The New New Economy

An Interview with Adam Tooze

Octavian Report: How would you define the COVID economy — how is it unique, if you think it is unique?

Adam Tooze: I do think this is a unique, and though it's an overused word nowadays, unprecedented, crisis. We have never had a shock like this before in the sense that we've never had a global shock of this type that was triggered by our response to a public health crisis — or more broadly an event in the ecosystem and the natural world that we inhabit, which some people of course attribute to our own actions. I don't mean here the lab conspiracists. I mean the people who think hard about emerging infectious diseases and how they're related to humanity's impact on the environment.

I have argued that this is the first economic crisis of what people call the Anthropocene, the era in which humanity's collective impact on the environment is beginning to generate massive systemic blowback. We tend to think of that in terms of climate change, but what we've now experienced is that there are other channels through which this can act. We have long been anticipating that this could induce a dramatic crisis in the economic and financial system. Not really through the first round of natural effects: it isn't the dying of vulnerable people that by itself generates a shock, any more it would be the flooding of Bangladesh that would generate an economic shock in the case of climate change. Rather, the governmental response to that shock would generate a crisis, and that's really what we've seeing since January, starting in China and then rolling out across the entire world by the end of March.

That combination of factors — the scale of it, the speed of it, the extent of it, the causation, which runs by way of this natural shock, if you like, into the political system and then out into the economy — makes it new, and one has to say, I think probably a harbinger of crises to come.

OR: Why it is that you think these factors have created a new type of economic crisis?

Tooze: I think the crucial thing is that a normal business cycle, a normal economic crisis, starts in a different bit of the economy. The classic pattern is really much more like that we saw in 2008. You have a volatile sector, often driven by financial markets backing credit — like the real estate sector with a construction sector attached to it, which is heavy on the investment side with a lot of male labor, manual labor, blue-collar labor associated with it.

That tail, if you like, wags the entire economy by way of a broader economic shock with people losing their jobs and the multiplier effect coming into play from the consumer side and the damage spreading from that sector to the rest of the economy. This is typically also something that export-dependent economies suffer, like Germany or South Korea or Japan. They will see their auto sector get hit by a fall in foreign demand. Then you have a ripple effect through the rest of the economy.

This is totally unlike what we've seen in 2020, where what we've had to do is deliberately stop the face-to-face service sector, which accounts, in the U.S., for more than 70 percent of employment and is preeminently the domain of female labor. It's a domain that has been widely regarded as the future of employment. It is if you like the body, not the tail, of the economy, and we have deliberately set about shutting it down. That's really completely unlike any crisis that we've ever previously witnessed.

The corresponding fall in consumption that we've seen over the last couple of months has been unlike anything we've seen before. Consumption matters so much because it really is by far the largest component of aggregate demand in any modern economy, especially one like the U.S. So this is a short term that's quite novel, very comprehensive. It cannot be stressed strongly enough that for all of the bullish talk we have seen, we're very early on in this process.

OR: Can you talk through the various political and economic responses we’ve seen to COVID?

Tooze: I think we have to distinguish different levels of decision making. In economic policy, if you're looking at the level of the central banks and central bank leadership, we've seen a pretty consistent reaction across the world, with the Fed playing an absolutely indispensable role. This is based on an evaluation of the lessons learned in 2008 and in the notorious Taper Tantrum of 2013. On the European side, we see in play the lessons learned from the Eurozone crisis of 2010 to 2012.

In both cases there are pretty concerted decisions by the central banks during the height of the crisis in March arriving at the conclusion that they need to do whatever it takes — on steroids. This isn't Mario Draghi's version of “whatever it takes,” or even Ben Bernanke's, but a truly massive extension if necessary of asset purchases, and in the American case, an extraordinary range of programs all designed to prop up and ensure that the financial system doesn't add a financial heart attack to our other problems.

We have the public health crisis, we have a huge problem with unemployment coming down the pipe on account of the lockdown. What they were trying to do was to ensure that we didn't have, on top of that, a financial crisis to deal with as well, and not just at the center of the global financial system, but also in key emerging markets around the world. That's one area where I think we can see clear learning.

I think there's also been an element of learning and development of economic policy with regard to the labor market. The Americans don't have a short-time-working system the way that the Europeans have, but the Payroll Protection Program was designed to provide a substitute for that in the United States, and the top-up to the unemployment insurance fund, again, was done on a large scale after the '08 crisis and worked well then and has been done again now.