socialist-economics

WORLD ECONOMY, TRADE AND FINANCE

Branko Milanovic Interview on "Capitalism Alone"

The eeyore Marxist! Always worth reading

By Branko Milanovic - 11 January 2021

This is the text of the interview given to Sega Newspaper at the occasion of the publication of "Capitalism, Alone" in Bulgarian. The text in Bulgarian is here.

1. How do you think the fact that you grew up in Yugoslavia and received your doctorate in the Belgrade University has affected your worldview and your work?

I think it affected me mostly through Yugoslavia non-aligned foreign policy. Among other things that were ideologically motivated and were taught in school was also the emphasis on non-alignment, namely on anti-imperialism and anti-hegemony (which was a shorthand for the Soviet Union). This opened up our minds and interest towards non-European parts of the world. It might not have produced the same effect on everyone, but even in my teenage years I was very political and very "Tiermondiste". I often regret that the same attitude is not, as far as I know, present now in the schools in Serbia and in the rest of the former Yugoslavia. Eurocentrism, in the form of the European Union, is dominant now and is stifling other interests.

2. You are most famous for your work on income inequality. How does "Capitalism, Alone" – with its broader scope – fit into it?

You are right that "Capitalism, Alone" is much broader and more political. It is a combination of my long-standing interest and work on income inequality with my also longer-term (but less visible) interest in Marxism, the meaning of communism, and global issues (as I partly explained in the previous question). So for me it was nothing new, it was just a natural evolution. "Capitalism, Alone" was very easy to write. But for many who did not know much about my interest in broader political and social issues it came as a novelty.

Let me also say that any important work on inequality has to go together with social and political analysis. Piketty I think illustrates that very well.

3. One of the main points of your book is that the global domination of capitalism has led us to a new "schism" – between the liberal capitalism of the West and the political capitalism, best exemplified by China. What sets them apart?

In very general terms, history set them apart. This is one of the reasons why in my book I do not simply contrast US and China; many other books do just that. I try, in the first part of the chapter on political capitalism and China (which may also be one of the most important parts of the book) to explain the genesis of China's political capitalism by defining what I think was the global historical role of communism.

Or more abstractly, what I think sets liberal and political capitalisms apart is the fact that human history is too rich and complicated to accommodate only one political system. We may all, as the dominion of capitalism shows, understand the language of profit and financial gain, but I do not think that we would ever have exactly the same attitude towards political power.

4. Where do you think the Balkans are situated in the global economy and in the light of the division between the liberal and the political capitalism? Is the region doomed to be always chasing behind and always late?

The Balkans were historically a periphery. They were that during the Roman Empire, Byzantium, the Ottoman Empire, the Industrial Revolution and today. I do not think that this is likely to change. But there are many peripheries in the world, and often, by looking at the center from a different angle, the periphery can illuminate and see things that the center overlooks. The Balkans are at the intersection of Western Europe, Mediterranean civilization, and the Muslim world. These are significant advantages, if one knows how to use them well. Also, being a periphery does not mean that one cannot become rich. Surely, Australia and New Zealand are historically and today, the periphery too, but they are rich.

There are some Balkan countries that seem today to be rather close to political capitalism. I have in mind Turkey, Montenegro, and Serbia. But note that I do not establish a hierarchy such as believing that political capitalism is inferior to liberal capitalism in all domains. There are circumstances where it can do better than liberal capitalism.

5. Your book "Capitalism, Alone" came out just as the world was about to learn about the coronavirus. After all that followed, if the book was about to be released tomorrow, would you add or change something to it?

No, would not except possibly in one area. I was quite critical about the feasibility of Universal Basic Income in rich countries. I still believe the arguments I gave in "Capitalism, Alone". But I do recognize that in emergency conditions like the ones we experience today, having a stable guaranteed income for the entire population (even if it is rather low) would be helpful and would dispense with the need to make constant political decisions about new wage-support packages. The automatism of the Universal Basic Income would be an advantage.

