Like many, I imagine, I did not see the Covid crisis coming and feel like a rabbit in the headlights in lockdown at home. Amongst other things the crisis has brought into question the role of government in society, as described for example in Yuval Noah Harari’s recent article in the Financial Times[1] and the recent edition of the Economist[2].

Governments around the world have had to step into people’s lives in a way not seen (in the West at least) since the Second World War, and are having to take on a role in managing the economy which is also unprecedented outside a major war.

After the crisis is over, whenever that may be, it is likely that there will be a continued expanded role of the state, in this blog I want to argue that this is likely to be for a long time and profound.

It is also worth noting that often the shape of an economy is forged during a crisis or the immediate aftermath, which are times when things can rapidly change. For example, after the end of World War II, there was a widespread acceptance that demobilised soldiers should be rewarded for the sacrifices they made.

At the same time, the USA military, worried about the threat of the Soviet Union, decided that it would be strategic for the USA to build an extensive road system. The government therefore created and subsidised a system of mortgages whereby returning GIs could buy a house, and the network of roads facilitated the building of suburbs and mass car ownership, which together with the ‘military-industrial complex’ largely determined the shape of the post war US economy.

I think it is useful to set out some broad categories over which state involvement will expand, to show that in their entirety they imply a long and deep expansion of the state:

1. Surveillance society: As the crisis progresses, governments are having to monitor the health and movement of their citizens; countries such as Singapore and South Korea have apparently successfully halted the spread of Covid by doing so. Harari highlights that it is often the case that the extraordinary powers of the state do not remain temporary and can persist long after the emergency. I think this risk may be overstated – during World War II, peoples’ rights were suspended, but they were returned with time in Western democracies. That they were not in the Soviet Union, was because it was an oppressive government not because of the war. China has increased the surveillance of its citizens, but it was already doing this before. If we can remember back pre-crisis, there was a great deal of angst about people’s privacy and the ability of companies such as Facebook to manipulate it. During and post-crisis maybe presents an opportunity to come to a modus operandi. 

• Attitude to risk: the pandemic will probably have changed people’s attitude to risk. Being locked at home indefinitely will mean that this not happening again will be of considerable importance to voters, who may be willing to sacrifice some privacy, choice and material wellbeing. There is likely to be the political will to shift to how society deals with risk – definitely for future epidemics, but hopefully also on issues such as climate change. 

• Health economy: during the crisis the health service will grow, both in terms of resources and also in power and importance. Given the likely general will that “we don’t want this to happen again”, this increase is likely to remain. With an ageing population and increase in medical costs due to technology, health will command an increasingly large chunk of GDP. The organisation of health services and the role of public/private position will come into question.

• Distorted economy: large expansion of public debt, nationalisation of private debt, monetisation of debt and the use of monetary policy way beyond what was ever envisaged, will cause massive distortions in the economy, exacerbated by distortions caused by the 2008 financial crisis and its aftermath; with monetary policy almost rendered ineffective through overuse. Governments and central banks will have to engage in unprecedented economic reorganisation. What this will look like is anybody’s guess and I suspect we don’t have theoretical tools to guide us.

• Need for massive fiscal stimulus: during the crisis we are seeing a massive slump in GDP, and government attempts at fiscal stimuli of unprecedented levels. We can’t predict how long or extensive will be restriction on people’s movement, but the need for fiscal stimulus will be great and need to last for a long time. Economists were calling for this post-financial crisis, and now governments seem willing. This will entail even more increase in government debt levels, and role for the government in the economy. How governments decide to spend the money will be crucial, and will determine the development of the economy for years to come. There is quite a lot of buy-in for the idea of a ‘green new-deal’ with large investment in renewable energy and sustainability.

• Government running of economy: The Covid crisis poses many more (economic)  problems then the financial crisis – essentially in the financial crisis governments had to bail out only a small selection of large financial institutions, and to some extent the tools they had available already existed. Now they will have to bail out a vast array of companies; barbers, restaurants, shops, airlines, to name but a few. Hayek’s critique of socialism is that the economy is too complex for a central authority to run, only a distributed market system provides the information for an economy to run efficiently. Yet to some extent the government will have to run the economy, and it is orders of magnitude more complex than in Hayek’s day and our government is not set up to do this.

• Mediation of economic relations: governments are mandating suspension of debt, rents, bankruptcies, house purchases, debt-to-equity swaps, and so on. The unrolling of this will be a mammoth task, doing this fairly will be highly problematic and I suspect governments do not have the expertise to do so.  

• Repaying debt: all of the aforementioned items mean that the government debt levels will have increased massively – which in turn mean either high levels of tax, or some kind of inflation or monetisation of the debt. Which again means a larger role for the state in the economy.

