Capitalism, contagion, and moral hazard: A cure worse than the disease?

Experience in this unprecedented health crisis is conclusive: Absent an impartial referee there is nothing to prevent a mythical free market from decaying into crony capitalism and causing irreparable damage to society, economy, and a badly battered political system.


Moral hazard.  It’s an odd-sounding term for a concept well-known to “worldly philosophes” (a.k.a., economists), but few others.  More recently it has become a veritable catchphrase for critics of “crony capitalism” (a.k.a. corporate capitalism).  Chalk it up to the deadliest, most disruptive, pandemic in modern history.

The Covid-19 pandemic has upset the global economic apple cart in ways few could have imagined, ways natural calamities (hurricanes, earthquakes, droughts) and human-induced shocks (terrorist attacks, recessions) in the past, for all the damage, dislocation, and human suffering they occasioned, did not.  Lockdowns, stay-at-home orders, school closings, social distancing, people dying in agony surrounded by aliens in full Hazmat gear, and the ubiquitous facemasks that render us all faceless.  Such scenes have turned bustling cities into something resembling a sci-fi film depicting life on Planet Earth after the Apocalypse. 

The Contagion

The Economist, a paragon of classical liberalism which has been singing the praises of free enterprise since the 1840s, predicts that among the long-term consequences of the coronavirus crisis will be the 90% economy:

In many things 90% is just fine; in an economy it is miserable, and China shows why. The country started to end its lockdown in February. Factories are busy and the streets are no longer empty. The result is the 90% economy. It is better than a severe lockdown, but it is far from normal.

“Far from normal” means different things to different people,  especially in an age of deep class divisions, rising inequality, and culture wars.  What it means for frontline workers in medicine and law-enforcement, for example, is farther from normal than for the self-isolating, social-distancing, mask-wearing majority.  What it means for furloughed wage-earners and for tens of millions who have filed unemployment claims is the crushing burden of unpayable bills, families in free fall, and financial ruin.

Will most workers in the private sector still have jobs when local economies reopen?  A Goldman Sachs survey found that two-thirds of small-business owners expected to run out of cash in less than three months. In the U.K., the number of commercial tenants in arrears on rent due has risen by nearly a third.  Unsurprisingly, the hardest-hit parts of the 90% economy in the U.S. and Europe

Even now in Europe’s five largest economies, over 30m workers, a fifth of the labor force, are in special schemes where the state pays their wages. These can be generous, but nobody knows how long they will last.

Meanwhile, “far from normal” is different altogether if you happen to be Jeff Bezos, the CEO of Amazon and the world’s richest capitalist, who reportedly raked in $24 billion in profits during the first few months of the pandemic.  That is far from normal, too, but it points to a fact of political life under crony capitalism that  Republicans in leadership positions never talk about—namely that for not a few billionaires with deep pockets who shell out millions in campaign contributions to elect legislative lapdogs, the pandemic has already opened the door to profiteering on an epic scale. And if the past is prologue, we ain’t seen nothin’ yet.

Moral Hazard

America’s billionaires grew their wealth by $282,000,000,000 in just 23 days during the lockdown. That’s $12,300,000,000 a day. Meanwhile, millions of Americans are out of work and struggling to pay the bills. This is a tale of two pandemics.

—Robert Reich Tweet, May 2, 2020

In a recent article entitled “How to think about moral hazard during a pandemic,” The Economist proffered this definition: “Moral hazard describes situations in which the costs of risky behavior are not entirely borne by those responsible for that behavior, so encouraging excessive risk-taking in the future.”. The moral dimension arises from the fact that moral hazard invariably involves money—money managers, money markets, and, above all, moneyed interests—and the greater the amounts the greater the hazard.  

If you’re thinking something along the lines of “No wonder economics is called the dismal science” you’re not alone. Think of the checks and balances that form the cornerstone of the U.S. Constitution.  It’s an idea that became a lofty principle aimed at safeguarding the separation of powers.  Now think about moral hazard.  In the absence of checks and balances and a separation of powers, what is to prevent a few uber-rich individuals from buying votes in Congress on everything from taxes, trade, and tariffs to health care and immigration?