6. In your book you assert that the so-called "carrying capacity of the earth" is a fallacy. Do you really think that there is no danger of the modern capitalism leading us to a massive planetary ecologic crisis?

I am what is called a "techno-optimist". I believe that with a right combination of incentives and "punishments", subsidies and taxes, we can curb pollution and CO2 emissions and change the dominant technology to be much more ecologically friendly. So I do not think that anything other than the usual economic tools is needed. The question is whether there would be sufficient political support to enact such policies.

7. In one of your latest articles you called Trump "the Ultimate Triumph of Neoliberalism". How could you summarize your assessment of his presidency?

If you define" neoliberalism" to be a ideology where commercialization of all activities, including politics, is legitimate, then Trump is a perfect and full embodiment of that view. He regards political office as any other job where the job-holder's main interest (and duty) is to maximize own income. Indeed, he behaved as the President of the United States as he behaved as the head of the Trump conglomerate. He made money. He treated citizens as his employees. It is in that sense that he is the triumph of neoliberalism.

I think that many people who fail to see that aspect are bound to misunderstand his presidency by using terms that do not apply to it ("fascist", "populist" etc.)

8. You expressed your mistrust with the so called "return to normalcy" in the USA, popular now that the Trump era is coming to an end. Why?

I think that Biden might wish to return to "normalcy", understood as a Clinton-Obama type of government. But one has to realize that such presidencies, especially under Clinton, were synonymous with the roll-back of the welfare state, decline of the middle class, and rising economic and political power of the top 1 percent. This in turn would bring back the very conditions that have given rise to Trump. A much cleaner break with the past is, I think, necessary. But the issue is whether the new administration will be willing to do it and perhaps even more whether the Congress would let it do it. American presidents, looked on from abroad, seem like elected kings because their power in some foreign policy aspects is indeed great. But in domestic policies they are much more constrained. So I am not very optimistic.

John Case
Harpers Ferry, WV

ASSA 2021 – part one: the mainstream dilemma

Saturday, January 9, 2021

Mike Roberts: ASSA 2021 – part one: the mainstream dilemma

-- The annual conference of the American Economic Association (ASSA 2021) was unusual this year, for obvious reasons. Instead of 13,000 academic and professional economists descending on an American city to present and discuss hundreds of submitted papers over a few days, because of the COVID-19 pandemic, ASSA 2021 was virtual. Despite that, there were a host of papers presented, along with plenaries of the great and good in mainstream economics and economic policy.

Every year, there is an issue that tends to dominate among the mainstream presentations. In previous years that has been the economics of rising inequality and last year it was the economics of climate change. Not surprisingly, this year it was the economic impact of COVID-19 and what policies to deal with the pandemic slump.

There were two large panel presentations on the economic impact. The first was on what was happening to the US economy and where it was going. Former central bank governor of India, Raghuram Rajan, now back at his neoclassical base at the University of Chicago, raised the risk of rising corporate debt turning into 'corporate distress'. He reckoned that the current monetary and fiscal support offered to small and large corporations "will have to end eventually" and "at that point, the true extent of the distress will emerge". Rajan reckoned it was time for 'targeted support' to reduce debt accumulation and so avoid future bad debts on the banking system – a banker's policy as recently advocated by the so-called Group of Thirty bankers.

Carmen Reinhart, recently appointed as chief economist of the World Bank andjoint author with Kenneth Rogoff of the huge (and controversial) book on the history of public debt, also echoed Rajan's worry about rising debt, not only among corporates in the US but particularly in the so-called emerging economies. In the Great Recession, the US dollar appreciated sharply against other currencies as it was seen as a 'safe haven' for cash and assets. But in this COVID-19 pandemic slump, the dollar has depreciated significantly because it seems investors fear that US fiscal spending is too large while dollar interest rates have plunged. But what happens to the ability of emerging economies to service their dollar debt, if the dollar should start to rise again?

