The coronavirus crisis is easily comparable to the great financial crisis of 2007-9 and might even turn out to be more severe. Its impact on the long-term development of the world economy could also prove crucial because neoliberal, financialised capitalism entered the crisis in a state of structural weakness, especially in the USA. Ιn the course of the great crisis of 2007-9 the leading nation states took steps to rescue finance and prevent a structural challenge to financialisation and globalisation, while shifting the costs of adjustment onto working people and the poor. Consequently, the years 2009-19 bear the hallmarks of a declining social system trapped in unmanageable conflicts of interest.
Throughout that decade, investment, production, and capital accumulation were historically weak, particularly in Europe. Even more remarkable was the weakness of productivity growth despite the constant chatter about a new “industrial revolution” through Artificial Intelligence. At the same time, the profound inequalities of neoliberal financialisation were maintained, and even worsened, as the rich were protected by the machinery of the state. Toward the end of the decade even some thoroughly systemic mainstream economists argued that the core of global capitalism has been mired in stagnation for some time.
Since the outbreak of Covid19 nation states have implemented quite different policies reflecting the historically distinctive nature of this crisis. Some states have adopted extraordinarily expansionary fiscal and monetary policies, above all, the USA. Other states, such as Germany, have been equally expansionary in fiscal policy while also providing gigantic support to domestic industry. And still other states, such as those in the Southern periphery of the EU, have been much more constrained in their actions by the great burden of public debt. The likely outcome will be even greater divergence among national capitalisms in the years ahead.
In this historically unprecedented context, social struggles have already broken out among competing interests in each country, and they are likely to lead to significant changes and perhaps even in paradigm shifts. There are signs that the representatives of international capital as well as the national oligarchies are trying to use the crisis to further their interests. This could only mean that the livelihoods of workers would be badly affected. The way to defeat these attempts and to obtain a new social dispensation favourable to the interests of labour and the social majority is to be bold in proposing new socioeconomic structures and mechanisms of social interaction. An important policy concept in this respect is that of a Pandemic Basic Income.
The distinctive character of the Coronavirus Crisis and the role of the state
The distinctive features of the Covid19 crisis are due to state-imposed lockdowns, which immediately affected the side of production and circulation of goods and services. A major shock was delivered to manufacturing that disrupted interlinked supply chains and international trade by reducing the availability of inputs. The shock was manifestly more severe in the field of service provision, particularly travel, tourism, entertainment, restaurants, hotels, pubs, and so on.
Lockdowns also immediately affected the side of aggregate demand by restraining social contact and forcing people to stay at home. Consumption declined precipitously, leading to a jump in private saving, perhaps also as a response to the profound uncertainty created by the disease and the unprecedented state responses to the pandemic. Investment collapsed equally precipitously in the USA, the EU and elsewhere as enterprises set aside investment plans in the face of extreme uncertainty.
Finally, lockdowns also affected the sphere of finance by immediately deflating the overblown stock markets across the world but also by restricting portfolio flows to developing countries and raising the prospect of a full-blown global financial crisis.
Faced with the unfolding economic disaster caused by the lockdowns that they had instigated, nation states had to respond urgently. In the heavily financialised US economy, the state undertook an extraordinary expansion of its fiscal deficit through tax cuts, public spending, and direct support for household income. The state also provided guarantees for bank loans to industry. At the same time, the Federal Reserve provided enormous volumes of liquidity to private banks and corporations driving interest rates to zero. The ensuing expansion of the money supply has been very great,
It is instructive to observe the contrast between the USA and China in confronting the crisis Chinese economic policies reflected the different structure of the country’s economy, which is much less financialised, as well as its different internal power balance. Rather than relying primarily on incentives provided to private enterprises, the Chinese state boosted employment directly by mobilising the State Operated Enterprises, which are still crucial to the core of the economy. It also engaged in a wide programme of public investment in new technologies, including 5G. However, the Chinese state was much less concerned with supporting personal income, shifting much of the burden onto the poor, and it relied proportionately much less on credit provision through the central bank.
