US sleep-walking on the road to socialism?

As the pandemic is likely to accelerate the relative decline of the US

M Ziauddin May 23, 2020
The writer served as Executive Editor of The Express Tribune from 2009 to 2014

During the Cold War days, the real contest was between two economic systems — capitalism and socialism/communism. And by the mid-1980s, capitalism won hands down. The Soviet Union, which had championed communism, disappeared from the face of the earth and socialist China was looking like a country about to change its course as it had seemingly started adopting rules under which free market economy-led globalisation was capturing the world economy.

But the 2008 financial crisis and the current Covid-19 pandemic — occurring within a decade — seem to have turned the tables on capitalism which is seemingly sleep-walking into a socialist course with China on the verge of taking over the world’s economic leadership without making major compromises on its socialist norms that regulate its domestic economy.

Asia’s economy today is not only bigger than America’s but has nearly caught up or has moved ahead in most technologies. According to US media it would take the US a generation to reverse this trend, if at all.

Meanwhile in the US, more than 20 million jobs were lost in April alone, bringing the total virus-related unemployment to 26 million and raising the official unemployment rate to 14.7%. The actual rate is probably higher and, according to American press reports, factories are still closing.

Aside from re-shoring medical supplies, not much is being done to rebuild America’s industrial economy. Rather, dependence on East Asian manufactures is likely to rise while the Asian economy becomes more integrated and less dependent on America.

Along with subsidised education and medical care, it’s expected to turn the US into a European country, focused on public welfare and redistribution rather than wealth creation by and for the 1%. This is expected to reverse three decades of wealth transfer from labour to capital which would be very popular among the left leaning US youth eager to send Trump home come the next election.

During the 2008 financial crisis, going against the basic tenets of free market economy, the US government saved the Wall Street banks and other big financial institutions with tax-payers money and now breaking more rules of the free market economy, more of the same money is being injected into strategically sensitive companies to save them from collapsing.

In fact, the entire industrial sector including energy and airlines, as well as the market for corporate bonds are in a manner being taken over by the government as it is buying private assets with freshly printed dollars, forcing these entities to function under rules that controvert the basic planks on which stands capitalism.

A decade ago, the Federal Reserve was instrumental in keeping the banking system from going bust. This time, the Fed’s actions are far more sweeping, and it has essentially propped up entire financial markets with its bottomless ability to buy assets with freshly printed money.

As the Feds started pumping trillions of dollars in the financial market to save it from failing, the market has rebounded by some 30%. The Fed has bought billions of dollars worth of US Treasury bonds and government-insured mortgage bonds, keeping the prices of those bonds artificially up and pushing yields from moving south.

The US government has also earmarked enormous sums for certain industries. Airlines could receive $50 billion in loans and aid in the $2 trillion CARES Act. The law set aside around $17 billion for businesses critical to maintaining national security, an excuse widely seen as being intended for the aerospace and military giant Boeing.

American conservatives are said to be worried that the budget deficit was out of control, but there is not much they or anyone else could do about it. As they say, it’s politically impossible to sacrifice tens of millions of people on the altar of “hard money”. And equally difficult to cut the bloated military budget.

The pandemic is likely to accelerate the relative decline of the US while the spend-and-spend-more mentality of American politicians eventually is feared to put yuan on a par with the dollar, if not ahead of it.

Published in The Express Tribune, May 23rd, 2020.

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