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26 August 2020updated 22 Apr 2021 3:39pm

The world to come: The imminent shocks

As Shi Zhengli, a Chinese virologist known as “the bat woman of Wuhan”, has warned, Covid-19 is merely one of many lethal challenges. 

By Adam Tooze

A few years ago, a team of analysts at the Bank of England began thinking about the Anthropocene. They worried that we might be approaching the moment at which humanity’s impact on the environment would blow back on our control of the economy. They had a specific scenario in mind. A disastrous natural shock would force politicians to react precipitously.

After years in which warnings had been ignored, financial markets would, quite reasonably, decide to ignore the risk. When the shock came, the result would be a massive adjustment in prices. Entire sectors of the economy would be revalued. Pyramids of credit would implode and the central bank would be forced to come to the rescue.

To avoid this happening, the central bank economists did not advocate a radical environmental policy. Nor did they consider what central banks could do to facilitate the financing of public investment to mitigate the risks. Their vision was more limited. Through stress-testing and disclosure standards they would make the financial system itself more resilient. If investors took account of the risks ahead of time, even in the event of a disaster, prices would undergo a far less dramatic reset.

But the central bank analysts were thinking about the wrong crisis: they were focused on climate change, not a pandemic.

We know that Covid-19 was not an act of God. Nor was it bred in a lab as conspiracy theorists allege. It emerged out of the environmental pressure cooker of central China. Since the 1980s epidemiologists have been warning that zoonoses are an increasing threat. Before Covid-19 there was Mers, Sars, and foot and mouth. Those had been contained, or they had ravished societies too poor to matter to Western central banks. Unlike climate scientists – who since the 1970s had been involved in a dialogue with economists – infectious disease specialists talked instead to aid workers and bio-security experts. Central bankers engaging with the issues of pandemics were few and far between.

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What the Bank of England analysts got spectacularly right was the way that the shock would work. It was not the effects of climate change per se that would disrupt financial markets, it was the political action to address those effects at the expense of business that would do the damage. Likewise, it is not Covid-19’s death rate that impacts the economy, but our reaction to it – both our individual effort to protect ourselves and the government decision to order a lockdown. But whereas, thinking about climate change, the central bankers imagined that we were working on a timeline of 12 years, 12 days is a long time in Covid-19 world.

In the case of climate change, the relationship between economic activity and environmental change is causal and direct. Burning fuel is essential for economic activity and it also generates warming. This is both the central dilemma and the secret hope of central bankers who champion green policies, such as Mark Carney, the former governor of the Bank of England. Once capital markets price in the associated costs and risks, they become a hugely powerful force for change. Investors would of their own accord drive out coal and opt for cleaner gas and renewables. At the start of 2020, this was the basis on which mainstream climate policy was proceeding. Government action would shepherd investment and research and development towards technical solutions. Carbon pricing would do the rest.

Covid-19 presents more urgent challenges. Vaccine development is key, but that does not address the origin of zoonoses. To limit the risks of viruses developing would require comprehensive regulation of land use in the frontier zones of capitalism – an unlikely prospect at best. As Shi Zhengli, a Chinese virologist known as “the bat woman of Wuhan”, has warned, Covid-19 is merely the tip of the iceberg. We should expect more lethal challenges to come. To prepare for this, the “climate finance” formula of resilience and pricing transparency will not be enough.

Being a gym-honed stunt double may make you somewhat better able to withstand a car crash, but if everyone who got into a car had to meet that exacting standard our lives would be hell. To handle the risks and the costs of the Anthropocene, the state’s full capacity for intervention and the security of its balance sheet are indispensable.

To their credit, faced with Covid-19, the Bank of England and the Treasury have delivered. Like their counterparts all over the world they have engaged in levels of spending and monetary financing that would have made the advocates of a Green New Deal blush. The challenge will be to embrace this new reality, not to anathematise it, not to dismiss it as aberrant and not to turn it into a battlefield of arguments over austerity.

Adam Tooze is the author of “Crashed: How a Decade of Financial Crises Changed the World” (Penguin)


Read the rest of the “world to come” series here

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This article appears in the 26 Aug 2020 issue of the New Statesman, The world after Covid