Source: Labor Notes

Part 1

The coronavirus pandemic is not simply a “natural disaster.” How many people and which particular people will fall ill or die depends not just of the characteristics of the infection but also on the policies and institutions of the society.

To understand how a large-scale disaster can be social and political, rather than natural, it is useful to look at the example of famines. The economist and philosopher Amartya Sen, a preeminent scholar on hunger in the modern world, argued that the mainstream understanding of famines—as the result of natural disasters that caused overall food availability to collapse—is fundamentally wrong.

Droughts or floods might be natural phenomena, and famines might follow them, but Sen pointed out that most famines in modern times did not involve large declines in average food availability. Instead, famines were caused by particular social groups losing access to food, usually because their incomes collapsed.

It was well within the power of governments, Sen argued, to give these affected groups enough income so they could buy food, or provide them with food in other ways. If the government failed to do this and a famine resulted, then that famine was caused not by nature but by policies and institutions.

As a child, Sen lived through the Bengal Famine of 1943 (in what was then British-controlled colonial India). Writing about it many years later, he observed that the famine did not affect all social groups equally but primarily people in rural areas, and among them mainly farm laborers who did not have direct entitlement to the food they grew (unlike self-employed small farmers or sharecroppers). The war-driven boom in urban incomes fueled rising food prices, the farm workers could no longer afford enough food, and the British colonial government refused to provide them with adequate incomes or food. Millions starved to death, Sen observed, even as “Bengal was producing the largest rice crop in [its] history.”

Sen observed similar patterns in famines generally. Often famines happened when there was no decline in average food availability. During famines, food was often exported from afflicted areas to feed higher-income and politically favored groups elsewhere. Famines happened under dictatorial or colonial rule where governments faced little political pressure to act to avert famines, rarely if ever in democracies with independent media and opposition political parties.

The coronavirus pandemic originated with a highly infectious and deadly virus jumping the species barrier to human beings. Its human impacts depend, however, on the political and economic structures in the society. In the United States, its impacts lay bare some grave failings of economic policy and institutions—indeed, of the capitalist system itself—that are not at all new.

UNEQUAL ACCESS TO HEALTH CARE

If access to medical care is determined by one’s ability to pay or access to insurance—and such access is not universal—some people who need care urgently will go without, even as people in less urgent need do receive attention. As soon as the coronavirus epidemic erupted, for example, reports emerged of the wealthy and influential getting tested while others could not.

In the U.S., before the recent layoffs nearly 28 million people (more than 10 percent of the non-elderly population) did not have health insurance. About a third of those who do have insurance still have problems paying out-of-pocket costs, sometimes forgoing needed care.

Such barriers to treatment can magnify the spread of an infectious disease. “A young person with no health insurance and an itchy throat,” notes the German epidemiologist Hendrick Streeck (quoted by the New York Times), “is unlikely to go to the doctor and therefore risks infecting more people.” Those who finally go late to the ER may also suffer worse health effects from lack of timely attention.

In the United States, those who do get treatment could face dire economic consequences. The nonprofit FAIR Health estimates that the average bill for an uninsured coronavirus patient requiring a six-day hospital stay would top $70,000.

EMPLOYERS’ POWER OVER WORKERS

As the crisis unfolded, some employers kept requiring workers to come in. The video game retailer GameStop, for example, came under fire for keeping stores open even after shutdown orders for nonessential businesses. Management claimed it was “essential retail” because it sold items needed for work from home. Employees and others saw instead the company profiting from surging demand for gaming products, at the risk of workers’ health. (GameStop relented in late March.)

Employers cannot, of course, literally force anyone to come to work. But many people may go in if their employer insists, simply because they cannot afford to lose their jobs. In the U.S., people in the bottom half of the income distribution get, on average, 90 to 95 percent of their income from work; those in the next two-fifths above them, 80 to 85 percent. (By contrast, people in the top 10 percent of the income ranking get over 40 percent of their income from property, in the form of profits, rents, dividends, interest, etc.; those in the top 1 percent, nearly 60 percent.) Most of us simply do not have other sources of income to fall back on if we lose our jobs, apart from public benefits.

In other high-income countries workers also rely on their jobs for money incomes, but they get access to health care through public health insurance or a public health service. In the U.S., in contrast, about 60 percent of those with health insurance have an employment-based plan; excluding those covered by Medicare, about 75 percent. When losing your job means losing both your income and your health coverage. employers have enormous power over workers.

WORKERS’ VULNERABILITY TO UNEMPLOYMENT

Unemployment insurance claims are breaking records. Since the week ending March 21, new claims have topped 3 million every week, with the highest weekly figures in late March and April topping 6 million. To put those figures in context, 3 million is more than four times the highest level previously recorded in the half-century these data have been collected. Total claims over this period are more than 33 million.