It is equally instructive to note, nonetheless, that the US government has been extremely careful to buttress its global hegemony via dollar provision. Faced with a shortage of international liquidity as capital flows dried up and trade was disturbed, the Federal Reserve stepped in and provided dollars through swaps with the central banks that it had also traded with in the previous crisis. Not only this, but the Fed also allowed institutions to obtain dollars by swapping US Treasury Bills. It appeared, furthermore, that the most pressing need for dollars originated with Japanese institutions that had previously provided funds to the Collateralised Loan Obligations market among US enterprises. The actions of the US government indicate that it intends to prevent any challenges to the role of the dollar as the world currency in the years ahead.
The EU faced with Coronavirus Crisis
For our purposes, however, it is even more important to observe the contrast between the EU and the other two leading economies. In the EU the crisis was confronted largely by each separate nation state, with no evidence of coordination. For EU states in the EMU, the monetary response was dictated by the ECB, which was initially reluctant to provide cheap and abundant liquidity, but eventually introduced its Pandemic Programme, which has been recently further extended.
The Pandemic Programme directly contravened even the last remnants of rules-based behaviour by the ECB, in complete contrast with the traditional logic of its statutes. The central bank is able to provide liquidity by accepting state bonds of low creditworthiness (such as those of Greece) and by breaking the “capital key” of member states, that is, in proportions unrelated to their contribution to its capital. Only days after these steps were taken, the German constitutional court announced a decision that challenges the liquidity provision policies implemented by the ECB since 2014. This was a blow to the Coronavirus policies of the ECB and to European law that could have deep implications for the survival of the Eurozone.
As the crisis struck, rules-based decision making was also abandoned with regard to fiscal policy in the EU. Public spending would be governed by discretion, which would naturally be exercised by nation states. The Stability and Growth Pact that presumably sets the framework of fiscal policy in the EMU and affects policy more broadly in the EU, was suspended, thus putting austerity into abeyance. Nation states could spend according to their resources for 2020. It will be far from easy to reintroduce the austerity framework after the crisis.
At the same time, the tight regulation of state aid, controlling the extent of state support for national industry with the presumed intention of creating a “level playing field” in the EU, was also suspended. Nation states were able to support their industries according to their resources. Since March 2020 state aid of 2tr euro has been granted to industry by national governments, and the leading share was advanced by Germany (roughly 1tr).
The final step indicating that the euro has lost even the last vestiges of a rules-based operation is the proposal by the European Commission to undertake a programme of fiscal expenditure during 2021-24 in conjunction with its regular budget for 2021-27. The Commission proposed that it should command a further 0.6% of EU Gross National Income against which it could proceed to borrow 750bn euro from the open markets. The money would then be made available as grants and loans to nation states in the Southern and the Central European Peripheries of the EU. There is considerable room for doubt that the money will indeed be split into 500bn of grants and 250bn of loans, as the Commission maintained, but there is no doubt that the proposal represents an important step for the EU. Spurred by Germany and France, both of which became very concerned about the stability of the EMU as Coronavirus struck – especially Italy – the EU partially relaxed its long-standing policy of avoiding major fiscal transfers and joint borrowing.
Dispassionate analysis of these developments indicates that the old divisions that plagued the EU in the course of the Eurozone crisis have re-emerged in a new guise. The key player will once again be Germany, which is striving to strengthen its hegemonic position in the EU and avoiding and a collapse of what is effectively a domestic German market.
The terrain ahead
The social and political tensions created by coronavirus will depend greatly on how governments will choose to cover the resource costs of the crisis. The first point to note is that in this respect the COVID19 crisis resembles a straightforward capitalist crisis insofar as it requires a boost to demand to prevent existing resources from becoming unused and degraded. From the perspective of working people, therefore, the initial cost ought to be covered through government borrowing. Under no circumstances should it be met by generalised austerity measures leading to contraction of welfare provision and wage cuts.
