The Economist UK - 28.03.2020

(Frankie) #1

22 BriefingThe pandemic and the state The EconomistMarch 28th 2020


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“T


he governmentintervention is not
a government takeover,” the Ameri-
can president argued. “Its purpose is not to
weaken the free market. It is to preserve the
free market.” The imf pointed to the “un-
precedented policy actions undertaken by
central banks and governments world-
wide”. The economic response to the finan-
cial 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 gov-
ernmental power, however, suggests an-
other 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 sup-
port the economy. As The Economistwent 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 United States section). 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 conserva-

tive 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 on next
page). Even Germany, whose fiscal recti-
tude is the punchline of economists’ jokes,
is spending more (see Charlemagne).
The upshot is that the state is swelling.
Last year overall government spending ac-
counted for 38% of gdpacross 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 im-
portant qualitative changes under way in
how policymakers manage the economy—
the responsibilities they have seized for
themselves, what is seen as a legitimate ac-
tion 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 wid-
ened 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 pro-
grammes 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 rule-
book. In a standard recession firms are al-
lowed to go bust and people to become un-
employed. 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 govern-
ments 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”, com-

Rich countries are experimenting with radical new economic policies. History
suggests that the effects will be permanent

Economic policy and the virus

Building up the pillars of state


talk to each other so that they can stimulate
a global response to the disease, not just
one that operates at a national or city level.
Yves-Alexandre de Montjoye, who studies
computational privacy at Imperial College,
in London, says that governments should
come together to agree on common proto-
cols for handling covid-19 data, making it
easier to pool their resources. Compared
with finding ventilators and protecting
health-care workers, though, this is pretty
low down the list of anyone’s must-dos.
And there’s the rub. Covid-19 demands
an array of drastic, immediate responses. It
also requires thinking that looks beyond

the next two weeks. The network of com-
puters built for entertainment, conve-
nience, connection and security is helping
in all sorts of quotidian ways, from video-
conferencing to team-working to gaming
for rest and recuperation. But it also pro-
vides a network of sensors that can co-ordi-
nate the responses of both individuals and
whole populations to a degree unimagin-
able in any previous pandemic. Countries
are learning how to make use of that pan-
opticon’s power in a pell-mell, piecemeal
way. The systems that they lash together
may last a long time. It would be best to
keep an eye on them. 7
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