the World Economic and Political Order After the Pandemic

The World Economic and Political Order After the Pandemic            

                              By

               Dr. Michael Sakbani

The  Pandemic is a manifestation of the good and mal in an interconnected world. In a world we can fly from one end to the other in one day, everybody can be a victim and everybody can be a healer.  The  pandemic teaches us that a virus is a common ill, just as is  a climate catastrophe, or an agricultural crop failure as was the disappearance of anchovies in the south American coast in 1970.  Dealing with global problems requires global solutions.

The abilities of countries, however, are not even. There were ones which have the infrastructure of health and social maintenance and ones that do not. There are countries that were well prepared and others that were not. Yet, they all were hit by the same virus and are affected by the same climate problems, almost at the same time. Ad none of them is protected unless they all are.

An epidemic per se does not change the political or economic order. It presents the society with a mirror picture of its problems and incapacities juxtaposed to its needs. It forces societies and their leaders to undertake changes or reforms which were not on the agenda before. In old Russia WWI produced Communism. In Germany and Italy, it produced  Nazism and Fascism. In more pragmatic societies like the US, it produced the New Deal and the reforms of FDR. So, let us see what the mirror has shown.

How Did the Liberal Democracies Do

The US, and other liberal democracies, were caught unprepared. That is because public investment was not made in what people essentially need, such as health preparedness, basic societal support, research and knowledge to cope with emergencies. Instead, public investments were in the military and in pork-barrel appropriations which aid in reelections of politicians and assures the continuation of the support of the military industrial complex. According to the investigations of the New York Times, the Trump Administration wasted critical 6 weeks in wishing the epidemic away, making false public announcements about the short disappearance of the virus and the availability of tests for everyone who wants them(New York Times)[1]

There is no question that the US Administration ignored the warnings by many highly placed officials, including the Secretary of Public Health, Alex Azar, the Director of the  National Institute of Allergies and Infectious Diseases Dr. Antony Fauci, the economic adviser Dr. Peter Navarro and the national security officials as well as the Pentagon. The  President simply  was concerned that taking drastic isolation measures would impact badly the economy which in turn would jeopardize his re-election. Many state Governors, followed on  partisan lines, the cues set  by the President.

The crisis revealed that of all parts of the US Federal Government, the military was the only branch well prepared to meet crisis. The military had a long experience in logistic preparedness and the resources to simulate crisis and deal with  them, while its civilian counterpart had scarcely the wherewithal’s to deal with an epidemic..

The question then arises as to  what power does the citizenry have in in influencing decisions regarding the distribution of public funds, and what control they can express regarding critical decisions by elected Governments. It should be recalled that Prime Minister Blair went to war in Iraq when 75% of the British public was against the war. In other words, what is the power of the public outside election times to control government actions in liberal democracies? I know of only Switzerland which has popular participation by the citizenry. In other liberal Democracies, popular movements which have a continuous public opinion mobilization might be the way to control state action.

Capitalism; the Climb of Corporations onto Power

In 1989, the American political scientist  Francis Fukuyama predicted the end of history. The triumph of Capitalism over collective Socialism was, to him, final and without appeal.