It’s not rocket science. The answer is obvious: Moral hazard in a capitalist system dominated by a corporate elite arises out of political-economic power relationships that are fundamentally unbalanced and unchecked.  “Rarely,” says The Economist, “has the scope for moral hazard seemed as massive as now.”

As readers of a recent piece in Forbes magazine learned, the CARES Act provides a glaring example of just how massive the moral hazard is at this time in history.

A $1.7 million stimulus check?

While wealthy Americans are not eligible for the comparatively measly $1,200 stimulus checks that are now being disbursed to many Americans, they are on pace to do even better. 43,000 taxpayers, who earn more than $1 million annually, are each set to receive a $1.7 million windfall, on average, thanks to a provision buried in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

A headline in ProPublica provides another example:

The Bailout Is Working — for the Rich

The economy is in free fall but Wall Street is thriving, and stocks of big private equity firms are soaring dramatically higher. That tells you who investors think is the real beneficiary of the federal government’s massive rescue efforts.

In this trenchant piece, Pulitzer Prize-winning journalist Jesse Eisinger calls the federal government’s attempt to pull the economy back from the brink “both a spectacular success and a catastrophic failure.“  In early May, a time of “unfathomable pain across the country not seen since the Great Depression,” the stock market was buoyant.  “Junk bonds, historically dodgy during an economic swoon, have roared back,” Eisinger noted.

Shares of major private equity firms like the Apollo Group and  Blackstone soared.   

The reason: Asset holders like Apollo and Blackstone — disproportionately the wealthiest and most influential — have been insured by the world’s most powerful central bank. This largess is boundless and without conditions. “Even if a second wave of outbreaks were to occur,” JPMorgan economists wrote in a celebratory note on Friday, “the Fed has explicitly indicated that there is no dollar limit and no danger of running out of ammunition.”

Bottom line: “It’s a bailout of capital.” 

Capitalism: Cure or Curse?

In politics and the natural order, the key word is “balance”.  It’s also true of economics.  The Greeks understood the supreme value of balance in all things and gave it a name—the Golden Mean.  

There was arguably a time in American economic history when a proper balance was struck between the free market and state intervention.  The Great Depression was the occasion and the New Deal was the robust policy response that restarted a badly stalled economy and lifted the hopes of the huddled masses. 

That was then and this is now.  Then America had Franklyn Delano Roosevelt in the White House; now we have Donald Trump. Then the Republican Party nominated the moderate and decent Alf Landon as it’s presidential candidate.  Now Mitch McConnell is the grim face of Republicans in the Senate who only represents the corporate interests of an elite class of capitalist extremists and libertarian lunatics who conflate any state intervention aimed at protecting competition, consumers, and a balanced economy with socialism. Here, for example, is Leora Levy, a wealthy onetime commodity trader and Trump’s pick to be the next U.S. Ambassador to Chile, on Twitter: “AMERICA WILL NEVER BE A SOCIALIST COUNTRY!!!” she posted. “WE ARE BORN FREE AND WILL STAY FREE!!!” (@labbielady 2/5/19)

Today’s extreme capitalists (a.k.a. far-right conservatives) extol the virtues of deregulation and stigmatize any public-spending designed to help people who need help as “socialism” and a “giveaway” while insisting that billion-dollar bailouts for banks, massive tax cuts for the rich, subsidies for agro-industry, coal mining, and big oil are necessary for economic expansion and job creation.  

The Founders buying into the idea of a “commercial republic” is a mirror image of Adam in the book of Genesis taking a bite of the apple. The original sin that gave rise to the unbalanced, oligopolistic capitalism so evident in America today can be traced to the late 17th Century when John Locke (“the Father of Classical Liberalism”) set forth his seminal ideas on social contract theory, natural rights, and private property.

A century later, Adam Smith rhapsodized about the invisible hand of the marketplace in The Wealth of Nations, a work destined to become the holy gospel for the apostles of modern market economy—and for it’s apologists. What began as an economic theory has been perverted and turned into a secular religion—an extreme version of capitalism neither Locke nor Smith envisioned but Karl Marx predicted in his three-volume work, Das Kapital.    

