The Coronapocalypse is a failure of competence, but also of capitalism
Are you surprised that the whole US economic system has essentially collapsed in a matter of weeks? I am.
This is an enormously disruptive shock, to be fair. But the speed with which the health of the American economy has gone from healthiest in history to gasping on life support has been astonishing and totally without precedent.
I am a student of history. As such, I’ve been looking at this moment through a long term lens in order to learn from past precedents. At this juncture, I’ve settled on 1929 and the start of the Great Depression as the most appropriate historical analogy. Now, this doesn’t mean that we are about to enter a Depression (though that is distinctly possible); rather, I contend that this crisis will be just as seismic as that one was and that its consequences will linger for a decade as well as scar all of us for a generation.
The analogy is imperfect, of course. There are huge differences between that moment and this one, you will point out. I won’t disagree. Perhaps the most salient one to me right now is that while the Great Depression lasted 10 years, this cratering of the US economy has happened over 10 weeks and, most acutely, in the last 10 days.
First, let’s review some history. When the stock market crashed in 1929, the Dow plummeted from its September peak of 381 to a low of 41 in July 1932. However, because so few Americans owned stocks at the time, the financial collapse did not immediately cycle though the rest of the economy. Unemployment only gradually increased, to a peak of about 25 percent in early 1933. Gross domestic product fell steadily, ultimately declining by about 30 percent. In other words, it took years for the economic hammer blow of the Great Depression to be felt.
The economic crash caused by the coronavirus has been much more sudden and sharp. Last week, an all-time record number of people — 3.3 million — filed for unemployment insurance. Some estimates predict that the unemployment rate will skyrocket from a historic low of 3.3% last month to 20% this month.
Even the two-trillion dollar-plus stimulus package just passed will likely not be enough to prevent the economy from collapsing. Goldman Sachs projects that G.D.P. could decline by 24 percent in the second quarter of 2020, an unprecedented drop. The mind reels at such a number. Deutsche Bank now sees “a severe global recession” and drops in GDP that “substantially exceed anything previously recorded going back to at least World War II.”
I’m not suggesting that the government shouldn’t step in decisively right now. However, the fact that they have to points to a massive failure of societal and economic resilience any way you look at it.
This COVID-19 crisis was almost certainly inevitable, but that it became a complete catastrophe may not have been. It has been exacerbated by shocking lapses in competence across multiple levels of government around the world. That is indisputable, and I won’t bother to explore that side of the story right now. What I’d rather focus on is the other accelerant to this calamitous pandemic, one that few people are discussing on the news: our 21st-century form of hyper-capitalism.
Capitalism 2020 + Globalization = COVID 19
This is not a cyclical market correction from bull to bear; the whole economy is melting down.
How did this come to be? How could the US suffer through 10 admittedly painful years of depression, but the current American economic system essentially collapse after 10 days of COVID-19?
The proximate cause is that 70% of the modern economy — in the US but also globally — depends on our continuous consumption. This pandemic is grinding nearly all forms of that consumption (with the notable exceptions of toilet paper and hand sanitizer) to a sudden and almost complete stop. As one pundit put it, your purchases are someone else’s paycheck. When you stop buying, the American economy essentially stops breathing.
This economy — and increasingly the global one — depends disproportionately on people buying shit they don’t need with money they don’t have, and that is in and of itself a tremendous source of vulnerability. I use that word intentionally: the hyper-capitalist model we’ve adopted in most of the world is to blame for this shocking lack of collective resilience. The system we’ve allowed to flourish is shockingly fragile.
21st-century hyper-capitalism abhors surplus. It punishes companies and supply chains that have any “waste” — another term for excess inventory. Airlines see their stock prices go up based on passenger load factor (PLF), an industry metric that measures how much of an airline’s carrying capacity is used. In other words, it’s a measure of the management of what they consider to be wasteful. Consulting firms like McKinsey tracks the “capacity utilization” of their workforce. All companies with supply chains operate with “just-in-time” (JIT) manufacturing principles, where stock or parts are pulled into the system “just in time” and are not just “lying around.”
As a result, we have no slack in any part of the economic system. The reserves that robust organisms rely on to absorb and survive shocks simply aren’t there. It’s like an extremely skinny person getting really sick; there is nothing to draw on in times of stress or sickness.
