COVID and The Fourth Turning of Capitalism
The rules of the game as capitalism has known them for the past four decades are undergoing a shift. Higher interest rates and wages will make it harder for capital to make money.
As the next American (2024) and Canadian (probably 2025, but possibly next year) work their way closer, polls are suggesting a swing to authoritarian populist governance, matching the results seen recently in the Netherlands and in New Zealand, as well as the heavy defeat of the Australian Voice referendum. Behind this swing, all apologies to Jimmy Carter, is a well-documented sense of malaise in democratic countries over the past two to three years, Economies are growing, and there are some signs that wage increases are finally keeping up with inflation, especially as inflation rates have fallen in many countries, especially in North America. Yet the public remains upset, and blames leaders like Joe Biden and Justin Trudeau, especially for recent bouts of inflation, particularly of gasoline prices and housing costs.
There is rarely a mention that we are still coming out of the worst pandemic in a century, triggered by the most contagious airborne virus that medical science has encountered. It required lockdowns for more than a year, caused global disruption to supply chains, and killed or permanently disabled large sections of labor forces. By constraining aggregate supply just as consumers entertained thoughts of “revenge spending” using pandemic savings and stimulus payments, the pandemic is largely responsible for the last two years of inflation. This inflation has led central banks to raise interest rates significantly, making it more difficult to borrow to finance housing purchases and general consumption, all feeding public anger that something is “broken.”
Public opinion reflects a vicious grievance that the pandemic even happened, and will not tolerate any problems being ascribed to the tail end of SARS-Cov-2. The bad news is that pandemics leave a long economic tail..Historians have debated whether the Renaissance and ensuing modern world are themselves a product of the Black Death of the 14th century. The economic echoes of COVID are likely to last into the 2030s.
Complicating the post-pandemic era is that in the early 21st century, global capitalism has struggled to evolve past the era of neoliberalism and globalization. Mark Blythe and Eric Lonergan have characterized modern capitalism as having gone through three eras: The Gilded Age, which the Great Depression felled, the Trente Glorieuses following World War II, brought down by 1970s stagflation, and the neoliberal/Raegan/Thatcher era, which ought to have been done in by the 2008 financial crisis, but has persisted. The pandemic is a second body blow to neoliberalism. In the first two transitions, a new model of capitalism was waiting in the wings, but that has not been the case in the third transition. Nevertheless, some changes are starting to emerge, brought along by the post-pandemic upheaval. Two in particular are problematic for those hoping the neoliberal model would endure a little while longer.
First, capitalism since the 1980s has been debt-fuelled, pushed along by very low inflation and interest rates. This has had several causes, including high savings rates in Asia, deliberate policy decisions by central banks, and three decades of wage suppression that has prevented aggregate demand from exploding. The financial crisis drove interest rates close to zero, and below the zero lower bound in several countries, leading governments to load up on debt finance as well. Low interest rates have made it easier for companies to borrow to invest, and have enabled consumers to offset their reduced real incomes by borrowing, in the process fueling multiple housing bubbles. The inability to generate meaningful returns on bank deposits has led households to venture into the stock market with their savings, keeping the markets frothy and generating annual double-digit returns. Prolonged high interest rates will undo this process, making housing even more unaffordable, lowering the gains to personal retirement accounts, and keeping households from financing increased consumption with debt. All of these will make electorates angry, but they will also force capitalists to work harder to make money on investments.
The other change is in labor markets. Companies have made money easily for the p[ast four decades because money was cheap to borrow and labor costs were low because labor was abundant. The decline of well-paid manufacturing work and the reduced importance of unions led to the growth of low-wage service jobs, and a ten-point reduction in most Western countries of labor’s share of national income. There was little incentive for capital to invest in labor-saving technologies when labor was plentiful and cheap, both domestically through immigration and globally through trade liberalization. There have been signs that a reduction in the oversupply of labor has been in the offing. Birth rates have been falling around the world to the extent that the global population should start to fall by 2100. There is strong political pressure to limit immigration to wealthy economies, just as labor participation among the native born has been falling, especially for older and male workers after the financial crisis. The pandemic reduced labor supply further, as workers died, became disabled by long COVID, and stayed home to avoid infection. Labor shortages have become evident around the West, especially in low-wage service industries like restaurants and hospitality. Wages have started to rise in response, as they historically have in the wake of pandemics that remove large parts of the labor force, but have not risen by enough to draw enough new entrants to the labor market. Cheap labor was another factor that made it easy for businesses to make money.
While consumers have pandemic disruptions and inflation to complain about, the rules of the game as capitalism has known them for the past four decades are undergoing a shift. Higher interest rates and wages will make it harder for businesses to make money, just as populations are growing restless with stagnant living standards and decades of frustrated aspirations. The neoliberal economic model proved resilient in the face of the financial crisis. It now faces another challenge in the (to borrow a phrase) great reset forced on the economy by the pandemic’s tail.
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