The last time we faced an economic crisis anywhere near as severe as the one we are about to encounter was in 2008, when the global banking system began to collapse under the weight of its own excesses.
When the US government’s decision to allow Lehman Brothers to fail sent financial markets into freefall, world leaders realized it was time to step up. At first, they provided trillions of dollars worth of short-term liquidity (effectively short-term loans) to the world’s biggest banks, but they soon realized that the banks were not simply illiquid (out of cash), but insolvent (completely unable to pay their debts). At this point, they threw their weight behind their financial systems with bailouts that saw states becoming significant shareholders in many of the world’s largest financial institutions.
In the several years that followed, many countries adopted fiscal stimulus measures aimed at limiting the impact of the financial meltdown on the real economy. Initially, the United States and the UK both implemented large stimulus programs aimed at absorbing job losses and preventing the kind of Keynesian downward spiral in demand that gave us the Great Depression. But it was China that saved the global economy from another depression, with a stimulus package worth nearly 20 percent of GDP at its peak. Huge state investment protected both the Chinese economy and the economies of its major trading partners.
Soon, however, governments all around the world were changing their tack. In Europe, the sovereign debt crisis, which was a delayed response to the financial meltdown of 2008 among countries whose monetary policy was restricted by membership of the euro, hit the PIIGS (Portugal, Italy, Ireland, Greece, and Spain). The Troika – the European Commission, the European Central Bank, and the International Monetary Fund – imposed harsh austerity measures on countries like Greece in return for bailouts. The UK followed suit and imposed a deep austerity program, despite there being absolutely no sign of a sovereign debt crisis for the British government.
Why this sudden turnaround? From the very beginning, the Right and the Left had been engaged in a struggle over the interpretation of 2008. Many on the Left complacently believed that the financial crisis would vindicate their warnings about the inherent unsustainability of financial capitalism. The Right, initially cowed by the nature of the global financial crisis, quickly came forward with their own story. What happened in 2008 was not simply a crisis of the international financial system, it was a crisis caused by profligate governments spending too much money on public services.
In the UK, used to the Thatcherite common sense that a government can only spend as much as it earns in taxes, the austerity narrative won the Conservatives the 2010 election. Since then, 120,000 people have died as a direct or indirect result of the austerity policies implemented by that government. Our economy has stagnated for nearly a decade, with wages and productivity both flat for most of the last ten years. As a result, austerity has failed on its own terms — the national debt is higher as a percentage of GDP than it was in 2010.
In the wake of the financial crisis, the Conservatives spread a deliberately false narrative in order to profit electorally from one of the worst crises ever to hit the global economy. The Labour Party was not much better — promising austerity lite and controls on migration in response to the success of the Tory message. The hegemonic response to the crisis had been established.
As the coronavirus crisis unwinds, the Right is in power, and they are demanding that journalists, citizens, and even health officials fall in line behind the government narrative. Questioning government policy — whether on monetary policy, statutory sick pay, or welfare payments — is “politicizing” a public health crisis.
The idea that the coronavirus crisis can be “politicized” is to imply that it is not an already inherently political event. Of course, the outbreak of the virus was a natural — and judging by research from the Gates Foundation, predictable — event. But its economic impact, and, in particular, the distribution of costs, could not be more political. If we are to avoid another lesson in disaster capitalism from the Right, we need to understand the likely impact this crisis will have on our economy and prepare accordingly.
The panic over the coronavirus has already begun to impact financial markets: the S&P, the Dow Jones, the FTSE, and many other indices have all seen larger falls than those they saw in 2008. Falling stock prices reflect investors’ realization that, with workers forced to stay at home, borders shut, and consumption and investment both collapsing, the global economy is headed into a deep recession. After a decade of rising corporate debt, the big worry is that falling corporate incomes will cause a cascade of corporate bankruptcies that could threaten some major financial institutions.
So far, so much like a generic recession. But there are some big differences between the crisis we are currently facing and the one that followed the 2008 financial crisis. After 2008, many people lost their homes, and many more lost their jobs. The suffering was huge and was not confined to the least well-off in society. But with the coronavirus recession, the economic risks are much more individualized and much more severe, especially for the UK.
Many people — especially those in London, where the virus is most severe — will be unable to pay their rent or their bills on just £94.25 per week — the Statutory Sick Pay available to those forced to self-isolate. Self-employed people, those on zero-hours contracts, and those in the gig economy may not even be eligible for Statutory Sick Pay.
What’s more, the growing number of people without stable employment face a dramatic loss of work as businesses stop trading, people stop consuming, and public spaces slowly shut down. Even if they aren’t forced into self-isolation, those without a stable income — all those categories above, plus freelancers, small business owners, and those paid on commission — face an immediate and lasting loss of income.
After a decade of austerity, household savings are dangerously low. The year 2017 was the first since 1987 that households spent more than they earned, covering the difference by taking out new debt and drawing down from their savings. There are more than 8 million households in the UK already struggling with some form of problem debt.
With high rents, high transport costs, and stagnant wages, the UK was already enduring a cost-of-living crisis before the coronavirus hit. How are families supposed to cope with a further loss of wages, when banks will continue to demand debt repayments, landlords will continue to demand rent, and utilities companies will continue to demand bills?
Central bankers are also far more constrained than they were in the wake of 2008. Monetary policy is already extremely loose — interest rates have now been cut to as low as they can go without heading into the dangerous territory of negative interest rates. Quantitative easing could be continued, but there is evidence that, even before the crisis, further money creation was showing diminishing returns. The Federal Reserve has already offered $1.5 trillion worth of short-term loans to the financial sector, and even this has not stemmed the panic.
Every single one of these problems is political. Each of these issues — from low pay, to high debt, to an absence of monetary fire power — results from the actions of previous governments, and they can only be dealt with by this government. Generalized fiscal stimulus of the kind outlined in Rishi Sunak’s budget last week combined with further quantitative easing will not be enough.
The government needs to introduce targeted support for families facing a loss of income as a result of the coronavirus crisis. The alternative is to watch as people either ignore the government’s advice to self-isolate, spreading the virus further, or take it, and find themselves forced out of their homes or bankrupt within a few months. It is no coincidence that those who cry “politics” are not facing this choice.
Grace Blakeley is a research fellow at the Institute for Public Policy Research (IPPR).