The Pandemic and the Economy: An Uncertain Prospect

Preliminary estimates from various sources indicate that the contraction of the major national economies during 2020 has been equivalent and in many cases significantly greater than the Great Recession of 2009. The gross domestic product (GDP) of the US, which shrank by 2.5 percent in 2009, decreased 3.5 percent in 2020. In 2020 the Japanese economy contracted almost the same, 5.3 percent, that it contracted in 2009, 5.4 percent. The respective rates of economic growth in 2020 and 2009 in Germany were -6.0 percent and -5.7 percent; in France -9.8 percent and -2.9 percent; in Spain -11.0 percent and -3.8 percent; in Russia -3.1 percent and -7.8 percent. National economies that in 2009 could get through the Great Recession with reduced but positive rates of growth have been severely hit this time. Thus India’s GDP growth, 7.9 percent in 2009, fell to -10.2 percent in 2020; Australia’s GDP growth was 1.9 percent in 2009 and -6.7 percent in 2020. China had a positive growth rate of 2.3 percent in 2020, an almost minuscule level compared with the 9.4 percent of 2009 and the double-digit rates that China enjoyed during the years leading up to the Great Recession. These figures for countries with significant weight in the world economy reveal a very profound economic contraction in 2020, in many cases unprecedented since the Great Depression of 1929.

The coronavirus pandemic pushed the world economy off a cliff from unsustainable processes that were already widespread in 2019. We will never be able to know whether the world economy would have gone into crisis by 2020 even if there had been no pandemic, but business profits were falling in 2019 and private debt had reached record levels, even exceeding those seen before 2009. This time the debt in many countries was mainly corporate debt, not household debt as in 2009. At any rate, the world is now again facing a global economic crisis. This one is, of course, a very specific one.

At the time of writing (mid-April 2021), though there is no doubt that the depression of 2020 will be confirmed to have been the most important global economic crisis since World War II, it is virtually impossible to predict how far this economic crisis will affect each national economy, how long the crisis will continue, and to what extent the likely but still uncertain decline of the pandemic as a result of mass vaccination and public health measures will allow economic activity to recover throughout 2021. US president Biden's $1.9 trillion economic stimulus has been approved by the legislative branch and is now in the process of being implemented. This is a huge expense, compared to earlier public spending stimuli. It remains to be seen whether the US economy will continue locked in depression, as some Marxists believe; will revive with that spending, as Paul Krugman and other Keynesians like him optimistically expect; or will revive just to enter an inflationary crisis, as N. Gregory Mankiw and other economists, also Keynesians or New Keynesians, less optimistically fear. The state of the art of economic knowledge is far from being able to give an answer with some degree of security to such disagreements.

Since the 1950s and 1960s, when Milton Friedman and other conservative economists launched a major attack against the reformist ideas of John Maynard Keynes, economists have disagreed endlessly about whether Keynesian policies are or are not effective to stimulate economic growth in free-market capitalism. That several decades later they continue to argue about such basic issues shows the major limitations of economics as a supposedly scientific discipline. Indeed, what the historical record shows is that Keynesian policies—i.e., interventions to stimulate a national economy—have a manifest effect only when they are massive, so that they question the free-enterprise character of the market economy. An example of such massive intervention occurred in 1942 immediately following Pearl Harbor, when the mass unemployment of the 1930s ended: even in the early 1940s, after years of New Deal policies to fight the Great Depression, unemployment remained at very high levels. In the 1930s, the unemployment rate peaked twice in the US, first in 1933, when it reached 24.9 percent, then in 1938, in the so-called Roosevelt recession, when it rose again to 19.0 percent. It was still at 9.9 percent in 1941, when the US, though it had not yet entered World War II, had begun to significantly increase its military preparations. It was only after the Japanese attack in December 1941 that the US government took half of the country's economy under its control to meet military needs and the unemployment rate fell dramatically to 4.7 percent in 1942.

The global economic crisis associated with the COVID-19 pandemic has unique characteristics and if economic forecasts are always risky, on this occasion they are even riskier, because of the complexity of the linkage between the crisis and the pandemic. All optimism about an economic recovery supposedly just around the corner assumes the effectiveness of the policies implemented to control the pandemic. If lockdowns and restrictions of movements of people and goods continue, it will be impossible for national economies to recover positive rates of growth. A further issue is whether the US economy could recover in a context of business-as-usual, or rather economic-policy-as-usual, in the rest of the world. For the moment, the US $1.9 trillion stimulus does not seem to have been taken as an example by other countries. In Europe, the idea of austerity and fiscal prudence is very entrenched among politicians, not only of the conservative right-wing parties but also among the moderate left-wing forces such as the socialist and social-democratic parties that long ago abandoned any perspective of social transformation.

