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Mostrando postagens com marcador The Economist. Mostrar todas as postagens
Mostrando postagens com marcador The Economist. Mostrar todas as postagens

segunda-feira, 18 de maio de 2020

Why the pandemic could eventually lower inequality - The Economist

Free exchangeWhy the pandemic could eventually lower inequality

History suggests it could precipitate shifts towards a more equal income distribution

The Economist, May 16, 2020
For america’s poor, the covid-19 pandemic has delivered a swift and brutal reversal of fortune. At the start of the year unemployment was plumbing new lows. Years of wage growth for low-income workers had healed some of the scars left by the global financial crisis. Already by 2016, the most recent year for which figures are available, the economic expansion had produced a smaller rise in American income inequality, after taxes and transfers, than any expansion since the early 1980s. Between 2016 and 2019 the weekly earnings of low- and middle-income workers grew at an annual average pace of 3.8%. Since covid-19 struck, however, a host of economic statistics—and legions of pundits—have pointed to a resurgence in inequality. Yet if history is a guide, the pandemic could eventually render the distribution of income more egalitarian.
There are many reasons why the well-heeled might suffer less in the pandemic. Much of the plunge in asset prices that occurred in March has since been retraced. In places like New York City and Los Angeles, covid-19 seems to have hit poorer neighbourhoods harder. Low-wage earners are often less able to work from home or maintain social distancing. Interruptions to schooling widen the gaps in achievement between children from richer backgrounds and those from poorer families.
Meanwhile, workers on the lower rungs of the income ladder have borne the brunt of job losses. America’s unemployment rate rose by roughly ten percentage points, to 14.7%, in April—the highest since the Depression. The jobless rate for workers with a college education went up by nearly six percentage points, to 8.4%; that for workers without a high-school diploma leapt by just over 14 percentage points, to 21.2%. A new paper published by the Becker Friedman Institute at the University of Chicago reinforces the point. Between February and April, find its authors, employment among workers in the top fifth of the income distribution dropped by 9%. In the bottom fifth, by contrast, it plunged by 35%.
Were the crisis of unemployment to end as swiftly as it began, the effects of these uneven job losses on inequality would be limited, and fleeting. Many jobless workers are earning more in unemployment benefits than they did on the job, thanks to a top-up of $600 per week enacted by Congress in March. Of the more than 20m Americans who were out of work in April, 78% were reported to be temporarily laid off. But the danger is that temporary job losses become permanent. The authors of the Becker Friedman paper calculate that active employment—or the number of workers counted on payrolls—declined by 14% between February and April. About 40% of that fall occurred at firms that had ceased operations, at least temporarily. Not all will reopen. A new working paper by Jose Maria Barrero of Instituto Tecnológico Autónomo de México, Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago is similarly gloomy, concluding that 42% of pandemic-related job losses will be permanent. Meanwhile, the crush of claimants has overwhelmed some state governments and slowed the flow of unemployment aid. Top-up benefits are due to expire in July, when millions will still be jobless.
The most vulnerable workers are therefore likely to be squeezed hard by the recession. But if history is a guide, those at the top of the income distribution could yet face a reckoning. Disruptive global events have often precipitated shifts towards a more equal distribution of income and wealth. In his influential book, “Capital in the Twenty-First Century”, Thomas Piketty points out that high levels of inequality in the late 19th and early 20th centuries were reduced by the calamitous events of the period from 1914 to 1945. In that time the share of income earned by America’s top 1%, for instance, dropped from 19% to 14%. The combination of depression, war, inflation and taxes compressed incomes and laid waste to vast fortunes. Walter Scheidel, a historian, goes further still in his book on long-run inequality, “The Great Leveller”. Since antiquity, he argues, only four forces have ever managed to reduce inequality in a sustained way: war, revolution, state failure and pandemic. (The troubles often coincide: a pandemic contributed to the failure of the Roman empire; another coincided with the end of the first world war.)