The triumph of capitalism had two aspects: market competition and the rise of the new regulatory state shaped by the libertarian right. Up to roughly the early eighties, corporate business leadership and government power control were interchangeable; corporate leaders, like James Forestall , Alfred Sloan, Charles Erwin Wilson, Douglas Dillon, Robert McNamara and George Schultz slid into and out of government almost in -noticeably. This is best expressed by Wilson`s  aphorism” for years I have thought what is in the interest of our country is in the interest of General Motors and vice versa " This paternalistic mesh underwent a radical change during the Reagan-Thatcher era. The rise of the ideological right led by William F. Buckley jr, William Rusher, Russel Kirk and many academicians like Milton Friedman , James Buchanan and Frederich Hayek together with the multiplication of right- wing  think tanks like the Heritage, Cato, American Enterprise and Hoover Foundations,  all led to a determined climb by business corporate advocates into the power centers in Washington. The late Justice Lewis F. Powell was hired in the early seventies by the US Chamber of Commerce to write a policy memorandum on what business should do and advocate to further its interests in the US capital. His recommendations were gradually fulfilled in the 1980`s as business lobbyists numbers increased dramatically in Washington. DC. From modest budgets of few millions, in the early 1970`s, lobbying was financed to the tune of $3.5 billion  in the late 1990`s. according to Professor Robert Reich. ( Reich, Netflix , 2019.)[2].  Reich documents that close to 40% of former House Representatives became lobbyists after retirement and 48% of former Senators entered this business.(Ibid.)[3]. Washington lobbyists exert pressure on elected officials because their campaigns are largely financed by private businesses. The financed elected legislatures  pay back in skewing legislation in favor of business. The plum is in granting business tax exemption and subsidies and favorable regulations. Examples are exempting bonuses of top executive from tax, barring default on student debt or on mortgages while business is free to do so, barring the Federal government from using its enormous bargaining power in negotiating drug prices. Reich put such subsidies at the order of $ 100 billion.
President Reagan pioneered the practice of appointing to regulatory bodies people who do not believe in and are active adversaries of the mandates of these bodies. This was crowned by the decision of the US Supreme Court “Citizens United” in 2010, in which corporate businesses were given under the first amendment pertaining to free speech the right to spend their monies on financing election campaigns.

  The paradigm of Capitalism unhinged and free of regulations ruled the landscape after the collapse of Communism. As Thatcher and Reagan put it : there are no alternatives. This applied not merely to companies, but also individuals, as they scrambled for employment and advancement, investing in their own ‘human capital’so that they can be picked up by the new globalized businesses.  Public services were increasingly privatized and subjected to market competition with everything from healthcare to higher education to even servicing the military subjected to the criteria of profit in the name of ‘choice’ and ‘efficiency’[4]. This is how Bechtel, Black Water and Charter schools came into the news in Iraq and New orleans. Unions were crushed while social democrats shifted inexorably to the right. In the US the drift towards the right made states like Florida advertise that they are  union- free  states.

The functions of state also changed. Early in the post war era, the state took on the goals  of trying to narrow the gap in income distribution and finance social services. But this came to end in the mid 1980`s

The capitalist system that ruled thereafter, has allowed wealth to be concentrated in the hands of a few individuals, the envied 1 % . The Nobel laureate Professor Joseph Stiglitz` research shows that from 2008 till 2015, 90 % of the growth in the US `GDP went to the top 1 %. (Stiglitz, 2015 ),[5] Global businesses which have no roots and no loyalties except to their own profit line, moved their industrial  plants and headquarters to locations where they used their labor -saving technologies on the cheap and where they paid least taxes. Such countries are also outside the norms of the ILO and practically free of environmental restrictions. The situation has evolved so badly that the six heirs of the Walton family who own Wall-Mart in the US, have a combined wealth exceeding 140 million Americans. ( J. Harkinson, 2015, W. Domhoff, 2015 )[6]

And the trend for skewed distribution of income gathered momentum after 1985 with the spread of globalization; the share of capital in the GDP increased by 5 to 10 percent over the trend set for close to 80 years in the USA. Naturally, capital owns the new technology which turned out to be labor saving (Sakbani, 2020) [7]. Thomas Piketty corroborates this in the  European countries by the rise of the ratio of profit growth to income growth.( Piketty,2014 )[8]

 The sins of unfettered capitalism should not however, obscure the role of the markets in the allocation of resources. There is simply no other and better mechanism. But by markets it is meant competitive markets free of monopoly and government favoritism. At any rate, the State should play a compensating role to market outcomes when social goals are at stake, because the market does not account for social returns and does not charge social costs.  

Wealth and income are not in our era always earned by developing industries or exploiting land or introducing new technologies to old methods of production, but quite often, by the stock-market valuation of newly enlisted enterprises in the Tech. industries which produce information services out of  small enterprising beginnings. Millions are created overnight just as millions can be destroyed overnight. This casino capitalism has to be regulated, subjected to social purposefulness and taxed fairly but fully. The EU commission reported that Apple made millions of Euros in various countries but did not pay taxes in these counties where it had its businesses. Similarly, Amazon, the giant mass distributor, pays little US federal taxes. So did most of the cruise liners)[9]

In the period after the 2008 crisis, Europe in particular, shifted to drastic austerity in the name of correcting the so called” Problem of Public Finances”. In a bloc of highly interdependent economies, the fiscal austerity of the UK, Germany, the Netherlands and Finish Governments hit the Southern EU  states with full force. Greece, Portugal, Spain, Italy and even France, were dragged down and forced into austerity, born essentially by the poor and working poor.