Lawrence Summers, the guru of secular stagnation, reckoned that the pandemic slump has only increased the length of stagnation in advanced economies. Interest rates had dropped into negative territory and fiscal stimulus had been raised to new heights. But that would not end stagnation unless "there are structural policies adopted". He did not spell out what these were, but instead argued against untargeted fiscal spending like the proposed $2000 per person check to all Americans, which he saw as just adding to the incomes of those who had actually increased their incomes during the COVID. Summers has been attacked for his rejection of the $2000 payment from the left. But what it shows is that the mainstream is increasingly worried that fiscal and monetary stimulus is creating uncontrolled debt levels (despite low interest costs) that will have to be reined it at some point – and also that Federal Reserve largesse has mostly ended up in boosting the stock market and the better-off.

Liberal left economist and 'Nobel' laureate, Joseph Stiglitz called for a resetting of the US economy when the pandemic ends. He wanted to reverse the tax cuts to the corporations and better off implemented by Trump; increase environmental regulations; break the power of the tech monopolies and make productive public investments. What is the likelihood of any of this under the Biden administration over the next four years?

In contrast, right-wing orthodox John Taylor of Stanford University wanted the Fed to stop its emergency COVID bond purchases and other credit facilities as soon as possible, and for the new Biden administration to be cautious on more public spending. You see, for Taylor, the market system was innovative and works. During COVID, internet businesses and purchases had rocketed and this was the way forward, replacing the old ways with the new. But that needs not more regulation, but less regulation of businesses like Uber or Amazon.

Perhaps the most interesting paper in this session was that by Janice Eberly of NorthWestern University who showed that during the COVID slump, companies had saved huge amounts of capital spending on offices, travel and other physical equipment as staff worked from home (at their own expense). This provided an opportunity for business to boost the productivity of the workforce without extra capital spending and less labour – a way out for capitalism after the pandemic?

The second big session was on the world economy. By any measure, the panellists agreed that the COVID-19 slump was the worst in the history of capitalism. But even worse, it could take some time for economies to return to their pre-pandemic levels, if ever at all. On current projections, the OECD reckons that won't happen until 2022 and even then, world GDP will behind the pre-pandemic trajectory.

The impact on world trade has been even more damaging. According to the World Trade Organisation, world trade growth will never return to its previous trajectory.

And as it was argued in the US economic session, global debt levels are at record levels.

Dale Jorgenson of Harvard University is an expert on global productivity growthand its constituents. In his presentation, he reckoned that the differentials of growth in output and output per worker between the G7 economies and the 'emerging economies' of China and India would be resumed. "Growth in the advanced economies will recover from the financial and economic crisis of the past decade, but a longer-term trend toward slower economic growth will be re-established." Interestingly, he argued that the consensus view that China's economic growth will slow because its working-age population is falling may not be right, if China can raise the quality of its labour force through education and extend the working age. That could deliver an annual growth rate closer to 6% than the 4-5% forecast by many.

The other half of the Rogoff-Reinhart history of debt team, Kenneth Rogoff again presented his current view that the level of global debt is near a tipping point. Yes, interest rates are very low making debt servicing sustainable. But economic growth is also low and if interest costs (r) start to exceed growth (g), then a debt crisis could ensue. So the problem of fiscal sustainability has not gone away, as many argue. Of course, Rogoff only talks about public sector debt (graph), when the problem of record high corporate debt is much more worrying for the sustainability of future economic growth in capitalist economies.

Joseph Stiglitz's answer to a post-pandemic global debt crisis was to cancel the debts of the poorest countries. This should be done by "creating an international framework facilitating this in an orderly way". What chance of this being agreed and implemented by the IMF and World Bank, let alone all the private creditors like the banks and hedge funds?