Past crises are a far cry from today’s difficulties. The Black Death compressed income gaps by dramatically reducing the ratio of workers to arable land. Even in the worst possible case, covid-19 will kill far fewer than the 30-60% of Europeans felled by bubonic plague. Stockmarkets could plunge again, but it is very unlikely that they will match the collapse of nearly 90% that took place between 1929 and 1932. Yet some comparisons can still be made. The debts racked up by governments during this pandemic will in some cases reach heights last seen during the world wars. When governments eventually balance the books—and especially if they reduce debt burdens via taxation, financial repression or debt restructuring—the wealthy could find themselves footing the bill.

Time for a redeal

Furthermore, the crisis could have indirect effects that influence the trajectory of inequality. In a critique of Mr Piketty’s arguments published in 2017 Marshall Steinbaum, now of the University of Utah, argued that the wars and the Depression of the 20th century mainly led to greater egalitarianism by discrediting ruling elites and the regressive policies that had enabled the rises in inequality in the first place. That created space for social democracy to bloom. Inequality fell not only because of higher taxes but also because of extensions to the welfare state.
History need not repeat itself. Governments and economic systems of all kinds have struggled to manage the pandemic effectively and equitably. But it does not take much imagination to see that if politicians allow the costs of the pandemic to be borne unequally they could sow the seeds of a transformative populist backlash. They would do well to heed the lessons of the past. 
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sexta-feira, 15 de maio de 2020

Has covid-19 killed globalisation? - The Economist

Globalisation unwound
Has covid-19 killed globalisation?

The flow of people, trade and capital will be slowed

The Economist, Leader May 14, 2020 edition
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For our coronavirus tracker and more coverage, see our hub
Even before the pandemic, globalisation was in trouble. The open system of trade that had dominated the world economy for decades had been damaged by the financial crash and the Sino-American trade war. Now it is reeling from its third body-blow in a dozen years as lockdowns have sealed borders and disrupted commerce (see Briefing). The number of passengers at Heathrow has dropped by 97% year-on-year; Mexican car exports fell by 90% in April; 21% of transpacific container-sailings in May have been cancelled. As economies reopen, activity will recover, but don’t expect a quick return to a carefree world of unfettered movement and free trade. The pandemic will politicise travel and migration and entrench a bias towards self-reliance. This inward-looking lurch will enfeeble the recovery, leave the economy vulnerable and spread geopolitical instability.
The world has had several epochs of integration, but the trading system that emerged in the 1990s went further than ever before. China became the world’s factory and borders opened to people, goods, capital and information (see Chaguan). After Lehman Brothers collapsed in 2008 most banks and some multinational firms pulled back. Trade and foreign investment stagnated relative to gdp, a process this newspaper later called slowbalisation. Then came President Donald Trump’s trade wars, which mixed worries about blue-collar jobs and China’s autocratic capitalism with a broader agenda of chauvinism and contempt for alliances. At the moment when the virus first started to spread in Wuhan last year, America’s tariff rate on imports was back to its highest level since 1993 and both America and China had begun to decouple their technology industries.
Since January a new wave of disruption has spread westward from Asia. Factory, shop and office closures have caused demand to tumble and prevented suppliers from reaching customers. The damage is not universal. Food is still getting through, Apple insists it can still make iPhones and China’s exports have held up so far, buoyed by sales of medical gear. But the overall effect is savage. World goods trade may shrink by 10-30% this year. In the first ten days of May exports from South Korea, a trade powerhouse, fell by 46% year-on-year, probably the worst decline since records began in 1967.
The underlying anarchy of global governance is being exposed. France and Britain have squabbled over quarantine rules, China is threatening Australia with punitive tariffs for demanding an investigation into the virus’s origins and the White House remains on the warpath about trade. Despite some instances of co-operation during the pandemic, such as the Federal Reserve’s loans to other central banks, America has been reluctant to act as the world’s leader. Chaos and division at home have damaged its prestige. China’s secrecy and bullying have confirmed that it is unwilling—and unfit—to pick up the mantle. Around the world, public opinion is shifting away from globalisation. People have been disturbed to find that their health depends on a brawl to import protective equipment and on the migrant workers who work in care homes and harvest crops.
This is just the start. Although the flow of information is largely free outside China, the movement of people, goods and capital is not. Consider people first. The Trump administration is proposing to curtail immigration further, arguing that jobs should go to Americans instead. Other countries are likely to follow. Travel is restricted, limiting the scope to find work, inspect plants and drum up orders. Some 90% of people live in countries with largely closed borders. Many governments will open up only to countries with similar health protocols: one such “travel bubble” is mooted to include Australia and New Zealand and, perhaps, Taiwan and Singapore (see article). The industry is signalling that the disruption to travel will be lasting. Airbus has cut production by a third and Emirates, a symbol of globalisation, expects no recovery until 2022.
Trade will suffer as countries abandon the idea that firms and goods are treated equally regardless of where they come from. Governments and central banks are asking taxpayers to underwrite national firms through their stimulus packages, creating a huge and ongoing incentive to favour them. And the push to bring supply chains back home in the name of resilience is accelerating. On May 12th Narendra Modi, India’s prime minister, told the nation that a new era of economic self-reliance has begun. Japan’s covid-19 stimulus includes subsidies for firms that repatriate factories; European Union officials talk of “strategic autonomy” and are creating a fund to buy stakes in firms. America is urging Intel to build plants at home. Digital trade is thriving but its scale is still modest. The sales abroad of Amazon, Apple, Facebook and Microsoft are equivalent to just 1.3% of world exports.
The flow of capital is also suffering, as long-term investment sinks. Chinese venture-capital investment in America dropped to $400m in the first quarter of this year, 60% below its level two years ago. Multinational firms may cut their cross-border investment by a third this year. America has just instructed its main federal pension fund to stop buying Chinese shares, and so far this year countries representing 59% of world gdp have tightened their rules on foreign investment. As governments try to pay down their new debts by taxing firms and investors, some countries may be tempted to further restrict the flow of capital across borders.

