Shutdown: How Covid Shook the World's Economy

by Adam Tooze

Whereas profits were private, losses were socialized. The crises had been brought on by speculation.

Back to the days of the Silk Road, infectious diseases had traveled east to west across Eurasia. In earlier times, the spread had been limited by the slow pace of travel. In the age of sail, those who carried diseases tended to die en route. In 2020 the coronavirus moved at the speed of the jet and the high-speed train. Wuhan in 2020 was an affluent metropolis of recent migrants. Half the population would leave the city to celebrate Chinese New Year. SARS-CoV-2 took only a matter of weeks to spread from Wuhan around China and to much of the rest of the world.

In the historic record of modern capitalism, there has never been a moment in which close to 95 percent of the world’s economies suffered a simultaneous contraction in per capita GDP, as they did in the first half of 2020.

By the end of 2020, the largest part of scientific research on Covid-19 was dedicated to mental health.22

To understand how polycrises develop, Chen suggested that China’s security officials should focus on six major effects.

At the same time, they should be alert to the convergence of what might appear to be superficially distinct threats into a single new threat. Differences between inside and outside and between new and old could easily become blurred. Apart from convergence, one also had to contend with the “layering effect,” in which “interest group demands from different communities overlap with one another to create layered social problems: current problems with historical problems, tangible interest problems with ideological problems, political problems with nonpolitical problems; all intersecting and interfering with one another.” As communication was becoming easier around the world, “linkage effects” could result. Communities could “call out to one another across distances, and mutually reinforce one another. . . .”

The CCP had to reckon, Chen warned, with the “magnifier effect” in which “any small thing can become a . . . whirlpool; a few rumors . . . can easily produce a ‘storm in a teacup’ and abruptly produce a real-life ‘tornado’ in society.”

The virus was an example of backflow on a huge scale, from the Chinese countryside to the city of Wuhan, from Wuhan to the rest of the world. Politicians in the West, as much as in China, struggled with convergence, layering, and linkage.

Indeed, if you ignore its original context, Chen’s checklist for the party cadres could even be read as a guide to our private lives, a self-help manual for the corona crisis. How many families, how many couples, how many of us confined and isolated by quarantine were proof against magnification and induction effects? It could feel at times as though the invisible threat of the virus was stressing the weakest parts of our personalities and our most intimate relationships.

Why . . . has the economic damage of such a comparatively mild pandemic been so huge? The answer is: because it could be. Prosperous people can easily dispense with a large proportion of their normal daily expenditures, while their governments can support affected people and businesses on a huge scale. . . . The response to the pandemic is a reflection of economic possibilities and social values today, at least in rich countries.33

if we focus, as this book does, on the economic reaction to the pandemic, lockdown seems a one-sided way of describing the reaction to the coronavirus. Mobility fell precipitately, well before government orders were issued. The flight to safety in financial markets began in late February. There was no jailer slamming the door and turning the key. Investors were running for cover. Consumers were staying at home. Businesses were closing or shifting to homework.

But the problem, as Beck pointed out, is that getting to grips with modern macro risks is easier said than done.40 It requires agreement on what the risk is, which entangles the science in our arguments and taxes the rest of us with the uncertainty of the science.

It requires a willingness to contend with political choices, choices about resource distribution and priorities at every level. That runs up against the prevalent desire of the last forty years to avoid precisely that, to depoliticize, to use markets or the law to avoid such decisions.42 This is the basic thrust behind what is known as neoliberalism, or the market revolution—to depoliticize distributional issues, including the very unequal consequences of societal risks, whether those be due to structural change in the global division of labor, environmental damage, or disease.43

It was the managerial centrist types who were under most pressure. Figures like Nancy Pelosi and Chuck Schumer in the United States, or Sebastián Piñera in Chile, Cyril Ramaphosa in South Africa, Emmanuel Macron, Angela Merkel, Ursula von der Leyen, and their ilk in Europe. They accepted the science. Denial was not an option. They were desperate to demonstrate that they were better than the “populists.” To meet the crisis, very middle-of-the-road politicians ended up doing very radical things.

The immediate economic policy response to the coronavirus shock drew directly on the lessons of 2008. Fiscal policy was even larger and more prompt. Central bank interventions were even more spectacular. If one married the two in one’s mind—fiscal and monetary policy together—it confirmed the essential insights of economic doctrines once advocated by radical Keynesians and made newly fashionable by doctrines like Modern Monetary Theory (MMT).47 State finances are not limited like those of a household. If a monetary sovereign treats the question of how to organize financing as anything more than a technical matter, that is itself a political choice. As John Maynard Keynes once reminded his readers in the midst of World War II: “Anything we can actually do we can afford.”

