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When State Intervention Saves “the Economy,” but Not You

China’s response to the pandemic has sharply contrasted with Trump’s, with a far stronger public health response in China but little aid for the poorest. Both countries’ responses to the crisis show that a strong state doesn’t stand in contradiction with neoliberalism — rather, it’s a key element of it.

Chinese commuters wear protective masks as they line up to catch a bus at the end of the workday during rush hour on May 18, 2020 in Beijing, China. Kevin Frayer / Getty

Common sense dictates that the global coronavirus crisis ought to be tackled by international collaboration. But in practice, the pandemic will be confronted by each nation-state independently, with no uniform economic response or common speed of recovery. While capitalism is dominated by neoliberal ideology, the decisions made by each government are heavily influenced by the particular power structures, political circumstances, and balance of class forces in each country — divergences likely to become even more pronounced after this crisis.

The most crucial differences are naturally those between the United States — still the hegemonic power — and China, the rising challenger for hegemony. The contrast between their governments’ responses casts light on the balance of power between central and local authorities and between the state and the market in both countries.

The unprecedented expansion of public spending in the United States has, indeed, spurred discussions about whether this crisis signals the “end of neoliberalism.” But contrasting the Chinese and US responses allows us to highlight the need to go beyond the false dichotomy between a strong interventionist state and neoliberalism. Rather, we should focus on how different power structures manifest concretely in the way each country has tackled the crisis so far. This contrast becomes even more relevant given the heightened political tensions between China and the United States, as Donald Trump and Joe Biden campaign over who can “deal” with the Chinese government better.

From the outset, it is worth noting that for China, 2020 is the final year of the 13th Five-Year Plan, and the Chinese government is keen to attain its goal of a “comprehensively prosperous society” (quanmian jiancheng xiaokang shehui). For the United States, 2020 is a general election year, and the federal administration is under pressure to achieve results quickly. These short-term concerns have played a vital role in shaping the two states’ responses.

Coronavirus broke out in China immediately before the Chinese Lunar New Year — a period typically accompanied by increased consumption. But in 2020, the entire economy suddenly froze as the coronavirus disrupted domestic and even global supply chains. One week after the lockdown of Wuhan, the US government announced a travel ban for people who had been in China two weeks prior their scheduled visit to the United States. Yet that ban was followed by a month during which the United States did next to nothing to prepare for the incoming crisis. Instead, in an attempt to pacify the stock market, Trump downplayed the danger that COVID-19 posed to the economy and the health of the American people.

Despite Trump’s reassurances, the public health emergency triggered a worldwide recession from which neither China nor the United States was spared. The unemployment rate escalated rapidly in both countries, reaching 6.2 percent in China on February 20 and 4.4 percent in the United States on March 20. More recently, new unemployment claims in the United States have skyrocketed beyond the 30 million mark — several times greater than the number filed during the 2007–9 financial crisis. A shock that began as a health emergency turned into a major economic and social crisis in both China and the United States.

Figure 1: Chinese urban surveyed unemployment rate, and US unemployment rate. Sources: US Bureau of Labor Statistics, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, and Wind.
Figure 2: US new Unemployment claims. Source: US Employment and Training Administration, Initial Claims, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/ICSA

But this is where the similarities ended. First, the Chinese state’s power structures enabled the government to intervene directly in the labor market. Crucially, China increased employment in state-owned enterprises (SOEs) and boosted public investment in infrastructure projects. Moreover, the coordination of provinces by the central government allowed the Chinese Communist Party (CCP) to tackle the public health care crisis with considerable effectiveness. At the same time, however, Chinese government policies focused mainly on long-term macroeconomic effects and generally ignored the provision of immediate relief to vulnerable groups of the population.

In contrast, the US government, acting in line with its neoliberal ideology, attempted to boost and defend employment indirectly. Liquidity was offered to corporations in the form of loans, while incentives were given to firms to maintain their workforce. The result was a dramatic failure — leading to an extraordinary escalation of unemployment. Furthermore, the greater independence of individual states relative to the federal government in the United States and the weakness of central coordination continued to create major difficulties in controlling the virus compared to China. It is notable, however, that the US administration has laid heavier emphasis on providing immediate relief to weaker social groups. The motive of the Trump administration was probably fighting the upcoming general election, but the contrast with China is still remarkable.

