The Economics and Politics of Crisis – By Prof. Edward McKenna

The Economics and Politics of Crisis

By Prof. Edward McKenna

The Great Recession of 2008 was both far-ranging and long-lasting. But at the end of the crisis, the world was fundamentally unchanged. The Neoliberal paradigm, which emphasized markets and individuals, still held sway. The crisis we are currently experiencing will also be far-ranging and long-lasting. But with each passing day, it is becoming more apparent that the world may likely change in fundamental ways as we emerge from this pandemic. Not that this is in any way guaranteed, only that the daily experience of virtually everyone on the planet can’t hope but foster an understanding that we have been living in a world that greatly overemphasized the importance of the individual, and severely undervalued the role of the community. As this awareness grows, great forces will develop to reestablish the balance between the individual and the community. And this will make possible the development and implementation of new ideas that will serve to foster the development of people within their communal experience.

Part of the reason why the world will change is due to the unique nature of this crisis. In all previous economic crises, the economic problems began on the demand side. Businesses would reduce their purchases of new machines, consumers would reduce their purchases of new houses, and total demand would fall as a result. But this crisis began on the supply side. An unseen virus, whose spread is very rapid, and for which we have no cure, has required all of us to self-quarantine and to engage in social distancing. As a society we are asking those whose work is not absolutely essential for life to remain home. But what this inevitably means is that the supply of output that we will be capable of creating will be severely reduced. In the United States, Janet Yellen, the former chair of the Federal Reserve, has stated that it is quite possible that within a few weeks we will reach Great Depression levels of unemployment, meaning unemployment of 25% of our workforce.

But this act of social distancing means that we are asking one another to share in the burdens created by this virus. For those who will be out of work, there will be great uncertainty as to whether they will have the income to feed and shelter their family, much less be able to provide the kind of education and healthcare every individual deserves. And there will be great uncertainty as to whether there will be a job waiting for them once this crisis ends. For those whom we are asking to work, whose work we have deemed essential for our existence, we are also demanding a great deal. In many cases these people must work in conditions that simply are not physically safe due to the coronavirus. Watching the almost daily outcry from medical workers, who literally put their life on the line and yet cannot acquire even the minimal protective equipment necessary for safety, reveals to us that there is a fundamental flaw in our society. The same is revealed by the factory workers who must work in close quarters without proper masks and gloves. And the same goes for agricultural workers, who provide the food so necessary for our welfare. We are coming to understand that the truly valuable workers are a different group from those we have admired in the past.

We must be clear about the basic bargain that those who are staying home to protect the lives of others and those who are working in unsafe conditions have made. Those who work to produce output must share this output with those who are staying home to bring an end to this virus. This is no individualistic bargain made by unseen workers in a market. This is a decision that our community is making, that is necessary for the communal well-being. Such a decision cannot be left to individuals on their own, it can only be made at the community level, and can only be successful if individuals have trust that those who are making communal decisions are making them in the interest of all of us.

Even the highly individualistic politicians in the United States seem to understand this. In the 2008 crisis, the financial institutions that were responsible for the poor decision-making that led to the housing crisis were completely bailed out. But the homeowners, whose home was often their only source of wealth, lost their homes in the millions. This time, however, we see politicians going out of their way to emphasize that we must pass legislation that will help everyone, from those workers who will lose their jobs, to those small businesses that will go out of existence without help, to those state and local governments whose finances will be in shambles as a result of this pandemic. Of course, we will have to be extraordinarily vigilant to make sure that the politician’s words are matched by their actions, already we are learning of the unequal impact that the virus and the ensuing economic destruction are having on various groups in society. Long delays are occurring for workers attempting to receive unemployment insurance, while the Federal Reserve lends to large businesses on a daily basis. But it is not likely that these types of inequalities will go unnoticed or unpunished. The average person knows we are in this together, and not as individuals. It is very unlikely that people will accept the kind of unequal bargains that were drawn in the 2008 crisis this time around. A small, but illustrative, example of this is something occurring in a race for a United States senatorial seat in Georgia. The revelation that one of the candidates had sold stock on the basis of inside information just prior to the growth of the pandemic has led from her going to the leading candidate, to having virtually no support. People will simply not accept that some people can gain and some people lose as a result of this crisis. We are facing this crisis as a community, and we must treat one another with this understanding.

