How the Coronavirus Crisis Became an Economic Crisis

Part 2 of a new joint series in Labor Notes and Dollars & Sense:
“Coronavirus, Capitalism, and the Workers’ Movement.” Find Part 1 here.

By Alejandro Reuss | Web-only

Some of the economic consequences of a massive communicable-disease crisis might arise in any society, regardless of the system of economic organization. Others, however, differ depending on the characteristics of the economic system. The particular ways that the coronavirus crisis has unfolded in the United States should be understood as a series of shock waves, transmitted through the structures of a capitalist economy and through the particular features of U.S. capitalism. In the United States and other countries, the coronavirus pandemic—in addition to being a public health disaster—has also triggered a massive economic crisis. Overall economic output, income, and employment have plummeted. The Congressional Budget Office (CBO) has predicted that U.S. per capita GDP will decline at an annual rate of nearly 40% in the second quarter of the year. That means that if the same rate of drop-off continued for a full year, incomes would drop (on average) to only 60% as much as they were a year before.

Total employment, according to the Bureau of Labor Statistics (BLS) job report for April, was down by more than 25 million compared to February. The “headline” (or U-3) unemployment rate calculated by BLS rose to nearly 15%. That number, however, does not include jobless workers who have given up looking (“discouraged workers”) or those who want to work full-time but can only find part-time work (“involuntary part-time workers”).The BLS’s broadest unemployment measure (U-6), which adds those workers and some others to the U-3 figure, surged to nearly 23% in April. The May report showed total employment bouncing back somewhat, by about 4 million, still down by more than 20 million compared to February. The headline unemployment rate, meanwhile, remained over 13% and the U-6 rate over 20%. (We always need to take official employment and unemployment figures with a grain of salt. This is even more true now, as the coronavirus crisis has caused deviations from normal data collection methods and ambiguity about how some workers are counted (the unemployment figures would be higher if “furloughed” employees who are not getting paid were counted as unemployed). Moreover, we should not take the bounce-back in the employment numbers in May as indicative that the economy has turned the corner into recovery. That cannot be determined from one month of data.)

We can place the mechanisms that have turned the public health crisis in the United States into a massive recession in two categories, those originating on the demand side of the economy and those originating on the supply side. The two sides are intertwined—changes in demand for goods and services affect the amounts produced, and changes in supply conditions affect people’s ability and willingness to spend.

Demand-Side Effects

First, people have cut back on consumption activities that entail close contact with others and might lead to infection (such as dining out, attending events with large crowds, shopping at brick-and-mortar stores, etc.). In a capitalist economy, this is expressed as a decline in demand for those goods and services, a resulting decline in businesses’ desired output, and in turn a decline in total work hours.

In an affected industry, owners and managers decide to reduce output, rather than have workers produce goods that cannot be sold. That means, in turn, that businesses reduce purchases of physical inputs (reducing or canceling orders for materials, energy, etc.) and labor power (cutting worker hours or laying workers off). Maintaining such purchases would only result in unnecessary expenses and larger business losses, which profit-seeking businesses aim to avoid.

The BLS employment data for April reflected the disproportional impact on the service sector, and especially on leisure and hospitality. Total private-sector employment was down by more than 20 million compared to February. In the leisure and hospitality sector alone, it was down by over eight million. In other words, while those industries accounted for only about 13% of total private employment before the massive job loss began, they were responsible for about 40% of the lost jobs. Businesses in the hard-hit sectors tried to adapt, like restaurants ramping up take-out and delivery services. Some other sectors (like supermarkets, online retail, package delivery, etc.) saw increases in demand and new hiring, but not nearly enough to offset the declines elsewhere. Leisure and hospitality employment recovered to a degree in May—by over one million jobs—but remained about seven million below the February level.

The effects of job loss in one sector can multiply across the economy: To the extent that affected workers cut back their spending, all industries that supply consumer goods and services face a decline in demand. Business owners and managers in those industries, therefore, also reduce output and work hours.

The magnitude of this second-order effect is not automatic or inevitable. It clearly depends on economic policies and institutions. The more replacement income laid-off workers get from “safety net” programs like unemployment insurance, the less they have to cut back their consumption spending. High levels of replacement income mean workers without jobs can still get the things they need to live, and workers in other industries are less likely to face layoffs or cuts in hours due to falling demand. For this reason, economists describe such policies as “automatic stabilizers.” When there is a drop in demand, these policies automatically inject some spending back into the economy.

