Covid-19 unleashes the economics of chaos
Updated: Oct 18, 2020
by Rob Hoveman
The Covid crisis has led to lockdown measures which have produced big declines in economic activity across the world. Britain has suffered the worst declines of any major economy. In the second quarter of this year, April to June, the British economy shrank by 20.4 percent, the worst slump by far since records began in 1955 and twice the decline in the US economy. There are two reasons why the British economy has suffered much more than others, both of them due to deliberate policies of Conservative governments.
The first is that the British economy is much more dependent on services and household spending than other major economies. This is the 1980s’ Thatcher governments’ legacy. During her reign, an already structurally weak manufacturing sector was devastated with the focus of the economy shifted to financial services and face-to-face services, along with household spending. With lockdown, face-to-face services have been and continue to be very badly hit while household spending has slumped as debts grow and workers fear for their jobs. The second reason for the weakness of the British economy is that the Tories deliberately locked down later than other governments, seeking a competitive advantage. This has spectacularly backfired.
The consequence of the late lockdown is that the virus spread to a far greater degree than expected - and prevented an easing of the lockdown until much later - than in other competitor countries. Johnson and Chancellor of the Exchequer Sunak have become increasingly desperate to open up the economy again given the scale of the economic slump. But they have done so when the spread of the virus had only just come under control and at relatively high levels. Now they and we are reaping the consequences of these policies as the R rate (the number of people an infected person will pass the virus on to) has leapt up above one. By mid-September R rate was hovering between 1.1 and 1.4. This suggests a disastrous and very rapid spread of the disease unless radical measures are taken. Moving pub closing times to 10.00 (based on the idea that people aren’t infectious before ten perhaps?) will do nothing to address the deteriorating situation. This is made even worse by two other factors.
Firstly, Britain is an open trading economy, dependent on trading links with an array of overseas trading partners. So it has been and will inevitably continue to be adversely affected by the downturns in the economies of its major trading partners. These downturns are once again becoming an inevitability with a second wave of the virus spreading across Europe and beyond. Secondly, as Michael Roberts has conclusively and repeatedly shown the world economy was already teetering on the brink of recession before the Covid crisis hit. The world economy recovered weakly from the financial crisis of 2008, although actual profitability in the real economy has continued to be depressed.
The perceived recovery, actually has the effect of delivering more and more wealth to a rapidly shrinking number of super-rich. But this has been largely on the back of very low interest rates and printing vast quantities of money. This has buoyed up international financial markets, but it has also spread into asset and particularly house and property inflation. Alongside this has been the growth of debt in both business and the personal sectors. Globally, this debt has now been added to massively as a result of government-led financial support for businesses during lockdowns.
For example, according to September’s 'Financial Times in Britain ‘: "the total for the various business support schemes has risen to well over £100bn". We will see little of this, of course, but unless we fight we will be burdened with paying it back in further and deeper, post-Covid austerity and tax hikes. So the world economy, and the British economy with it, was always going to struggle to recover from lockdown because of that inherited low profitability and the massive debt burden. The government is now faced with the dilemma of taking the action necessary to curb the spread of the disease and trying to avoid another devastating shut down of the economy.
On past performance we can pretty much guarantee they will fail miserably in this balancing act and we will get the worst of both worlds. The central consequence of all of this is massively rising unemployment, with three quarters of a million already having joined the dole queues. Millions more jobs are threatened as the government winds down the furlough scheme which has subsidised jobs during lockdown for over nine million people. The prospects for the British economy are dire. The Johnson government has little option but to continue to depend on market driven strategies, even as they are seen to fail. At a national level, no alternative to this course of action is being put. Sir Keir Starmer’s Labour Party has decisively turned its face from any radical alternative plan. Instead it spends its time attacking its own left, supporting each government U turn as they occur and attempting to prove how patriotic it is. This month’s 'Socialist Review' offers not only analysis and a political and ideological alternative to the carnage of British capitalism in crisis, but also a practical one in the Emergency Programme for Jobs as we explain below. The next months are crucial and we need to organise and act decisively.
This article first appeared in Socialist Review. Reproduced with the author's permission