20 BriefingThe pandemic and the state The EconomistMarch 28th 2020
2 of payers rising from 7m in 1940 to 42m in
1945 (today more than twice as many Amer-
icans are caught in the net). The second
world war also led to calls for the introduc-
tion of cradle-to-grave welfare systems. So
did the dynamics of the cold war: govern-
ments 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 un-
imaginable without wartime experience,
where the state managed practically every-
thing and ordinary people made tremen-
dous sacrifices, whether on the battlefield
or at home.The new ideology
What will be the lasting effects of the co-
vid-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 re-
covers, 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 repres-
sion”, where governments force citizens to
lend to them at below-market rates (see
Free exchange).
Central banks’ innovations will also
have lasting consequences. Few econo-
mists believe that the explicit co-operation
between the fiscal and monetary authori-
ties 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-
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 ratesat zero to support government borrowing,
even during times of economic growth and
low unemployment. If central banks prom-
ised to fund the government during the co-
ronavirus 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 inter-
ventions relates to policymakers’ tolerance
for risk. No one cheers when a firm goes
bust, but often the process helps shift re-
sources from less efficient to more effi-
cient 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, espe-
cially if the intervention proves successful
in narrow terms. The policy will formally
end once the pandemic has passed, but po-
litical pressure for similar support
schemes—from the nationalisation of tot-
tering firms to the provision of a universal
basic income—may well be higher the next
time a sharp downturn comes along. If pol-iticians are able to preserve jobs and in-
comes 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 pro-
vide labour-intensive services in which
productivity improvements are difficult,
such as health care and education. It must
match the salaries of workers in other sec-
tors 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 ar-
gued that government spending would
soar during the 2020s, even in the absence
of a crisis. That was not only or even pri-
marily because an ageing population
would raise demand for health care, but be-
cause 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 pan-
demic reach far beyond the role of the state.
Countries could become even less welcom-
ing to immigrants—the better, they may
believe, to reduce the likelihood of infec-
tion from foreign arrivals. On the same log-
ic, resistance to the development of dense
urban centres could mount, thereby limit-
ing construction of new housing and rais-
ing costs. More countries may seek to be-
come self-sufficient in the production of
“strategic” commodities such as medi-
cines, 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 mov-
ing in one direction for centuries. Another
radical change is looming. 7The giant awakensSources: Our World in Data; OECD *Includes spending on health, unemployment, incapacity-related benefits3403020100
19001880 50 182000Public social spending*, % of GDPNo dataSwedenUnited StatesUnited StatesBritainBritainFranceFranceSweden50403020100
1868 1900 50 182000Tax revenue, % of GDP