The
new normal will usher in the most profound changes since World War II.
by
Marshall Auerback and Jan Ritch-Frel
The
coronavirus pandemic has upended the global economic
system, and just as importantly, cast out 40
years of neoliberal orthodoxy that dominated the industrialized world.
Forget
about the “new world order.” Offshoring and global supply
chains are out; regional and local production is in. Market fundamentalism is
passé; regulation is the norm. Public health is now more valuable than
just-in-time supply systems. Stockpiling and industrial capacity suddenly make
more sense, which may have future implications in the recently revived
antitrust debate in the U.S.
Biodata
will drive the next phase of social management and surveillance, with near-term
consequences for the way countries handle immigration and customs. Health care
and education will become digitally integrated the way newspapers and
television were 10 years ago. Health care itself will increasingly be seen as a
necessary public good, rather than a private right, until now in the U.S.
predicated on age, employment or income levels. Each of these will produce
political tensions within their constituencies and in the society generally as
they adapt to the new normal.
This
political sea change doesn’t represent a sudden conversion to full-on
socialism, but simply a case of minimizing our future risks of infection by
providing full-on universal coverage. Beyond that, as Professor Michael Sandel has argued, one has to query the “moral logic”
of providing “coronavirus
treatment for the uninsured,” while leaving “health coverage in ordinary times…
to the market” (especially when our concept of what constitutes
“ordinary times” has been upended).
Internationally,
there will be many positive and substantial international shifts to address
overdue global public health needs and accords on mitigating climate change.
And it is finally dawning on Western-allied economic planners that the military
price tag that made so-called cheap oil and cheap labor possible is vastly
higher than investment in advanced research and next-generation manufacturing.
This also
means that the old North (developed world) versus South (emerging world)
division that long preoccupied scholars
and policymakers in the post–World War II period will become increasingly stark
again, particularly for those emerging economies that have hitherto attracted
investment largely on the grounds of being repositories of low-cost labor. They
will now find themselves picking sides as they seek assistance in an
increasingly divided and multipolar world.
The fault lines of the next economic
era have already begun to surface, creating friction with the previous
international structure of banking and finance, trade and industry. There is a
force beyond elites and critical industries driving this: The proletariat has
literally become the “precariat.”
In the
U.S. and Europe, the staggering number of service economy workers are going to
be quickly politicized by the shortfalls: People have seen a collapse in
income, and big failures in education, and health care. Union-busting, pension
fleecing, and austerity budgets and new technologies that concentrate wealth
away from labor have created a circumstance where ownership and profit models
must be revisited to sustain stability. The needs are too acute to be
distracted by the lies of Trump, or the inadequate responses in other parts of
the industrialized world. The current crisis will likely prompt
geopolitical and economic shifts and dislocations we haven’t seen since World
War II.
Death of Chimerica, the Rise of New Production Blocs
One
of the biggest casualties of the current order is the breakdown of
“Chimerica,” the
decades-old nexus between the U.S. and Chinese economies, along with other leading
countries’ partnerships with Chinese manufacturing. While the geopolitics of
blame for the origins of coronavirus continue to shake out, the process that
saw a decrease in exports from China to the U.S. from $816 billion in 2018
to $757 billion in 2019 will accelerate and intensify over the next decade.
While a
decoupling is unlikely to lead to armed conflict, a Cold War style of
competition could emerge as a new global fault line. Much as the Cold War did
not preclude some degree of collaboration between the U.S. and the former
Soviet Union, so too today there may still be areas of cooperation between
Washington and Beijing from climate to public health, advanced research to
weapons proliferation.
Nor does
this shift necessarily spell the sudden collapse of Chinese power or
influence—it has a colossal and still-growing domestic market and is on the
international leaderboard for a wide range of advanced indicators. But its
status as the world’s most desirable offshore manufacturing hub is a thing of
the past, along with the economic stability that steady inflows of foreign
capital brought with it. It does show a susceptibility to domestic stress, with
the Hong Kong protests last year providing a hint of what is in store as the
party leadership can’t pivot to new realities that include slower economic
growth and declining foreign investment.
