Gerassimos Moschonas Professor of Comparative Politics in the Department of Political Science and History, Panteion University of Political and Social Sciences, Athens, Greece and, currently, a Visiting Professor at the Free University of Brussels (ULB)

PARADIGM SHIFTS: THE COVID-19 CRISIS IN THE LIGHT OF THE GREAT DEPRESSION AND THE 2008 FINANCIAL CRISIS^[1]

Major economic crises are perceived as cataclysmic events that bring about significant changes. It is not surprising, then, that in the current COVID-19 crisis important scholars, pundits and politicians have expressed the view that the ensuing ‘aftermath’ shall be different from the ‘collapsing past’. Everything –or a lot– is going to change.

This prevalent perception of economic crises (the crisis as a trigger of significant changes) has spawned from the Great Depression. The Great Crash did bring about radical changes: it had a strong impact on the relations between the state, markets and politics, and deeply influenced economic and political ideologies, leading to transformations whose effects can be traced in western societies at least until the 1970s.

However, this was hardly the case in the aftermath of the 2008 crisis (and its extension as a debt crisis in the European Union). In spite of the great expectations that the rampant capitalist model would be rectified, the economic and political consequences of the crisis were ‘surprisingly conservative’.[1] The post-crisis reforms were primarily ‘sectoral’, largely focused on the financial sector and aimed at shaping an improved, safer and less toxic version of the financial architecture of the pre-2007 period. The 2008 crisis –the most important one since the interwar crisis and the first major one of a new generation of crises– has demonstrated that huge crises might not turn out to be such determining game changers, as was the 1929 crisis.

The limited extent of the consequences of the 2008 crisis is quite surprising. The scale of the systemic threat and the reward of moral hazard -use of public funds, in the name of a broader public interest, to bail out the private players who caused great harm to the common good –would warrant more profound changes. What prevented such changes from happening? Why did the 1929 crisis mold a new era worldwide, while the 2008 crisis merely brought about hardly discernible changes?

My hypothesis is that the depth and length of the recession are the two most important factors that determine the extent of changes in the post-crisis period. The severity and length of the Great Depression contributed to the subsequent changes in the economic and political paradigm. Conversely, the effective containment of the recession shock after 2008 was instrumental in preserving the status quo, in spite of any resulting minor changes.

In this context, however, the response to the two economic crises by public authorities (central banks and governments) was crucial, inasmuch as not only did it have an impact on the duration and intensity of the recession dynamics but –ultimately– it also expanded (1929) or limited (2008) the space for ideological novelty which could be taken up by status quo opponents. Let us have a look at the facts and their logic.

Depth and length of the recession, and paradigm shift

The ‘good’ responses to the 1929 Depression came in rather late. They were not implemented until 1932 (Sweden) and 1933 (in the context of the New Deal in the USA) – and then, again, not consistently (new recession in the United States in 1937). There is a consensus among experts that the mistakes and shortfalls in monetary and fiscal policies in the early 1930s aggravated the effects of the depression and fuelled the escalation of the disaster. As Eichengreen and Temin eloquently pointed out, after 1929, ‘Central bankers continued to kick the world economy while it was down until it lost consciousness’.[2]

The huge economic and social cost of the interwar crisis, its great length, the development of a vicious circle of (currency, banking, stock exchange, political) sub-crises within the crisis, the absence of any visible way out from the crisis and the absolute need for ‘something to happen’, all helped alternative ideas and alternative policy proposals to emerge, mature and converge. However, policies require politics.[3] The numerous twists and turns of this long and extraordinary crisis combined to prompt both old and nascent players (leaders, political parties, heterodox economists, trade unions) to either press for big change or become themselves its actors. The depth and duration of the crisis bred a favourable setting for the emergence and consolidation of heretical views and unorthodox, old and new, players. The protraction of the crisis expanded the space for political struggle, ideological novelty and policy change.

In stark contrast, in the 2008 crisis, the much greater efficacy of monetary and fiscal interventions, with the exception of the handling of the European debt crisis, dampened the recession shock and facilitated a swifter return to recovery. Moreover, there were two other factors which helped moderate the economic and social cost of the crisis: the much more systematic –compared to the interwar period– bank bailouts (which protected the huge number of savers and the extremely sensitive to any downturn risk modern middle classes) and the presence of a strong welfare state. By reducing the depth, length and cost of the 2008 crisis, these factors moderated or released the pressure for major economic and political changes. There was no longer much room for heretical views and unorthodox players. Not surprisingly, there was profuse social and political frustration leading to the extensive electoral punishment of governments in office.[4] Social frustration and alternation in government, however, did not bring about any significant changes in economic philosophy and politics. There was no paradigm shift.