This strange and economically unjustified fiscal conservatism took place when interest rates were at historical lows and investing in building up the economies and in clean technology were definitely going to bring higher net rates of return (Sakbani, 2020 ).[10]

The Covid 19 crisis even stripped these contentious stands of their fig-leaves. Today, the Republican Party in the US and the British Conservatives under the politically itinerant Boris Johnson, have jettisoned off the fear of public finance deficit and the ideological taboo of small government to protect their business constituents and secure their own re-elections.  Fox News editorials are now touting the old leftist planks of deficit spending.

The left however, has not weened itself off asking for more and more public spending. Jeremy Corbyn defeat and the failed campaign of Elizabeth Warren in the US., showed the limits of this old adage; the public has no appetite for it. The left has to reinvent itself,  for its advocacies have been taken over by the right  Its hope lies in emphasizing Democracy and its civic participatory core.as well as social safety nets.  

 The Role and Perception of the  Public Sector

The advent of the Covid 19 virus, like the HIV, has some origin in man`s intrusion and encroachment upon the  animal and the jungle kingdoms. It is reported that bats transmitted the  Covid -19  to other animals eaten by humans. For long, science has not provided a proof or counter proof on cross-species transmission. If this hypothesis is true, then at the bottom of such epidemics is man`s multiplying demography. The world as we still remember it was a planet of 5 billion people in the 1950`s Today, we are about 7.5 billion, polluting and consuming .

 In all  countries, when the crisis struck, people looked to Governments and public bodies for dealing with their problem. Indeed, it was the Government that took command of the situation albeit with various degrees of success. Businesses and voluntary civilian bodies were only organs of help to the Governments in charge.
For at least four decades, the public, especially in the USA, has been skeptical of the role of Government outside law and order and national defense. President Reagan famously said the Government is the problem and not the solution. So many people find the public sector lacking in a  bottom line. Its bureaucracies are thought  of as heavy, cumbersome and lacking in efficiency. This widespread belief is based on stereotype that does not stand to careful examination. To be sure, the public sector tolerates failure and needs periodic calling into account. But the record of business is not always better. It is precisely the lack of bottom line that exposes government to such criticisms, because what they do does not have a market price.
In the USA, the size of Government in 1952 was 5% of the active labor -force serving less than 180 million residents  Today, it is only 2% of the employed serving about 330 million residents. The public sector might have incompetents but it is rich with devoted public servants whose best elements are as good as the very best in the private sector.
The public distrust of the Government finds support in the concocted rational justifications offered  by the new Macroeconomics taught in the academe over the last forty years. This macroeconomics postulates the rationality of the homo economicus, the rational expectations of the individual, the efficient working of the markets and the multiple lags of fiscal policies and the  biased self- interested political calculus of politicians in election cycles.( Sakbani, 2009, and 2019.) [11] In the crisis of 2008, all of these postulates proved empirically invalid. Government saved the economies and the financial systems by following the old stuff carrying the insights of John Maynard Keynes. This time again, the macroeconomic policy responses are in the same vein. In a public lecture in 2017 at the graduate institute in Geneva, the eminent economist and public intellectual Paul  Krugman called this “the old stuff”. Another adjective richly  deserved is ”the largely valid stuff”.