As
investment flows turn inward back to industrialized countries, there will
likely be corresponding diminution of the global labor arbitrage emanating from
the emerging world. In general, that’s a negative for the global South, but
potentially a positive factor for workers elsewhere, whose wages and living
standards have stagnated for decades as they lost jobs to competing overseas
low-cost manufacturing centers (the increase in inequality is principally a product of 40 years of sustained
attacks on unions). The jobs won’t be the same, but to be sure, manufacturing
incomes exceed those of the service industry.
As each
country adopts a “sauve-qui-peut” mentality, businesses and
investors are drawing the necessary conclusions. Coronavirus has been a wake-up
call, as countries trying to import medical goods from existing global supply
chains face a shortage of air and ocean freight options
to ship goods back to home markets. Already, the Japanese government has announced its plans “to
spend over $2 billion to help its country’s firms move production out of
China,” according to the
Spectator Index. The EU leadership is publicly indicating a policy of
subsidy and state investment in companies to prevent Chinese buyouts or
undercutting prices.
Two
billion dollars is small potatoes compared to what is likely to be spent by the
U.S. and other countries going forward. And it can’t simply be done via
research and development tax credits. The state can and must drive this
redomiciling process in other ways: via local content
requirements (LCRs), tariffs, quotas and/or government procurement local
sourcing requirements. And with a $750-billion-plus budget, the U.S. military
will likely play a role here, as it ponders disruptions
from overseas supply sources.
Of course,
if the U.S. does this, other parts of the world—China, the EU, Japan—will
likely do the same, which will accelerate the regionalization trends in trade.
This may mean that some U.S. firms will have to operate in foreign markets
through local subsidiaries with local content preferences and local workforces
(that is how it worked in the 1920s—Ford UK was a mostly local British company,
different from the U.S. Ford Motor Company, but with shared profits).
An
examination of U.S. planning for the post-1945 world reveals the emphasis was
on free trade in raw materials mostly, not finished goods. (The U.S. only
adopted one-way “free trade” with its Asian and European allies later as a Cold
War measure to accelerate their development and keep them in the American
orbit.)
Domestically
within the U.S., as Dalia Marin writes, the coming declines in interest
rates will accelerate “robot adoption” by 75.7 percent, with concentration “in
the sectors that are most exposed to global value chains. In Germany, that
means autos and transport equipment, electronics, and textiles—industries that
import around 12 percent of their inputs from low-wage countries. … Globally,
the industries where the most reshoring activity is taking place are chemicals,
metal products, and electrical products and electronics.”
As the
coronavirus pandemic is illustrating, a viable industrial ecosystem cannot work
effectively if it is dispersed to too many geographic extremities or there are
insufficient redundancies built into the transportation of goods back into the
home market (rail, highway, etc.). Proximity
has become a significant competitive advantage for manufacturers, and a
strategic advantage for governments. But the U.S. government must play an
expanded role in the planning process. The U.S. is still a leader in many
high-tech areas, but is suffering the consequences of a generation-long effort
to undermine the government’s natural role as an economic planner.
In the
form of the regionalized blocs that are being sketched, in the Americas, Mexico
is likely to be one of the leading recipients of American foreign direct
investment (FDI). It already has a $17 billion medical
device industry and is sure to absorb much more capacity from China. This
has already started to
happen as a result of the U.S.–Mexico–Canada Agreement (USMCA, or new NAFTA). Furthermore, the Washington Post reports that “[a]s demand soars for medical
devices and personal protective equipment in the fight against the coronavirus,
the United States has turned to the phalanx of factories south of the border that
are now the outfitters of many U.S. hospitals.” This is in addition to the thousands of assembly
plants already in place in Mexico since the establishment of NAFTA. Indeed, if the
jobs that had moved to China move to Mexico, Central America, and South
America, this likely addresses many long-standing social tensions in regard to
immigration management, currency imbalances and corresponding black market
industries (ironically, it also likely means the end of Trump’s wall, as the
industrial ecosystem of the Americas becomes more cohesive and widespread).
