By Kumar David –
A brilliant electrical engineer, not the economists, was dead right: COVID was Catalyst not Cause of Recession
So-called market analysts, stockbrokers, day-traders and the pack you see on Bloomberg, CNBC and like channels and whose columns the untutored read like scripture in the New York Times, Economist and the Financial Times are plain blithering empiricists. “It didn’t rain yesterday, take a peek out of the window it looks fine this evening, so it will be a clear sunny day tomorrow”. That’s as good as their analytical methodology gets. OK, to be fair, they do look at company balance sheets and product trends and in the case of banks they do peruse liquidity and potential defaults. But it is not unfair to say that the methodology that traditional bourgeois economists and run of the mill market “analysts” use is plain vanilla empiricism. The alternative to this is to allow that though in science accurate data is the voice of god, one must nevertheless look for structures, relationships, how things depend on each other and grasp dynamics and trends. Yes indeed, theory must be empirically grounded but cognised and structured via scientific methodology as with Darwin and Marx.
One of the few fellows, to be truthful the only one I know who insisted and made himself a pain by repetition, that what governments and central banks had done in the decade after the 2008/9 great-recession was flawed, was Prof Harsha Sirisena (better known as HRS). A disaster was in the making; a destabilising wind would blow the whole pack of cards down; the global economy would reel into crisis, he theorised. The carnage this time would be immense and prolonged; this second part of the thesis remains to be tested in the coming months. As for a catalyst of doom he got more than he bargained for; COVID-19 was not a puff but a storm of hurricane proportions. HRS’s thesis was that the real problem would not be the catalyst, whatever it be, but the wobbly economic structure that central banks and political leaders had, globally, put together.
The thesis is easy to explain and runs counter to the scrappy economic punditry of “analysts” who now blush in shame. The global economy is carrying a huge number of firms that do not deserve to be alive; if exposed to the harsh reality of ruthless competition they would go under. If capitalism is to work, they should go under. You guessed it; HRS has traits in common with the Austrian School. (That’s not the only bone I have to pick with him but more on that later). The astronomical sums, trillions of dollars, that the FED, ECB, BoJ and BoE pumped in to salvage banks, giant corporations like General Motors and bankrupt industries (the US rust-belt), and the enforced holding of interest rates down to the floor was, and is, clearly not what capitalism should be about. Capitalism is about competition allowing healthy shoots to flourish and letting the lame go to the wall. Lame duck capitalism would surely stumble and fall. At which pothole one would know ahead of time. As things turned out, it was a coronavirus pit spawned by delectable bats!
The gist of it is; a large number of industrial enterprises, commercial firms and especially financial institutions (banks, hedge, investment and mutual funds) should have been allowed to bleed to death; Adam Smithian capitalism has no place for them. They are parasites on the tax payer, if you think bourgeois, or on the people if you recall of who eventually carries the tab for everything. The Augean Stables should have been cleansed. I will explain anon why the system, instead, chose to dig its own grave (the same gravediggers that Marx spoke of) but first another nugget of wisdom that many people has been repeating. ‘The tool-kit of the central banks the world over is empty!’ This recession will be more severe than previous ones because there is nothing left to fight it with.
Central banks have a few well-known tools in reserve with which to intervene in recessions viz; reduce interest rates to encourage firms to borrow and invest and persuade consumers to spend not save, second, pump money into the economy (buy bank and company bonds in large quantities) and the third item which is up to governments is to slash tax in the hope that firms will invest and consumers will spend the extra cash. But interest rates are already at zero and real interest rates are negative in most big EU countries, Japan and the USA; so that cock won’t fight anymore. What of flooding the markets with money. That option has been exhausted too with trillions of dollars in Quantitative Easing already pumped out into financial and corporate markets. Resort to expansionary monetary policy and liquidity actions can no longer restore confidence. “Emerging markets” and poorer countries are out of this loop in any case. Government and corporate hard currency debts are high; the median external debt of countries in 200% of GDP now, compared to below 100% in 2009.