Central and Local Efforts

There is no doubt that Chinese state structures proved more efficient in dealing with the public health crisis. This is partly due to the absolute power guaranteed to the central government by the one-party system, which reduces frictions between central and local authorities.

The Chinese central government sets the policy goals and coordinates the activities of provincial governments responsible for planning and implementing concrete measures. The central coordination — in this case undertaken by the Working Group of Epidemic Control, led by Premier Li Keqiang — ensured that each province in mainland China was responsible for supporting the medical staff of at least one city in the Hubei province. The swift establishment of two 1,600-bed hospitals in Wuhan, constructed by a central SOE, stands as clear proof of the efficiency of these arrangements.

This stood in stark contrast to the United States, with its lack of central coordination, amplified both by party opposition and the typical contention between state and federal areas of responsibility. As recently as March 31, state governors reported that they were competing with other states to gain access to medical resources. Even after the secretary of health and human services, Alex Azar, was tasked with centrally distributing medical equipment, and a special team headed by the vice president was established, the distribution of both equipment and funds remained politically influenced and, in some cases, ad hoc. After several weeks of reusing old equipment, New York hospitals gained access to much-needed resources when President Trump heard “from friends of his in New York” about the problem. The conflict between federal and state-level authorities became progressively sharper as the President encouraged citizens to “LIBERATE” certain states, presumably by continuing the demonstrations that saw thousands of people asking for a termination of the lockdown. Indeed, twelve US states, such as Georgia, South Carolina, and Tennessee, have already ended their lockdowns. The inadequacy of Trump’s administration exacerbated the structural weaknesses of state power in dealing with the public health crisis.

State and Market

These differences of approach — and the relevant attitudes to the relations between state and market — are also manifest on the terrain of economic recovery.

In China, the state remains a vital participant in market processes as the owner of state-owned enterprises (SOEs) that are estimated to produce about 25 percent of GDP. The latest data (for 2017–2018) shows that SOEs provide about 13 percent of total urban employment, a figure that reaches 30 percent when public officials are included. In times of crisis, this allows the government to intervene directly in the economy via the state sector. Thus, on March 20, the State Council released “guidance” on how to stabilize employment, urging SOEs, public institutions, and the military to increase employment in 2020 and 2021, especially for college graduates. Several large central SOEs rapidly began to expand job opportunities for graduates and migrant workers.

At the same time, the Chinese government provided incentives to private enterprises to maintain their workforce. The same “guidance” proposed that small and medium enterprises (SMEs) hiring college students for more than a year would receive a one-off subsidy. For SMEs that do not lay off workers, or that lay off only very few, as well as for all enterprises in Hubei province, the subsidy could be 100 percent of the unemployment insurance paid by the companies and their employees in 2019 — accounting for 2 percent of overall salary expenses and 1 percent of salary income, respectively. The subsidy for others could be up to three months of the unemployment insurance that is supposed to be paid by enterprises.

Meanwhile, public investment in “new infrastructure” was deployed to boost employment and demand, aiming to accelerate the recovery and maintain GDP growth. Central government prioritized investment in industries with high employment-increasing potential, seeking new investment projects that facilitate innovations in key fields, and improving social development in economically weaker areas in the geographical middle and the west of the country. By 5 March, twenty-five out of thirty-one mainland provinces had proposed new infrastructure projects in their government reports. Priority was given to 5G base stations, artificial intelligence, big data centers, and quantum computing, with the development of 5G networks receiving the largest share of investments. Two domestic telecom giants, Unicom and China Telecom, announced their cooperation over the nationwide construction of 250,000 5G base stations by the end of the third quarter, in advance of their previous plans.