My overall impression from these panels is that the mainstream is fairly pessimistic about a sufficient economic recovery from the pandemic, both in the US and globally. But the great and good are torn between the obvious requirement to maintain monetary and fiscal stimulus to avoid a meltdown in the world economy and financial assets; and the impending need to end that stimulus to avoid unsustainable debt levels and a new financial crisis. It's a dilemma for capitalist economics.

That dilemma also led to some papers by mainstream economists looking for ways to forecast future financial crashes. One paper reminded us that during the depth of Great Recession, the Queen of England visited the London School of Economics. As she was shown graphs emphasising the scale of imbalances in the financial system, she asked a simple question: "Why didn't anybody notice?" It took several months before she got an official reply from the economists. They blamed the lack of foresight of the crisis on the "psychology of denial". There was a "failure to foresee the timing, extent and severity of the crisis and to head it off." The causes of the Great Recession Now in this paper, the authors attempt to deal with this lack of foresight with machine learning. Using these modern techniques, they reckon that they can now predict systemic financial crises 12 quarters ahead. AnsweringTheQueen_MachineLearningAn_preview They go further in suggesting that the empirical work can offer 'precious hints' on why there are regular and recurring financial crises in modern economies – although I could not see what they were.

In another paper, the authors looked at five large financial crises over the last 200 years of capitalism to see what policies were most effective in recovering from crises.TwoHundredYearsOfRareDisasters_Fin_powerpoint They found that crises had "persistent effects both on financial markets and on economic activity". Surprise! However, they also found that since the end of the dollar-gold standard "downturns in economic activity following a crisis in the financial center continue to be quite protracted, the effects on financial markets are far less persistent." In other words, monetary injections by central banks under floating fiat currencies can preserve the value of financial assets but not help productive assets. Just as we have seen during the COVID slump.

The other worry about the impact of COVID for the mainstream was the possible collapse of trade and 'global value chains'. One paper found clearly that international trade wars and reducing the optimum distribution of international suppliers for political reasons was damaging. CuttingGlobalValueChainsToSafeguard_preview (1) It would reduce US GDP by 1.6% "but barely change U.S. exposure to a foreign shock".

The impact of COVID-19 was not the only issue that concentrated the minds of the mainstream. The economics of climate change was not ignored. Yet another paper showed that mainstream economics market solutions to global warming were failing. Carbon pricing was not working. Perhaps it is time to phase out mainstream economics itself. One paper raised the possibility that artificial intelligence could replace economists soon and do all the calculations that humans do now. WillArtificialIntelligenceReplaceCom_powerpoint

The next post will review the presentations by the radical wing of economics at ASSA 2021.

John Case
Harpers Ferry, WV

Mike Roberts: ASSA 2021: part two – the radical answers

Mike Roberts: ASSA 2021: part two – the radical answers

Mike Roberts summary of the ASSA URPE (Union of Radical Political Economists( sessions, part 2. Interesting to compare Roberts summaries with those of Equitable Growth published earlier. Different topics, but good example of distinctions between Marxist and social-democratic approaches to similar challenges.

At the annual conference of the American Economics Association (ASSA), there are sessions hosted by the Union for Radical Political Economics (URPE) for Marxist and other heterodox economists to present papers.

At this year's ASSA 2021, many of the URPE sessions were concerned with the economic impact of COVID-19 and climate change, as did the mainstream sessions, but, of course, from a different perspective. But before I look at those sessions, let me start with the annual David Gordon lecture presented by a different radical economist each year.

This year it was Michael Hudson who gave the lecture. Hudson is a longstanding radical economist with a wide reputation. He considers himself a classical' economist. His theme for the lecture was Has Finance Capitalism Destroyed Industrial Capitalism? Hudson argued that capitalism started as a progressive force in developing the productive forces because it was industrial capitalism. But since the 1980s, 'financial capitalism' had superseded industrial capitalism. And this was really a return to feudalism where the surplus in an economy was extracted by landlords (rent) and financiers (interest and capital gains), not by exploitation of labour power (profits).