What is Capitalism?

Mainstream economists don’t tend to talk about “capitalism” very much, preferring terms like “market economy.” They like to celebrate markets—unregulated “free markets” most of all—and to emphasize markets in describing modern economies like that of the United States. But there is more to capitalist economies than just markets. Economists of non-mainstream theoretical perspectives, known as “radical political economists,” emphasize three major characteristics of capitalism—private property, wage labor, and production for profit. (For a more in-depth discussion, see Samuel Bowles, Richard Edwards, Frank Roosevelt, and Mehrene Larudee, “Capitalism as an Economic System,” in Understanding Capitalism: Competition, Command, and Change in the U.S. Economy, 4th ed.)

1) Private property
When people think of private property, they may think first of personal belongings, such as their clothes, furniture, cars, or homes. Radical political economists, however, emphasize the economic and political importance of private ownership of the means of production (things that are used to produce other things, such as land, factories, machinery, raw materials, etc.). In the United States and other capitalist societies, these are owned mainly by private individuals or companies, and in fact by a relatively small percentage of the population. This is a familiar fact of life, yet there have been other societies, both ancient and modern, in which such resources cannot be privately owned, or at least some key resources cannot be privately owned. Critics of private ownership of the means of production, especially when highly concentrated, point to the enormous power that the control of resources gives to a relatively small number of capitalist owners, not least over the majority who have no other way to make a living but to work for them.

2) Wage labor
In capitalist economies, most employed people (as officially defined for purposes of employment statistics, those who “for pay or profit”) work for someone else for pay. They do not work for themselves, in their own businesses or on their own farms, but for some employer. Some wage or salary employees work for government agencies, but the vast majority work for private companies. In the United States and other similar economies, the predominance of wage labor has grown dramatically over time. Over the last couple of centuries, the U.S. economy has been transformed from one based on a combination of slavery, self-employment, wage labor, and unpaid household labor to one largely based on just the last two.

With the rise of capitalism and its worldwide expansion, starting about 500 years ago, both wage labor and slavery expanded dramatically. (If we treat wage labor as a defining feature of capitalism, then an economy based on slavery is, by definition, not a capitalist economy. Some radical political economists, however, view the modern slavery-based economies in the Americas after colonization as examples of a different form of capitalism.) While slavery has by no means been eradicated, over the last couple of centuries wage labor has largely superseded slave labor. Small business ownership and self-employment was also much more prevalent in earlier times than it is today. As large capitalist enterprises came to dominate most industries, however, self-employment became quite marginal. The United States is not mainly a country of independent proprietors—however much nostalgia may exist for a bygone age of small farmers, craftspeople, and shopkeepers—but of wage and salary employees and capitalist employers. The capitalists own the means of production and the employees work for them.

3) Production for sale (with the aim of profit)
The people who employ wage workers mostly do not directly consume the goods and services produced by those workers. In other economic systems, such as feudalism, those who appropriate goods produced by other people may aim primarily to keep those goods for their own enjoyment. The feudal lords, for example, might directly consume the crops produced by the serfs. Even today, in capitalist economies, some people are employed to directly produce goods and services for their employers’ consumption (such as cooks, cleaners, drivers, and gardeners employed by the affluent).

For the most part, however, employers take possession of goods produced by wage and salary employees in order to sell them at a profit. The shareholders and executives of General Motors do not want the cars as such; the owners of McDonalds do not want the hamburgers. They want the profits from the sale of these goods. This means that overall investment, employment, and incomes in a capitalist economy are largely dependent on private business owners’ and executives’ expectations of future profits. This puts pressure on governments to create profitable conditions for private business, and gives owners and executives a great deal of power—extending way beyond the individual company or workplace to the politics of entire nations.

