See that chart above? That’s the American economy, dying. It shows retail sales across the economy — and as you can see, the line plunges off the chart into the abyss. Add that to figures showing 36 million people and counting filing for unemployment in the last six weeks. Just half the US population is now employed. GDP cratering — and expected to fall further.
What’s the picture that’s emerging? Of an economy plunging heading into an historic depression. One that is shaping up to be a Greater Depression.
Let me take a moment to explain.
The retail sales number is especially vital because it confirms a key part of the vicious spiral of depression — the one that we economists hope never to see emerging. First, there’s some kind of shock — natural calamity, a sudden shortage, a banking crisis, or in this case, a pandemic.
Then, mass unemployment leads to less spending leads to mass bankruptcies across businesses leads to…mass unemployment. Only this time, the unemployment is long-term, not just short-term, because waves of business have shuttered their doors.
The economy is now at a permanently lower level of the following things: employment, income, savings, assets, and the things those thriving economic fundamentals underpin, like trust, optimism, happiness, and most crucially, confidence. As people lose confidence, they stop spending, and start saving what little they can. Bang! Depression has now set in. And this is what we are beginning to see emerging in America.
America’s economy is based on consumption like almost no other in the world. About a full 70 to 75% of it — depending how you count — is consumption. That means: people buying things, whether jeans, computers, cars, or food. That number is much lower elsewhere — for example, in France, consumption is only about 50% of the economy. Americans have long enjoyed being the world’s most voracious consumers — and I don’t mean that in a judgmental way, just an analytical one. The benefit of having a world economy designed for you — the American consumer — is that you get to buy more stuff, cheaper than anyone else.
But because America’s economy is so disproportionately based on consumption, it’s long had an Achilles heel, too. It’s especially vulnerable to slowdowns in consumption. That’s why there’s an obsessive focus from Wall St and Washington DC on “growth”, which really means “how much people are buying.” If people stop spending — even by a few percentage points — the whole economy begins to shake. The house of cards can crumble just like that — because consumption is a fickle beast.
There you are, just some average person in America. You’ve been forced “back to work,” by your governor, by the man who calls himself a President. Part of you is glad — at least you’re not furloughed anymore. That government stimulus check? It was barely enough to pay the bills for a week or two — and so you need the money. So back you go. To that restaurant you cook at, the bar you tend, that shop you man, that store you manage. With a sense of relief — mixed with trepidation. Will it all be over soon? Will life go back to normal? You cross your fingers, and hope.
But on that first day back, nobody much seems to lighten your door. You used to have twenty customers a day, now you have two. You used to have two hundred, now you have twenty. People, it seems, aren’t spending like they used to. Aren’t shopping like the were before. Ah, well, you tell yourself. It’s just the first day. Surely things will pick up soon.
But by the end of that week, nothing much has changed. Your old customer base hasn’t returned — although maybe they call and email you to tell you they hope you’re doing well. They’re not bad folks. You don’t blame them. But you do feel a sense of rising anger and frustration. The bills are mounting. If sales don’t go up, you’re going to have lay people off soon. Maybe you’ll be laid off yourself. By the end of the month — since most small and medium sized businesses exist month-to-month, like most American households do now — bankruptcy looms. And when you realize that, a twinge of fear numbs you right down in the pit of the stomach. What will you do then? You stifle the thought, with effort. You need to be strong now.
But the fear doesn’t go away. You’re manning a ghost bar, store, restaurant, hotel. All you have is time, and anxiety.
A month later, laying off your best employees, being laid off yourself, signing those bankruptcy papers at some finely cherrywood-panelled lawyer’s office, you realize. What economists call a permanent change in patterns of consumption had taken place. People stayed home — good and fine people, just people afraid for their families. You had too — off you went to work dutifully, every day, hoping for some respite — but you yourself had told your partner and kids to stay home and save money. That’s what everyone was doing — well, everyone who wasn’t a bleach-drinking “lockdown liberation” protestor. Everyone sane, in other words, stayed home — precisely because reopening the economy too soon had spread the virus faster, the death toll still hadn’t peaked, and so confidence and optimism had shattered.
And so the vicious spiral of depression had set in. Bang! You see your future turning to dust. And as an economy dies, you understand: it was always about human potential, this abstraction called “the economy”, and whether people can make the most of their — or not.
Let me distill the moral of my little story.
