Sunday, March 22, 2020

The Coronal Economy - Diseased Capitalism


To American Citizens,

The US and the world are experiencing economic turmoil in the wake of the COVID-19 pandemic. There are other factors that have been promoting volatility, but the corona virus has, is and will continue to exert its outsized dominance on the global economies. In demonstrating its influence, it is creating conditions that ripple across the global economy and within national economies. Each ripple reveals connections that were not necessarily properly or fully understood, or even known to have existed. Understanding all these ripples is critical because we either react or don’t to them; and if we have a skewed understanding of why and how things are connected what we choose to do or not may have consequences that we/you will regret later.

While the health implications of COVID-19 range from transient discomfort to tragic outcomes, the societal consequences can be much greater. As already demonstrated in the US and other nations, COVID-19 has disrupted supply-chains, transportation, travel, education, businesses, commerce, services, and virtually every aspect of life, even politics. This broad and multi-faceted influencing character of COVID-19 enables the crisis to inform everyone from individual citizens to national leaders in every area: government, business, religious entities, healthcare, technology, and quite importantly financial & economics; about their inter-relationships and often over-looked interdependencies. Using the pandemic situation to become better informed about our society/societies is particularly important because in response to the pandemic we are making decisions on what to do not just about containing the virus and bringing it to heel; but what is going to be done about all those consequences that those rippling effects are having.

One particularly salient dimension that has different conceptual understandings is the economy is at risk of a virus induced recession, a Corona-Recession (C-Recession). At issue here is that it seems the recession concern is viewed as a recession caused by an economic slow-down that is equivalent or similar to any other recession. It’s very true that the economy is slowing down because of the virus, but not because there is some required linkage between a virus and a nation’s financial system or structure. This is not to say that there aren’t any economic impacts from a virus but that what levers you pull or not may depend on how you understand how basic principles of the economy have been effected by our own responses to the virus.

The current economic levers being pulled are attempting to deliver their results/benefits via a “stimulus” package approach.  In a ‘normal’ recession this is one of the well-established tools. Stimulus packages are expected to provide a boost to help kick-start some of the economic activities that have either been impacted or were primary causal factors of the recession. To be effective the requirement is that the ‘stimulus’ will change at least some of the financial problems that lead to the recession. Does the C-Recession fulfill the requirement(s) that a ‘stimulus’ solution would help resolve?

The initial domino that started the C-Recession wasn’t a fundamental financial factor, it wasn’t part of a Wealth of Nations capitalistic economic process (yet). It wasn’t capital, resources, labor or trade; it was biological, a virus. Global economies were already in various economic states, many dealing with low growth and thus vulnerable to anything that could push them past a manageable point of stability. The US’s economy was perceived to be generally in a good condition and even considered strong by some. And then COVID-19 virus infected a human host and fairly rapidly began its normal biological spread. As a virus, it didn’t change the state of financial systems or process. Nothing about capital was altered by the virus. Resources didn’t become more or less scarce from a physical world perspective. Labor initially was still able to produce the goods and services that underpinned commerce/trade.

Then the virus reached a level of infected hosts in a region of China that ‘tipped’ the vulnerable economy of China. The spread of infections began to strain their healthcare system and then was recognized as a threat to their production capacity because the requisite labor was now at risk to a health impairment. The COVID-19 spread triggered a quarantining of cities/regions in China which further impaired access to labor. Thus, as a second or third order effect, labor became perhaps the first financial/economic domino to fall. With that domino, combined with the global transmission of COVID-19, the same chain of dominos began to replicate across the globe. Even before it hit the US, there were concerns and ramifications to the US economy. Once COVID-19 appeared in the US, the dominos just kept expanding. And for the US, some of those consequences exerted pressures in some areas to greater degrees than in other economies.

The ‘strong’ US economy was fundamentally founded upon the ‘consumer’ and ‘services’. So if you pull a lever that depresses consumer behavior and/or reduces services used then you are playing with a non-linear lever. And that’s exactly what the US has had to do. To contain the contagion most states are engaging in efforts to promote or require public isolation and social-distancing. And of course, that reduces consumer consumption and less demand for services. By removing the consumer from the “Consumer Economy” the results should be very self-evident. Because employing these methods to contain and hopefully eliminate the spread of COVID-19 is a priority to limit the impact on the economy, there is an immediate cost to the economy. It is a double-edged weapon; and as with all such weapons one must be careful in choosing how one uses it.  This means you must understand how the tool works from bottom to top.

