The Economist USA 03.28.2020

18 BriefingThe pandemic and the state The EconomistMarch 28th 2020

2

1

“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