Democratic politics has rarely done well at addressing existential-value conflicts or systemic risk. Now every democracy in the world is having to deal with both simultaneously.
Humans disagree profoundly about how to think about life in relation to eventual death. Thomas Hobbes treated a mutual right to self-preservation as a self-standing moral precept, which, safety-charged with a fear of death, can ground political order. But he also spent the second half of his masterpiece Leviathan (1651) concocting a new Christian theology because he worried that some people feared their eternal souls burning in Hell rather more than they did dying.
Politicians struggle with systemic risk because trying to reduce it usually involves taking concurrent actions in multiple spheres. Possible remedies often create too many political losers for democratic politics to absorb.
In the present crisis, disagreement about the weight to give economic risks in relation to otherwise avoidable deaths from Covid-19 is becoming a Hobbesian political problem. In the US, it is already palpably straining individual states’ authority to decide. Democratic politics cannot function if armed protesters turn up when representatives take decisions, as they did in the Michigan state legislature on 30 April. When lockdowns eventually end or loosen, the disagreement about relative risk will also impede the economic recovery if those who above all fear for their health stay at home.
Beyond the necessarily political choices to be made, the severity of the present systemic risks is a further burden. The interactive dynamics between debt and energy have long been central to these risks. In the 1970s, energy became more expensive, igniting inflation, while rising debt made viable both higher-cost production and consumption. For the past five years, low-interest debt has allowed so much oil to be produced that its cheapness for consumers has foiled central bankers’ efforts to encourage inflation in order to depreciate the value of the world’s still fast-growing debt.
Without driving up debt further, there could have been no economic response to the Covid-19 crisis. This borrowing has amplified the systemic risks in play because central banks have had to extend enormous support to sovereign debt markets and banks. Experience since 2008 also suggests that for Western democracies the ongoing risks created by this new debt will simply have to be accepted. After the 2008 crash, reducing budget deficits came at too high a political cost to repeat – austerity, the rise of populism – and outside Germany very little overall national debt reduction occurred.
In democratic politics, cutting debt requires tight bond market conditions, which means much higher interest rates, and there has been no such pressure for advanced economies since 2012.
Neither can we expect inflation to reduce the long-term systemic risks around debt. There will be inflationary pressures as national production replaces global supply chains in some sectors. But oil prices will remain low, consumer demand depressed, and, quite probably, many jobs lost in the service sector will not return.
Although more debt adds to the high risk of an eventual bond market collapse, governments cannot now reduce that risk. It is too late. Nothing they could plausibly do will make any meaningful difference before that time when bond market conditions substantially worsen. There is no basis on which to judge when that future will arrive, even though, as the first weeks of this crisis demonstrated, central banks can still fail at propping up financial markets. In the interim, governments will have to contain the deleterious fallout of running the world economy this way, when zero interest rates and quantitative easing seriously harm pension funds, distort capital allocation and, via asset price inflation, fuel wealth inequality.
The direct systemic risks around oil, by contrast, are short-term, too. Oil’s acute debt vulnerabilities have now spread from the United States to the Middle East. Saudi Arabia lost $24bn in foreign exchange reserves in March. Iraq has already asked the IMF if it can suspend its debt payments.
Without a rapid injection of demand for oil from restarting economies, US politicians must answer the politically charged question of what to do about the crisis in the shale oil industry, as production shuts down and insolvency for many companies beckons. It would require a considerable leap of faith to allow present market dynamics to work themselves out, so that the banks and other investors that have sunk credit into the sector take losses, and trust there will be few systemic consequences.
Caution would suggest that a world economy that has depended on debt-fuelled, largely unprofitable shale oil production for the best part of a decade cannot recover unless it still does so in three years’ time. We do not live in a world on the verge of a planned energy transition, but one where to dispense rapidly with shale oil, or disregard what is happening in the Middle East, would invite further economic disaster. To pretend otherwise, and wish away the scale of the energy revolution that eliminating oil requires and ignore how energy change is constrained by the laws of physics, is itself akin to a systemic political risk.
But energy denial, like its climate change counterpart, is part of the democratic political landscape. As politicians decide how to calibrate the conflicting economic and environmental risks over competing time horizons, the Hobbesian political problem of deep existential-value disagreement returns in a quite stark form. Deciding on the risks politicians must take will require painful truth-telling about the choices available.
This article appears in the 06 May 2020 issue of the New Statesman, Remaking Britain