The “headline” (or U-3) unemployment rate calculated by the Bureau of Labor Statistics is now nearly 15 percent. That number, however, does not include those who have given up looking (“discouraged workers”) or those who want to work full-time but can only find part-time work (“involuntary part-time workers”). Adding in those and some others, BLS calculates a broader (U-6) figure of nearly 23 percent.

Losing your job hurts not just your income but your health. Researchers at Drexel University and the University of Michigan found that the increase in mortality risk from being unemployed is about 70 percent. By comparison, the increase from one additional year of age is about 7 percent. So being unemployed has about the same effect on mortality as aging a person 10 years.

In other words, many people could die prematurely during this pandemic not because they have contracted a deadly infection but because they have lost their jobs.

THE UPSHOT

While this strain of coronavirus is new, the underlying social conditions that shape its impacts are not at all new. The crisis is transmitted like a shock wave through the political and economic structures of society: The lack of a universal guarantee to the most basic goods (like health care). The enormous power differential between employers and workers. The vulnerability to unemployment. These are everyday scourges of life in capitalist America. The current crisis has just illuminated these realities in an especially stark way.

 

 

Part 2: How the Coronavirus Crisis Became an Economic Crisis

An enormous infectious disease crisis would produce a big economic fallout in almost any society, regardless of its economic structure. Some of the consequences, however, depend on the economic system. The impacts of the coronavirus in this country are felt through the structures of a capitalist economy and through the particular features of U.S. capitalism.

Economists are now predicting that U.S. gross domestic product (GDP)—a standard measure of the total output of goods and services—will decline at an annual rate of 30 percent in the second quarter of this year. That means that if the same rate of drop-off continued for a full year, incomes would drop (on average) to only 70 percent as much as they were a year before. Total employment, according to the Bureau of Labor Statistics (BLS) jobs report for April, was down by more than 21 million compared to February.

We can place the mechanisms that have turned the public health crisis in the U.S. into a massive recession in two intertwined categories, those originating on the demand side of the economy and those originating on the supply side.

DEMAND-SIDE EFFECTS

In order to reduce risk of infection, people have cut way down on consumption that involves close contact with others, such as dining out, crowd events, and in-person shopping. In other words, demand for those goods and services has dropped. As a result, businesses have cut back worker hours and laid workers off. Hotel and restaurant workers, brick-and-mortar retail workers, and others—by the millions—have lost their jobs.

The BLS jobs report for April reflects the disproportional impact on the service sector. In leisure and hospitality alone, jobs were down by over 8 million. While leisure and hospitality accounted for only about 13 percent of total private employment before the massive job loss began, those industries were responsible for about 40 percent of the lost jobs.

The effects of job loss in one sector can then multiply across the economy: affected workers cut back their spending; that reduces demand for other goods and services; that decline in demand leads other businesses to cut hours and jobs too.

NOT INEVITABLE

The magnitude of this destructive ripple effect is not automatic or inevitable. It depends on economic policy and institutions.

The more replacement income laid-off workers get from “safety net” programs like unemployment insurance, the less they have to cut back their consumption spending. High levels of replacement income mean workers without jobs can still get the things they need to live, and workers in other industries are less likely to face layoffs or cuts in hours due to falling demand.

Economists term such policies “automatic stabilizers.” When there is a drop in demand, these policies automatically inject some spending back into the economy and reduce the overall blow to production and jobs.

We already have some income-replacement policies, such as unemployment insurance. The federal government and some states have expanded unemployment benefits during past crisis periods, such as the Great Recession of 2007-2009 and its aftermath, and have done so again in the current crisis. The recent “stimulus” bill increases benefit levels, duration of benefits, and eligibility.

Combined state and federal benefits, on average, will replace close to 100 percent of laid-off workers’ lost pay through the end of July (not including the value of employer-provided benefits like health insurance). This does not necessarily mean, however, that demand for goods and services will stay the same. Since the expanded benefits are only temporary, and future job prospects so uncertain, many may cut back their spending now anyway.

Bosses in the U.S. have historically been more successful than those in other high-income capitalist countries at limiting unemployment benefits. Eligibility, duration, and level of benefits are all typically lower here than in other similar economies. Such benefits reduce workers’ desperation to keep their jobs—and employers’ power over workers—so business owners and executives generally oppose them.

Employers and the politicians beholden to them, moreover, typically push for any expansion of benefits during a crisis to be strictly temporary. They don’t want increased economic security for workers to become the “new normal.”

SUPPLY-SIDE EFFECTS

Cuts to output and jobs also originate on the supply side of the economy. In the current crisis, production across many industries has been interrupted by individual workers’ refusal to go in to their workplaces, by groups of workers collectively demanding suspension of in-person work, and most importantly by government-mandated shutdowns of “nonessential” workplaces.