Still, whatever the macroeconomic effect of the policies now proposed will turn out to be, there is no question that policies that protect low-income people from the effects of unemployment must be applauded, as they will give some protection to the most vulnerable in society, many of them now jobless and without prospects, as well as cloistered for months in overcrowded households. That such policies are implemented is also a sign that ruling elites do not feel comfortable allowing social discontent to spread because of generalized social misery.

After a year of the COVID-19 pandemic we know that the disease affects men more than women and that—unlike the 1918 flu pandemic that concentrated its victims among healthy young adults—COVID-19 is more severe and more lethal the higher the patient's age and when there are previous chronic health problems such as obesity, alcoholism, high blood pressure, and diabetes. But these problems have a social gradient: they are more frequent in lower socioeconomic strata, as indicated, for example, by income level, or years of formal educational, or professional qualification. Smoking and chronic respiratory diseases have the same gradient, the latter often because of occupational exposures. All these preexisting conditions make COVID-19 infection more severe and more lethal; conversely, COVID-19 is less severe in those with better jobs or higher incomes who also tend to live in less overcrowded settings and generally have fewer chronic diseases. The lower-income group—which in the US largely overlaps with Latinos and African American— is also the one formed by people likely to have jobs in the service sector, in construction, or in industry, i.e. jobs that do not allow them to work online, require directly contact with people, and therefore lead to more potential exposure to contagion.

In the US, where there is no national health system and health care is basically private, health care is worse for those low on the social ladder, particularly workers in the informal economy and undocumented migrants. Statistics from the past year show that COVID-19 mortality is considerably higher among African Americans, Latinos, and the Native American population. Most likely, and probably with not too large differences among countries, the rate of incidence (the number of cases per, say, million people), the rate of mortality (the number of deaths per million people) and the case-fatality rate (the proportion dying among those who get the disease) will be higher the lower socioeconomic status of the group considered. The pandemic will thus contribute to maintaining and increasing health inequalities by income, race/ethnicity, citizenship status, and other forms of social differentiation.

Vaccines are being distributed worldwide mostly based on countries' ability to pay and, within each country, vaccination often follows a pattern where favoritism and connections take precedence over epidemiological criteria that seek to minimize the number of deaths. An unknown is the extent to which the rejection of vaccines—because of misinformation or fear of being subjected to experimentation by the government or “big pharma”—may be sufficient to compromise the effectiveness of vaccination, which will generate herd immunity sufficient to suppress the pandemic only if it reaches a high coverage threshold in the whole population. Unfortunately, in recent years both the fear about vaccines and the skepticism of large sections of the population about the need to deal with climate change have shown that current public opinion on scientific issues feeds on sources highly polluted by a kind of modern superstition in which witches, maledictions, satanic rites, and curses have been displaced by conspiracies to invent data, promote theories, or manipulate elections. Donald Trump's tens of millions of voters are the most obvious example of this modern superstition which, of course, exists in other political and cultural forms, to a greater or lesser extent, in all countries.

Preliminary data for the US economy in 2020 show some differential characteristics of the pandemic depression (Figure 1). While personal consumption expenditure contracted by 1.3 percent in 2009, in 2020 it contracted much more, by 2.7 percent. The major annual declines of residential investment after 2007—it declined 25.3 percent in 2008, 24.4 percent in 2009, and 3.4 percent in 2010—were a major component of the Great Recession. In contrast, in 2020 such investment surprisingly increased by 9.7 percent. Non-residential investment dropped 15.1 percent in 2009 but only 3.6 percent in 2020. The monumental profits of some companies like Amazon or Apple in 2020 have been commented on by the media, but they do not compensate for the similarly monumental losses experienced by the many other companies likely to be in the majority. Indeed, according to preliminary estimates, profits after taxes dropped by 6.0 percent in 2020 (they had decreased by 15.1 percent in 2009). Arguably, the figures for 2020 will very likely be revised and changed, as usually occurs, by the agencies that report economic statistics, but the statistics as they appear now show obvious differences between the 2020 depression and the Great Recession of 2009. On February 27, The New York Times reported on the activity of Berkshire Hathaway, the Warren Buffett-led business conglomerate whose estimated value is about half a trillion dollars. One of the most characteristic aspects of what Berkshire Hathaway did in 2020 is the acquisition of massive quantities of its own publicly traded shares. This is, in the short term, a way to increase the market value of the company; it also shows how scarce are the opportunities for acquisitions of other profitable companies or for direct investment in productive activities with good profit prospects.