It’s lonely out there

Don’t be fooled that a trading system with an unstable web of national controls will be more humane or safer. Poorer countries will find it harder to catch up and, in the rich world, life will be more expensive and less free. The way to make supply chains more resilient is not to domesticate them, which concentrates risk and forfeits economies of scale, but to diversify them. Moreover, a fractured world will make solving global problems harder, including finding a vaccine and securing an economic recovery.
Tragically, this logic is no longer fashionable. Those three body-blows have so wounded the open system of trade that the powerful arguments in its favour are being neglected. Wave goodbye to the greatest era of globalisation—and worry about what is going to take its place.
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This article appeared in the Leaders section of the print edition under the headline "Goodbye globalisation"

quinta-feira, 16 de abril de 2020

Pandemic geopolitics: Is China winning? - The Economist (April 16, 2020

Pandemic geopolitics
Is China winning?

The geopolitical consequences of covid-19 will be subtle, but unfortunate

The Economist, April 16, 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For our coronavirus tracker and more coverage, see our hub
This year started horribly for China. When a respiratory virus spread in Wuhan, Communist Party officials’ instinct was to hush it up. Some predicted that this might be China’s “Chernobyl”—a reference to how the Kremlin’s lies over a nuclear accident hastened the collapse of the Soviet Union. They were wrong. After its initial bungling, China’s ruling party swiftly imposed a quarantine of breathtaking scope and severity. The lockdown seems to have worked. The number of newly reported cases of covid-19 has slowed to a trickle. Factories in China are reopening. Researchers there are rushing candidate vaccines into trials (see Briefing). Meanwhile, the official death toll has been far exceeded by Britain, France, Spain, Italy and America.
China hails this as a triumph. A vast propaganda campaign explains that China brought its epidemic under control thanks to strong one-party rule. The country is now showing its benevolence, it says, by supplying the world with medical kit, including nearly 4bn masks between March 1st and April 4th (see article). Its sacrifices bought time for the rest of the world to prepare. If some Western democracies squandered it, that shows how their system of government is inferior to China’s own.
Some, including nervous foreign-policy watchers in the West, have concluded that China will be the winner from the covid catastrophe. They warn that the pandemic will be remembered not only as a human disaster, but also as a geopolitical turning-point away from America.
That view has taken root partly by default. President Donald Trump seems to have no interest in leading the global response to the virus. Previous American presidents led campaigns against hiv/aids and Ebola. Mr Trump has vowed to defund the World Health Organisation (who) for its alleged pro-China bias (see article). With the man in the White House claiming “absolute power” but saying “I don’t take responsibility at all”, China has a chance to enhance its sway.
Even so, it may not succeed. For one thing, there is no way to know whether China’s record in dealing with covid-19 is as impressive as it claims—let alone as good as the records of competent democracies such as South Korea or Taiwan. Outsiders cannot check if China’s secretive officials have been candid about the number of coronavirus cases and deaths. An authoritarian regime can tell factories to start up, but it cannot force consumers to buy their products (see article). For as long as the pandemic rages, it is too soon to know whether people will end up crediting China for suppressing the disease or blaming it for suppressing the doctors in Wuhan who first raised the alarm.