The year would witness the head-turning spectacle of the IMF scolding a notionally left-wing Mexican government for failing to run a large enough budget deficit.50

It was hard to avoid the sense that a turning point had been reached. Was this, finally, the death of the orthodoxy that had prevailed in economic policy since the 1980s? Was this the death knell of neoliberalism?51 As a coherent ideology of government, perhaps. The idea that the natural envelope of economic activity could be ignored or left to markets to regulate was clearly out of touch with reality. So too was the idea that markets could self-regulate in relation to all conceivable social and economic shocks.

All this left doctrinaire economists gasping for breath. That in itself is not surprising. The orthodox understanding of economic policy was always unrealistic. As a practice of power, neoliberalism had always been radically pragmatic. Its real history was that of a series of state interventions in the interests of capital accumulation, including the forceful deployment of state violence to bulldoze opposition.

The scale of stabilizing interventions in 2020 was impressive. It confirmed the basic insistence of the Green New Deal that if the will was there, democratic states did have the tools they needed to exercise control over the economy. This was, however, a double-edged realization, because if these interventions were an assertion of sovereign power, they were crisis driven.55 As in 2008, they served the interests of those who had the most to lose. This time, not just individual banks but entire markets were declared too big to fail.

The market revolution of the 1970s was no doubt a revolution in economic ideas, but it was far more than that. The war on inflation waged by Thatcher and Reagan was a comprehensive campaign against a threat of social upheaval, which they saw as coming from without and from within.

If central banks since 2008 have massively expanded their remit, it was out of necessity, to contain the instability of the financial system. But that was politically possible—indeed, it could be done with no fanfare whatsoever—because the battles of the 1970s and 1980s had been won. The threat that haunted Dornbusch’s generation had evaporated. Democracy was no longer the menace that it had been in neoliberalism’s years of struggle. Within the sphere of economic policy, that expressed itself in the startling realization that there was no risk of inflation.

The leadership of the EU or the Democratic Party in the United States might not have the stomach for structural reform, but they grasped the interconnection between modernity, the environment, the unbalanced and unstable growth of the economy, and inequality. The facts were, after all, so stark that it took an act of will to ignore them.

Seeing 2020 as a comprehensive crisis of the neoliberal era—with regard to its environmental envelope, its domestic social, economic, and political underpinnings, and the international order—helps us find our historical bearings. Seen in those terms, the coronavirus crisis marks the end of an arc whose origin is to be found in the 1970s. It might also be seen as the first comprehensive crisis of the age of the Anthropocene to come—an era defined by the blowback from our unbalanced relationship to nature.78

The British economist Lord Nicholas Stern once remarked that climate change results from history’s greatest market failure—the failure to attach a price to the costs of CO2 emissions.23 If this is true, then as the coronavirus crisis of 2020 demonstrates, the failure to build adequate defenses against global pandemics must be a close second. Even the best-funded global public health infrastructure cannot offer guarantees, but as 2020 began, the disproportion between pandemic risk and the investment in global public health was nothing short of grotesque.

Imagine for a second extending a similar calculus to the entire collective response to the coronavirus. The question is this: What was the remaining value of the lives of mainly elderly patients who might be saved by a sudden and massive shutdown, and the suffering avoided for those who develop a lingering form of Covid affliction, weighed against the cost to the 1.6 billion young people whose education was disrupted and the hundreds of millions who lost their jobs and the tens of millions who would go hungry as a result of worldwide economic disruption?

Given the infectivity of SARS-CoV-2, this was an absolutely urgent threat that brooked no delay. Beijing grasped that. The West did not. In China, a public health failure on the scale of that which occurred in Italy, the UK, or the United States would have cost millions of lives. If the political management of the crisis had been as cack-handed in Beijing as it was in Washington or in London, it might well have rocked Xi’s iron grip on power. But this is not what happened. Not only did China not suffer a Soviet-style collapse, but it turned the tables on its foreign critics.

There is a tendency in the West to suggest that China’s draconian measures were a familiar part of the CCP’s repertoire. But that both mistakes Chinese realities and underestimates Beijing’s boldness. The lockdown ordered in Wuhan had no precedent in recent Chinese history. In 2003, 4,000 Beijing residents who had been exposed to SARS had been kept in isolation and 300 college students were detained in a military camp for two weeks.12 That was nothing like the closure of an entire city of 11 million people, let alone a province or a country.13

Despite Xi’s call to return to work, by the end of February, even in the most active provinces, only an estimated 30 percent of small and medium-sized businesses had reopened, as against 60 percent for large industrial corporations.63 Despite the amount of attention lavished on the likes of Foxconn and the giant state-owned enterprises, small and medium-sized enterprises, almost all of which are privately owned, account for 99.8 percent of registered companies in China and employ almost 80 percent of workers. Together, this huge mass of small businesses contributes more than 60 percent of gross domestic product and more than half of all tax revenue.

