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For the U.S. and China, Public Investment Must Lead the Way

Aug 26, 2020

In previous articles, I discussed the onset of what I term the “Third Great Depression” and the Global South’s debt crisis. In both, I alluded to the fact that the severity of the current recession means that, as anchors of the global system, the U.S. and China will have to undertake serious restructuring in order to help their economies escape a long depression. By enacting stimulus measures this year, both countries managed to avoid the utter economic freefall unleashed on peripheral economies from Lebanon to Argentina. However, we are merely at the beginning of a long and difficult road. Private investment, employment, and global trade are not likely to recover for years to come. An exit from these conditions will only come with much greater public intervention in both the U.S. and China, though it is not clear that policymakers understand this fact. 

The U.S. economy shrunk 9.5% in the second quarter, its worst contraction ever. While there will no doubt be a rebound in the third quarter, that recovery is stalling as coronavirus case numbers have risen and the state has failed to provide additional stimulus. To arrive at even this grim point, the U.S. government pumped trillions of dollars in aid to businesses and the unemployed. Just as crucially, the Federal Reserve made it clear that it would print money to provide unlimited support to financial markets, propping up the treasury market, repo markets, the banking sector, corporate bonds, and stock markets ‘indirectly,’ which have rallied to all-time-highs. In doing so, the Fed has allowed the U.S. financial sector to totally decouple from the underlying economy, completing a process that was decades in the making. This has allowed struggling U.S. companies to borrow record-smashing sums at rock bottom rates. 

Unlike the U.S., China seems to have the pandemic largely under control. The Chinese economy has enjoyed a modest recovery after posting its first official contraction―a 6.8% decline in Q1―on record. Nevertheless, consumer spending remains weak relative to pre-pandemic levels and unemployment is still high, with tens of millions of jobs likely still needed. Just as in the U.S., there has been a serious bifurcation between the working class, which is suffering more and spending less, and the rich, who seem to be doing fine. While the People’s Bank of China likewise unleashed its own torrent of liquidity in the banking system, the government’s fiscal response seems to have been relatively modest so far. In May, the government announced a roughly $500 billion stimulus package focused largely on infrastructure projects. (For comparison, this was around a sixth of the amount spent by the U.S., an economy of comparable size.) This is a page out of 2008’s book, but today’s mass unemployment demands a response of greater magnitude. 

Productive investment creates growth and employment; productive investment is, on the whole, not happening because it is not profitable. Firms today are borrowing huge sums―admittedly at low rates―not to invest and expand, but to tread water as their earnings endure a massive contraction. Of course, central banks and policymakers do not want businesses to fail simply because of lockdown measures. But adding even more debt to an already record-setting pile is not sustainable when private earnings are stagnant or falling. At best, even more firms will turn into zombies, surviving by raising new debt but failing to grow or turn profitable. At worst, the can is being kicked down the road to a future contraction and series of inevitable failures. While the U.S. and Chinese economies play quite different roles within global capitalism, both face this fundamental problem. 

Perhaps the greatest consequence of this is that debt-laden, unprofitable firms will not be able to make up for the mass layoffs caused by the crisis. In the U.S., ‘temporary’ layoffs that were addressed by stimulus programs like the PPP loans are becoming permanent as those programs expire. Tens of millions remain unemployed or underemployed; 40 million are at risk of eviction. The White House and Congress have bickered and failed to extend aid for both businesses and ordinary people, right in time for the fall flu season and the distractions of the election cycle. The failure to extend pandemic unemployment benefits has slashed aid for tens of millions of Americans by two thirds or more. China has undertaken some stimulus programs, and does not demonstrate the enormous political dysfunction of the U.S., but the government’s fear of another debt binge has constrained its response. 

As private investment fails to materialize, or is channeled unproductively into financial speculation incentivized by central bank policy, there remains only one alternative to end the slump: public investment. There is no private bank or corporation with the willingness or capacity to boost demand and employment to the degree required by the recovery. Quite simply, the public authority must use its fiscal power to conduct socially and economically productive investment in order to marshal society’s resources and avoid the massive waste of languishing resources and talent. 

When I say “marshal resources,” I do not simply mean “pour lots of concrete for giant infrastructure projects.” As Yan Liang has written: “there is no shortage of meaningful jobs that can be created, for example, public school teachers, environmental conservation and clean up jobs, ecotourist guides, childcare, elderly care, health care, and many more.” Both the U.S. and China need to rapidly undertake a transition to renewable energy and radically reduce industrial and agricultural pollution; here too are areas where massive investment can be put to good use. Just as was the case during the Great Depression, it is inevitable that public investment will be needed to lead the way to recovery. The global economic environment will be too challenging for private investors to do so, and the stimulus-as-life-support measures employed today prevent the massive corporate failures and consolidation that would be required to restore the profitability of investment. 

This said, there is little reason to believe that the U.S. political system is capable of the foresight or cohesion necessary to create a recovery program, as it has demonstrated in recent weeks. Trump can only cling to power by destroying what remains of the integrity of the election system; an incoming Biden administration would not bear even the slightest resemblance to that of FDR. Sadly, I expect that American society will continue to destabilize and that civil conflict of some kind will precede any necessary change. 

China’s government has greater capacity to restructure its economy for recovery, but it is hamstrung by fears of debt, corruption, and waste. It also faces a number of difficult questions about the medium-to-long-term environment it finds itself in. Can China’s domestic markets compensate for the long-term shortfall in exports to struggling peripheral economies, and to battered primary markets like Europe and the U.S.? Bridging that gap would imply a substantial increase in domestic consumption, and that is only possible with policies that employ millions of people and significantly increase both wages and benefits. 

During the Great Depression, it took years of failures and errors guided by antiquated modes of thought before new experiments were attempted. Today, the failure to adequately grasp the scale of the crisis and respond appropriately will worsen and prolong the recession. Capitalism’s neoliberal and Keynesian stewards have both failed. Austerity was an utter disaster everywhere it was attempted; deficit spending provided some fuel to the economy, but it did not revive the profitability of private investment in the years following the 2008 crash. It is time for investment directed not at profit-making, but at fulfilling social needs, to fill the gap. There is much unmet need to meet: good education, healthcare, and housing; clean water and air; work that is dignified and fulfilling. 

Can we expect these things from today’s political class? It is difficult to say―let us hope that we need not suffer too many years of their blundering through the dark before they reach for the exit.

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