The contrast with the United States is sharp. There, employees of private businesses make up over 85 percent of the total workforce, while the number and size of “government corporations,” the closest US equivalent of Chinese SOEs, is too small to influence labor demand significantly. Given the lack of SOE “instruments” and the unwillingness to boost public investment to create new jobs, the US federal government attempted to mitigate the effects on unemployment indirectly via loans that either offer incentives to employers to maintain their workforce or come with conditionalities dictating where the funds could (or could not) be spent.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed into legislation on March 27. A large part of this $2 trillion stimulus package provided loans aiming to support businesses of all sizes as well as reduce the unemployment rate by appending covenants to some of these loans. It soon became clear that this indirect method of supporting employment would be deeply problematic. In response, the Federal Reserve announced on April 9 that it would take additional actions to provide up to $2.3 trillion in loans to businesses as well as state and local governments. The US Treasury would provide about $195 billion under the CARES Act, acting as credit protection for these loans.

The weaknesses of these massive liquidity injections were immediately clear. The lending program for big businesses contains no restrictions regarding stock buybacks, dividends, executive pay, or maintaining the workforce — thus allowing companies to tap into these funds to boost their stock value and pay out dividends to shareholders. The program for midsize and small companies comes with more restrictions as “borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act.” However, employees are not protected, as the Fed merely asks for “reasonable efforts to maintain payroll and retain workers.”

Last, small and medium businesses can apply for loans at the Small Business Association via the Paycheck Protection Program (PPP). These loans become grants if the funds are spent on payroll (at least 75 percent of the total), interest on mortgages, rent, and utilities. Yet businesses may opt to treat the funds as loans and indeed terminate some of their employees. More important, the funds from PPP were rapidly exhausted, and significant problems occurred in their disbursement even after recipients were officially approved. The method of disbursement was controversial, too, as banks have already made about $10 billion in processing fees.

There can be no doubt that the neoliberal, financialized structures of US capitalism contributed directly to the extraordinary explosion in unemployment as coronavirus hit. The system proved incapable of confronting both the public health emergency and the shock to wage labor and small and medium businesses.

Social Protection

Equally revealing, however, have been the differences in social protection between the two dominant states in the world market.

Chinese economic policies mainly addressed the macroeconomic aspects of coronavirus — that is, employment and growth. Key to this decision is that 2020 is the final year to achieve the government’s declared goal of “comprehensively prosperous society,” as well as being the final year of the 13th Five-Year Plan.

From the government’s perspective, there’s only one task left in achieving its goal — namely, lifting 5.51 million poor people in rural areas above the 2,300-yuan annual income threshold ($340 in 2010 constant prices). The coronavirus crisis has increased the difficulty and uncertainty of reaching that goal, with large numbers of migrant workers, farmers, and self-employed people likely to fall below that threshold. Hence the government’s concern to create new jobs via expanding public investment throughout the country.

But rather less impressive is China’s direct income support for the worst affected layers of workers and others. Measures were taken to ensure that enterprises continue to pay employees — they will receive their regular salary for at least one payment cycle. By the end of 2018, 97 percent of China’s population were covered by public health insurance as part of “five insurances and one fund” (wuxian yijin, including pension insurance, medical insurance, unemployment insurance, work injury insurance, maternity insurance, and housing provident fund). The expenses are paid partially by employers and partially by employees themselves, deducted directly from their salaries. In the case of COVID-19, all medical bills are covered by the public sector for people who are insured, with two-thirds paid by the public health insurance and the remaining one-third through the fiscal budget.

But there was no central decision to distribute monetary support to stricken families and to those facing destitution from the collapse of economic activity. For instance, in Henan, the third most populous province in central China, there was only a meager, one-off allowance of 2,000 yuan ($282) to registered poor employees as a special subsidy for the pandemic. Other provinces continued to rely on consumption coupons, but these could only be used for specific goods and services, such as tourism, and not for groceries or daily necessities. Only the coupons supplied by Wuhan administration are valid for basic necessities, but these are offered on a first-come-first-served basis through an online payment system. People without smartphones as well the self-employed were excluded. Deprivation and harsh conditions for the poor escalated.