Sheer desperation can be seen in Trump’s proposal at lunch with Republican senators to slash payroll tax for both employers and employees from 14.4% to zero. Representative Tulsi Gabbard has introduced a resolution in the House of Reps. calling for every American to receive $1,000 a month until the pandemic passes. Senator Mitt Romney proposed, less generously, sending everyone a one-time cheque of $1,000. “It’s going to be incredibly negative for the economy. A recession is inevitable” said Jim O’Sullivan, chief strategist of Canadian investment bank TD Securities. None of this band aid will work; people will not go out and spend, demand will not flourish, confidence is shattered, the economy will run down and employment will nose dive.
This motley crew of bankers, traditional economists and political leaders are not Keynesians. The way FDR tackled the Great Depression was diametrically the opposite of what the current lot are up to. The New Deal was huge state spending on infrastructure development (Hoover Dam, Highways) and employment creation. Spending went directly into economic activity, not to banks and financers; it created jobs and supported working- and middle-class families. Post 2008-9 QE money and gains from zero interest rates drive asset price inflation; that is make the rich richer. There is no comparison between Keynesian economics and the policies of post-neoliberal strategy makers. Insane volatility shows desperation; news of each stimulus plan is greeted by a 1,000-point market up-swing, followed by a larger reversal as realisation seeps in that gimmicks won’t work.
Boeing and McDonald’s are among the biggest losers, as are energy, financial services and the travel industry. U.S. airlines want a $50 billion handout; even casinos are asking Congress for a bailout! S&P Global is forecasting a global GDP decline of 4 to 6% in Q2, 2020 to just 1 to 1.5%, followed by a decline of another 4% in Q3. Charles Schwab a big investment firm, like the whole motely establishment now says: “This is unlike anything we have ever seen”. It’s set, game and match to the HRS and Casandra. When capitalism gets screwed up the exchequer, that is the people, have to pay to bail it out; when it does well it screws the people anyway.
I promised a few paragraphs ago to explain why policymakers went against the grain of Smithian capitalism and bailed out rotten banks and firms instead of letting them go to the wall. Why didn’t they allow competitive markets to do their job? Maybe to a degree the class wanted to shield its foolhardier members, friends and relatives, but there is a far more important reason. Here is my question that HRS and the Austrian School never did answer: “Look, if competitive capitalism, real Smithian capitalism, shows its ruthless face and cleanses the debris, many businesses will close, no-good companies will bankrupt (Boeing, GM, Chrysler, steel, coal and manufacturing), unemployment will rise, living conditions will decline and people will revolt. Face-it HRS! Either you salvage broken capitalism or it will be the revolution!” I think he acquiesced, but only silently.
Policymakers via apparently stupid economic policy making were smart in politics. The strength of modern democracy and the rise on all sides of a variety of populisms terrifies the ruling classes, the 1%, the 10%. Capitalism flummoxed, finds itself squarely in the cross hairs of the modern working class, often mistakenly called the middle class, educated youth or white-collar employees. In fact, this is the new working class corresponding to the technology and means of production of the late post-war world. It is the modern version of the grave diggers that grumpy old Marx growled about. I will have to return to modern populism, the strength of democracy, the failure of capitalism to tame the democratic genie that is has spawned and global economic crisis in a full-length column sometime. But where do I find the time?
Let me close with a few anecdotal words about HRS. He led off at the top of bunch of pretty prestigious first-classes, seven in all. The majority went on to collect PhDs. Among them, Premala Sivapragasapillai the country’s first woman engineer (her field was Civil) the Mechanical First was Sivasegaram who married her in London in December 1968 – I signed as a witness – and there was Kasilingam Vigneswaran who, as Varathrajaperumal’s Chief Secretary did some splendid planning for the first North-Eastern provincial council. Premala was at Oxford, Siva and I at Imperial, London, and HRS in Cambridge in the mid-late 1960s. Vigneswaran is a U of Waterloo, Canada, PhD.
My personal grouse with HRS is that the only record I held, apart from being a pain in the butt, was to get the highest mark ever in Prof. R.H. Paul’s subject, the jewel in the crown of the electrical engineering course. To my chagrin it lasted just one year; HRS, who graduated a year after I did, surpassed it the following year. I forgive him because he brings an excellent bottle of New Zealand wine whenever he visits. He was attached to U of Canterbury, Christchurch, NZ for many years before he, like the rest of us, retired.