There are other forces at work that are also contributing to our understanding that while we may be individuals, we are individuals within a community. Just recently I was listening to a report on National Public Radio given by the station’s national health reporter. This is a person whose entire career is devoted to health issues, and yet he was explaining that he was shocked to learn, as a result of this crisis, how dependent the United States is on the rest of the world for acquiring medical supplies and pharmaceuticals. It is stunning, he related, to come to learn that because China has had to close down part of its economy, that the US suddenly finds it cannot obtain the drugs and medical supplies it requires to fight this virus. I must say, it certainly is stunning, stunning to learn that even experts in the field have been unaware of the degree to which the interconnectedness of the global economy has grown over the past 40 years, the era of neoliberalism. And this has not been an accident. For more than two centuries, economists have extolled a doctrine known as comparative advantage, a doctrine that essentially states that any particular area should specialize in the production of that which it does most efficiently, and rely on trade with the rest of the world to obtain whatever else it requires. So we should not be surprised to learn, for example, that while the assembly of a good such as an automobile might take place in one country, the parts that go into that automobile may come from more than 50 countries around the world, countries that were most efficient in the production of that particular part. This extended supply chain, as economists would refer to it, works fine in an idealized world where interruptions such as pandemics never occur. But as we are now learning, in our actual world, such interruptions can bring production to a halt all over the world. This, in turn, will undoubtedly lead to a more critical view of doctrines such as comparative advantage. Every region of the world must be capable of producing all of those things that are necessary for its existence when crises such as the present one occur. Regions must plan their development in such a way that they have the independent capability of sustaining themselves, and such planning may mean that a region must be capable of producing the essentials of life when extraordinary circumstances occur, even if such things cannot be produced in what appears to be the most efficient manner in normal times. And, this may also require holding ample reserves of essentials to meet extraordinary times, even if the holding of such reserves runs counter to the idea of cost minimization in normal times. In other words, we will have to find ways to balance the irresistibly individualistic logic of the market with the overarching needs of the community, for it is only within a community that individuals can flourish.

While I believe that it is virtually inevitable that we will become more aware of the importance of community as a result of our present experiences, we should not take it for granted that such an awareness will automatically lead to a positive outcome. As awareness of the importance of community grows, so also does the awareness that we have to imbue a community with the power that it requires to act in the interest of all of us. But such power can be easily abused. In crisis times, peoples’ heightened fears of catastrophe make them more open to support authoritarian and/or dictatorial individuals whose delusions of grandeur lead them to claim, often quite charismatically, that is only through them that the people can be saved. The study of recent history is invaluable in understanding these dangers. World War I, 1914-1918, was immediately followed by a flu pandemic that, over three successive waves, actually killed more people than died in the war. Less than a decade later, a great depression followed, ending in World War II. One can only imagine what someone born in say 1905, and who experienced all of these events, must have come to believe about the nature of human beings and their place in the world. But it was also during this time frame that we see the rise of Lenin and communism in Russia, Mussolini and fascism in Italy, and Hitler and Nazism in Germany. Each of these dictators emphasized the importance of the community, but they did so for their own aggrandizement, and not for the welfare of the community they claimed to speak for.

So it is that in our own time we find the rise of Trump in the United States, Bolsonaro in Brazil, Oban in Hungary , and Duterte in the Philippines, each claiming they will protect the community and lead it to greatness. So, as difficult as it may be, given the challenges that we are all facing, we must nevertheless find the strength to speak for the importance of community, but to see its role as important precisely because it is only within community that individuals can flourish. And this means all individuals. Perhaps the heaviness of our burdens can be lightened by the hope that this time we can create a world that is truly different.

Ed McKenna, Ph.D., is Professor of Economics at Connecticut College in New London, CT, USA. He specializes in macroeconomics and econometrics. His work lies at the intersection of economics and philosophy. He is particularly interested in the relationship between philosophical conceptions of justice and fairness and economic theories that explain the distribution of income.

Society is like a company of pedestrians going on a pilgrimage. Suppose one among them is attacked by cholera, do the rest go on their way, leaving him behind? No, they cannot. Rather, they break their journey at the place for a day or two, relieve him from the disease and help him to acquire strength in his legs. Or, they start out anew, carrying him on their shoulders. If anyone runs short of his subsistence, others give him their own. Together, they share everything with all. Together, they stream ahead, singing their leading chorus. In their eagerness to go ahead with others, they forget their trifling differences which in their families might have led to negative exchanges and court cases, even down to three generations.

Shrii P. R. Sarkar

“Sá vidyá yá vimuktaye - Education is that which liberates”