Another obstacle is that China’s propaganda is often crass and unpleasant. China’s mouthpieces do not merely praise their own leaders; some also gloat over America’s dysfunction or promote wild conspiracy theories about the virus being an American bioweapon. For some days Africans in Guangzhou were being evicted en masse from their homes, barred from hotels and then harassed for sleeping in the streets, apparently because local officials feared they might be infected. Their plight has generated angry headlines and diplomatic rebukes all over Africa.
And rich countries are suspicious of China’s motives. Margrethe Vestager, the eu’s competition chief, urges governments to buy stakes in strategic firms to stop China from taking advantage of market turmoil to snap them up cheaply. More broadly, the pandemic has fed arguments that countries should not rely on China for crucial goods and services, from ventilators to 5g networks. The World Trade Organisation expects global merchandise trade to shrink by 13-32% in the short run. If this turns into a long-term retreat from globalisation—which was already a worry before covid-19—it will harm China as much as anywhere.
More fundamental than whether other countries are willing to see China supplant America is whether it intends to. Certainly, China is not about to attempt to reproduce America’s strengths: a vast web of alliances and legions of private actors with global soft power, from Google and Netflix to Harvard and the Gates Foundation. It shows no sign of wanting to take on the sort of leadership that means it will be sucked into crises all across the planet, as America has been since the second world war.
A test of China’s ambitions will be how it acts in the race for a vaccine. Should it get there first, success could be used as a national triumph and a platform for global co-operation. Another test is debt relief for poor countries. On April 15th the g20, including China, agreed to let indebted nations suspend debt payments to its members for eight months. In the past China has haggled over debt behind closed doors and bilaterally, dragon to mouse, to extract political concessions. If the g20’s decision means the government in Beijing is now willing to co-ordinate with other creditors and be more generous, that would be a sign it is ready to spend money to acquire a new role.
Perhaps, though, China is less interested in running the world than in ensuring that other powers cannot or dare not attempt to thwart it. It aims to chip away at the dollar’s status as a reserve currency (see article). And it is working hard to place its diplomats in influential jobs in multilateral bodies, so that they will be in a position to shape the global rules, over human rights, say, or internet governance. One reason Mr Trump’s broadside against the who is bad for America is that it makes China appear more worthy of such positions.
China’s rulers combine vast ambitions with a caution born from the huge task they have in governing a country of 1.4bn people. They do not need to create a new rules-based international order from scratch. They might prefer to keep pushing on the wobbly pillars of the order built by America after the second world war, so that a rising China is not constrained.
That is not a comforting prospect. The best way to deal with the pandemic and its economic consequences is globally. So, too, problems like organised crime and climate change. The 1920s showed what happens when great powers turn selfish and rush to take advantage of the troubles of others. The covid-19 outbreak has so far sparked as much jostling for advantage as far-sighted magnanimity. Mr Trump bears a lot of blame for that. For China to reinforce such bleak visions of superpower behaviour would be not a triumph but a tragedy. 
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This article appeared in the Leaders section of the print edition under the headline "Is China winning?"