What Happened to International Cooperation

The international system of cooperation, symbolized by the UN and its specialized agencies are critical for collective action on global problems but do not have the means, because the leading members do not have the political will to act collectively. The UN Security Council could not pass a resolution during the corona crisis  because the US and China could not agree on an adjective for the pertinence of  the virus: is it a Chinese virus or just a virus. Quit baffling was the refusal of the United States to use the WHO diagnostic testing offered to it when its testing preparedness was woeful. There were countries like South Korea, New Zealand, Australia, Germany, Denmark, Finland and other Democracies in Asia who were successful in combating the Covid-19 and reducing the death toll. Yet, the US and the UK, as examples, were unwilling to draw on this comparative experiences 

The Covid 19 has demonstrated the gaps in the WHO mandate, where it could not have asked China to allow the Organization to send investigative missions early on when the Chinese were not revealing the truth about the epidemic. Similar gaps can be ascertained in various other international bodies. In a world threatened by pandemics, by climate change, by regional water shortages and crop disasters on massive scales, the international cooperation system must be strengthened and given the mandates and resources to carry out their missions.

Regional bodies like the EU. Have not passed the effective cooperation test. Europe was hit by the virus at roughly the same time. When the agonies of Italy and Spain required help, other countries concentrated on meeting their national needs. Protective apparels, medical equipment like ventilators and medical supplies were sequestered and denied to exportation. That means the nation states prioritized first their needs. Furthermore, the idea of issuing EU collective bonds was shut down by Germany, the Netherlands and Austria and others.

Dangers and Opportunities

Looking at collective systems and authoritarian governments, it is clear that China  after a month and a half of lies and dissimulation, took drastic mitigation measures practically impossible in open societies. China was able to stem the tide and stop the epidemic. The cost it  paid will never be known and China hid the epidemic for a month and a half. The great story is not Chinese, rather that of the Asian Democracies: South Korea, Taiwan , Japan and may be Singapore , Australia and New Zealand, who  were the real champions. South Korea, tested up to mid -April, ,40 times per capita more than the US has done and moved to relax the isolation measure a week ago.

Authoritarians like Victor Orban of Hungry, availed of the crisis to take unlimited powers from the Parliament. There are measures of electronic surveillance and tracing people applied to fight the epidemic, especially in South Korea, which can in authoritarian hands really threaten freedom, privacy and human rights and the authoritarians are not hesitant to exploit.

Where Is All the Money Going and What is the Shape of the Recovery

The  Covid -19 crisis has turned on the money printing machine. The money tree, now called QE., will leave the US economy with more than $ 3 trillion new dollars. Similar relative amounts will also feed into the European economies. Until the Covid -19 crisis, China and others in the low- wage international supply chain, have been able to ramp up the aggregate supply with cheap goods. Now, avoiding inflation requires turning this liquidity into new investments. The crisis affords the chance to invest in infrastructure and clean technology. It also provides the opportunity to diversify the international supply chain by bringing some such industries to The US and Europe.

Looking at the shape of the economic recovery, its recovery curve will depend on how the economies open up. That means when and where various Governments think they have seen the back of the epidemic. Five  conditions must be fulfilled before re-opening becomes possible. First, having large scale diagnostic testing to know in instant real time the size of the epidemic spread and therefore the scope of the necessary social distancing to implement . Second, having  wide scale anti -bodies testing of recovered people to know what immunity they have acquired. Third, attaining the capacity to trace infected individuals in order to isolate them . Fourth, for each state or locality, the capacity of the health services should be the constraint. Fifth, eventually, discovering effective remedies and ultimately a vaccine. Any reopening before attaining the first three conditions would risk reigniting the virus and costing more deaths. From what can be known now, we are far from such a state; several months might be needed.

The recovery will depends on the depth of the recession. Morgan -Stanley has estimated the rise in unemployment in the US  at 13 % . Goldman Sachs estimation is 15% and Morgan- Chace is little higher ( David Kelly, 4/13/2020, J.Fox, 4/14/2020).[12] . Our guess-estimate  informed by the available data places unemployment in the US at a range between 16 % and 19%.

On 114/4/2020, the IMF predicted a loss of global GDP of $9 trillion in their moderate scenario. That is about 12% of the global GDP. The IMF is forecasting growth in  emerging economies at 1 percent and a decline of growth of developed economies of 6 percent. ( IMF, Update,4/14/2020 )[13] . In their view, it will be the  deepest  recession since the great depression of the 1930`s.; we might have up to 20 % decline in the GDP of many countries.Two important new press reports are that China will have through the second quarter, a negative income growth for the first time in three decades. the second is that the US `GDP will have a decline of 6.8 percent in the second quarter of 2020. Recent reports of unemployment place the number of workers applying for unemployment benefits at 26 million. 