A major issue is the expansion of the public debt in almost all national economies, a steady trend in recent years that has had dramatic overtones in 2020. In the US, the federal debt, which amounted to 62.2 percent of GDP in 2007, rose steadily during the Great Recession to reach 89.3 percent of GDP in 2010. During the following tepid recovery during Barack Obama’s presidency and “the best economy ever” trumpeted by Donald Trump, the US debt continued growing to reach 104.0 percent of GDP in 2018, 104.9 percent in 2019 and then jumped 20 percentage points to 124.9 percent of GDP in 2020. Something similar has happened in many other countries: the national debt amounted in 2020 to 150 percent of GDP in Italy, 120 percent in Spain, 116 percent in France, and an astounding 266 percent in Japan. Nobody is talking about these figures, perhaps because they are obvious evidence that the market economy requires major government intervention just to continue dragging itself along. Isn’t capitalism a well-functioning system that regulates itself?

In almost all countries, a significant proportion of the population today earns its income from irregular or illegal work, self-employment; but the gig or informal economy fell apart in the second and third quarters of 2020 like a house of cards, due to policies of physical isolation required to curb the pandemic. Hundreds of millions of formal and informal jobs were lost worldwide at the time and the last two quarters have been very heterogenous across countries. With minor exceptions and differences, since the last decades of the last century, both in advanced economies and in the countries of the periphery, labor market regulations and laws have changed generally towards more deregulated and precarious employment conditions. In our free enterprise system, most jobs depend not on social needs but on the ability of those who own assets to make a profit by employing others, and that is why social protections are often eliminated (because they create “labor-market rigidities”) when they interfere with the ability to invest money to produce more money—that is, with the accumulation of capital. That is a general trend under capitalism. When labor markets are more formal and more regulated, there is some temporary protection against the consequences of unemployment. After the first quarter of 2020, many millions fell into the ranks of those protected by unemployment insurance, which in many other countries, especially on the periphery, is scarce or non-existent. Everything indicates that a significant fraction of the world's population has survived during 2020 from government-provided income. But the pandemic crisis has also taken from governments a large fraction of tax revenue. The consequence of these ongoing processes is that national debts are steadily rising in all countries to levels that were unthinkable just a few years ago. How much the rope can be stretched is hard to tell. Nobel laureate and New York Times economic columnist Paul Krugman has often written in recent months about the need not to be frightened of a public debt equivalent to 100 percent of GDP or even much higher. On the other hand, economists who are frightened by that debt level do not at the moment proclaim their fears too strongly.

According to the statistics reported by national governments and compiled by the World Health Organization and other sources, the COVID-19 infection has caused until mid-April 2021 nearly 3 million deaths worldwide. This is a total of national estimates, to be taken just as a quite gross “guestimate,” and it is very probably a large underestimation, as there is evidence that many poor countries (for instance, in Africa) register a quite small fraction of total deaths. At any rate, these statistics are the only numbers available to gauge the magnitude of the pandemic, and they show that in each of seven countries, COVID-19 has already caused more than 100,000 deaths. The USA is number one with 560,000 deaths, Brazil follows with over 360,000, Mexico and India have had some 200,000 deaths each, and the UK, Italy and Russia are not much over 100,000 deaths each. Among the high-income economies of the world, Japan with a population of 126 million, almost identical in size to that of Mexico (but much older) and only 20 million less than Russia, has had only 9,000 COVID-19 deaths and seems to have had a major success in the fight against the pandemic (suffering about 1/60 of the number of US deaths with a third of the US population). Haiti, the Dominican Republic, and Cuba, with almost identical populations of 11 million each, are neighbors in the Caribbean. Extremely poor Haiti is reported as having only 252 deaths, a very low figure that seems very likely connected with very poor death registration systems in the country, while the Dominican Republic has reported 3,378 deaths, and Cuba only 443. With just 3.1 million people and many similarities to these other islands, Puerto Rico has had 2,141 deaths. According to the WHO database, while South Korea has reported 108,000 cases and 1,764 deaths, North Korea has reported zero cases and zero deaths, which looks consistent with the known ability of the North Korean dynastic regime to lie unashamedly about the social realities of the country. Much more reliable are the reported counts of 4,735 deaths in China and just 35 in Vietnam, countries that, according to knowledgeable observers, have excelled in implementing effective policies to curb the pandemic.