The post-2010 extremely problematic management of the debt crisis by the European Union confirms the hypothesis that the severity of the crisis is a factor of political renewal. The length and depth of the crisis in the southern European countries contributed to the development of alternative ideas and to the emergence of new political actors. In Greece, where the extent of the crisis fully matched the 1929 crisis, the emblematic case of SYRIZA shows how the protracted plummeting of the economy favours political change.

The response to a crisis is so important that it becomes –technically– an integral part of the dynamics of the crisis and a component of its very nature. In particular, it determines to a large extent the duration and depth of the recession dynamics. As a result, the difference in the length and depth of the two crises in one case expanded (1929) and in the other case restricted (2008) the marketplace of ideas and, hence, the space for ideological and policy novelty.

1929 or 2008? The COVID-19 crisis

The factors which heavily affected the dynamics of the 2008 crisis included: improved knowhow in addressing the crisis; better protection for the huge number of savers and the middle classes; the welfare state as stabilizer. These factors were not the product of conjuncture. They shall be present and active in subsequent crises. Moreover, they render the 2008 crisis distinct from all other major crises in the past and, from a cognitive perspective (in other words, regarding its usefulness in facilitating the understanding of the parameters of the crisis which is currently in progress), more important than the 1929 crisis. In this context, the predominant tendency to compare the COVID-19 crisis with the 1929 crisis, rather than the 2008 one, is quite surprising. In fact, it is this new era crisis –much more than the Great Depression– that would actually serve as a benchmark.

The management of the economic dimension of the COVID-19 crisis demonstrates the importance as a model of the 2008 crisis. In order to address the economic impact of the pandemic, state authorities are taking extremely bold steps and are adopting the 2008 crisis management model. In fact, their actions are even more daring than those seen in 2008. If central banks and governments manage to weather the storm with their unprecedented interventions, just as they did in 2008 (with their equally, at the time, ‘unprecedented interventions’[5]), then they will considerably restrict the potential for the development of alternative economic and political ideologies.

However, the key to understanding the long-term changes that the COVID-19 crisis will or will not bring is, as was the case with previous crises, the length and depth of the recession. The uncertainties surrounding health developments render the depth of the recession cycle unpredictable. Our premise, however, is that only the third of the scenarios envisaged by economists –the nightmarish scenario which speaks of a long and deep recession– would have substantial impact on the relations between the state and markets and on political ideologies. In that case, the already enhanced désir d’Etat (desire for more state) will become stronger and left-wing ideas will re-emerge. In all other scenarios, there is very little likelihood of a real paradigm shift. The fact that the outbreak of the current crisis was not caused by a plummeting economy or a toxic sector or institution of the economic system (and there are many such sectors) as was the case in 1929 and in 2008, renders any major change even less likely.

Though everything is possible, not everything is equally possible – this is what the preceding analysis argues. Major economic crises are no longer such big game changers as was the catastrophic crisis of 1929, even if this might still be possible under extreme circumstances. In all likelihood, emergency Keynesianism shall once again rescue – as it did in 2008 – economic (neo-)liberalism.

[1] This contribution is a short and adapted version of the paper: Gerassimos Moschonas, ‘The coronavirus crisis in the light of the past: the 1929 Crash, the 2008 crisis and their consequences in the relations between state and markets’, Dianeosis, June 2020 (in Greek). Available at:

https://www.dianeosis.org/wp-content/uploads/2020/06/moschonas-arthro-krisi-v5-1.pdf

[2] Kahler, Miles and Lake, David, 2013, ‘Introduction: Anatomy of Crisis: The Great Recession and Political Change’, in Kahler, Miles and Lake, David (eds), Politics in the New Hard Times, The Great Recession in comparative perspective. Ithaca and London: Cornell University Press, p. 23.

[3] Eichengreen, Barry and Temin, Peter, 1997, The Gold Standard and the Great Depression, National Bureau of Economic Research, Working Paper 6060, Cambridge, p. 2.

[4] Gourevitch, Peter, 1986, Politics in Hard Times. Comparative Responses to International Economic Crises. Ithaca, NY: Cornell University Press, p. 239.

[5] Chwieroth, Jeffrey and Walter, Andrew, 2010, ‘Financial crises and political turnover: a long run panoramic view’. Paper presented at the annual meeting of the International Political Economy Society, Harvard University. November 12-13, p. 3.

[6] Kahler, Miles, 2013, ‘Economic Crisis and Global Governance: The Stability of a Globalized World’, in Kahler, Miles and Lake, David (eds), Politics in the New Hard Times, The Great Recession in comparative perspective. Ithaca and London: Cornell University Press, p. 44.