Big Business Is Good Business
But this
will also have significant impacts closer to home: Much
as Franklin Delano Roosevelt ultimately prioritized domestic
ramp-ups in wartime production over trust-busting, so too national champions are
likely to feature more prominently today, as domestic scale and balance sheet
strength are given precedence to accommodate the drive to revive employment
quickly, and work
collaboratively to halt the spread of the coronavirus. The scale of companies will not be
regarded as a political problem if they can both deliver for consumers and show
the capacity of following political direction for what the public’s needs are.
Tech companies like Apple and Google are stepping up to fill the void left by massive federal
government dysfunction. The “break up Big Tech” voices are nowhere to be heard at
the moment.
We still
need a more robust form of
regulation for these corporate behemoths, but via a system of regulation that
is “function-centric,” rather than size-centric. As co-author Marshall Auerback
has written before,
this kind of regulation “restricts the range of corporate activities (e.g.,
structural separation so as to prevent companies like Amazon and Google from
owning both the platform as well as participating as a seller on that
platform), or the prices such companies can charge (as regulators often do for
utilities or railways). These considerations would be ‘size neutral’: they
would apply independently of corporate size per se.”
Capitalism has always had its plutocrats, but
scaling back America’s overly financialized model (by preventing stock
buybacks, to cite one example) would represent a useful reform and prevent a
lot of economic waste. Instead of going to enrich
executives and shareholders beyond the dreams of Croesus,
that measure might help to ensure that the profits
of these companies will be directed to the workers’ wages (which also means
supporting increased unionization), or plowed back into investment (e.g.,
increased robotics).
Biodata, Privacy, and an End to Pandemic Profiteering
And there
are fault lines in the business world. The pharmaceutical and medical research
industries face immense pressure from other businesses to end the pandemic so
they can get back to profitability. That means temporarily setting aside
profits and pooling intellectual property to encourage collaborative efforts on
the part of biotech and pharmaceutical companies to find proper treatments for
COVID-19, and make them freely available, especially if governments were to
waive antitrust scrutiny in exchange for all of the data Big Pharma companies
collectively hold. As the Guardian reports, “[t]here is a precedent. Last June,
10 of the world’s largest pharmaceutical companies—including Johnson &
Johnson, AstraZeneca and GlaxoSmithKline—announced they would
pool data
for an AI-based search for new antibiotics, which are urgently needed as
antibiotic-resistant bacteria have proliferated across the world, threatening
the growth of untreatable disease.”
Privacy advocates are
already expressing concerns about a growing and overweening medical surveillance state.
These surveillance concerns lack historical context: From the 19th century on,
serious health problems were met by hardline government policies to reduce
them. Policies ranging from quarantine to vaccine were not always mandatory,
but there was an understanding that personal concessions had to be made to
manage a huge population and an advanced society; the Constitution was not a
suicide pact. We can further alleviate those concerns today by ensuring that
the information uncovered does not become a precondition or additional cost of
receiving insurance coverage. In light of coronavirus, cost savings of
incorporating biodata into immigration and customs are a no-brainer for
governments, and are certain to cause friction with individuals who may not
want to give blood or saliva to get a visa or work permit, and agribusiness
leaders who know that safety measures cut into profitability. But the scales
have tipped in the other direction.
North Versus South
What about the other countries in the developing world that don’t have close geographic proximity to
a home market, or abundant supplies of key commodities required for
21st-century manufacturing needs, or even a well-developed manufacturing base
(in other words, the countries that have hitherto
been large recipients of investment solely on the grounds of cheap labor)? Many
of them have faced immediate pressure with the
collapse in global trade, unprecedented capital
flight that is sure to grow as the coronavirus spreads, all the while coping with COVID-19 with highly inadequate
health systems.