Income-replacement policies obviously do exist in capitalist economies. The current unemployment insurance system in the United States—a combination of federal and state policies—dates back to the 1930s. The federal government and some states have periodically expanded unemployment benefits, especially during crisis periods such as the Great Recession of 2007–2009 and its aftermath, and have done so again in the current crisis. The Coronavirus Aid, Relief, and Economic Security (CARES) Act increases benefit levels, the duration of benefits, and eligibility. Combined state and federal benefits, on average, will replace close to 100% of laid-off workers’ lost pay through the end of July (not including the value of employer-provided benefits like health insurance). This does not necessarily mean, however, that demand for goods and services is unaffected by the surge in unemployment. Workers who have lost their jobs may still face a decline in their disposable incomes because of the loss of benefits like health insurance and the resulting increase in out-of-pocket costs. Workers experiencing cuts in work hours may not qualify for unemployment benefits. Some workers, such as undocumented immigrants, are denied federal benefits even when otherwise qualified. In addition, since the expanded benefits are only temporary, and future job prospects are so uncertain, many workers (employed and unemployed) may cut back their spending anyway.

In the United States, business owners and managers have historically been more successful than in other high-income capitalist countries in limiting unemployment insurance benefits. The eligibility duration and the replacement rates in the United States have generally been lower than for most other high-income countries. Since public “safety net” programs reduce workers’ reliance on wage employment for income—and with it, employers’ power over workers—capitalists have historically opposed such policies. Where unemployment insurance and other safety net programs do exist, business groups usually fight to keep benefits low and eligibility restrictive. Employers and the politicians beholden to them, moreover, typically push to keep the expansion of such programs during crisis periods strictly temporary. They do not want increased public economic security programs to become the “new normal.”

Supply-Side Effects

Second, there are negative effects on overall economic output and employment due to disruptions on the supply side of the economy. Even in industries that involve little or no contact between workers and the public, for example, workers faced risk of infection if they went in to work and came into contact with other workers. Production in these industries has been interrupted by individual workers’ decisions to stay away from work, groups of workers collectively demanding the suspension of work, and above all mandated public-health shutdowns of “nonessential” workplaces. Production and employment declined even if people were still able and willing to pay for the kinds of goods the affected industries produced—so this was not just a result of the fall in demand.

It may be possible for work to resume, for some occupations, with appropriate adaptations. The widespread, though highly unequal, transition to remote work is an example. Some forms of work might be compatible with new social distancing practices. Others might be safe with proper protective equipment. To the extent that production is interrupted, however, the total output of goods and services declines—as do the market incomes of employers and workers. Employees of shut-down businesses, whether formally laid off or “furloughed,” do not get paid their wages. Expanded unemployment insurance benefits can reduce the impact on workers and the ripple effects across the economy. For reasons described above, however, job losses may still feed into a decline in demand, production, and employment across the economy.

In addition, people engage in specific kinds of consumption activities connected with their work lives. For example, most people normally have to get back and forth between home and the workplace. With millions working remotely, furloughed (with jobs but not actually working), or unemployed, people have been traveling much less. Along with a collapse in leisure travel, this has contributed to a dramatic fall in demand for gasoline, sending oil prices plummeting.

A decline in production in one industry, in addition, can have second-order effects on businesses in other industries. Businesses are connected to each other by input-output relations. A business in one industry, for example, buys needed inputs (machines, materials, etc.) from businesses in another. It may sell some of its output not to consumers but to other businesses, for which those outputs are needed inputs. Businesses where production has been interrupted (say, due to shutdown orders) will stop ordering inputs as normal, negatively affecting businesses in “upstream” industries. If they produce inputs used by other businesses, those “downstream” industries can be negatively impacted as well. When automakers shut down operations, for example, so do parts manufacturers. When meatpacking plants shut down, retail sales in supermarkets and take-out restaurants drop.

Limitations of the Demand-Boosting Playbook

There are well-known policy responses to recession triggered by a collapse in overall demand in the economy, going back to the Great Depression of the 1930s. To inject additional demand into the economy, the government might:

  • Purchase goods and services from private businesses
  • Make cash payments to businesses, without requiring goods and services in return
  • Make cash payments to individuals, without requiring work in return
  • Directly employ individuals for pay
  • Cut taxes to increase individuals’ disposable incomes
  • Increase the money supply, with the aim of reducing interest rates
  • Directly make loans to businesses or individuals