Feudalism had originally been critiqued by the great classical economists like Adam Smith and David Ricardo who reckoned that the landlords and financiers held back the productivity of labour by reducing the surplus going to the industrial capitalists. Hudson argued that Marx also supported industrial capitalism as progressive, being he was "the last of the great classical economists."

Hudson argued that Marx had a vision that capitalism will eventually create the objective conditions for a transition to socialism. Instead, in the last 50 years finance capital has blocked that vision with a form of 'neo-feudalism' represented by monopolies extracting 'rents' and bankers extracting interest and capital gains. And now the main enemy of workers was not the capitalist owners of industrial companies, but rentier capitalists who exploit us through mortgages, loan rates, housing rents etc. And now it was rising debt that was the cause of capitalist crises and not the falling rate of profit of productive capital. This was where David Harvey and Hyman Minsky had taken us forward from Marx.

I disagree. This classic financialisation' thesis by Hudson has many holes, in my opinion. First, modern capitalism can hardly be described as 'neo-feudalism' because feudalism was never a mode of production based on monopoly rents or usury. Under feudalism, the surplus created by the serfs and peasants was appropriated by landed aristocracy directly from the produce of the land. Commercial and financial activity was an adjunct, not the dominant activity of feudalism.

Yes, the classical economists opposed the landlords and monopolies and supported industrial capitalism, but the whole point of the Marxist critique was to reveal the new form of exploitation under the capitalist mode of production, namely the exploitation of labour power for profit by capitalists (industrial capitalists). Indeed, Marx's Capital has a subtitle: A critique of political economy; and back in 1842, Engels wrote a piece entitled An outline of a critique of political economy. Both attacked the position of classical political economy because it backed markets and the exploitation of workers for profit in industry.

At no time did Marx or Engels suggest that 'industrial capitalism' could move smoothly to socialism without first ending the contradiction between labour and capital through class struggle. The idea of a seamless progression to socialism was that of the later revisionists like Eduard Bernstein. Yet Hudson seemed to suggest that the gains that workers made in public services, wages and welfare in the 'golden age' after WW2 were made possible because it was in the interests of the 'progressive' industrial capitalists. Tell that to the workers who had to fight hard for these gains! These gains were only possible because the industrial capitalists were forced to concede them by labour action; and they were able to do so only because profitability of capital was relatively high. But when profitability started to fall in the 1970s, ushering in the era of 'neo-liberalism', that was when there was a reversal of those gains and the relative rise of financial capital.

Indeed, the idea that we can divide capitalism into progressive industrial capitalism and reactionary monopoly financial capitalism is not only not the Marxist view, it is also empirically invalid. There is a very high integration between financial and industrial functions in modern capitalist companies – they are not separate. And most important, the industrial surplus value-creating function is still the largest section of capital by any measure.

Josh Mason from John Jay College was the discussant on the Hudson's lecture and he made some telling points. He queried Hudson's claim that industrial capitalists supported better public services because it raised the quality of the labour force. Mason argued that industrial capitalists' main aim is always to lower wage costs and, for them, public services are a cost not a saving. In the neo-liberal period, industry supported austerity, crushed trade unions and demanded public spending cuts just as much as bankers. And monopolies are found in industrial sectors just as much as in finance. Moreover, is Jeff Bezos just a rent extractor? Surely Amazon exploits workers for profit in its distribution and web services like an industrial capitalist, not like a 'neo-feudal' financier?

For me, the Hudson 'financialisation' thesis not only weakens and distorts Marx's critique of capitalism by ditching his law of value for post-Keynesian monopoly rent extraction theory. It is also empirically incorrect. And it leaves the door open for a reformist policy: that if we regulate or control the finance sector and monopolies and return to 'competitive industrial capitalism' (something that never really existed), then we can gradually move onto socialism.