In
the meantime, the multi-trillion-dollar
market for emerging market debt, both sovereign bonds
and commercial paper, has collapsed. Many of these countries, via
their state pension funds and sovereign wealth funds, have become the ultimate
endpoint for many of the newer asset-backed
securities that finally revived years after the 2008 financial crisis. This has
become the potential new stress point in the $52 trillion “shadow banking” market. The U.S. Federal Reserve has sought to ease the funding stresses of
much of the developing economies by offering central bank swap lines. It has
also broadened prime dealer collateral acceptance rules, and set up commercial
paper swap facilities, all of which have eased short-term funding pressures in these economies that have
incurred substantial dollar liabilities.
As
the emerging world central banks then start to lend on those lines to their own
banks, it should start to alleviate the shortage of dollars in the offshore
dollar funding markets. We are starting to see some easing of stresses, notably in Indonesia—because it’s an
exporter of resources more than a cheap labor price economy.
But
whereas in previous emerging markets crises, China was able to buttress these
economies via initiatives such as the “Belt and Road Initiative,” Beijing
itself is likely to be buffeted by the twin shocks of declining global trade
and a reversal of foreign direct investment, which declined 8.6 percent
in the first two months of this
year.
Longer-term,
many other countries face comparable
challenges to China: Capital controls,
collapsing domestic currencies, and widespread debt defaults are likely to
become the norm. That’s already happened to serial
defaulter Argentina again. South Africa has been downgraded to junk status. Turkey remains
vulnerable. The so-called “BRICS” economies—Brazil,
Russia, India, China and South Africa—are all
sinking like bricks. The problem is
exacerbated by the fact that coronavirus and likely future pandemics will
create additional stresses on developing economies that depend on their labor
price advantage in the international marketplace to survive.
By
contrast, countries like South Korea and Taiwan have
had a “good crisis.” Both have vibrant
manufacturing sectors and created successful multiparty democracies. Foreign investment in South Korea continued to grow in the first
quarter of this year, as it rapidly moved to contain the spread of COVID-19
through an extensive testing regime (while keeping its economy open). Similarly
in Taiwan, by activating a national emergency
response system launched in 2004 (following the SARS virus), that
country has mounted a thoroughly competent
coronavirus intervention of unprecedented effectiveness. The
results speak for themselves: as of April 15,
in South Korea, a mere 225 deaths, while in Taiwan, an
astonishingly low total of six deaths in a country of 24
million people—this despite far more exposure to infected Chinese visitors than
Italy, Spain or the U.S.
Of course,
the very success of Taiwan’s response revives another potential fault line,
namely the tension underlying the “One China” policy. Before COVID-19, it is
noteworthy that the WHO “even refused to publicly report Taiwan’s cases of SARS
until public pressure prompted numbers to be published under the label of
‘Taiwan, province of China,’” according to Dr. Anish
Koka.
At the very least, Taiwan’s divergent approach and success at fighting the
pandemic will bolster its pro-independence factions.
The question of foreign nations upholding Taiwan’s
sovereignty with regard to China is increasingly thorny, given Beijing’s
growing military capacities. This will present an ongoing diplomatic challenge
to Western parties who seek to increase engagement with Taipei without
heightening tensions in the region.
A Recalculation of ‘Economic Value’
We have
outlined many fault lines likely to be exposed or exacerbated as a consequence
of COVID-19. Happily, there is one fault line likely to be slammed shut:
namely, the false dichotomy that has long existed between economic growth and
environmentalism. The Global Assessment from
the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem
Services
reports that “land degradation has reduced the productivity of 23 percent of
the global land surface, up to US$577 billion in annual global crops are at
risk from pollinator loss and 100-300 million people are at increased risk of
floods and hurricanes because of loss of coastal habitats and protection.”
