Shutdown: How Covid Shook the World's Economy

by Adam Tooze

It was Trump’s last act of real power. While the president golfed, the benefits on which millions of Americans depended were cut off, the government faced shutdown, defense spending was in limbo, and the fragile stimulus compromise began to disintegrate. Reverting to the House Democrats’ more ambitious agenda, Pelosi piled in behind those calling for bigger checks. Meanwhile, the high priest of Clinton-era centrism Larry Summers took to the airwaves to declare that stimulus checks to the tune of $2,000 would likely cause the economy to overheat.13 Anything on which Trump, Sanders, and Hawley could agree was bound to be a bad idea. Then, on December 27, having made his final mark, Trump signed the original bill into law.

This was good not only for America. With its generous budget deficits, the U.S. pumped demand into the world economy. The overall effect was in sharp contrast to 2008–2009. Then too the government budget deficit had exploded, but under the impact of the financial crisis, both households and businesses had tightened their belts. The private savings rate shot up, and this substantially offset the government deficit.

For all the sound and fury of Trump’s trade wars, America’s net imports from China actually increased in 2020.

After the swift passage of the CARES Act in the spring, it had taken months of intense negotiation to finally put together the second stimulus deal in December 2020, and then it all hung on Trump’s signature. On the Democratic side, the main reason to get the second stimulus deal done sooner rather than later was the expectation that as soon as Biden was inaugurated, the GOP would pivot. The party that under Trump had happily voted for huge deficits would rediscover fiscal rectitude and insist on budget balance. They would sabotage Biden as they had done Obama. If the Republicans held the majority in the Senate, fiscal policy would be paralyzed and the entire onus of economic policy would fall on the Fed.

Pundits warned of a vicious spiral in which widening social differences stoked resentment that further inflamed the populist anti-elite backlash.

the fall in household consumption was real, and the prospects for 2021 were grim. It was, according to the Bank of England, the worst recession in three hundred years.

In truth, amid the chaos of 2020, it was hard to discern any clear pattern. Johnson and his crew appeared panic-stricken and opportunistic, a campaign team rather than a government. About the fiscal balance, however, there was little ambiguity. For the budget year 2020–2021, rather than the £55 billion in borrowing expected in March 2020, the final total came to a total of £300 billion. This was unprecedented in peacetime.

As 2021 began, the U.S., the UK, and the governments of the EU were all running huge deficits. Their economies were ailing. The political situation was tense—in the case of the U.S. and the UK, at times, unbearably so. This was democratic politics and intergovernmental diplomacy in the raw. It was a constellation one might have expected to light up the currency or bond markets, but they barely flickered. From the financial record, you would not have known that anything of any note was going on. Conversely, there was little financial turmoil to compound the political battles of December and January. That is not to say that democratic politics was free from the power of money. Crucially, in all three cases there was no left-wing option on the table. The battle was between right populists and centrists, and the centrists had the stronger hand.

But disagreeable as right-wing populism might be, it was not the same as facing a militant Bernie Sanders bent on bringing social democracy to America, or a radical Labour government determined to turn Brexit into Lexit.

As the new year began and the anniversary of the pandemic approached, the problem was not money. The problem was how to use it.

The EU was the only part of the world where money did not dictate national rates of immunization. Bulgaria and Germany each received their rations. This was a remarkable achievement, but it was not matched by similar energy with regard to either securing orders or managing delivery. Approval for vaccines was also slow.

On the anniversary of the public health disaster of the spring of 2020, Europe’s governmental machine was again failing the coronavirus test. In light of this shambles, John Maynard Keynes’s emancipatory exclamation that we can afford anything we can actually do began to take on an increasingly bitter taste.

Born in 1942, Biden was among the teenagers who heard John F. Kennedy declare that the “torch” had passed to a “new generation.” That was in 1961. Biden’s first run for president was in 1988. At the inauguration in 2021, the age gap between Biden and his vice president, Kamala Harris, was so large that it was hard not to think of the presidential and vice presidential couples as a family group—adult children and spry elderly parents.

