Enduring and fundamental changes are often forced upon us by events – the Great Depression and the New Deal’s reform of capitalism, the assassination of President Kennedy and his succession by Lyndon Johnson and his Great Society, the 2007-8 financial collapse and the ensuing restructuring and regulation of the financial sector to reduce the probability of systemic collapse. And now we have the coronavirus, or COVID-19.
The behavior changes the pandemic has wrought will likely prove transient. Plans are already being laid for the day when we can move about freely, decide for ourselves how often and for how long to wash our hands, and replace social distancing with hugs. Manufacturers of personal hygiene products such as Unilever and Procter & Gamble are hoping that sales of soap and such will remain elevated, but this is more important to them and to the fastidious than to the nature of the institutions and practices that undergird the way our economic lives are organized.
Three institutions are unlikely to emerge permanently unchanged from this pandemic and the steps taken to ameliorate its consequences: the Federal Reserve System, the globalized economy, and capitalism. Start with the Fed.
The pandemic hit the economy suddenly and hard. Many financial sectors seized up, lending froze, tens of millions were thrown out of work, small businesses shuttered, all at a daily cost in lost output of $25 billion reckons James Bullard, president of the St. Louis Federal Reserve bank.
Led by chairman Jay Powell, the Fed reacted swiftly to prevent a liquidity problem from becoming a solvency problem. It lowered its benchmark interest rate to below zero in real (inflation-adjusted) terms. It pumped liquidity into the markets. Backed by legislation that in effect handed it $4 trillion with which to grease the wheels of commerce, it unveiled nine programs to lend to states and businesses. It bought junk bonds, abandoning its insistence on investment-grade collateral. It is acquiring municipal bonds the riskiness of which is more than a little difficult to measure.
With congressional approval and/or the connivance of the treasury, the Fed probably will find a way to buy shares if the markets deteriorate. “Nothing is out of the question,” says Quincy Crosby, chief market strategist at Prudential Financial. Eric Rosengren, president of the Boston Fed says, “We should allow the central bank to purchase a broader range of securities or assets.”
Meanwhile, it purchases bonds issued by the government to raise funds for a relief programme that seems headed to $4-$6 trillion when all the legislation is agreed by warring political parties – perhaps 20% of GDP – and prints money billions to finance those purchases.
Fed vice-chairman Richard Clarida, the central bank’s number two official, deems all of this “entirely appropriate,” says the economy is fundamentally sound, and that when it recovers “we, at the appropriate time, will be able to unwind these programs.” Never mind that the bank started its new adventure while still holding four times the $800 billion in bonds it had heading into the 2007-8 financial crisis. Asked how the Fed would shrink its role “at the appropriate time”, Clarida responded, “That’s a long way down the road.” It surely is. The Fed is now and will remain a much larger player in the U.S. economy than it has ever been. For borrowers the goodies provided by the Fed will come with a price tag: expanded government regulation – prohibitions on borrowers’ use of funds for share buybacks or excessive executive compensation among them.
Would that Bagehot were here to comment on a Fed that is following his advice to lend “quickly and freely”, but only against good collateral and at penalty rates. This Fed is hoping that following one of those three instructions ain’t bad.
Another institution that will never be the same is the congeries of players, actions, trade policies lumped under the title of globalization. China hawks are in the ascendant. It is now clear that the Chinese knew about the virus long before they warned the world, that they lied about its human-to-human transfer and about its death toll, blamed the origin on the American military rather than on their “wet markets” for freshly slaughtered meat, or the Wuhan chemical weapons facility, with its flawed safety record.
It is also clear that America has become dependent on China for many vital medical supplies and devices. Chinese firms account for more than 90% of U.S. supplies of antibiotics, vitamin C, ibuprofen and hydrocortisone, and 70% of acetaminophen. Globalists and free traders will have a difficult time explaining why America’s leading geopolitical rival, already threatening its access to major trade routes in Asia, buying ports in the Middle East, Africa, Europe and South America for use of its blue water navy and subsidized commercial enterprises, should be allowed to dominate needed medical supplies and, to boot, use Huawei to gain control of the nation’s communication grid.
And why America should not subsidize a home-grown pharmaceutical industry, use its control of access to the international financial system to discourage other countries and companies from cooperating with Xi Jinping’s globe-girdling Belt and Road Initiative. Just as America used that weapon to force Russia’s Rosneft oil trading subsidiaries to exit Venezuela. And the threat of sanctions forced Switzerland’s Allseas Group SA, which was laying the Nord Stream 2 natural gas pipeline from Siberia to Germany, to disengage, at minimum forcing a costly delay in a project the U.S. has opposed from its inception.
In short, America has available to it a range of weapons to supplement Trump’s tariffs, and allow it to reduce its dependence on China – disengage, to use a word that horrifies globalization’s advocates and beneficiaries. And, it seems the Chinese regime. “To the great consternation of the regime,” writes Jonathan Baron in his public affairs firm’s latest report, “COVID-19 has reinforced and accelerated the U.S. policy consensus in support of decoupling the bilateral economic relationship.”
Yes, this adds to the flight from globalization to autarky. But we live in a world in which the flight is on, whether or not the U.S. decides to follow along. According to the Global Trade Alert Project “As of 21 March 2020, 46 export curbs on medical supplies have been introduced by 54 governments since the beginning of the year.”
These trade distortions “often become permanent features in the world trade system,” notes the GTA. True, but such distortions have been built into the system decades ago, a system that long before Trump decided enough is enough certainly bore little relation to what is called “free trade.”
Finally, we come to the most important institution of all, capitalism, warts and all. The greatest producer of widely shared material wealth the world has ever seen. It most recently produced an economy sufficiently robust to provide government with the enormous resources with which to ameliorate the plight of those stricken, either physically or fiscally, by the Wuhan virus. Surely, good marks for that.
And for the private sector. It has provided enough examples of humane treatment of staff and customers to restore some of the lustre that capitalism’s reputation lost to rising inequality, the greed of the managerial class, and abusive treatment by companies with market power.
But capitalism will not emerge from this crisis unchanged, any more than it emerged from the Great Depression unchanged. Government will play a larger role in health care, not least by becoming responsible for a strategic reserve of equipment and medical supplies that will be its to allocate in an emergency; more workers will be covered by unemployment insurance; managed trade will replace free trade, enhancing the role of special-interest lobbyists; traumatized workers may express renewed interest in trade union membership, which now accounts for only 6.2% of the private-sector workforce.
One great American institution is not changed. Henry Kissinger, who has been with us for three years short of a century, certainly deserves the title of an institution. He agrees that “the world will never be the same again after the coronavirus.” But never one to ride with the latest policy fashion, he isn’t buying the notion that our future is best served by disengagement from China, and by extension other trappings of the post-WWII order. In a Wall Street Journal op ed he warns “The pandemic has prompted an anachronism, a revival of the walled city in an age when prosperity depends on global trade and movement of people. … The historic challenge for leaders is to manage the crisis while building the future. Failure could set the world on fire.” Dr. Kissinger spares us his view on whether our leaders are up to the challenge.