The second millennium was nearly over, and so were global capitalism’s worst “financial troubles.” Or so one influential economist suggested in 1999.
On the eve of this century, MIT’s Rudiger Dornbusch argued that humanity was living through the early days of a nigh-interminable Belle Époque. In the century to come, the world would witness “a relentless advance of the standard of living” as “big government” policies gave way to “free enterprise” and globalization “dismantled” the nation state. Tragedies might temporarily interrupt this march of progress, but never durably reverse it. For our happy fate had been sealed in the early 1980s, when policymakers finally accepted a timeless economic truth: “Money is too serious to be left to politicians.”
By this, Dornbusch meant that whenever democratically accountable officials gain power over money creation, they prioritize economic growth and employment over price stability. Which is to say, they finance expansive public spending with heedless money-printing. The state is a terrible investor. Free markets are far wiser stewards of a society’s limited resources. Therefore, the government’s primary macroeconomic responsibility was to simply safeguard the value of money — by placing monetary policy on a shelf too high for the common people to reach.
Happily, in the final two decades of the 20th century, states the world over had done just that. Central banks had secured independence from popular pressure and then given absolute priority to low inflation. Through the threat of interest-rate hikes, they had also imposed some fiscal discipline on legislatures. As Dornbusch exulted in 2000, the “past 20 years” of monetary policy and “the very rise of independent central banks, is all about getting priorities right, getting rid of democratic money which is always shortsighted, bad money.”
To many, these first decades of Dornbusch’s golden age — also known as the “neoliberal era” — had looked gilded at best. The rise of independent central banks had corresponded with a fall in labor’s share of income. As policymakers prioritized price stability over full employment, they had condemned the most unskilled or socially stigmatized workers to perpetual joblessness. As globalization eroded barriers to the free movement of capital, it had condemned entire regions to economic dispossession.
All the while, global carbon emissions had increased in tandem with evidence of anthropogenic warming. These were the years when climate scientists first started sounding like Cassandras. Epidemiologists were scarcely less alarmed. Whatever else global capitalism had proffered in the 20th century’s closing decades, it had also fostered a more fertile breeding ground for emergent disease than any our species had ever known. Never before had so many humans lived in such densely populated cities, each ringed by vast and unsanitary agglomerations of domestic animals, and linked to all others by air travel. Even as these pathogenic conditions kicked up periodic epidemics, investment in global public health had remained scarce.
Yet Dornbusch was hardly alone in his triumphalism. It had become the common sense of his profession. When viewed through the windows of America’s economics departments — or in the pages of their textbooks — the age of undemocratic money looked serene in the new century’s dawning light.
Two decades later, from almost any vantage point, things looked bleak.
The neoliberal era had always been shadowed by inconvenient truths. By 2020, however, these realities had moved from the periphery of elite consciousness into its very center. In March of that year, neoliberalism’s morbid symptoms conspired to form what the historian Adam Tooze calls a “polycrisis” — a complex web of simultaneous epidemiological, financial, democratic, ecological, and geopolitical crises that induce and magnify each other.
Tooze’s new book, Shutdown: How COVID Shook the World’s Economy, is an instant history of 2020’s polycrisis. In it, he offers a panoramic survey of the COVID pandemic’s first year, tracing the spread of viral and financial contagions across borders and over time. Like Tooze’s last book, a chronicle of the decade following the 2008 crash, Shutdown offers a primer on the mechanics of a global financial panic, the techniques that central bankers deployed to contain it, and the political events that ensued. Laced through these taut synopses is a meditation on a grand historical question: Did 2020 mark the end of the world economic order as we’d known it since 1980? And if so, what precisely is taking neoliberalism’s place?
On one level, Shutdown narrates the 21st century’s rebuke of neoliberal triumphalists like Dornbusch (who is quoted in the book’s introduction).
Not only did last year’s crises contradict their rosier prognostications for the new millennium, but the policy response to the COVID crash repudiated their core convictions. Central banks across the world facilitated massive deficit spending by buying up their own governments’ bonds. Economic growth and employment took clear priority over the preemption of inflation. Global capitalism’s flagship institutions did not just tolerate such fiscal laxity; they evangelized for it. As Tooze notes, 2020 “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.”
And yet Tooze argues that these unorthodox interventions, if radical in theory, were conservative in effect. For all its laudable achievements, the policy response to the COVID crash fortified pre-existing inequalities, and the invidious growth model that produced them. Despite the private sector’s newly conspicuous underinvestment in public health and decarbonization, democratic states barely increased their authority over economic development. The pandemic had eviscerated neoliberalism as a macroeconomic orthodoxy and utopian ideology. Nevertheless, as a system of power, it persisted.