A report by Moody’s Analytics on behalf of the Wall Street Journal concluded, as of early April, that because of state shutdown orders “at least one-quarter of the U.S. economy has suddenly gone idle.” These job losses feed again into a decline in demand.

Declining production in one industry can also affect related industries, either “upstream”—those that supply it with inputs (materials, energy, etc.)—or “downstream”—those that use its output. When automakers shut down operations, for example, so do parts manufacturers. When meatpacking plants shut down, retail sales in supermarkets drop.

We’ve also seen a decline in work-related types of consumption, in part due to supply-side conditions like mandated shutdowns. With fewer people commuting to work, for instance, the demand for gasoline has dropped dramatically, sending oil prices plummeting.

THE DEMAND-BOOSTING PLAYBOOK

When demand collapses, government has a well-known set of policy options, going back to the Great Depression of the 1930s, for injecting spending back into the economy. The government might:

• purchase goods and services from private businesses

• make cash payments to businesses, without requiring goods and services in return

• make cash payments to individuals, without requiring work in return

• directly employ individuals for pay

• cut taxes, to increase individuals’ disposable incomes

• increase the money supply, with the aim of reducing interest rates

• directly make loans to businesses or individuals.

We have already seen some of these demand-boosting policies. The late March stimulus bill included about $600 billion in direct cash to individuals. That is mostly the $1,200 and $500 “stimulus checks” plus expanded unemployment benefits.

It also included about $500 billion directly for large corporations, about $450 billion in loans but also billions in cash “grants” (much of that to airlines). Another $350 billion, mostly in the form of loans, was earmarked for small businesses. Some corporations, by no means small, sparked an outcry by grabbing some of these “small business” funds. No surprise there.

In addition, the Federal Reserve launched an “unlimited” program to purchase financial securities owned by private financial institutions, with the aim of driving down interest rates. The idea is that lower rates will get private businesses and individuals to borrow and spend more.

THE MULTIPIER EFFECT

All of these actions could boost spending in the short run.

When lower-income people receive additional income, they tend to spend most of it, so the demand boost is relatively large.

During the Great Recession of 2007-2009, economist Mark Zandi estimated that the total spending impact of an extra $1 in unemployment benefits or nutrition assistance was between $1.60 and $1.75. That’s because recipients’ spending became income for other people, who in turn spent most of it; that spending becomes income for still other people, who spend most of that, and so on. This is known as the “multiplier effect.” The multiplier is smaller when higher-income people receive extra income, since they are likely to save more of it.

Businesses that receive stimulus money may also refrain from spending it, especially if there is little reason to expand production. During a big recession like this one, businesses may decide to pocket extra money as a hedge against running out of cash down the road. (Some of the corporate bailout money was earmarked for wages and benefits, so that may reduce businesses’ cash hoarding.)

An infusion of money into the banking system, likewise, does not always translate into substantial new lending. During the 2007-2009 recession, the Federal Reserve bought trillions of dollars worth of bonds from banks, but the banks largely sat on the additional cash, holding it as “excess reserves.”

NO QUICK FIX?

The current crisis poses some special complications, making it unlikely that standard demand-boosting policies will quickly restore production and jobs.

First, the sectors that are hardest hit—leisure and hospitality—are the least likely to respond to the general sort of demand-boosting that’s in the stimulus bill.

If people remain worried about coming into close contact with others, increased overall purchasing power isn’t likely to translate quickly into more demand for restaurant meals, sporting events or concerts, or hotel stays. (Nor would we want it to.) It may boost demand for other kinds of goods and services—take-out meals, online retail, and so forth—and some of the workers who have lost jobs in the hardest-hit sectors might get jobs in those other sectors. But not all will, especially not in the short run.

Second, business shutdown and state stay-at-home orders constrain supply. Even if consumers were demanding more goods and services, in many sectors businesses would not be able to meet that demand. (Nor would we want to see more in-person employment in the short run, since that would accelerate the spread of the virus.)

THE UPSHOT

In the short and the medium term, big declines in output and work hours are a fact. Demand-boosting policies can lessen the carnage. Not all policies out of the recession-response playbook, however, are equally effective in boosting demand. Nor are the various options equally good for other reasons.

Some options, for example, reduce economic inequality; others increase inequality. Those that primarily benefit low- and middle-income people are better on both scores than those that benefit high-income individuals and giant corporations.

We clearly cannot avoid falling incomes and hours altogether, so responses to the crisis need to cope with that reality.

Far-fetched as it may seem, it is possible to manage significant declines in a country’s average income without a disastrous human toll. The key is that the brunt must not be borne disproportionately by a vulnerable group, like those who lose their jobs, and that none of the burden should be borne by those who are already struggling. We’ll see how in Part 3.

Alejandro Reuss is an economist and historian, lecturer in Labor Studies at the University of Massachusetts, and former co-editor of Dollars & Sense. A longer version of this article (with full list of sources) is available at Dollars & Sense.

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