out Wall Street but not the people who lost their homes.
Companies began to shift from earning their profits by selling services and goods to making profits from financial activity. In the 1980s, about 10 percent of corporate profits came from the financial sector, but now it’s over 25 percent. To make things worse, they distribute those profits to shareholders instead of investing them in the company's business, or they buy back their own stock in order to boost its price. A huge portion of our economy, the unreal part, is now a giant casino. It exists on bets—very rich investors (people and corporations) making very large bets.
THE ILLUSION OF A STRONG ECONOMY
Together, these patches have created the illusion of a strong economy—the one President Trump likes to brag about—because there is a lot of money out there and a few people are piling up massive amounts of wealth. But these massive amounts of money don’t represent real goods and services. For example, until recently Uber and WeWork looked like strong businesses and big money-makers simply because investors bet that they would be. They were not.
None of these supposed solutions were solutions at all. They mostly made things worse. Patching the economy with credit means we now have record-breaking levels of household, medical, credit card, and student loan debt, alongside falling or stagnant wages. Deregulating Wall Street created a volatile economy prone to bubbles.
Furthermore, this “financialization”—bolstering the casino part of the economy—shifts the economy away from investing in long-term projects like infrastructure and instead puts money into anything short-term that can turn a quick profit. For example, the stock market tends to reward corporations when they cut or outsource jobs, even when these actions clearly won’t be profitable in the long or even the medium term.
Furthermore, no one in government has come up with a realistic solution to solve the climate crisis while preserving capitalism. Capitalism is on shaky grounds indeed.
CAPITALISM IS RUNNING OUT OF IDEAS
This economic crisis looks to be like no other in our recent history. Economists at the St. Louis Fed project that 47 million workers could be out of a job by June, sending us to 32 percent unemployment. Job losses will be much less extreme in countries that are taking more aggressive intervention measures, such as in much of Europe, but they could be even worse in other parts of the globe. >China is struggling to resume production.
Capitalism has lasted for five centuries and has withstood all kinds of crises, but it has required increasing interventions from governments, as sociologist Wolfgang Streeck argues, to “buy time.” Its advocates are running out of ideas to save it.
Fortunately, a host of solid proposals, like taxing Wall Street and the wealthy, Medicare for All, and Caring Across Generations to fund care work, show us a path to economic (and public health) recovery. Some, like the Green New Deal, are also our only hope for environmental sustainability.
But all of these proposals require us to move away from the fundamentals of capitalism: a system built on individualism and competition, for the purpose of maximizing profits. The only way we will survive is to rebuild based on collectivity and solidarity, centering human need.
Stephanie Luce is a professor at the School for Labor and Urban Studies, City University of New York, and a member of the Professional Staff Congress-CUNY/AFT.