How “democratic money” saved global capitalism.
Neoliberalism, in Tooze’s conception, is defined by the depoliticization of economic management. In the years between 1980 and 2020, policymakers generally transferred authority over investment and resource distribution out of legislatures and into markets, courtrooms, and central banks. This diminishment of popular sovereignty wasn’t always acknowledged as such; one can justify tight monetary policy, deregulation, and fiscal restraint without disparaging “democratic money.”
Even before the COVID crisis, however, the technocratic justifications for the neoliberal program had largely broken down. The 2008 crash had revealed that financial deregulation and economic stability were more compatible in theory than in practice. The ensuing decade was characterized by slow growth, low interest rates, and scant inflation. In that context, prioritizing price stability over employment began to look perverse, even to independent central banks. Why raise interest rates when millions were unemployed and the biggest threat to price stability was deflation? With wealthy nations enjoying low borrowing costs and suffering from chronic shortages of productive investment, economists who’d once preached fiscal rectitude started agitating for higher levels of deficit spending.
If these intellectual currents constituted the kindling for a paradigm shift in public policy, then COVID put a blowtorch to that tinder. In March 2020, shutdowns halted entire categories of economic activity. Unemployment soared. Under these conditions, the market economy could not provide workers and businesses with the income necessary for meeting their financial obligations. Nor could private-income flows sustain demand for e-commerce or essential goods and services. The threat of a global depression loomed — and the 21st-century equivalent of a worldwide bank run ensued.
Investors sucked cash out of the money markets that firms the world over depend on for short-term financing. During a conventional market panic, stock prices fall and bond prices rise, as investors trade risky assets for safe ones. But in March 2020, the world’s safest asset — U.S. Treasury bonds — started crashing too. This was a horseman of economic apocalypse. The global financial order was built atop the presumption that U.S. Treasury bonds could be readily converted to cash, at no significant loss. If that assumption was false, then no investor was safe.
The problem in the Treasury market wasn’t that traders had lost faith in U.S. debt. Rather, they had acquired an insatiable appetite for U.S. dollars. Mutual funds needed cash to keep up with massive withdrawals, and selling the riskier assets on their books would have required accepting massive losses. So they sold Treasuries instead. Meanwhile, as the dollar strengthened in value, emerging-market governments sold off their Treasuries, so as to supply their resident borrowers with the currency necessary for keeping up with their dollar-denominated debts. Yet as these states and mutual funds liquidated Treasuries all at once, U.S. debt started losing its value, triggering other Treasury holders to sell off while they still could, in a vicious cycle that threatened to unravel nothing less than the global financial order.
In these conditions, only “big government” could save global capitalism. No institutions but major central banks could stabilize bond prices. And nothing but massive deficit spending could plug the holes that COVID had punched in household income, business revenue, and consumer demand.
To a 1990s neoliberal, these two objectives might have seemed mutually exclusive. Traditionally, you stabilize the market value of government debt by limiting its supply, not issuing more of it. It was deference to this economic logic that had led the Clinton administration to reduce its ambitions for stimulus in the early 1990s. Faced with falling investor appetite for U.S. Treasuries — and thus, higher borrowing costs of Uncle Sam — the Democratic president pivoted to deficit reduction.
The 2020 crisis revealed that this trade-off, in which the U.S. government must choose between high deficit spending or low interest rates, only exists if the Federal Reserve wants it to. On March 23, 2020, the central bank pledged to purchase U.S. Treasuries in whatever quantity was needed “to support smooth market functioning.” The value of U.S. debt promptly stabilized. The global financial recovery commenced.
What sustained that rally, however, was an avalanche of public spending. By the end of 2020, OECD governments had issued a combined $11 trillion in new debt. And yet, over that same period, their borrowing costs fell. Across the developed world, 80 percent of government bonds issued in 2020 offered a less than one percent yield; the other 20 percent had negative interest rates.
Tooze presents a number of explanations for this phenomenon. But the primary factor is also the simplest: “Epic government deficits could be financed without driving up interest rates” because “one branch of government, the central bank, was buying the debt issued by another branch of government, the Treasury.”
In nations throughout the developed world, central banks bought up as much public debt as needed to sustain high demand for — and thus low interest rates on — the bonds left available for private purchase. The more money legislatures spent, the more debt central banks bought. Fiscal policy effectively determined monetary policy. Congress led, the Fed followed. We had entered Rudiger Dornbusch’s nightmare. The world was awash in democratic money.
Meet the new economic order, same as the old economic order.