quinta-feira, 26 de março de 2020

Aumento o peso do Estado nas economias - The Economist

Building up the pillars of state
Rich countries try radical economic policies to counter Covid-19

History suggests that the effects will be permanent

The Economist, March 26, 2020
Editor’s note: The Economist is making some of its most important coverage of the Covid-19 pandemic freely available to readers of  The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
“The government intervention is not a government takeover,” the American president argued. “Its purpose is not to weaken the free market. It is to preserve the free market.” The imf pointed to the “unprecedented policy actions undertaken by central banks and governments worldwide”. The economic response to the financial meltdown of 2007-09 was big enough. But in answer to the Covid-19 pandemic policymakers are launching even bigger, more radical interventions. Putting the economy on a wartime footing is supposed to be temporary. A look at 500 years of governmental power, however, suggests another outcome: the state is likely to play a very different role in the economy—not just during the crisis, but long after.
The policy response has been swift and decisive. Globally central banks have cut interest rates by more than 0.5 percentage points since January and have launched huge new quantitative-easing schemes (creating money to buy bonds). Politicians are throwing open the fiscal spigots to support the economy. As The Economist went to press, America’s Congress was set to pass a bill that boosts spending by twice as much as President Barack Obama’s package in 2009 (see article). On top of that, Britain, France and other countries have made credit guarantees worth as much as 15% of GDP, seeking to prevent a cascade of defaults. On the most conservative measure, the global stimulus from government spending this year will exceed 2% of global GDP, a much bigger push than was seen in 2007-09 (see chart 1). Even Germany, whose fiscal rectitude is the punchline of economists’ jokes, is spending more (see article).
The upshot is that the state is swelling. Last year overall government spending accounted for 38% of GDP across the rich world. The stimulus effort, combined with a fall in nominal GDP in the next few months, will push that ratio well above 40%, perhaps to its highest-ever level.
To focus just on the numbers misses something crucial, though. There are important qualitative changes under way in how policymakers manage the economy—the responsibilities they have seized for themselves, what is seen as a legitimate action and what is not, and the criteria used to judge policy success or failure. On these measures, the world is in the early stages of a revolution in economic policymaking.
Central banks have in effect pledged to print as much money as necessary to keep down government-borrowing costs. The European Central Bank is promising more or less to buy everything that governments might issue; this should reduce the gap in borrowing costs between weaker and stronger euro-zone members, which widened in the early days of the pandemic. On March 23rd America’s Federal Reserve promised to buy unlimited quantities of Treasury bonds and agency mortgage-backed securities, if necessary. The rise in borrowing caused by America’s stimulus may be matched, at least initially, by bond purchases by the Fed, which smells a lot like money-printing to finance deficits. The central bank also announced new programmes to support the flow of credit to companies and consumers. The Fed is now the direct lender of last resort to the real economy, not just the financial system.
Politicians, too, are ripping up the rulebook. In a standard recession firms are allowed to go bust and people to become unemployed. Even in normal economic times, roughly 8% of businesses in OECD countries go under each year, while 10% or so of the workforce lose a job. Now governments hope to stop this from happening entirely. President Emmanuel Macron does not speak only for France when he vows that no firm will “face the risk of bankruptcy” as a result of the pandemic. Boris Johnson, Britain’s prime minister, contrasts his government’s response with the one during the last financial crisis: “everybody said we bailed out the banks and we didn’t look after the people who really suffered”. Larry Kudlow, the director of America’s National Economic Council, calls America’s fiscal stimulus “the single largest Main Street assistance programme in the history of the United States”, comparing it favourably with Wall Street bail-outs a decade ago.
To that end, governments across the rich world are channelling vast sums to firms, providing them with grants and cheap loans in an attempt to preserve jobs and prevent them from going bust. In some cases the government is paying the wages of people who cannot work safely: the eu in particular has embraced this policy, while the British state will pay up to 80% of the wages of furloughed workers. The American package includes loans to small businesses that will be forgiven if workers are not laid off. Households across the rich world are being given temporary relief on mortgages, other debts, rent and utility bills. In America people will also be sent cheques worth up to $1,200.
The vast majority of economists support these measures. Nominally they are temporary, designed to hold the economy in an induced coma until the pandemic passes, at which point the world is supposed to revert to the status quo ante. But history suggests that a return to pre-covid days is unlikely. Two lessons stand out. The first is that governmental control over the economy takes a large step up during periods of crisis—and in particular war. The second is that the forces encouraging governments to retain and expand economic control are stronger than the forces encouraging them to relinquish it, meaning that a “temporary” expansion of state power tends to become permanent.