On the campaign trail, Biden had repeatedly evoked four converging or overlapping crises—his version of the polycrisis—the pandemic, the economy, the call for racial justice, and the climate.

Between 2014 and 2016 the status quo was rocked by the Ukraine crisis, the commodity price collapse, the Syrian refugee crisis, Greece’s near default, China’s near-miss financial meltdown, Bernie Sanders’s unexpectedly strong challenge to Hillary Clinton, Brexit, Trump’s victory, and the Gilets Jaunes explosion in France.

Given the extraordinary relief of the arrival of the vaccines and the departure of the Trump presidency, it was tempting to think of January 2021 as a moment of culmination. The Biden team themselves knew different. They had not just inherited a train wreck but were in the middle of one.

As far as the economy was concerned, the Biden team showed every sign of being determined not to repeat the mistakes of 2009. They had read the postmortems on the Obama administration. They would go large. They would hold out no hope of cooperation from the Republicans. They would start with the $1.9 trillion American Rescue Plan and follow that with a $2.3 trillion infrastructure program and the American Families Plan, costed out at $1.8 trillion. On top of the $3.6 trillion stimulus delivered in 2020, this level of government spending was unprecedented in peacetime.

also attacked from the center by voices like Larry Summers and economists of international repute like Olivier Blanchard.

It was hard to credit, but it seemed that finally, after decades of quiescence in the labor market, the Fed was wakening up to the implications of the historic defeat of organized labor in the 1980s and the dawning of a new era of globalization. This meant that it could afford to run the economy hot without fear of a runaway wage-price spiral. Of course, if the economy picked up steam, so too would prices, but that was nothing to fear. When asked at a press conference on January 27, 2021, whether he considered inflation a risk, Powell gave a remarkable answer. “Frankly, we welcome slightly higher inflation. . . . The kind of troubling inflation that people like me grew up with seems, seems far away and unlikely in both domestic and global context that we’ve been in for some time.”

There might be a tug-of-war, but the implication of the Fed’s reframed policy targets of August 2020 was that it was now committed to tolerating inflation above 2 percent, at least for a while. It was time for the markets to adjust to that.

The balance of the world economy depends on the quadrilateral that links the U.S. labor market, the U.S. bond market, fiscal policy, and Fed interventions. If the American economy ran hot and U.S. interest rates went up sharply, that would apply the squeeze that foreign borrowers of dollars had long dreaded. It would be a true test of the new toolkit for managing the risks of global financialization.

The Fed’s predicament concentrated in distilled form the situation facing governments more generally in the wake of 2020. None of the forces that had come together to make 2020 a moment of global crisis had exhausted themselves. Far from it.

Environmental historians speak of the “great acceleration” that has been driving the radical transformation in humanity’s relationship with our natural habitat.11 They date the moment of takeoff to 1945, with a further acceleration in the 1970s. Despite the signs of a return to something like normality in 2021, the great acceleration is the right historical frame within which to situate the 2020 moment: an exceptional and transient crisis, no doubt, but also a way station on an ascending curve of radical change.

Though it had long been foreshadowed, the coronavirus cruelly exposed the deep incapacity of most modern societies to cope with the kinds of challenges that the era of the Anthropocene will throw up with ever-greater force.

Given the limitation of our social, cultural, and political coping capacities, we depend ultimately on technoscientific fixes. Generating those depends on our willingness and ability actually to mobilize the scientific and technical resources at our disposal. What is striking about the experience of 2020 in this regard is not just the success in developing the vaccine, but the disproportion between the scale of the crisis and the scale of the means used to resolve it.

The future challenge laid down by 2020 seems clear. Either we find ways to turn the billions invested in research and development and futuristic technologies into trillions, either we take seriously the need to build more sustainable and resilient economies and societies and equip ourselves with the standing capacities necessary to meet fast-moving and unpredictable crises, or we will be overwhelmed by the blowback from our natural environment. These are the kinds of demands easily dismissed as unrealistic. But after the shock of 2020, how much more evidence do we need? What needs adjusting is our common understanding of the reality that we are actually in.