China’s official unemployment statistics showed a tiny increase during the crisis from just 5.3 percent to 6 percent. But the unemployment insurance system covers only half of the urban workforce and a fifth of migrant workers. Despite the concerted effort to restart production, in March 2020, of the normal workforce of 174 million long-range migrants, only 129 million were at work.66 That implied a loss of at least 45 million jobs. Allowing for migrant workers not counted in the official data, the number in March was probably closer to 80 million lost jobs. Even the National Bureau of Statistics was willing to admit that at the worst point in the crisis, the number of people idled in China’s cities amounted to 18.3 percent. Combing carefully through the data, analysts at BNP Paribas concluded that as many as 132 million workers were either temporarily unemployed, displaced, or furloughed, which would amount to 30 percent of China’s urban workforce.

On all sides February 2020 delivered a staggering demonstration of the collective inability of the global elite to grasp what it would actually mean to govern the deeply globalized and interconnected world they have created.

At the G7 meeting, Jerome Powell gave no indication of his next move, but, by the end of the day, he had approved an emergency cut to interest rates. The Fed had not seen fit to inform any of its partners. But it was now clear that the markets needed help and it was up to the Fed to make the first move. In so doing, it opened the space for other central banks to follow. The question was how far conventional monetary policy could really help. As Katie Martin of the Financial Times remarked: “Anyone who can clearly articulate how easier [central bank] policy can fix an economic pullback based on deaths, grounded flights, closed factories and ghost cities is very welcome to get in touch.”50 The new thing to get used to, in the words of one investor, was that “who is in charge here is the WHO, not the central banks.”

The second half of 2019 was the first time outside a major recession in which women outnumbered men in paid employment in the United States.31 A year later, 2020 was the first recession in which women’s job losses and unemployment outnumbered men’s.32 As the mainstays of manual service labor, Latina women suffered most. Their unemployment rate soared above 20 percent. In Europe too, women workers in the bottom quintile of the income distribution suffered the largest loss of employment.

Using real-time data on social distancing and lockdown measures, we can estimate the biggest aggregate of all, global GDP, on a daily basis. The result is a picture of extraordinary drama. For 2019, global GDP stood at something like $87.55 trillion. Over the course of a mediocre year, it had grown by 3.2 percent. In 2009, the worst year in recent record, global GDP had contracted by 1.67 percent. In February 2020, as a result of China’s shutdown, this huge flow of production contracted by 6 percent. And then in March it went off a cliff. Global GDP reached its nadir on or around Good Friday, April 10, 20 percent down from where it had been at the beginning of the year.69 Never before in history had economic activity contracted this fast and this comprehensively across the world. It was a more sudden and precipitous contraction even than during the Great Depression of the 1930s.

American government debts are the safe assets on which the entire structure of private finance rests. They are the foundation of America’s financial might and thus of the world order as we know it.

In times of uncertainty and recession, as investors lose confidence, they tend to shift from shares, whose prices fluctuate with business fortunes, to government debt that can be sold at a steady price or can be used as collateral for borrowing on good terms.

U.S. Treasuries are the ultimate safe asset because the market is gigantic. At the start of 2020, there was almost $17 trillion in U.S. government IOUs in public circulation. These are backed by the most powerful state with the biggest tax base, and they trade in the deepest and most sophisticated debt market.

When we say that the U.S. dollar is the reserve currency of the world, what we are talking about are not America’s nondescript green banknotes. What we are talking about is the wealth stored in interest-bearing U.S. Treasuries.

A common chain of events in a recession is, therefore, for the price of equities to fall and the price of Treasuries to rise. When the price you pay for a Treasury rises, their yields—the annual interest coupon payment divided by the price you paid to own the bond—fall. And in response to the first impact of the virus, in February 2020, that is what had happened. Shares fell. Bond prices rose and yields came down. Falling yields lower interest rates, make it easier for firms to borrow, and should in due course stimulate new investment.

But then, gathering force from Monday, March 9, something more alarming began to happen. The run for safety turned into a panic-stricken dash for cash.4 Investors sold e...

On March 13, J.P. Morgan reported that rather than a normal market depth of hundreds of millions of dollars in U.S. Treasuries, it was possible to trade no more than $12 million without noticeably moving the price.6 That was less than one-tenth of normal market liquidity. This was a state of financial panic, which if it had been allowed to develop, would have been more destabilizing even than the failure of Lehman Brothers in September 2008.