This suggests an international pattern in which countries with authoritarian governments run by Communist parties, like Cuba, China, or Vietnam, have dealt much more efficiently with the pandemic, probably because of a more stringent application of public health policies. The experience of the Nordic countries seems to show also that the so-called Swedish approach to dealing with the pandemic—not implementing mobility restrictions or mandatory rules of isolation to avoid damaging the economy— has been much less effective than the more “authoritarian” approach of Sweden’s Norwegian and Danish neighbors. Thus the 684 deaths in Norway, with 5.3 million people, and the 2,437 deaths in Denmark, with 5.8 million, add up to 3,121 deaths for 11.1 million, which compares very favorably with the 13,621 deaths among the 10.2 million population of Sweden.

US data also suggest that less stringent policies to face the pandemic have implied higher mortality. Figure 2 is a plot of COVID-19 deaths per 100,000 population (dp100k) from the start of the pandemic to mid-April 2021 in the counties of the continental US; the darker the county, the higher its COVID-19 mortality. We find darker spots of high mortality, for instance, in La Salle, Texas (378 dp100k) and San Joaquin, California (180 dp100k); lighter plots reveal counties with low mortality such as Williamson, Texas (84 dp100k), or Plumas, California (32 dp100k). A simple visual inspection of the map suggests that mortality is quite higher in Texas than in California. According to journalistic reports, the policies followed by Texas and California may represent polar opposites in US efforts to deal with the pandemic, with very non-interventionist policies in Texas and “extremely authoritarian” policies in California. Thus, both the national and the international evidence suggests that policies to curb the pandemic utilizing mobility restrictions and forced isolation, though often unpopular, have been effective, with countries or counties not applying them paying with higher mortality. Of course, these are tentative conclusions based on data that are being continuously updated, and further research will be needed to give more definitive answers to the question of which policies have been more effective in reducing COVID-19 mortality.

Unfortunately, it is still unknown whether the promising prospects of eradicating the pandemic thanks to vaccine availability will be realized or not in the coming summer months. The pandemic has demonstrated the inability of governments to coordinate a public health response that must necessarily be global, because the pandemic will continue as long as there are population reservoirs without herd immunity. An added unknown is the emergence of viral strains that are easier to transmit and for which the current vaccines may not be effective.

The nearly 8 billion of us who make up the world's population are facing difficult times. The global economic and political system based on for-profit production and national states governed by elites that are mostly defenders of their power and the status quo has shown its inability to deal with the problems of the 21st century. Will our planet Earth evolve into ever-worse social, epidemiological, and ecological disasters, or perhaps toward a Third World War that will end this civilization? Will humanity be able to organize itself in a way that is more in line with its general interests? These are questions that very few people ask themselves. Regrettably, consciousness is often clouded by problems that do not go beyond parochial concerns that at most end at the national border. It would, however, be callous to ignore the fact that for a large majority of humanity the key problems are those related to immediate survival, be they those of getting food for tomorrow, not being evicted next week, or not being killed in the next peaceful demonstration or traffic stop.

Recent years seem to demonstrate enormous social inertia and an amazing human inability to curb the uncontrolled processes that, under the control of economic and political elites, are leading us into the abyss. However, if one thing is clear in today's muddle, it is the need to support those who open up some future prospect, whether it is youngsters demanding climate-change policies, pro-democracy demonstrators in Myanmar or Hong Kong, farmers in India fighting major commercial interests for their survival, or the masses protesting against racism, repression, corruption, and government or police abuse in Russia, Nigeria, Uganda, Paraguay, the United States, or any other place in the world.

Sources

Statistics presented in this article are all available online from the World Bank, Eurostat, the World Health Organization, and the FRED database of the Federal Reserve Bank of St. Louis. From The New York Times I cite opinions of Paul Krugman (“Learn to stop worrying and love debt: Why you should ignore the coming Republican deficit rants”, December 3, 2020), and N. Gregory Mankiw (“The Biden economy risks a speeding ticket”, Feb. 26, 2021). Figure 1 is from computations of data in billion current dollars from the FRED database: CONS refers to personal consumption expenditure; PROFITS to corporate profits after taxes with inventory valuation adjustment and capital consumption adjustment; RESIDENTIAL and NON-RESIDENTIAL INVESTMENT are respectively private residential fixed investment, and private nonresidential fixed investment. Figure 2 is a screen shot of the website of the COVID-19 resource center of Johns Hopkins University.