In all countries, the important indicator is the ratio of dismissed workers to those retained. The higher is this ratio, the more difficult and harder will be the recovery. Many businesses will use the crisis to restructure their work -force, and in big business who owns the new labor saving technologies, they might opt for the robotics if suitable. Furthermore, many small businesses might disappear altogether. 
In the USA there is the  problem of the ballooning since 2008 of private debt which has accumulated over the years. This includes a huge corporate debt, the heart attack of the $16 trillion mortgage market which has to be reopened given that the majority of small and medium -size enterprises are involved in a big way in the construction industry, and finding an orderly resolution to the  student debt of $1.6 trillion, which otherwise could  bankrupt many financial institutions.

President Trump is agitating for reopening even beginning of May. That would likely be a premature date. The US president is very worried about his re-election. and he sees in the economy his best vehicle of approval. In Europe, Austria, Denmark and Spain are easing closures by opening selected parts of the economy while keeping social distancing. In all probability, the reopening will be rolled out gradually and selectively. Governments are advised to draw lists of priorities of their economic sectors and another list of how various sectors can implement protective measures and social distancing. This would map out matrixes where on the horizontal, one would have the priorities and on the vertical the capacity to protect and cope. The result is sequential  combinations of possibilities which would assure intelligent reopening .

 Unemployment, according to the above  forecasts, will be high when the economy reopens. Historically, unemployment is a cyclically lagging indicator. Therefore, the pace of recovery is likely to be slow. If we add to that the slowness of administrative procedures to put the massive loans and aid in the hands of enterprises, one has to conclude that the number of dismissed workers will relatively increase before reopening. Consequently, the curve might be an extended U-shaped which rises gently upward in 2021. In the 2008 crisis, it took the economy 5 years to re-establish growth and bring down unemployment meaningfully. Since reopening will be rather sequential in time for various countries, the overall U might have several smaller U`s and V`s  within it. This holds hope that the recovery will not be as slow as the one in 2008.

Geneva, 23/4/2020.

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                                                                      NOTES

[i]  .. The New York Times, Sunday, 4/12/2020.

[ii] . Robert Reich, Saving Capitalism, in Netflix, 2017.

[iii] Reich ,Ibid.

[iv]  Examples are found In Bechtel, and Black Water subcontracting for the military during th Iraq war, and the rise of Chartered schools after Katrina in New Orleans.

  [v]Joseph Stiglithz, Inequality and Economic Growth, in Sementic Scholar, No.15, 2014.        .,

Vi  . J. Harkinson, Mother Jones, October, 2015, also, William Domhoff, Who Rules America;  Power, Politics, and Social Change , University of California Santa Cruz, 015.

[viii]Michael  Sakbani, Trump the President That Was not To Be, in michaelsakbani.blogspot.com, 2017

VIII . Thomas Pikietty, Capital in the Twenty Ffirst Centuary (20/4) Cambridge, Massachusetts, 2014.. 

IX . Tax Avoidance,” The Apple Tax Ruling-What This Means for Irland,Tax and multinationals” , the Guardian, 2018.,

X . Michael Sakbani, Reflections on Karl Marx and the Neo-Classisists  in, michaelsakbani.blogspot.com, 2019.                                              

[xi]Michael sakbani, Trade Wars with the World; Can Mr. Trump Approach Work, in michaelsakbani.blogspot.com, 2019, also, Michael Sakbani, the Global Financial Crfisis , Central Bankingand the Reform of the International monetary and Financial Systems, in michaelsakbami.blogspot.com, January 2009.

[xi. i]Jeff Fox, “Goldman Sachs Says Downturn Will Be 4 Tmes Worse Than the Housing Crisis , then Unprecedented Recovery”, CNBC, April 14, 2020.

[xiii].   Dr. David Kelly, J.B.Morgan, Economic Update , April 13,2020   

                                                   

Xiii  IMF, Transcript of the Press Conferenceon the Release of  the World Economic Outlook, 14/4/2020.