Jeff Rubin is the former chief economist and chief strategist at CIBC World Markets. His latest book is The Expendables: How the Middle Class Got Screwed by Globalization, from which this essay has been adapted.
You could see the pandemic coming. It wasn’t as though there was no warning. The virus emerged in China but arrived in North America before we were ready, and it landed with the destructive force of a tsunami. Record-setting consumer spending hit a brick wall as shoppers stayed home. New car sales went over a cliff. And following just like clockwork, unemployment went through the roof as shops and factories shut down. An unprecedented bull run on the stock market quickly turned into panic selling, and the Dow cratered, seemingly overnight. The S&P dropped over 20 per cent into bear market territory, and the result was a global recession that seemed to come out of nowhere. More than 116,000 people died in the United States.
Elvis Presley appeared on The Ed Sullivan Show that year, the Frisbee was invented, Ford introduced the Edsel with great fanfare, Canada unveiled the Avro Arrow jet fighter, the USSR launched Sputnik, and Dwight Eisenhower was sworn in as president of the United States. It was 1957.
By the way, the world recovered almost immediately from the Asian flu, as that pandemic was known. After a staggering 10-per-cent decline in gross domestic product (GDP) in the first quarter of 1958, by the third quarter growth had spiked to 10 per cent – a 20-percentage-point swing. So, no big deal, right? The economy got the flu, it took some time off, and it went right back to churning out jobs and profits. In fact, when economists and historians talk about the “Eisenhower Recession,” they seldom even mention the Asian flu as a cause.
It would seem to follow, then, that we have a model to help us predict what the recovery from COVID-19 will look like. Just look at 1958, and then wait for the jobs and the markets to return to form and the good times to resume – not quite the catastrophe we feared.
But while consumer spending, consistent GDP growth and a record-breaking bull run on the stock market may make it feel as though we’ve wandered into the past, that is a dangerous illusion, especially if you’re a member of the rapidly shrinking middle class. Because consumer spending, GDP growth and stocks have almost nothing to do with your economic health.
In fact, those things measure only rich people’s economic health. And of late, these folk haven’t been getting rich by making more Edsels or engineering more Arrows. Those cars and planes belong to a different world, a world in which factory jobs paid a middle-class wage and products on the shelves came from factories down the road. A world in which local labour was so essential that their jobs were secure. And a world where taxes were so progressive that the rich actually paid their freight. That was a long time ago.
Looking backward in politics is usually considered poor form. It’s much safer to be considered progressive and look ahead. But the fact is that the late 1950s and early 1960s may have marked the greatest economic equality in history. And that economic health was like immunological health. The economy got better quickly because it was already healthy.
But two other things happened in 1957 that give us some sense of why the recovery from the COVID-19 recession might be a lot harder than shaking off the Asian flu.
First, the Treaty of Rome was signed in March of that year, establishing the precursor of the European Union (the European Economic Community). Though the tight political and economic integration of a “United States of Europe” was still just a dream, the Treaty of Rome was an important step in creating a common market. Up until that point, each country had the ability to impose tariffs to protect key industries and the associated jobs. From that moment on, France, West Germany, Belgium, the Netherlands and Luxembourg would give up that ability in exchange for the right to sell in each other’s markets without facing tariffs. The hope behind lifting tariffs was that in a world of economic expansion, workers and industries wouldn’t need protection: There would be so much wealth to go around that everyone would be better off.
In other words, it was a form of free trade and a precursor of what was to follow. Free trade was an idea that was sweeping the world. The General Agreement on Tariffs and Trade (GATT), a treaty designed to increase international trade by removing protections for industry and labour, had been signed into law in 1947, and went through several rounds of updates, each slashing more tariffs. In 1956, the so-called Geneva Round (because it was negotiated in Geneva) eliminated US$2.5-billion of protections between 26 countries. So, globalization was swirling in the air as the Asian flu was making its way across the Pacific.