But let's move on here too. There were some important papers on China in the URPE sessions. Minqi Li of the University of Utah made a compelling empirical case that China was not an imperialist country in Marxist terms. Li argued that, although China had developed an exploitative relationship with South Asia, Africa, and other raw material exporters, China continued to transfer a greater amount of surplus value to the core countries in the capitalist world system than it receives from the periphery. Just handful of countries are rentier imperialist economies getting super profits from working people in global south and China is not one of them.

China has a net stock of financial investment of around $2trn, but this is mainly FX reserves held in US T-bonds ($3.5trn). Gross FDI stock is $1.7trn, but only a tiny share is invested in Africa or Lat Am. It's mostly in tax havens! So 90% has not been invested for imperial super-profits. Indeed, the profitability of China's FDI is lower than profitability for foreigners on inward investment into China ie China's net investment income from abroad is negative.

Zhonglin Li and David Kotz reach a similar conclusion in their paper. IsChinaImperialist_EconomyStateAnd_preview (1) China is ruled by a Communist Party that came to power through a socialist revolution. China still has a significant sector of large state-owned enterprises and the party and state exercise considerable control over the economy. China's role in other parts of the world does not fit the Marxist concept of imperialism. China does not operate a free market economy, as the CP is still directing investment and employment to a great degree.

Li and Kotz argued that the pro-market faction has not triumphed in China. Indeed, this is also the conclusion of another paper by Isabelle Weber of UMA. HowChinaEscapedShockTherapy_TheMar_preview (2) She reckoned the direction of 'more market' was dominant among Chinese reformers very early in the reform process in the 1980s, but the question of how to introduce market mechanisms into China's command economy remained highly contested and is still unresolved.

Two other Chinese scholars provided further empirical support for the view that China is not imperialist. UnderstandingChina'sNew"DualCirc_preview Using the world input-output database, Su from Nanking University and Liang from UMA reckon China transfers up to 10% of its value added through trade to the US and other imperialist economies. Indeed, there is an asymmetrical trade relationship with the US, so that if the US and China were to completely halt and transfer their bilateral merchandise trade to elsewhere, the Chinese economy would lose 2.5 percentage points in its growth rate and over ten million jobs, while the United States would gain 1.3 percentage points in growth and some 700 thousand jobs. That is why President Xi is looking to adopt a 'dual circulation' strategy of switching more to the domestic market.

All these studies confirm the empirical work that G Carchedi and I first presented to the Historical Materialism conference in 2019. China is not an imperialist country in the Marxist definition. But two questions on China were still unanswered for me. All the contributors reckoned that China was a capitalist state in some form, if not imperialist. In which case 1) how did this capitalist economy perform so unprecedently well during the neo-liberal period when the imperialist economies and other peripheral capitalist economies did so poorly?; and 2) if China is capitalist and yet so huge, will it eventually become imperialist? But that's for another day.

There were also several good papers on the impact of COVID and the economics of climate change. Ron Baiman of Benedictine University highlighted the huge loss in Arctic ice in the recent period that had now become a tipping point in its impact on global warming. InSupportOfARenewableEnergyAndMat_powerpoint (1) Stopping emissions rising was not enough. We need to reduce the existing carbon stock. If we could reduce the stock already in Arctic, we could give the planet an extra 17 years to turn things round. It was utopian to solve the crises by looking to achieve zero emissions alone. He reckoned that there were technical solutions that could lower stock levels including Arctic Sea-Ice climate triage and carbon cycle climate restoration "that would rapidly move us toward avoiding increasingly catastrophic climate impacts." Strangely, he did not mention to need to phase out fossil fuel production as well.

Robert Williams of Guilford College gave us chapter and version on how the COVID pandemic would increase the already high levels of inequality of wealth and income in the major capitalist economies. Even before the COVID, Federal Reserve policies "have lavished hundreds of billions of dollars annually on the rich. Despite an unemployment rate trumpeted by many for its 50-year low, these structural forces and policies have left the vast majority of US households were wholly unprepared for sudden onslaught of the coronavirus."