One can imagine a world in which all this led to systemic change. After all, the neoliberals had been roundly discredited. They had asked democratic publics to forfeit economic power to the free market in exchange for stability and peace. But it was now clear that the “free market” did not exist. The global financial order was a government program. It lived at the mercy of the state. Capital needed massive government intervention to survive its own periodic crises and the Anthropocene’s coming shocks. Monetary policy could be rendered undemocratic, but never apolitical. The “invisible hand” was attached to Jerome Powell’s forearm.
The world that neoliberalism had made was not stable, liberal, and peaceful, as promised, but rather, increasingly nasty, brutish, and hot. As Tooze makes clear in his account of U.S.-China relations in 2020, the free movement of capital did not bring geopolitical harmony. And it certainly hadn’t averted ecological emergency. The COVID pandemic was an object lesson in the hazards of an overreliance on private capital. Price signals had directed far too few resources into pandemic prevention, even from a purely economic standpoint; preempting or shortening the COVID pandemic would have had a multitrillion-dollar payoff. The analogy between this underinvestment in public health and our even more egregious underinvestment in climate-change mitigation wasn’t hard to draw.
And these market failures were plainly resolvable! Money was no object. The pandemic had forced the Federal Reserve to reveal as much. “Bond vigilantes” could not actually hold the U.S. government hostage. The balance of power ran in the other direction. If the Fed wished to abet decarbonization by effectively monetizing deficit spending on a green transition, there was little investors could do about it. And this was only a bit less true for the European Central Bank. John Maynard Keynes had articulated 2020’s central economic lesson way back in 1942, when he assured the British public that “anything we can actually do we can afford.”
Yet no Green New Deal was in the offing. The policy response to the COVID crisis was exponentially more intelligent and humane than the one we’d seen post-2008. The Fed’s uninhibited support for credit markets spared workers from the ravages of a global depression. Congress’s unprecedented deficit spending enabled America’s poverty rate to fall amid a world-historic disaster. Together, Keynesian monetary and fiscal policies put a floor under the vulnerable throughout the developed world, and much of the Global South. But they had also increased the distance between that floor and the global order’s proverbial ceiling.
Central banks had the tools to minimize macroeconomic damage, but only through mechanisms that inflated asset prices. Unless paired with fiscal redistribution, accommodative monetary policy would therefore increase the stock-owning minority’s income and wealth — and thus economic inequality. Alas, COVID-era fiscal policies were preservational, not transformational. As a result, last year’s events did not merely leave the pre-pandemic class hierarchy intact; they fortified it.
Meanwhile, democratic governments increased their authority over investment only marginally. The European Green Deal, which aims to promote macroeconomic recovery while expediting a green transition, is impressive by the E.U.’s austere standards. But it is too small to plug this year’s projected shortfall in private investment, let alone meet Europe’s commitments under the Paris Climate Agreement. In its original form, Joe Biden’s Build Back Better plan called for investing $4.375 billion a year into green innovation — which is roughly what Americans spend annually on pet treats — for eight years. Once the Senate is done with the president’s climate plan, the world’s largest economy is liable to devote an even more piddling sum to averting economically ruinous temperature increases.
The final bill is also expected to include less than $10 billion in funding for pandemic prevention and preparedness. Even in the midst of a world-historic crisis that has already cost the global economy tens of trillions of dollars worth of output, the world’s wealthiest governments are declining to invest seriously in public health. This summer, an IMF report estimated that a comprehensive global vaccination drive would cost $50 billion — and yield $9 trillion worth of benefits by 2025, which meant “that funding this proposal may possibly be the highest-return public investment ever.” The Global North declined to take the IMF up on that opportunity.
Policymakers had abandoned the core tenets of neoliberal orthodoxy. The wall between monetary and fiscal policy had fallen. But this paradigm shift in macroeconomic governance wasn’t Marxian or even Keynesian so much as Bismarckian, in Tooze’s reckoning: It embodied the pragmatism of 19th-century German conservatives who concluded that “everything must change so that everything remains the same.”
Popular resistance to this restorative project has been slight. Germany’s recent election became a contest between a pair of party leaders campaigning as “the new Merkel.” Canada’s, meanwhile, saw the election of a parliament nearly identical to the one assembled in 2019.
In the United States, there has been no mass agitation for Biden’s $3.5 trillion agenda, let alone for one that exceeds its modest ambitions. In some polls, the electorate evinces less appetite for change than even the Bismarckian elite: While policy wonks in both parties have blessed the idea of a permanent child allowance, surveys show a large majority of the public opposing the policy.