Jump ahead to 1945, the end of a cataclysmic era bracketed by two world wars, the stock market crash, depression, and the Holocaust.  The turbulent interwar years produced two major totalitarian threats, one on the left and one on the right.  They also produced original thinkers like Karl Polanyi, author of The Great Transformation.

Polanyi lived in social-democratic “Red Vienna” during the turbulent 1920s and 1930s.  Nikil Saval writing in The Nation explains how Polyani at first embraced Marxism as “a hopeful counterpoint to the Dickensian poorhouse on one extreme and fascism on the other” and later not only broke with Marxists but also broke new ground as an economic historian. Polyani showed how the gold standard rendered the efficient and humane management of a market economy impossible and, at the same time.  “Under the gold standard,” he wrote, “. . . the leaders of the financial market [are] in the position to obstruct any domestic move in the economic sphere which [they happen] to dislike.” As Saval notes, 

For Polanyi, the problem with this social arrangement was not only that it impeded the democratic process but that is also allowed the interests of the market to assert their primacy over those of society.

The aforementioned article first appeared in December 2016.  That’s significant because the author did not have the kind of window on the cruel and corrupting side of capitalism the Covid-19 pandemic has given the world.  

Clearly Wall Street traders, bankers, and hedge-fund managers have no answers to the medical challenges this pandemic poses. What is equally clear that the elite business class is not to be trusted with answers to the economic challenges we face.  

Indeed, many highly influential business and banking elites back the deceitful, hate-mongering, name-calling narcissist in the White House. Skeptics are urged to read Evan Osnos’s trenchant “How Greenwich Republicans Learned to Love Trump” (The New Yorker, May 3, 2020):

The story of Trump’s rise is often told as a hostile takeover. In truth, it is something closer to a joint venture, in which members of America’s élite accepted the terms of Trumpism as the price of power.

Osnos, who grew up in Greenwich, notes that “the latest Forbes ranking of the world’s billionaires lists fifteen of them in the ‘Greater Greenwich Area,’ led by Ray Dalio, the founder of the hedge fund Bridgewater, who is worth an estimated eighteen billion dollars.” 

Nor did the rise of a politically engaged, jet-setting billionaire class happen overnight, Osnos argues.  In fact, “a generation of unwitting patrons paved the way” long before Trump stepped onto the political stage.

From Greenwich and places like it, they launched a set of financial, philanthropic, and political projects that have changed American ideas about government, taxes, and the legitimacy of the liberal state.

No wonder the government of the richest nation in the world was among the least well-prepared or –equipped to deal with a pandemic!  It’s not because market economies are inherently corrupt and chaotic or because free-enterprise is a bad idea in theory.  What Churchill said about democracy—that’s it’s the worst form of government, except for all the others—can also be said of capitalism. It’s the worst way to operate an economy, except for all the others.

Capitalism is inherently neither cure nor curse.  The problem is a state-sponsored, pseudo-capitalist ideology that bestows massive bailouts and tax benefits for the superrich.  A system that rewards greed and manic wealth accumulation at the expense of everything worth protecting and preserving in an otherwise decent society—even to the point of denying people a living wage or coronavirus victims access to affordable health care. 

The problem is not capitalism with a small “c” but Capitalism capitalized, the kind of extreme capitalism that seeks to kill competition rather than protect it, that rewards the use of junk bonds to finance hostile takeovers, and that turns the myth of the free market into a commodity to be sold to a public conditioned to believe that state regulation and intervention are thinly veiled “socialism”. 

As both history and the current Covid-19 pandemic amply demonstrate, an active state is both an economic and social necessity. Competition, not deregulation, is the key to a market economy that works for the many rather than the few. Experience in this unprecedented health crisis is conclusive:  Absent an impartial referee there is nothing to prevent a mythical free market from decaying into crony capitalism and causing irreparable damage to society, economy, and a badly battered political system.  The role of the state in normal times is to keep markets functional and fair; in a crisis, this economic principle becomes a moral imperative. 


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