Chyrs Esseau, Tomar Galaragga and Sherif Khalifa in their papers showed how previous epidemics have affected income inequality. They found that an epidemic/pandemic shock increased income inequality by 4.6 points (gini coefficient). "We conclude that the epidemics and pandemics of the early 21st century contributed to the stagnation, and even worsening, of the otherwise slightly decreasing trends in global income inequality."

Sergio Camara from the Autonomous Metropolitan University of Mexico provided an overall Marxian framework for the COVID pandemic, breaking the crisis down into its cyclical, structural and systemic parts. Cyclically, the world economy was already "on the verge of falling into a new cyclical crisis because of the imbalances accumulated after the 2007-2009 cyclical crisis." Structurally, the major capitalist economies were not equipped to handle the pandemic because they had run down the health, medical and public services needed to cope. And systemically, the pandemic had shown that capitalism's drive for profit over need leads to recurring crises in humanity, the climate and nature.

Finally, there was a session on 'post-capitalist futures' which, I think, exposed how market economies cannot cope with pandemics and reinforced the need for democratic socialist planning of economies. Robin Hahnel and Mitchell Szczepanczyk presented the results of their innovative attempt to model democratic annual planning in a post-capitalist economy. ComputerSimulationExperimentsOfParti_powerpoint Through iterative computer simulations of the planning process from local to central level and back, using a new computer coding technique, they found that it would not take a long at all to reach a feasible and practical annual plan to meet social needs with available resources which involved the participation and democratic decisions of people.

This was another compelling refutation of the critique made by neoclassical pro-market theorists like Von Mises and Hayek; and Keynesian pro-market social democrats like Alec Nove who argued that socialist planning was infeasible because there were just too many calculations to make. Only the invisible hand of the market and market pricing could do this. This paper showed that this was not true, especially now with the advances in computer programming. Democratic socialist planning can work and can replace market chaos.

John Case
Harpers Ferry, WV

The economy President-elect Biden is inheriting: 26.8 million workers—15.8% of the workforce—are being directly hurt by the coronavirus crisis

EPI: Heidi Shierholz: The economy President-elect Biden is inheriting: 26.8 million workers—15.8% of the workforce—are being directly hurt by the coronavirus crisis

39Blog | Economic Policy Instituteby Heidi Shierholz

We now have a full year of jobs data for 2020. This is an important moment to take stock of where things stand in the labor market.

The official unemployment rate was 6.7% in December, and the official number of unemployed workers was 10.7 million, according to the Bureau of Labor Statistics (BLS). These official numbers are a vast undercount of the number of workers being harmed by the weak labor market, however. In fact, 26.8 million workers—15.8% of the workforce—are either unemployed, otherwise out of work due to the pandemic, or employed but experiencing a drop in hours and pay. Here are the missing factors:

Some workers are being misclassified as "employed, not at work" instead of unemployed. BLS has discussed at length that there have been many workers who have been misclassified as "employed, not at work" during this pandemic who should be classified as "temporarily unemployed." In December, there were 1.0 million such workers, a substantial increase from November. (Wonky aside: Some of these workers may not have had the option of being classified as "temporarily unemployed," meaning they weren't technically misclassified, but all of them were out of work because of the virus.) Accounting for these workers, the unemployment rate would be 7.3%.
The number of officially unemployed is undercounted, even in normal times (and is probably worse now). Rigorous research that addresses issues like the fact that survey nonresponse is nonrandom—and that missing individuals are more likely than the general population to be unemployed—find that the official unemployment rate was understating the unemployment rate by 1.5 percentage points at the start of 2020. Accounting for that undercount yields 2.7 million unemployed workers who are misclassified as not in the labor force. This is conservative, given that there is good evidencethat this problem is likely substantially worse in the coronavirus era. (Another wonky aside: this research also finds that the official labor force participation rate was understating labor force participation by 1.9 percentage points at the start of 2020, or by 4.8 million workers.)
Some workers who are out of work as a result of the virus are being counted as having dropped out of the labor force instead of as unemployed. In order for a person without a job to be counted as unemployed, they must be available to work and actively seeking work. However, during the COVID-19 crisis, many people who are out of work as a result of the crisis do not meet those criteria. For example, many workers are out of work because of care responsibilities as a result of COVID-19 (e.g., a young child's school being remote, or an elderly parent's day care closing). These workers would not be counted as officially unemployed but are nevertheless out of work because of the coronavirus shock. To calculate how many there are, I estimate what the labor force level would be if the labor force participation rate had not dropped since February—the month before the pandemic hit the U.S. labor market—by multiplying the February labor force participation rate by the December population level. I then subtract this "counterfactual" labor force from the actual labor force. This yields an additional 4.9 million people out of the labor force as a result of the crisis.
Millions of employed workers have seen a drop in hours and pay because of the pandemic. BLS reports that 7.5 million people who were working in December had been unable to work at some point in the last four weeks because their employer closed or lost business due to the coronavirus pandemic, and they did not receive pay for the hours they didn't work. This is a substantial increase from November. These workers have clearly been directly harmed by the coronavirus downturn.

Adding up all but the last quantity above, that is 10.7 million + 1.0 million + 2.7 million + 4.9 million = 19.3 million workers who are either unemployed or otherwise out of the labor force as a result of the virus. Accounting for these workers, the unemployment rate would be 11.3%. Also adding in the 7.5 million who are employed but have seen a drop in hours and pay because of the pandemic brings the number of workers directly harmed in December by the coronavirus downturn to 26.8 million. That is 15.8% of the workforce.

Finally, even the 26.8 million is an undercount. For one, it doesn't count those who lost a job or hours earlier in the pandemic but are back to work now. The cumulative impact would be much higher. But perhaps more importantly, the 26.8 million is a drastic undercount because it ignores the fact that even workers who have remained employed and have not seen a cut in hours and pay are being hurt by the weak labor market. How? Essentially the only source of power nonunionized workers have vis-à-vis their employers is the implicit threat that they could quit their job and take another job elsewhere. Case in point: One of the most common ways nonunionized workers get a wage increase is by getting another job offer for higher pay—they either accept the new job, or their current employer gives them a raise in response to their outside offer. When job openings are scarce, as they are now, workers' leverage dissolves. Employers simply don't have to pay as well when they know workers don't have as many outside options.

All this means that stimulating the economy to create jobs is crucial—both to the 26.8 million workers who are being directly harmed by the downturn because they are either out of work or have had their hours and pay cut, and to the millions more who saw their bargaining power disappear as the recession took hold. It is even more urgent considering the country is now facing a resurgent virus and renewed job losses.

A further reason more relief is so important is that this crisis is greatly exacerbating racial inequality. Due to the impact of historic and current systemic racism, Blackand Latinx workers have seen more job loss in this pandemic and have less wealth to fall back on. To get the economy back on track in a reasonable timeframe, policymakers should pass an additional $2.1 trillion in fiscal support (the $2.1 trillion is calculated by subtracting the $900 billion December COVID-19 relief bill from the total $3 trillion in fiscal support that is actually needed). In particular, it is crucial that Congress provide substantial aid to state and local governments. Without this aid, austerity by state and local governments will result in cuts to essential public services and the loss of millions of jobs in both the public and private sector.

Senate Republicans forced the December bill to be far too small. Fortunately, with their new majority in the Senate given the results of the Georgia runoffs, Democrats will now be able to get more relief measures through reconciliation. Top priorities must be aid to state and local governments and further extensions of unemployment insurance. There is no time to lose.

John Case
Harpers Ferry, WV