The sinews of power

In recent centuries government spending across the capitalist world has leapt. In the 1600s the outlays of the entire English state accounted for about 5% of gdp, with practically no spending on public health or education, nor much regulation of economic life, save for crude contract enforcement (see chart 2). That began to change in the 18th century, and from the end of the 19th century Britain and other capitalist countries saw increased state intervention, with more government resources being devoted to public goods such as welfare and education and commensurate increases in taxes (see chart 3).
Governments have had some lean periods. In Victorian Britain state spending fell as a share of gdp—though that was largely because economic growth was so rapid, and the measure in chart 2 excludes spending by local governments, which became exceptionally powerful over the period. In the 1980s Ronald Reagan succeeded in stabilising America’s day-to-day federal spending. His reforms, as well as those of Margaret Thatcher in Britain, reduced the role of government in fixing prices; privatisations encouraged profit-making firms to provide formerly state-run services such as power and transport. Yet even during Reagan’s presidency the number of pages of federal regulations rose by 14%.
A back-of-the-envelope calculation finds that, of the more than 50 countries for which there are long-run fiscal data, two-thirds saw their government-spending-to-gdp ratio increase between 1988 and 2018. America’s ratio of day-to-day public spending to gdp is eight percentage points higher than it was in 1962, when Milton Friedman wrote “Capitalism and Freedom”, a book which warned of the dangers of socialism.
Historians argue over why the public sector has a tendency to expand. In the 19th century Adolph Wagner, a German economist, suggested that as places got richer, demands on government grew. An increasingly complex production process needed more regulation and contractual enforcement. Wealthier people would also demand more public welfare provision, the theory goes, perhaps because they worried less about their own material situation and could thus turn their attention to others.
Wagner’s theories also pointed to what economists call “hysteresis” in fiscal policy. Governments may intend to boost spending only for a short while. But then expectations change, making such expansionism hard to undo. It is now common sense that the state should provide education to children at no cost to parents, or support people who are out of work. American governments have in recent decades cut the share of public spending devoted to welfare. However, it remains politically impossible to bring it down to anywhere near its level in the mid-1960s, before President Lyndon Johnson’s “war on poverty” was launched. The upshot is that while it is easy to ratchet state spending up, it is much harder to push it down.
Perhaps the most important lesson of 500 years of history, however, is that nothing has helped boost state power in Europe and America more than crises. Historians broadly agree that the growing fiscal capacity of capitalist countries from the 1700s onwards was linked to the need to fight increasingly sprawling and expensive wars, especially those using navies and where the field of battle was far from home. (The Seven Years War of 1756-63 is widely considered to be the first global war because it involved a large number of countries, often fighting in foreign theatres.)
To win, countries required increasingly complex, well-resourced administrations which could supply fighters with weapons that worked and food that had not rotted. They also needed the money to pay for it, whether by levying more taxes or by becoming a reliable borrower in markets—which called for yet more bureaucracy. Growing state capacity, in turn, allowed for the emergence of the capitalism we know today, with properly regulated markets, efficient telecoms and transport, and healthy and educated citizens.
The winners of those wars also seized control of resources, from sugar and spices to linens, which proved integral to industrialisation. So it is no surprise that historians contend that wars and other crises have been an engine of economic development. It is no coincidence that the Netherlands, the first country to embrace capitalism, in the 17th century, was also at the time the world’s pre-eminent naval power, fighting and winning numerous wars over the period; or that Britain, which came to dominate the seas in the 18th century, then became the world’s largest economy. According to Larry Neal of the University of Illinois at Urbana-Champaign, the Industrial Revolution “occurred precisely during and because of the Napoleonic wars” of the late 18th and early 19th centuries.
The responses to crises since then have further consolidated the power of the state. France’s top rate of income tax was zero in 1914; a year after the end of the first world war it was 50%. Canada introduced income tax in 1917 as a “temporary” measure to finance the war. During the second world war income tax in America turned from a “class tax” to a “mass tax”, with the number of payers rising from 7m in 1940 to 42m in 1945 (today more than twice as many Americans are caught in the net). The second world war also led to calls for the introduction of cradle-to-grave welfare systems. So did the dynamics of the cold war: governments across the capitalist world wanted to forestall a communist rebellion. The state-led model pursued in Europe from the 1950s to the 1970s, in which bureaucrats controlled services from power networks to transport systems, would have been unimaginable without wartime experience, where the state managed practically everything and ordinary people made tremendous sacrifices, whether on the battlefield or at home.