If the banks had been as weak in 2020 as they were in 2008, core loss-absorbing capital across the entire system would have been slashed to a low of 1.5 percent of assets, less than a sixth of what is considered safe. Several of America’s biggest banks would have failed, requiring gigantic and politically toxic bailouts.

What brought it to its knees in September 2008 was not large losses on mortgages. What brought Lehman down and threatened all the other banks was the fact that it lost access to the repo markets in which it had previously funded its giant balance sheet of mortgage-backed securities.15 The collective withdrawal of confidence on the part of its repo market counterparties was the equivalent of an instant bank run on the scale of hundreds of billions of dollars.

In March 2020 the run extended to every class of assets in the financial system. It was no longer a run into safer investments, but a general dash for cash. And the cash that everyone wanted was dollars. It was a run out of assets into dollars.17

As mutual fund managers faced massive withdrawals, they needed cash urgently and had to choose which assets to sell first. They would no doubt have preferred to sell the riskiest assets on their books, like shares and corporate bonds. In a normal market, that would have been the best strategy. In March 2020 they could be disposed of only at a large loss. So, instead, fund managers sold their most liquid and safe assets, government bonds. As a result, uncertainty in equity and corporate debt markets spread to the Treasury market. As selling pressure built up, it unraveled the conventional assumption that as shares go down, bonds go up, and vice versa. Rather than balancing out, the prices of shares and bonds were collapsing together.

In one of the most sophisticated markets in the world, 75 percent of the market-making in U.S. Treasuries is done by algorithmic trading. As volatility surged and risk increased, the algorithms automatically reduced the size of the positions they would take. At the same time, they hiked the spread between prices at which they would buy and sell bonds. This was programmed into the algorithms because it was a sensible reaction to a turbulent market that had taken a turn to the downside. It was destabilizing because it applied a squeeze to another key node in the fragile system of market-based finance: the hedge funds.

The Fed was a competent, high-functioning piece of the U.S. state apparatus. As such, it had unsurprisingly attracted Trump’s ire in the years prior to 2020. What was surprising was that in 2020 it became once again the driver of an expansive interventionist program of stabilization. It will be years before we have an inside view based on documentary evidence. For now, the simplest interpretation is that a team of veterans, conditioned by the experience of 2008, under undogmatic but broad-minded leadership, equipped with an acute political antenna, responded to a crisis of confidence that was threatening to become existential in the way that such a crisis demands: with maximum force. The fact that it was not accompanied by more drama was part of the confidence-building exercise.

On Sunday, March 15, Powell made his next dramatic move. He called an unscheduled press conference and announced that with immediate effect the Fed was cutting interest rates to zero—something that it had done just once before, at the height of the crisis in 2008. To stabilize the market, it would be buying at least $500 billion in Treasuries and $200 billion in mortgage-backed securities, and it would start big.34 By Tuesday, $80 billion would be off the hands of the broker-dealers, more in forty-eight hours than Ben Bernanke’s Fed had bought in a typical month. And to satisfy the global craving for dollars, the Fed would be easing the terms on the so-called liquidity swap lines—deals under which the Fed swaps dollars for sterling, euros, Swiss francs, and yen in potentially unlimited amounts. In effect, the Fed was assuming the role of a central bank to the world, dispensing dollars to every part of the credit system that was tight.

In its role as lender of last resort, on March 23 the Fed revived the Term Asset-Backed Securities Loan Facility, or TALF—one of the stalwarts of the 2008 crisis—to backstop auto, credit card, small-business, and student loans. This was on top of the facilities it had already opened for issuers of commercial paper, money market mutual funds, and primary dealers in Treasury securities. These loans were largely internal to the financial system and involved the Fed in minimal lending risk.

In a second, more radical step, Powell announced the establishment of two facilities to support credit to large employers. The Fed was no longer just backstopping lending by others. It would offer to provide the credit itself. The Primary Market Corporate Credit Facility (PMCCF) was intended to buy debt or loans directly from corporations. The Secondary Market Corporate Credit Facility (SMCCF) would buy corporate debt off the books of other investors, including the sort of exchange-traded funds that specialize in high-risk, high-yield debt. The volume proposed for the two facilities was $750 billion.

Finally, as the third key prong of its support operation, the Fed threw its full weight behind the markets for public debt. Municipalities were in the front line of the corona fight, managing the pandemic response and paying for extra precautions, while facing plunging tax revenues. On March 23, the Fed announced changes to both the Money Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility (CPFF) that promised to ease the flow of credit to municipalities.