Like it or not, we are in what Ulrich Beck already in the 1980s dubbed “second modernity,” a world comprehensively convulsed and transformed by our own activities.

To meet the environmental challenges ahead, we have to take the innovative potential of science and technology revealed by the first centuries of modernization and actually unlock and fully mobilize it at a global level. Otherwise, there is every reason to think that 2020 will be only the first of an increasingly unmanageable series of global disasters. Either way, for better and for worse there is no escaping the fact that “big things” are going to happen. The continuation of the status quo is the one option we do not have.

The significance of central banking as a domain of modern government is that it is one arena in which the authorities have been forced to grasp the scale of the challenges facing us.

What has made central bankers into the exemplar of modern crisis-fighting is the vacuum created by the evisceration of organized labor, the absence of inflationary pressure, and more broadly, the lack of antisystemic challenge. The interventions can be as large as they are because though they have huge material consequences, and though the bond market itself has a real-world presence in the form of traders and computers and legal documents, central bank asset purchases are the equivalent of waving a digital wand.

But as tempting as the idea may be, we cannot travel back in time to the days of postwar Keynesianism. And that is certainly not the ambition of twenty-first-century central bankers, who are far from revolutionary. Their practice is that of Bismarckian conservatives in the second half of the nineteenth century: “Everything must change so that everything remains the same.”

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In 2020, at least as far as the financial system is concerned, managerialism once again prevailed, but it was less an exercise in all-powerful technocratic manipulation than a scrambling effort to preserve a dangerous status quo. “Too big to fail” has become a total systemic imperative. The effect is to underwrite successive rounds of escalating debt-fueled speculation and growth. Can it go on? There is no fundamental macroeconomic limit that anyone can discern. The question rather is whether technocratic governance can keep up and whether society and politics can handle it. Can it be democratized? If not, can it at least be legitimated? And can we find ways to absorb or offset the inequalities that this growth model produces? The full force of those questions was first recognized after 2008. After 2020, they still awaited an answer.

Can it go on ? Answer is in ecology, not economics.

The new era of globalization is generating a centrifugal multipolarity.

In its early stages, the Biden administration shows every sign of continuing this campaign. In his first press conference as president on March 25, 2021, Biden roundly declared: “China has an overall goal, and I don’t criticize them for the goal, but they have an overall goal to become the leading country in the world, the wealthiest country in the world, and the most powerful country in the world. That’s not going to happen on my watch because the United States are going to continue to grow and expand.”

American advocates of an antitotalitarian line evoked dark fantasies of a neutralized, amoral Europe, drifting between the blocs.

Far from marking a moment of decoupling, thanks to the slump in the West and China’s continued growth, 2020 was the first year in which China overtook all its rivals to become the world’s favorite destination for foreign direct investment.

Western analysts were left to wonder what was driving Beijing’s escalation. Was the Chinese leadership reckless and naive, or was it trapped in a nationalist propaganda narrative of its own making? Or was Beijing’s reaction indicative of something more sinister? Was Beijing convinced that America and Europe’s decline was entering a terminal stage? Following the fiasco of the Western response to Covid, was now the moment for Beijing to press home its advantage and demand acceptance and respect for its ruthlessly effective regime?

But as the Chinese like to point out, if social science is a matter of data, China’s modernization, through its sheer scale, generates more data points than any previous episode of economic growth. It is the greatest social experiment of all time. That is the materialist foundation of what Beijing calls twenty-first-century Marxism.33 The point is not that modernization theory is wrong, but only when it incorporates China’s transformation will it actually come into its own. This does not mean that managing China development is without risk. What 2020 demonstrated were the stresses generated by China’s astonishing growth, the flaws in the Chinese apparatus of power, and its resilience, potency, and ambition.34 Beijing too is walking a tightrope without an end.

it is in the U.S. that the disharmony between politics and economic and social development is at its most extreme and consequential.36 Twenty-first-century America is a country in which political power is shared between two parties, one of which, the Republican Party, has been for decades committed to blocking the construction of a state apparatus befitting of an advanced society and dismantling it where it does exist. Furthermore, as 2008 demonstrated and 2020 confirmed, in moments of national crisis, the GOP is no longer a party with a vision of government either in the long or even the short term. It has revealed itself as a vehicle for the undisciplined pursuit of particular interests and the expression of affect rather than considered national policy.