The new ideology

What will be the lasting effects of the covid-19 pandemic? Start with the size of the state. Over the next year government debt will rise sharply, as spending jumps and tax revenues collapse. When the economy recovers, attention will turn to paying it down. “Capital and Ideology”, a new book by Thomas Piketty, a French economist, shows that after the first and second world wars many governments in the West turned to heavier taxation of the incomes and wealth of the richest to achieve that goal. Another option is “financial repression”, where governments force citizens to lend to them at below-market rates (see article).
Central banks’ innovations will also have lasting consequences. Few economists believe that the explicit co-operation between the fiscal and monetary authorities risks creating runaway inflation, as it has done in Venezuela and Zimbabwe, any time soon. (If anything, the bigger worry right now is deflation, not least because of a collapse in oil prices.) However, just as the use of quantitative easing in 2008-09 opened the door to more of the same down the road, it will become harder to make the argument that the “magic money tree” does not exist. Politicians in the future may lean on central banks to peg interest rates at zero to support government borrowing, even during times of economic growth and low unemployment. If central banks promised to fund the government during the coronavirus pandemic, they might ask, then why shouldn’t they also fund it to launch an expensive war against a foreign enemy or to invest in a Green New Deal?
The final impact of the current interventions relates to policymakers’ tolerance for risk. No one cheers when a firm goes bust, but often the process helps shift resources from less efficient to more efficient uses, thus raising productivity and average living standards over time. The novel notion that the government needs to preserve firms, jobs and workers’ incomes at practically any cost may endure, especially if the intervention proves successful in narrow terms. The policy will formally end once the pandemic has passed, but political pressure for similar support schemes—from the nationalisation of tottering firms to the provision of a universal basic income—may well be higher the next time a sharp downturn comes along. If politicians are able to preserve jobs and incomes during this crisis, many people will see little reason why they should not try again in the next one.
Calls for a more activist fiscal-monetary government will come against a backdrop of structurally higher demand for state spending. The public sector tends to provide labour-intensive services in which productivity improvements are difficult, such as health care and education. It must match the salaries of workers in other sectors in order to retain its own, even as they become less productive relative to the overall economy—a phenomenon which raises the cost of provision. Long before the coronavirus pandemic, fiscal wonks argued that government spending would soar during the 2020s, even in the absence of a crisis. That was not only or even primarily because an ageing population would raise demand for health care, but because health systems would be able to treat a wider range of illnesses more effectively, which would push up costs.
The likely economic effects of the pandemic reach far beyond the role of the state. Countries could become even less welcoming to immigrants—the better, they may believe, to reduce the likelihood of infection from foreign arrivals. On the same logic, resistance to the development of dense urban centres could mount, thereby limiting construction of new housing and raising costs. More countries may seek to become self-sufficient in the production of “strategic” commodities such as medicines, medical equipment and even toilet roll, contributing to a further rollback of globalisation. But the redefined role of the state could prove to be the most significant shift. The rules of the game have been moving in one direction for centuries. Another radical change is looming.
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This article appeared in the Briefing section of the print edition under the headline "Building up the pillars of state"