Of course, economists and financial analysts call this by another name: efficiency. In a perfectly “efficient” company, there is only exactly what you need at that moment. Those companies get rewarded by stock market investors who bid up their share price, whereas companies that do the opposite — have extra capacity that they’re not using — get punished.
The result? No one is ready for a rainy day — let alone for a sudden recession. A recent analysis from JPMorgan Chase described how little of a cash buffer the median small business has. The typical one has a reserve of 27 days; the average restaurant has 16 days. Is it any wonder why both of these segments of the economy are already in peril?
To make matters worse, many of the larger American companies squandered the salad days of the last decade by spending their accumulated cash on corporate buybacks of their stocks or issuing dividends. This pumped up their stock price, but it made them more vulnerable to a sudden crisis. It would like you or me using our savings to buy Brioni suits or Birkin handbags; those things may make us look pretty in the short run, but they are frivolous expenditures when the economic world is on fire around you.
It’s not just commercial companies, either. This is also the reason that the public health care system in the US will soon be at its breaking point. Why? Because health care in the US is largely a private for-profit business, not a social good. Hospital conglomerates ruthlessly downsized their facilities in the past decade. They thought that they had too many beds and eliminated them — and the societal price for that cold economic calculus will come due in the coming weeks. One chilling statistic should drive the horrible truth home: the U.S. currently has fewer hospital beds per capita than Italy.
Now, a system that already runs close to full capacity is faced with a pandemic that will soon overwhelm hospitals. To put it bluntly, there is no surge capability at all in our current health care system — and we have hyper-capitalism, in part, to thank for that. In yet another perversion of the dynamic that this system promotes, Governors of all 50 states are also competing against each other — as well as FEMA — right now to outbid each other for life-saving supplies like masks and ventilators.
This lack of reserves trickles all the way down (no pun intended) to the individual level. 53% of Americans — the richest country on Earth — have no emergency savings account and live literally paycheck to paycheck. 53 million workers ages 18 to 64 — or 44% of all workers — earn barely enough to live on. Their median earnings are $10.22 per hour or about $18,000 per year.
In sum, we have allowed or encouraged every element of our economic system — from corporations to consumers — to become frighteningly fragile. We have optimized for “efficiency” when we should have been prioritizing personal and systemic resilience. So what can we do about it now?
We are going to get out of this moment. But, as Machiavelli famously said, we shouldn’t waste the opportunity in a good crisis.
We are living through a global pandemic moving at a speed and scale never encountered before, but it didn’t have to infect the global economic system as quickly as it did. The cracks in our financial systems have been exposed, and they reveal a shockingly brittle host body. The world economic system is like an 80-year-old with severe respiratory problems facing COVID-19; 10 weeks ago, she was fine. Today, they’re in mortal peril.
I hope that we use this crisis as a teachable moment. Let me be clear: I’m not an anti-capitalist. But as everyone from Thomas Piketty to Greta Thunberg has argued, the current economic system is broken. In the past decades, it has left behind millions in the middle class who have tried, in vain, to maintain their quality of living in the face of globalization, technological disruption — but also the hyper-capitalistic model that elevates the market above all else. That dynamic drove the two most tectonic events of the last decade before the terrifying arrival of COVID-19, namely the election of Donald Trump and Brexit. As I have noted before, those two developments were the wrong answers to the right question: how do we manage those disruptive forces within an economic, political and social system where the most amount of people benefit? Now, COVID-19 has given us all another reason to think critically about the secular religion of unrestrained capitalism that we’ve allowed to take hold.
After all of this is a terrible memory, we need to move past “market uber alles” and reward the companies that prioritize long term time horizons over quarterly ones. We should vote with our wallets and buy shares in companies that invest in resilient systems, boast of “surplus capacity”, and preserve cash for rainy days or even recessions. Make no mistake: COVID-19 is not going away right away, and pandemics are almost certainly going to be a regular part of our collective future. We definitely need to learn from the catastrophic mistakes that were made in response to this virus, and I’m confident that we will. But of equal importance is that we correct the structural flaws in our economic system that allowed a public health crisis metastasize into an unprecedented economic one.