As they have demonstrated in successive presidential elections, the Democrats are majoritarian, but thanks to America’s eighteenth-century Constitution and the GOP’s rearguard action in gerrymandering and voter suppression, the grip on power of this modernizing coalition is frustratingly weak.

Spread across priorities ranging from childcare to the energy transition, that was far too little to effect a transformation of American society or to put the United States on course to climate stabilization. Especially with regard to the energy transition, they appeared to rest on optimistic assumptions about the private investment that would be triggered by modest public stimulus combined with regulatory change. When it came to long-term policy, Bidenomics was a continuation of the public-private, blended finance, Frankenstein policies that had been so typical of the crisis-fighting in 2020.

Even without a majority, the Republicans can be counted on to deploy all the checks and balances of America’s Constitution to their full effect. As is increasingly apparent, their political future depends on resisting the logic of majority rule by all means necessary. Given their inability to formulate a political vision that could encompass a majority of the American electorate, their best bet is to consolidate the kind of rigged constitutional settlement more commonly associated with the nineteenth century.

With Trump as president, pluralism and incoherence were a saving grace. In light of the experience of 2020, it is not obvious whether America and the world have more to fear from a unified American government subject to risk of capture by the nationalist right, or a more incoherent American regime in which key levers of power remain the purview of functional elites, globalized interests, and modernizing coalitions in key centers like New York and Silicon Valley. The polite way of framing this, for instance when conversation turns to the latest impasse in American climate policy, is to argue that a progressive future for the United States depends on the dynamism of “subnational actors.”

the haunting question remains: Is the United States as a nation-state capable of responding in a coherent and long-term fashion to the challenges of the great acceleration?

Any of these vectors of global change—environmental, economic, political, geopolitical—by themselves would suggest that far from being a culmination, 2020 is merely a moment in a process of escalation. Taken together, they form a dynamic parallelogram that makes de-escalation hard if not impossible to imagine. The great acceleration continues.

The chief countervailing force to the escalation of global tension in political, economic, and ecological realms is therefore crisis management on an ever-larger scale, crisis-driven and ad hoc. This may lack the grandeur or ambition of transformative politics, but it is not without historical consciousness or consequence. It is the choice between the third- and the fourth-best options, and as such, it really matters.

Europe’s failure in the years after 2010 was of historic dimensions. The year 2020 could have been the same. It was not. In a conscious determination to avoid a disastrous repetition, Europe’s political class defined the 2020 crisis as new. The least that you can say for them is that they found new ways to fail. They took on the task of a common vaccine policy and turned its launch into a legitimation crisis. They constructed a new fiscal capacity that was undersized for the job. Another intervention by the German constitutional court, this time on the legality of the joint financing of the NextGen EU fund, served notice that the legal foundation of Europe’s federal institutions remained unsteady.

Crisis-fighting is both relentless and hectic. It is driven by the urgency of the immediate situation. It is caught in a tangled web of interests and must make up its instruments as it goes along. It is also, however, guided by reflection on past crisis-fighting. Whether in the form of books, articles, or “folk narratives,” contemporary history is part of that process of collective learning. History-writing is part and parcel of history-making.

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The historical account laid out in this book is critical in intent. But it would be foolish to deny that it is entangled with and indeed complicit with its subject matter—the efforts of elites around the world to master the crisis. This is a matter of personal politics, biography, institutional attachment, and social identity. The force of those factors should not be denied by any self-aware writer. In a pandemic, this entanglement takes on a more material quality. How each of us came through the crisis was defined in large part by the events and decisions described in this book.

But beyond such material conditions, which define the writing and reception of any book, a historical narrative of this type is entangled at a deeper intellectual level with the exercise of power. This is because, in modernity, power and knowledge are constituted together.

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