All over the world, the recovery from the 2008 financial crisis was characterised by stagnation – of wages, productivity and investment. In fact, the economic slowdown that has been so evident since 2008 pre-dated the financial crisis, but was concealed by the huge returns generated in finance, real estate and professional services. Larry Summers, an economist and former US Treasury official, termed this trend ‘secular stagnation.’
Over the last forty years, nearly every wealthy economy has seen the share of national income taken by labour fall substantially. Wealth and income inequality have risen as the labour share has fallen. Globalisation and financialisation still allowed for high growth rates before 2008, but after the crash globalisation went into ‘retreat’: cross-border capital flows declined by 65 per cent between 2007 and 2016.
After this point, global growth was buoyed only by incredibly cheap credit and public investment undertaken by developmental states in the Global South, and extraordinary policy interventions in the Global North. Central bankers were forced to keep the economy on life support through ultra-low interest rates and quantitative easing. But even with monetary policy so loose, businesses still weren’t undertaking enough productive investment. Instead, the main effect of low interest rates was to inflate a debt bubble three times the size of global GDP.
As I wrote last year, many economists were predicting that a recession would hit the US, the UK and the Eurozone by 2022. The yield curve, which shows the return on US government debt of different maturities, had inverted for the first time since 2007 – meaning that short-term bonds had higher returns than riskier long-term bonds. An inverted yield curve has predicted every major recession in the last 50 years. In the end, the recession came earlier – and hit unimaginably harder – than expected.
In the UK, these trends were particularly severe. In the period between 2008 and 2019, growth had averaged less than 2 per cent per year, shrinking to its lowest levels since 2010 in the final quarter of 2019. This poor performance was not expected to improve – before the pandemic sent the country into recession, the Bank of England forecast growth would average just 0.5 per cent per year over the next several years.
The UK economy was also suffering from a chronic shortage of investment; gross fixed capital formation – including productive investment by both the public and private sectors – stood at just 17 per cent in 2018, next to 21 per cent in Germany and the United States. Partly as a result of low investment, productivity had stagnated for the longest time since the invention of the lightbulb. Employment was high, but much of the work available was precarious and low paid: wages had stagnated for the longest time since the Napoleonic wars.
We were still living in the shadow of the last crisis – and the response to it – when the pandemic hit. The UK economy could scarcely have been worse prepared.
The growth of precarious work and self-employment left many workers vulnerable to un- or under-employment before the government introduced the furlough scheme. High levels of household debt and low levels of savings – particularly among poorer families – meant that balance sheets were very fragile. Many of the millions of workers who suffered a loss of income when lockdown was introduced found themselves on the brink of homelessness and bankruptcy.
Corporate debt was also high – the legacy of more than a decade of very loose monetary policy. Businesses – particularly the less creditworthy ones – had taken advantage of low interest rates to increase their borrowing, often without directing this towards productive investment. Economists had identified an increase in the number of ‘zombie companies’ – firms that could only afford to repay the interest on their outstanding debt out of their earnings – in the years after the crisis.
Many of our public services were stretched to breaking point at the start of 2020. The combination of austerity, privatisation and ill-thought-out reform agendas had had an acute impact on the NHS. Local government had seen its central government funding cut by half since 2010, placing adult’s and children’s social care services under severe strain.
The disastrous attempted rollout of Universal Credit had pushed many families to the brink of starvation: food bank usage rose by 30% in areas where UC had been implemented. Disabled people – many of whom have a high risk of dying from Covid-19 – had seen their support cut and suffered inhumane treatment during outsourced assessment procedures.
Austerity was not simply barbaric, it gave us a fragile, unproductive and unequal economy. Today, while there are few calls for a return to full blown austerity (perhaps because there is not much left to cut), there are still those who argue that the health of the nation must be sacrificed for the sake of economic growth. This was exactly the argument made by those who pushed for cuts in the wake of the financial crisis.
But instead of improving growth at cost of many lives, austerity made our economy less productive while also contributing to over 120,000 deaths. If the same logic governs the response to this crisis, the results will be even worse.
Ending lockdown before the virus is under control and the government has drastically expanded its test and trace capacity will, as many economists have pointed out, simply prolong the economic pain. As long as people feel uncertain about the virus, they will not go out and spend. And as long as people aren’t spending, businesses won’t invest. And as long as businesses aren’t investing, unemployment will continue to rise.
Without an extension to the furlough scheme – which, according to some estimates, would cost less than the Jobs Retention Bonus – rising unemployment could set off a cascade of economic and political instability. And if the government doesn’t find a way to support businesses in receipt of bounceback loans, as many as half of them may default, which could threaten the stability of the financial system. As a senior US Federal Reserve official has pointed out, the pandemic could still catalyse another financial crisis. We are no way near out of the woods yet.
As we have previously argued at Tribune, there are many ways out of this crisis that would not involve repeating the mistakes of the past. The government could convert its bounceback loans into equity stakes and impose environmental, social and labour conditions on the companies in receipt of this funding, encouraging them to undertake green investment and provide jobs to the unemployed. It could easily extend the furlough scheme, write off or restructure unpayable household debts, increase the generosity of UC and offer the same support to tenants as it has to landlords.
Over the long-run, the only way out of this crisis – and the only way to prevent much more severe ecological crises in the future – will be to decarbonise the UK economy. A substantive Green New Deal that decarbonised our energy, transport and agricultural systems would create more jobs than a typical stimulus package, as well as helping to mitigate the impact of climate breakdown. A global Green New Deal would have an even greater impact.
Too often, we treat ‘the economy’ as an objective, abstract entity, rather than the sum of our individual and collective decisions. Our economy cannot be prosperous if living standards are falling; our economy cannot be healthy if people are sick and dying. The only people who would stand to gain from such an outcome are those who profit from the oppression and exploitation of working people. Unfortunately, it is these interests who seem to be running the government.