The US economy, like we’ve discussed is especially reliant on consumption. That means it’s especially dependent on confidence, on optimism, on people feeling strong and safe and secure enough to spend, spend, spend. Even a minor downtick produces a recession. But a catastrophe like this? A pandemic? Which has been totally mismanaged? What does that produce? Well — is anyone feeling particularly confident, strong, safe, secure, or optimistic right about now?
You see the problem, perhaps. When an economy is as reliant on consumption as America’s is, even a minor, temporary loss of confidence causes it to stumble. But a massive, systemic, long-term shattering of confidence — like being surrounded by death on a mass scale, 80,000 and counting? That produces a rapid shift in what economists call “the propensity to consume.” Keynes, the great scholar of depressions, discovered that was the key to igniting them — or staving them off. Let the propensity to consume fall too far, too fast — and bang! A depression beckons. Stave it off — and then maybe you can lift an economy out of one.
How then do you raise the “propensity to consume,” which is really just another word for “confidence in the economy”? In moments like this — of profound and sweeping shock — you stimulate. At a scale and scope equal to the shock. If the pandemic’s affecting a whole society for months or years…that’s how long and hard you need to stimulate, too.
For that reason, the American government should have done (at least) three things. Guaranteed personal and small slash medium business incomes. Frozen debt repayments — don’t worry about the banks, they get free money from the Fed every month. And created a kind of permanent boost, a basic income. Those would have gone a long, long way to restoring confidence. People might have then felt that they could continue spending. Maybe not on the same things — maybe now less designer jeans and sports cars, and more refrigerators and books. But the overall level of spending might have remained high — instead of crashing, and taking the economy with it, into a Coronavirus Depression.
The thing about depressions is that once they set in, they last for a good decade or more. It’s cheaper to prevent them than it is — like any other malady, really — to treat them. That is why we should wish to stimulate — even though, yes, it’s not cheap. It is cheaper, still, than the alternative — which is a decade of ruin, which sets an economy and its people on a permanently lower path of income, savings, assets, mobility, opportunities.
The American government, unfortunately, didn’t do any of the above. Trump first denied there was a pandemic, then minimized, then told people to…drink Lysol. That was after Congress passed a bill that supported people for the equivalent of…just one week. So of course the economy is now plunging heading into depression.
America faces an unparalleled economic catastrophe. What retail sales cratering tell us is two things. First, people stay home, in times like these, even if they can go out and shop. Second, they consume less, because their optimism is gone. As the economy adapts to a permanently lower level of spending, a wave of businesses will have to shutters its doors, meaning today’s job losses become permanent — and that is how a whole economy grows poorer.
A new pool of people will then have to compete for what jobs there are on offer. That will erode the bargaining power of workers, so incomes will fall further. And what jobs are on offer are dead-end, go-nowhere jobs mostly, anyways: “low wage service jobs,” which is the modern American pundit’s way of saying: “you’re a servant all over again, just like your grandparents maybe were.” Poof! There go whole centuries of progress. No, I’m not kidding. An economy of people driving Ubers and delivering Instacarts and selling pallets on Amazon isn’t one of people reaching their potential. It’s not one of great discoveries and breakthroughs and creativity and imagination and freedom. It’s just one of soul-crushing menial labour.
That is what it means for an economy to grow poorer. Human potential goes up in smoke — and history rewinds. Instead of that chance to become that great artist, novellist, scientist, entrepreneur — you wind up a glorified servant. You could have been something — now you drive an Uber by day and sell stuff on Amazon by night, just to put food on the table. As a result, society itself grows impoverished in the truest way — of all the things you might have created. Maybe you would have discovered that vaccine, or written that chronicle of the pandemic, or made that documentary, or employed a few hundred people. Now? You’re just another servant, in an economy of them. Which is what most economies through history have always been, sadly — and that is why progress means the freedom not to live in the servitude that comes of poverty.
Depressions do more harm than we fully know. Americans haven’t suffered one in recent history — but they’re about to. And they’re about to learn, the hard way: depressions are things for which we have no good words. The opposite of seeds: things which undo harvests and unmake gardens. They are like viruses of the human spirit. They take us backward in time, as they plunge us downwards into the abyss. Head long enough that way, and you find yourself in a dark age. But that, perhaps, is just where foolish, brutal, indecent men like Donald J Trump have always been living — and want the rest of us to, too.
By Umair Haque
*Haque first published this in Medium on 15 May