The Asian flu could have cratered the global economy, but it didn’t. By coincidence, there was another near miss that year that most people didn’t even notice at the time. In 1986, it was revealed that a U.S. Air Force B-36 bomber had accidentally dropped a hydrogen bomb on New Mexico in May, 1957. It was, it turned out, the most powerful nuclear bomb ever built. At ten megatons, it was bigger than anything in today’s nuclear arsenal, and about 625 times more powerful than the bomb that was dropped on Hiroshima. Though the 42,000-pound bomb did not detonate, it left a crater 3½ metres deep and more than seven metres wide. If it had gone off, it would have vaporized the air base where the bomber was scheduled to land.
An investigation revealed that a safety mechanism had been removed.
You would think the Air Force would have been a little more careful with warheads by 1957. They’d already jettisoned one bomb off the coast of British Columbia, and another in the St. Lawrence River, in addition to crashes of nuclear bombers in the Atlantic and in the mountains of New Mexico. Another two nuclear bombs fell out of the sky in 1961 over North Carolina. Removing protections when so much is at stake, even to increase efficiency, can be more than dangerous. It can be apocalyptic.
None of those bombs detonated, but the slow-fuse-burn of GATT and globalization has left an industrial landscape every bit as cratered as the destruction left by a nuclear warhead. If a worker from 1957 could see Detroit today, what would he think? The shuttered factories across North America, the boarded-up main streets, the empty union halls – the physical toll of globalization would be inescapable.
Which brings us back to the flu.
Early on in the COVID-19 crisis, the scale of the required government response was often compared to that needed during the Second World War. It was time for our ingenuity and industrial might to be put to good use and mobilized, much in the way it had been a couple of generations ago. The United States built more than 2,700 Liberty-class freighters between 1941 and 1945. That’s two 14,000-tonne ships every three days (or more than 39 million tonnes of ship). Surely, the world’s biggest economy could make some N95 masks.
Well, not really. On March 19, 2020, Taiwan announced it could spare 100,000 masks a week for the United States (their sole military ally, which has been protecting them from Communist China for generations at immense cost). That’s out of a weekly output of seven million masks. So the Taiwanese were willing to set aside 1.4 per cent of their mask capacity for their much larger ally.
The EU also adopted a policy of “every man for himself.” In March, Brussels banned the export of medical equipment, even to other European countries, before eventually relenting in the face of pleas from member countries such as Italy that were hit particularly hard by the pandemic. Exasperated Serbian President Aleksandar Vucic stood in front of television cameras and said: “European solidarity doesn’t exist. That was a fairy tale on paper.” Shortly thereafter, Serbia shut its borders. The only foreigners allowed to enter the country? Chinese doctors. Mr. Vucic called China “the only ones who can help.”
He did have a point (though Russia also sent several transport planes full of equipment and medical personnel). Before the crisis broke, half of the world’s masks were made in China. Since then, the country has increased production twelve-fold. By the end of March, factories in China were pumping out 115 million a day.
While the Chinese government is busy controlling the world supply of crucial commodities, Canadian diplomats are reduced to sending out messages on social media, hoping that Chinese alumni of Canadian universities will be willing to help find a few boxes of gloves and masks. Hardly the commanding heights of the global economy that globalism promised.
What the COVID-19 crisis has shown us is that questions of economic theory aren’t just about economic health. They’re about health. Period. Because it’s not just masks and protective gowns the Chinese government effectively control. For years, lax regulatory control and low wages have made China a major source for the majority of component chemicals that go into generic drugs – that is, nearly all of the drugs Canadians and Americans are prescribed.
In a world frequently described as “globalized,” that’s not supposed to matter. The magic of just-in-time delivery, combined with efficient labour markets and economies of scale, is supposed to provide us with whatever we need, in abundance and at the best prices. That may work for flip-flops and lawn furniture (or whatever globally sourced product you buy at Walmart), but, as it turns out, it doesn’t work in an emergency. It doesn’t work when you absolutely need it to work.
It shouldn’t have taken a pandemic to teach us this lesson. The evidence has been piling up around us for years. But tragedy has a way of focusing one’s attention. Global deregulation was always a bad idea. It was always set up to benefit a small number of people at immense cost to everyone else. Exactly what that cost is becomes clear when we compare today’s economy with 1957′s.
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