Likewise, the study cites the fact that as of 2015, 33 percent of marine fish
stocks “were being harvested at unsustainable levels,” and notes the rise of
plastic pollution (which “has increased tenfold
since 1980”), both of which play a key role in degrading ecosystems in
a manner that ultimately destroys economic growth.
Finally,
repeated pandemics over the past few decades have shown these are not blips,
but recurrent features of today’s world. Hence, there is an increasing public
appetite for regulation to deal with this ongoing problem. Some industries,
such as agribusinesses, won’t like this, but the concerns are well-founded.
According to expert Josh Balk, 75 percent of new diseases start
in domestic and wild-caught animals, and 2.2 million people die each year from
illnesses transferred from animals. The majority of these are transferred from
poorly regulated factory farm chickens, cows and pigs; still, the “wet markets” of Asia and Africa, and the trade
in potential “transfer species,” such as pangolins, a major driver
of the $19 billion-a-year global trade in illegal wildlife,
must also be addressed. Beijing has suggested it will ban trade in illegal
wildlife and seek tighter regulation of the wet markets. The latter in particular may be
easier said than done, according to Dr. Zhenzhong Si, a research associate at Canada’s
University of Waterloo who specializes in Chinese food security,
sustainability, and rural development. Dr. Si argued that “[b]anning wet markets is not only
going to be impossible, but will also be destructive for urban food security in
China as they play such a pivotal role in ensuring urban residents’ access to
affordable and healthy food.”
To
be fair, this isn’t the first time that the sacred tenets of the global
economic framework have dealt with a crisis that seemed to usher in a new era. The same thing happened in the aftermath of the financial
crisis of 2008. But that was largely seen as a financial crisis, a product of
faulty global financial plumbing that nobody truly understood, as opposed to a
widespread social collapse closely approximating the conditions of the Great
Depression as we have today.
Not only
has the current lockdown put the entire global
economy into deep freeze, but it also came amidst a backdrop of widespread
political and social upheaval, and a faux recovery whose fruits were largely
restricted to the top tier. A collateralized
debt obligation is not intuitively easy to grasp. By contrast, being forced to
stay at home, deprived of vital income and isolated from loved ones, while
health care workers perish from overwork and lack of protective gear, is a
different order of magnitude.
Even
as we re-integrate,
it is hard to envisage a return to the “old normal.” Trade patterns will
change. Self-sufficiency and geographic proximity will be prioritized over
global integration. There will be new winners and losers, but it is worth
noting that the model of capitalism we are describing—one that does not feature
obscenely overcompensated CEO pay co-existing with serf labor and the
widespread offshoring of manufacturing—has existed in different forms in the
U.S. from 1945 into the 1980s, and still exists in parts of Europe (Germany)
and East Asia (Japan, South Korea, Taiwan) to this day.
Our
everyday lives will be impacted as selective quarantines and some forms of
social distancing become the new normal (much as they were when we dealt with
tuberculosis epidemics). All of this has implications for a multitude of
industries: restaurants, leisure, travel, tourism, sporting events,
entertainment, and media, as well as our evolving definition of “essential”
industries. Even our concept of personal privacy will likely have to be
amended, especially in regard to medical matters. Concerns about medical
surveillance—stigma (STDs, alcoholism, mental illness) and denial of
insurance—can be alleviated if everyone is guaranteed treatment regardless of
ability to pay, which will mean greater government intrusion into the lives of
citizens and activities of businesses as the public sector seeks to socialize
costs.
Taken in
aggregate, we are about to experience the most profound social, economic and
political changes since World War II.
Author Bios:
Marshall
Auerback is a market analyst and commentator.
Source: Independent Media
Institute
Credit Line: This article was produced by Economy for All,
a project of the Independent Media Institute.
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