• National and international: the Covid crisis has also thrown up the unsatisfactory settlement we have between national and international governance. The WHO, for example, is underpowered and underfunded. To deal optimally with the crisis, governments needed to co-ordinate which they haven’t really done. There are also issues with supply chains which throw up questions of localisation, and also national food (and toilet roll) security. A major risk which has not yet manifest is that Covid is spreading to developing countries, and in failed states such as Syria and Yemen. There is no way these countries can cope, and whilst it is there Corona could potentially mutate and return to developed countries. The 1918 Spanish flu came in 3 waves the first was mild, the second deadly. It is thought that the increased virulence was because it had the opportunity to evolve on the Western Front, where there were a large number of closely packed distressed people. A similar situation exists in Iblid.

• Monopolies and competition: the crisis has magnified trends which were already occurring in concentration of monopoly powers, for example the domination of Amazon over the retail sector. Many of these companies will have virtual control of crucial supplies such as food. Competition policy will need to be rethought.

• Role of corporations: The free market/shareholder maximisation paradigm should be over when many companies owe their existence to government support. There are many examples of corporate behaviour which now looks unsupportable – for example share buy-back and tax avoidance. After the 2008 financial crisis, governments made a big mistake: the financial crisis was generated endogenously by the finance industry; in the crisis the market determined that these financial institutions had failed. Governments had to bail out the system to save the global economy, but in so doing they recreated a failed system, whereas they should have thought about creating a new system which serves society We have entered the Covid crisis in a poor shape; after 10 years of austerity, high levels of debt and with monetary policy already shot. In return for their support, governments should expect corporations to radically change their behaviour.

• Re-framing capitalism: The Covid crisis highlights many of the disfunctions of our economy. Rather than focusing on economic growth, we may want to prioritise concepts such as sustainability, resilience, fairness less inequality. As governments will have to artificially put economies back together, they have the opportunity to build a better economy.

The role of the state is often categorised by an unhelpful dichotomy between capitalism (or the free market) against socialism. On the later side there are a couple of failed states like Venezuela and Cuba (amazingly some people still admire these places – I am taking about you, Jeremy Corbyn) and all other countries (although it is not clear where China or Russia fit in).

In the recent Economist article, warning of the state’s expansion, notes that: “Growing state capacity, in turn, allowed for the emergence of the capitalism we know today” [3]. In the extensive history of capitalism, Arrighi (2010)[4] argues that the expansion of capitalism in general, and ‘high’ finance in particular has run in parallel with the expansion of the state.

The capitalism that will emerge after Covid will be forged by the decisions made by the state, just as pre-Covid capitalism was. 

The 12 points above imply that we are entering an era of government-led reconstruction. There are many examples of countries with large governments which are not failed states, but are actually some of the wealthiest places in the world.

One example are social democracies typified by Scandinavian countries. Interesting models to look at are the developmental state – which is the model followed by China, pioneered by Japan and the Asian tiger economies such as Singapore and Taiwan.

Developmental state countries pursue a mixture of state supported economic development, working with elements of the market economy. These countries prioritise industrial policy which support certain industry sectors for example through directing finance via central banks and deploying development banks and other investment vehicles to support these sectors. The economies pursuing this strategy achieved spectacular economic growth. Not coincidentally, these countries have dealt very successfully with Covid.

Finally, not everything that Corona has thrown up is undesirable. Environmental pollution has decreased dramatically – perhaps we can keep it that way or is that too much to ask?

Corona may have come from a Pangolin, a species that has been illegally smuggled almost to the point of extinction. No one has really cared about their fate and nothing has been done about it, along with lots of other illegal wildlife trade, maybe now this will change.

The need for international co-ordination and support for developing countries has been highlighted, as has the importance and inadequacies of our health services, which are coming under increasing strain from ageing populations.  And finally the sense of solidarity – we (humans) are all in this together. 

picture by slgckgc – Set for Katy Perry’s Witness Tour, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=63197977

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[1] https://www.ft.com/content/19d90308-6858-11ea-a3c9-1fe6fedcca75

[2] Briefing: The Pandemic and the State https://www.economist.com/briefing/2020/03/26/countries-are-using-apps-and-data-networks-to-keep-tabs-on-the-pandemic

[3] Briefing: The Pandemic and the State https://www.economist.com/briefing/2020/03/26/countries-are-using-apps-and-data-networks-to-keep-tabs-on-the-pandemic

[4] The Long Twentieth Century: Money, Power and the Origins of Our Times (2010), Giovanni Arrighi, Verso.