We have already seen some of these demand-boosting policies put in place in the United States and elsewhere. The CARES Act included, for example, about $600 billion in direct cash payments to individuals. That mostly took the form of “stimulus checks” and increased unemployment benefits. (The stimulus checks are $1,200 one-time payments per single adult, $2,400 for married couples, and $500 paid to the parents of each child under 17. The amounts are lowered for individuals with incomes of $75,000 or more, or $150,000 or more for married couples.) It also included about $500 billion directly for large corporations, about $450 billion in loans and billions more in cash “grants” (much of that to passenger airlines and cargo carriers). Another $350 billion, mostly in the form of loans, was earmarked for small businesses. (Some corporations, by no means small, sparked an outcry by grabbing some of these “small business” funds. No surprise there.) In addition, the Federal Reserve launched an “unlimited” program to purchase financial securities—including bonds previously issued by the government and held by private financial institutions, bonds previously issued by private companies, etc.—with the aim of driving down interest rates. The idea is that lower rates will get private businesses and individuals to borrow and spend more. The Fed has also announced plans to purchase newly issued bonds on a large scale, directly channeling cash to the issuing businesses.

All of these policies could boost spending in the short run. When lower-income people receive additional income, they tend to spend most of it, so the demand boost is relatively large. Economist Mark Zandi estimated, during the Great Recession, that the spending impact of an extra $1 in unemployment benefits or nutrition assistance was between $1.60 and $1.75. That is because recipients spent most of the extra money, that spending became other people’s incomes, they spent most of that, and so on. (This is known as a “multiplier effect.”) The multiplier is smaller for extra income received by higher-income individuals, since they are likely to save more of it. Businesses that receive additional income may also refrain from spending it, especially if there is little reason to expand production, as during a recession. (Some of the bailout money, it should be noted, it tied to spending on wages and benefits. That may reduce businesses’ cash hoarding.) Further, an infusion of cash into the banking system does not always translate into substantial new lending. During the Great Recession, the Federal Reserve bought trillions in bonds, but the banks largely sat on the additional cash (holding it as “excess reserves”).

The current crisis, in addition, poses some special complications, so standard demand-boosting policies might not quickly restore production and jobs. First, the sectors that are hardest hit—such as leisure and hospitality—might be slow to respond to the general sort of demand-boosting that’s in the stimulus bill. This is true even aside from the impact of shutdown orders and the like. If people remain worried about coming into close contact with others, increased overall purchasing power may not translate quickly into more demand for restaurant meals, sporting events, concerts, or hotel accommodations. The recovery of employment in these sectors to their pre-crisis levels may be a long, drawn-out process. (It should be understood that, so long as the reopening of these sectors of the economy poses a serious health risk for workers and the public, the objective should not be the fastest possible recovery in production and employment. We are already seeing, as restrictions have been eased in many states, an alarming resurgence of infections.) Policies that boost demand across the board, of course, could stimulate increased production of other kinds of goods and services. Employers in those sectors might hire more workers, and some of the workers who have lost jobs in the hardest-hit sectors might get jobs as a result. Not all would, however, especially not in the short run.

Second, there are important constraints on supply, especially in the form of required shutdowns of nonessential businesses and widespread isolation requirements on workers. Some of the work that was done on-premises is now being done remotely, but certainly nowhere near all work affected by such requirements can be done remotely. Even if demand for some kinds of goods and services increased, it would not necessarily be possible for businesses to respond quickly with increased output and employment. (Again, nor would we want it to, as long as slowing the spread of the virus requires continued social isolation.)

For these reasons, responses to the crisis have to include adaptations to substantial declines in work hours and overall output, at least in the short to medium term. Demand-boosting policies can lessen the carnage. Not all policies out of the recession-response playbook, however, are equally effective in boosting demand. Nor are the various options equally good for other reasons. Some options, for example, reduce economic inequality; others increase inequality. Those that primarily benefit low- and middle-income people are better on both scores than those that benefit high-income individuals and giant corporations. Even if we cannot avoid declines in total output and income altogether, however, it is possible to manage significant declines in income without a disastrous toll in human terms. To accomplish this, the decline must not be borne disproportionately by a vulnerable group (like those who lose their jobs), and the most vulnerable must not bear any of the impact.

We’ll see how in Part 3 of this series.

is an economist and historian and former co-editor of Dollars & Sense.

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