The Economist USA 03.28.2020

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 rates

at 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. 7

The giant awakens

Sources:OurWorldinData;OECD *Includesspendingonhealth,unemployment,incapacity-relatedbenefits

3

40

30

20

10

0

19001880 50 182000

Public social spending*, % of GDP

No data

Sweden

UnitedStates

United States

Britain

Britain

France

France

Sweden

50

40

30

20

10

0

1868 1900 50 182000

Tax revenue, % of GDP