Coronavirus Is Leading to a Worldwide Recession: Here’s What We Can Do About It

Paddy Quick Mar 16, 2020

Coronavirus is impacting production throughout the world. Countries must take steps to slow down the pace with which the virus spreads so that hospitals and other healthcare providers are not overwhelmed by a sudden and massive influx of patients. Yet the globalization of the economy has made production in every country increasingly dependent on that of other countries so that no one country can ”isolate” itself from the crisis.

Reducing the spread of the virus requires isolating those who are affected, and tracing those who have come into contact with them so that they do not affect others. The first step is identifying those who are sick. 

The United States is particularly poorly placed for this task. 

Not only are millions of people not covered by health insurance and thus cannot afford the cost of testing, but one-quarter of all workers cannot afford to take time off work when they are sick because their employers do not provide paid sick leave. Immediate steps need to be taken and measures are being proposed by the Democrats in Congress.

The virus will spread. It will probably eventually affect half or more of the total population. Even those who seek to be tested run into the problem that tests are unavailable. This is due in large part to a lack of planning by the federal government.  President Trump actually merged the task force responsible for planning for a pandemic into one formed to address the problem of weapons of mass destruction.

The steps that have to be taken right now, such as the closing of schools and other places where large numbers of people gather, from religious services to sports events to restaurants, are, of course, reducing production in the United States. 

The spread of the coronavirus has exposed the extent to which globalization has linked workers in a worldwide system of capitalist production.

Consumption is falling both because so many people have been laid off and because people are understandably cautious about making large or even small purchases. Clothing sales, for example, have fallen significantly. Investment by businesses, such as the purchase of new plants and equipment, was already weak. While overall real GDP in the fourth quarter of 2019 grew at an annual rate of 2.1 percent, real gross private investment fell at an annual rate of 6.0 percent. Now is clearly not the time to expand productive capacity. 

The Covid-19 is seriously reducing international trade, including the little-recognized trade in intermediate goods, the parts necessary for manufacturing production. It is not only U.S. sales to countries such as China that have been affected. Even before Covid-19 hit the United States, contraction of production in China reduced its ability to supply the world with parts that are essential for manufacturing. German automobile production, for example, is dependent on the importing of parts from China.

The spread of the coronavirus has exposed the extent to which globalization has linked workers in a worldwide system of capitalist production. The world economy was already slowing down even before this crisis. In the last three months of 2019, GDP in Japan shrank at an annualized rate of 6.3 percent, and there was no growth in either Germany or the United Kingdom.

The usual monetary and fiscal measures to address recessions are not appropriate now. The problem is not that the demand for output has fallen but rather that businesses have cut back production and are therefore unable to meet that demand. It will do little good, therefore, for the Federal Reserve to cut interest rates as it has already done since this will have only a very minor effect on the cost (including interest) of purchases by either businesses or households. 

The Fed can, however, play a useful role in increasing the ability of banks to make loans to troubled businesses to enable them to hold out until the crisis is over. This it has agreed to do. The more long-term problem is that the interest rates of many central banks are already very low or even in the negative. In its efforts to encourage expenditure, the Central Bank of Japan, for example, penalizes banks who hold onto their money rather than spending it, by charging them interest on their funds rather than paying them interest. While the Federal Reserve is not yet at this point, it will have little ability to stimulate the economy anytime soon.

Similarly, reducing taxes will have little effect. Trump’s proposal to cut payroll taxes was criticized immediately in many different ways. Not only would it be of no use at all to those who are out of work, but the benefits would go disproportionately to those with higher wages. In any case, it would likely be insufficient to counteract the cut-back in consumption already taking place.

What is needed is the immediate allocation of funds to address the shortcomings in our healthcare system, starting with assistance in the testing of those who are suspected of having the virus, together with those with whom they have been in contact most recently. 

Unlike in 2008, what the country is facing is a decline in real production rather than the collapse of the entire financial system.

To this must be added the enforcement of rules, for the duration of the crisis, to provide assistance to those affected. This includes the need for sick pay to those who are unable to go to work or are responsible for the care of others. It must be made illegal for landlords to evict people for nonpayment of rent or for mortgage companies to foreclose on those who are unable to make payments. Utility companies must be prohibited for the duration of the crisis from cutting off supplies. Increased provisions of meals must be delivered to those who are homebound and, when schools are closed, to the children who rely on school-provided meals. Making alternative arrangements for child care poses a huge problem for parents. (This increased expenditure will in turn provide employment that will benefit not only child-care workers but those from whom they buy their provisions.)

To what extent should the government provide assistance to businesses that are undoubtedly facing either falling profit rates or actual losses? 

Big corporations have captured almost all of the gains from the increased productivity of workers over the past 50 years, so it is hard to have any sympathy for them. Unlike the 2008 financial crisis, what the country as a whole is facing is a decline in real production rather than the collapse of the entire financial system. With the assistance of the Federal Reserve, banks will be able to provide loans to some of the more established businesses to tide them over the worst of the crisis.

What about small businesses? The term ”small business” brings to mind the corner deli, bodega, or laundromat. But the government’s Small Business Administration (SBA) considers a manufacturing business to be “small” if it employs fewer than 500 workers. In addition, the term allows for the inclusion of the franchises of corporations such as McDonald’s. The SBA will provide little if any assistance to family-run businesses that have always been under continuous pressure from their corporate competitors. In fact, one of the “functions” that recessions play in a capitalist system is to “weed out” the small companies and thus further the consolidation of production in the hands of the big, multinational corporations.

The Covid-19 crisis exposes the inequities and injustices of the economic system within which we live. While even minor changes must be welcomed, the need for a fundamental rethinking of our system is increasingly clear.

Paddy Quick is a professor emerita at St. Francis College in Brooklyn and a member of the Union for Radical Political Economics.

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