Covid-19 drives leaders to make unprecedented interventions but what next?

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For years, those on the left in Britain have been arguing that the government should be more aggressive in its use of state aid to revitalise those parts of the country affected by industrial blight.

Now, at last, we have ministers prepared to have a bare-knuckled fight with the EU over their right to intervene on behalf of those living where the factories and the coalmines used to be, but they grew up as disciples of Margaret Thatcher, who insisted that tough state aid rules be included in the rules for the single market. Ah the irony of it!

In the past six months Boris Johnson’s economic policy has owed more to Tony Benn’s alternative economic strategy than to free-market principles. A willingness to nationalise failing industries? Check. A bigger role for the state? Check. Help for businesses contingent on them agreeing to rules of conduct set by the government? Check. Treasury-backed loans to struggling companies? Check. A decade of austerity to repair the damage caused to the public finances? Forget it.

Johnson has actually gone even further than Benn suggested in the 1970s and early 1980s. The AES did not suggest that the state should have the right to tell a family of five that they couldn’t invite two grandparents round for tea. It was all about intervention in the workplace, not telling people what they could do in their own homes.

The UK is by no means unique. At the end of August, Jerome Powell, the man who runs the US central bank, made it clear that controlling inflation would play second fiddle to securing full employment for all Americans. Governments everywhere are assessing their vulnerability to long supply chains and questioning whether globalisation is all it is cracked up to be. The rich are getting nervous that they will be hit with wealth taxes.

So what’s going on here? Well, since the 1970s the management of economies has been guided by a number of core principles: allow market forces to work; enshrine low inflation as the key objective of policy; reduce the power of the state; keep taxes as low as possible; remove power from elected politicians and hand it to technocrats; keep borders open. Some called it neoliberalism. Others dubbed it the Washington consensus.

These principles survived the first crisis of the 21st century – the financial crash of 2008 – but not the second. A global pandemic has forced governments – no matter where they come from on the political spectrum – to intervene in ways completely unprecedented in peacetime.

Some governments have made a better fist of it than others. Free-marketeers in the UK say that it is a good job Johnson’s government – given its record on providing personal protective equipment and Covid-19 testing – was not responsible for keeping the supermarket shelves stocked with food or we would have all starved. They have a point.

That said, times have clearly changed. Last week, Gordon Brown said the constitution of the Bank of England should be changed so that it was obliged to pay as much attention to jobs as to inflation. This is the same Gordon Brown who in 1997 gave the Bank its independence in the first place.

John McDonnell, who was shadow chancellor when Jeremy Corbyn led the Labour party, is calling for a green Marshall Plan that would pull the economy out of its slump by investing in decarbonisation projects. “As we deal with the Covid pandemic crisis we must not lose sight of the existential crisis of climate change that we also face,” he said.

McDonnell was making the same argument during last year’s general election campaign but nobody was really listening then. Now they are. The International Monetary Fund is calling for a green, inclusive recovery. The Paris-based Organisation for Economic Co-operation and Development will next week publish a report written by one of Brown’s former special advisers, Michael Jacobs, on behalf of an advisory panel including the chief economist of the Bank of England, Andy Haldane; Robert Skidelsky, the biographer of Keynes; and Mariana Mazzucato, a professor at University College London.

The report will call for policymaking to be based around four objectives: environmental sustainability; rising wellbeing (rather than simply higher incomes); lower levels of inequality; and more resilient economies.

It goes without saying that some new thinking is needed – and long overdue because since 2008 the world has experienced a near meltdown of the financial system, two severe recessions, a decade of flatlining productivity and an ever-rising threat from global heating.

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So what happens next? One option is to try to put the genie back in the bottle, which is what happened after the 2008 financial crash. But that didn’t work either, economically or politically. Austerity slowed growth and made voters angry. There is no appetite for another dose of the same, even on the right. As Brown says, they don’t even believe in the Washington consensus in Washington these days.

A second option would be for policymakers to recognise the need to keep supporting their economies for as long as it takes to bring unemployment down to pre-crisis levels and avoid deflation, while at the same time persisting with structural reforms. This, broadly, is what Shinzo Abe, who recently stepped down as Japan’s prime minister, tried for eight years with little success.

The alternative is to harness the best of the market – its ability to adapt and innovate – with the power of the state in order to bring about economic transformation of the sort Jacobs is suggesting. Carefully nurturing the technologies and industries of the future needs to be part of that mix. The question for the UK is whether it learns from its multiple crises or is overwhelmed by them.

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