This is where the C-Recession needs to be understood in a different context than most or other recessions. Let’s consider why. In any economy suffering a recession you target the financial factor(s) that have caused the downturn. In a Consumer dominated Economy the fundamental financial factor is by definition consumer spending. Public isolation & social-distancing brings that factor down with each individual who suspends the bulk of their ‘consumer’ spending; but it doesn’t stop there. These consumers don’t just stop spending in one specific area, they suspend spending in many areas. Those lost consumer activities reduce each and every consumer-oriented business or service; and the employees and owners are also going to reduce their own spending. This reduction in spending spreads more rapidly than the virus itself because it doesn’t require a successful transmission; secession of spending is automatic and guaranteed when the consumer just stops spending. So, the shock to the economy occurs more rapidly than with almost any other recession.

The next reaction from the C-Recession is that the consumers are also the production resources that create what is no longer being purchased and this can result in lost wages, lost jobs, and lost businesses. As these dominoes fall, they create their own sub-chains of dominoes falling. And this illustrates two dimensions of the C-Recession.

First, this recession is due to consumers-labors-owners cannot engage in the normal exchange of value, a fundamental principle of capitalism. It has nothing to do with not wanting to, needing to, or having everything that each party needs to engage in these activities. It’s that they are prohibited from doing so for societal reasons and needs. If the virus disappeared tomorrow, the economy could return to normal. [Note: The disruptions that have been induced during the crisis timeframe would have to be ‘flushed’ through the system, but the requirements for the good Economy we had are still fundamentally there.]

Second, since COVID-19 won’t magically disappear the problem to preventing or minimizing a C-Recession isn’t to ‘stimulate’ the economy. The economy wasn’t lacking capital, so providing capital doesn’t address a causal problem nor does it create demand that can’t be responded to since the consumers can’t engage in many of the activities they’ve been forced to suspend or the services that they cannot use. A better terminology would be to “bridge” or “protect” the economy from the disruption of the economy’s transaction process.

The economy isn’t there for the financial industry or government. The economy is there for the citizens of a nation or the world. It only exists because every individual is both a consumer and a laborer. The US economy is strong and large because it allows everyone to seek their interests, and to do this they engage in transactions with and for all comers. The economy is an aggregate of all these transactions; and because the US’s transactions are numerous and valued the economy is strong. We aren’t trying to ‘stimulate’ the economy, we are seeking to restore the transactions that have been stifled by the outbreak. To do this requires understanding what providing government funding means in this context.

Who is providing the capital, the funding, to build the ‘bridge’ for our economy? If you think it’s Congress, the Administration, States, or businesses you would be wrong. Congress is authorizing spending funds. The Administration would have to deliver on distribution that funding to whomever Congress allows the funds to be given to. States are effecting laws & regulations to support businesses and citizens to avoid the loss of jobs, and businesses (at least some) are working to sustain their workers because it’s in their own interests and the economy’s.

So, if it’s none of those entities who is providing the capital? It’s you, the citizens of the nation of each country. In the US, capital only exists because of citizens. It’s your labor, your consumption, you products, and your businesses. Remove the people and there is no capital, no value, no products, no services, and no economy. All the other entities and financial concepts are just various rearrangements of processes for structuring how the transactions are operationalized. Even those processes and structures are simply reconfigurations of laborers. Adam Smith termed this ‘specialization’ of labor.

Given it’s the US citizens who are providing US citizens with the capital/funds to bridge the C-Recession crisis, it’s not a risk that we are collectively taking; it’s what is in own self-interests. We are loaning ourselves the money, so we don’t lose our jobs, or our customers, or businesses, or investments. This is the mistake that our Congress is making. They think, they are providing the funds and some are worried that the government can’t afford it. It’s not the government that has to afford it, it’s the people and we are going to pay for it either by restoring our economy or we are going to pay for it by impairing or crippling that economy for years.

This is why the response to the C-Recession isn’t comparable to most or perhaps any other financial crisis that treating it like its just another financially induced crisis to our economy is not just the wrong concept, it will lead to and result in misinformed and bad decisions. Bad decisions which we all are use to from government.

The challenge here is to find ways to retain the labor and businesses that we had before the crisis, and to do so quickly. Whether our leaders are up to this task is not guaranteed, and if they play their typical political games we should be prepared for the usual ineptitude and to suffer the consequences.

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