When existing resources are again set in motion as the crisis abates, they will generate the returns through which to cover initial costs. Naturally, there might be distributional problems arising from government borrowing, which would give the rich extra claims on future production and resources. To avoid these problems, governments should increase the taxation of the rich, especially of wealth, and there should also be selective cancellation of debt.
Far more crucial, however, and reflecting the peculiar nature the current crisis, is the need for sustained government intervention to restructure the supply side and make it possible to respond to the boost in demand delivered by fiscal and monetary policy. This is likely to be a source of significant social tensions in the time ahead. The supply side of major capitalist countries is significantly weakened after years of neoliberal financialisation and the failed policies of 2009-2019. Moreover, the supply side has also been structurally affected by coronavirus. While some providers of services, such as hotels and restaurants, were devastated, others that required limited physical contact, such as Amazon, benefited greatly. Service provision (even within manufacturing) was also affected by the boom in remote conferencing facilities, which benefitted advanced technology giants, such as Microsoft. The great monopolies of the era of financialisation, whose power derives from new technologies, are likely to emerge from the crisis greatly strengthened if countermeasures are not taken.
These conditions necessitate far bolder steps on the part of the public sector than simply providing cheap credit to private enterprises. To revitalise production a wave of public investment is required, including profound changes in ownership and management of resources in the interests of workers and the many. The coronavirus crisis could potentially allow for a change in the balance of power in favour of labour.
A Pandemic Basic Income
In this light, a Pandemic Basic Income, appropriately defined, could prove an important tool in confronting the crisis as well as changing the social balance in favour of labour. It could be an effective way to deliver a blow to neoliberal financialised capitalism that has dominated economic and social life for four decades. The PBI would be a key element to reactivate demand and, of course, improve the living conditions of the population. Furthermore, it could be an important step to support a wave of public investment to reactivate and restructure supply side in favour of labour. The policy would be particularly important in peripheral EU countries that have been hit hard by coronavirus and have so far been unable to respond with sufficient vigour. The evidence below refers particularly to Spain.
The policy would work as a negative income tax for 2020, implying that the income could partly or totally be collected again through taxes at the end of the tax exercise. The effect on aggregate demand would be strong impact. We estimate that the multiplier effect of the expenditure in Spain would be larger than 1.3, that is, for each euro spent there would be an increase of GDP by more than 1.3 euros. As GDP expands, the government deficit will proportionately decline. Furthermore, a substantial part of the expenditure on PBI would return to government in the form of tax revenue. Our conservative estimates indicate that approximately 50% of the expenditure would be collected again.
The combined effect of the expenditure multiplier and the recovery of tax revenues would reduce the fiscal cost of PBI to just 3.9% of GDP. Sensitivity analysis and extending the payment of PBI to 12 months gives a range of net fiscal cost from 2% to 6% of GDP, which is hardly unmanageable in view of current policies by the major capitalist states. Furthermore, we estimate that Spain would save at least 15bn euros in unemployment benefits until the end of 2020 and the public healthcare bill would be smaller by several billion euros.
As the coronavirus crisis spreads across the world and its implications become more evident, governments will be forced to take complex action. Existing economic and social relations will be profoundly reshaped, but this does not at all mean that neoliberalism will self-destruct. Class and other social conflicts will be sharpened and there will be turbulence that offers a historic opportunity to the Left to change the balance of forces in the interests of labour and against capital. A Pandemic Basic Income is potentially a policy that could apply concerted pressure on the dominant forces of capital, while supporting labour and employment. For Europe, and especially the peripheral countries of the EU, this is the moment to consider carefully how PBI could be deployed in the interests of working people and society as a whole.
C. Lapavitsas, L. Torrens, S. Cutillas & P. Cotarelo
Article originally published at Brave New Europe: https://braveneweurope.com/costas-lapavitsas-lluis-torrens-sergi-cutillas-pablo-cotarelo-confronting-the-coronavirus-crisis-a-case-for-a-pandemic-basic-income-with-evidence-from-spain