Which isn’t to say that Biden’s program lacks democratic legitimacy. Most elements of the Build Back Better bill are overwhelmingly popular, and the median voter’s views on public policy are often protean and confused. Still, the following remains true: Last year, the American state revealed its capacity to directly raise workers’ incomes through massive interventions in the economy. And that display has not galvanized a mass movement for further interventions, so much as mild concern about inflation and the deficit.
“Democratic money” — in a world where organized labor is weak, right-wing media is strong, and the typical voter is a 50-year-old with a mortgage — seems to pose less of a threat to market rule than Dornbusch once imagined. Last year, in deep-blue Illinois, a majority of voters rejected a proposal to replace the state’s flat income tax with a progressive one. If the interest rate on U.S. Treasuries were set by popular referendum, it’s quite possible that America’s monetary policy would be tighter (and thus, more in line with Dornbusch’s past recommendations) than it is now.
Economic democracy in America: Better dead than red?
The left’s political weakness amid a radical and potentially liberating change in central-bank governance might seem paradoxical. But in Shutdown, Tooze suggests that the two are inextricably linked. It was precisely “the evisceration of organized labor” and “lack of an anti-systemic challenge” that both enabled and necessitated the new abnormal in monetary policy. Were trade unions still strong and militant, technocratic elites would likely have been too afraid of setting off a “wage-price spiral” to keep interest rates so low. If anticapitalist parties still had a mass base, meanwhile, conservative central bankers and legislators may have been less willing to tolerate 2020’s display of the state’s fiscal prowess.
On the other hand, in a world of strong unions and left-wing parties, the engine of economic growth would likely be wage increases instead of debt-financed speculation and asset-price appreciation. In that more egalitarian political economy, financial crises might be less frequent. And when crashes did occur, it might be possible to resolve them through structural reforms, rather than massive central-bank interventions aimed at stabilizing a wobbly, top-heavy economic order.
Or maybe not. Regardless, in the world we live in, though, Tooze sees little hope for transformational, progressive change in the near term. “In an earlier era,” he writes, his diagnosis of the global situation “might have been coupled with the forecast of revolution.” But this appears patently unrealistic; even “radical reform is a stretch.” What seems more plausible (if, as of yet, out of reach) are multitrillion-dollar public investments in “technoscientific fixes” — above all, green technologies that help reconcile status quo social expectations and political alignments with the imperative of rapid decarbonization.
Tooze hardly endorses the stability of the (post-?) neoliberal order. On a global level, China’s ascent guarantees profound geopolitical change. He writes that there is no macroeconomic reason why wildly inegalitarian, debt-fueled growth cannot be maintained indefinitely through government underwriting. But the political sustainability of this arrangement remains far from clear — especially given the ecological reasons why the global energy system cannot carry on as it has.
Nevertheless, Tooze seems to have an easier time imagining the end of neoliberal technocracy than its replacement by something better; at least, in the United States.
In Shutdown’s final analysis of the U.S., the historian mediates on the incoherence of American governance. Here, power is not just divided between rival branches of government, or between statehouses and D.C., but also between the world’s most advanced corporate sector and an aberrantly underdeveloped federal state. This diffusion of power has long frustrated attempts to advance progressive reform and economic self-government. But “with Trump as president,” Tooze writes, “pluralism and incoherence were a saving grace.” The state’s divisions enabled the Fed and congressional Democrats to engineer a robust crisis response, untrammeled by the GOP’s right wing. Further, the White House’s limited powers, and the outsize influence of a corporate sector hostile to Trumpism, helped keep the president’s quest to overturn the 2020 election quixotic.
“In light of the experience of 2020,” Tooze writes, “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.”
Tooze is a left-liberal and champion of the Green New Deal. He has no reverence for America’s archaic constitution or its plutocratic political economy. Yet, given our republic’s parlous condition (and its penchant for spending trillions on sowing mass death overseas), he cannot say with certainty that Dornbusch’s mantra is wrong; money might well be too serious to leave to American politicians.
This uncertainty is hard to second-guess. It is easier to see how the nationalist right could come to dominate the U.S. federal government than how the social-democratic left might radically reform it. Notably, acquiescence to an “incoherent” U.S. government need not mean fatalism about political reform. America’s center-left party still rules the world’s fifth-largest economy, and almost all of our country’s major urban centers. There remains much progress to make at the subnational level.
If 2020 proved anything, though, it’s that America’s federal government has unique and extraordinary capacities for affecting global economic change. No other entity can print the currency on which the global financial order is hopelessly dependent. None therefore has as much fiscal capacity or can influence on the world’s interest rates. When the dream of a social democratic America dies, hope for the left’s broader revival may soon follow.
If the old is dying, and the new cannot be born, then the U.S. left must strive to make America safe for economic democracy in the interim.