This contrasted with the US administration’s approach. With a possible eye to consolidating Trump’s base in view of November’s general election, the administration has focused on providing immediate relief via one-off payments to households and boosting unemployment benefits.

Thus, the CARES Act stipulates that citizens earning under $75,000 would receive up to $1,200 each (plus $500 for each child), while unemployment benefits were extended by thirteen weeks and increased by $600 on top of state benefits. Eligibility requirements for unemployment benefits were relaxed, with self-employed citizens able to claim benefits for the first time. Additionally, evictions have been prohibited for four months, and foreclosures on all federally backed mortgage loans have been suspended for sixty days. Moreover, part of the $100 billion aimed at supporting hospitals is supposed to cover the medical bills of uninsured citizens for problems related to COVID-19. Prior to the CARES Act, the “Families First Coronavirus Response Act” introduced paid sick and emergency family leave — guaranteeing the position of the employee after this leave ended — and provided universal free COVID-19 testing.

While the immediate relief that some of these measures would provide is undeniable, the motivations behind the government’s choice remain controversial. The Trump administration has opted for short-term interventions providing immediate support, without increasing public investment or providing universal health care coverage, apparently with a view to firming up its own electoral base.

It is also important to stress that despite these measures, vulnerable groups in the United States remain heavily exposed. Thus, banks are able to seize a part of the one-off payments as debt payment. Moreover, medically insured citizens with plans that include co-pay or deductible clauses as well as citizens with basic Medicare plans would need to pay sums varying from $1,400 to $9,000 in case of hospitalization. Last but not least, the overwhelming number of new unemployment claims has caused the Department of Labor to delay processing of applications — thus bringing the unemployed to the brink of destitution.

What’s Next

Confronting the coronavirus crisis has catapulted the nation-state to the forefront — making short shrift of the ideological arguments regarding the putative weakness of the state in the face of markets and private capital. However, despite bold interventions by governments in several big economies, including the United States, the UK, Germany, and others, it is wildly premature to talk of a “return to Keynesianism” or “the death knell of neoliberalism.” Authoritarianism and a strong state are not contradictory to neoliberalism but important elements of it.

As Rodrik has suggested, governments are not acting in new ways but rather as “exaggerated versions of themselves.” The public health crisis is an occasion for governments to pursue and deepen their own previous agendas; the likely outcome is that existing economic trends and political conflicts will intensify.

There is evidence that this is already happening. The contest between the United States and China appears to have deepened, as both political parties of government in the United States make a point of arguing about who can deal more efficiently with the “Chinese threat,” while attempting to shift blame for the public health crisis onto the Chinese government. At the same time, Japan and the United States are looking to re-domesticate industries currently at China or move them to other countries in Southeast Asia.

The different ways in which the United States and China have so far confronted the crisis are revealing of how the contest might develop. The Chinese state has demonstrated its capacity to confront the public health crisis in a centralized way, while taking decisive steps to boost economic activity by relying on public ownership of resources and public investment in key industries. At the same time, it has shown itself much less concerned about directly supporting household income and relieving destitution. The US state, in sharp contrast, has shown major structural weaknesses in dealing with the public health crisis, while its neoliberal ideology has prevented it from confronting the economic crisis effectively, thus resulting in exploding unemployment. At the same time, the US state has more strongly supported the poor and the destitute, despite the misery of neoliberalism.

These differences will be of profound importance in the coming period, since there is little doubt that overcoming the coronavirus crisis will depend on the state and the public sector around the world. Neoliberal shibboleths have already been challenged, and their failure is particularly clear in the United States, also affecting its hegemonic contest with China. The gradual withering away of neoliberalism and the changing balance in the hegemonic contest between the United States and China will also change the terms of the debate for alternative economic and social policies across the world.

End Mark

About the Author

Thanos Moraitis is a PhD Candidate in the department of Economics at UMass, Amherst. He is a member of the EReNSEP research project “The Political Economy of the COVID-19 Crisis.”

Yuning Shi is a PhD candidate in the Department of Economics at SOAS, University of London. She is a member of the EReNSEP research project “The Political Economy of the COVID-19 Crisis.”

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