Covid: everybody loses – at first

As we emerge from the Covid panic phase, you might think that the situation bears an increasing resemblance to the slow motion crises of the 1970s and 80s.

Recall the political economy big picture. The old system had had a good run.  Patterns were familiar and tools had developed to manage political pressures – a nudge here, a subsidy there, a few more jobs in state forests or on the railways, an occasional long-term policy artfully planted and left to mature.

But as growth slowed, economic pressures built and became unmanageable in the old framework.  Political confusion ensued: the slogans stopped working because the voters’ demands couldn’t be reconciled.

This suggests we need to figure out what people expect of government as a result of the Covid crisis – and how that might be orchestrated and channelled through the voting system.

One imagines that at best people would like Covid to go away and for things to go back to normal (for true believers, with a bonus of the nation being rededicated to some higher purpose).  NZ’s election may be a test of the credibility of this proposition.  A severe case of buyers’ regret seems possible.

Failing a return to normality, the natural preference is to want the impacts of change to be minimised (for everyone ideally, but most particularly for oneself).  This is tricky.

Because, first of all, adaptation is a process of informed trial and error.  While in historical terms things seem to be going quite fast and hopefully, it’s still a messy process.  Countries like South Korea and Germany suggest that rigorous testing and tracing can be effective at suppression; Sweden shows that governments can develop stable and long-term policies which reinforce natural social behaviour and try to avoid excessive impact on liberties and livelihoods.

Secondly, as governments make it up as they go along, they still need to confront some potentially enormous social and economic trade-offs.  These look impossible to reconcile under the old rules because, at this stage, many, perhaps most, folk reckon that they deserve to be made good (and some are even optimistic enough to believe they deserve a pay rise).

Which looks impossible because the response to Covid – both public and private – has cut a swathe through the economy.  Borrowing is a stopgap.  And while Western countries look creditworthy for some years, in the end, as the Greeks discovered, debt just gives you more time to deal (or not) with the underlying problems.

What else have governments got to play with?

  • Sure, taxes can be raised.  However, fifty years of public policy shows how limited and unpopular this option has been.  In a mobile world there is not much scope to raise the already-high yield from the richest, so it is the unlucky middle which is most likely to have its burden-bearing capacity tested.
  • Government expenditure – which has not been under really serious pressure in recent decades – can be cut.  The trick for governments is to find ways of making it seem inevitable while still keeping their coalition together.
  • The – often neglected – third element is regulatory spending.  At the end of the last century, Western government learned the limitations of state ownership and direct taxes as social tools, and substituted a public-private regulatory partnership across a swathe of areas.  Consumer choice and innovation was increasingly constrained or state directed in areas as diverse as banking, land use and building, energy, waste disposal and transport.  Government now will have to choose whether to do more of this (to achieve goals unaffordable through direct spending) or less (in order to give pinched consumers more choice on spending their own money).

Post-Covid does not feel like business as usual.  For the last twenty years, economic growth has provided a rising tide, usually sufficient to make these trade-offs politically manageable.   And there has been enough economic freedom for innovation to raise productivity and maintain economic growth.

The test now is whether governments’ responses to Covid leave space for even more innovation.  That means not propping up too many uncompetitive firms and occupations but letting them go and giving industries which are trying new things and raising productivity room to expand (big tech, big agriculture, fracking and GM foods anyone?).

The early response is not encouraging.  The pressure is on to maintain furlough and business support schemes despite warning signs of misdirection and fraud.  Some jobs which would have been lost even without Covid have probably been put on costly life support.  Britain’s Boris Johnson vows to convert the country’s homes to wind-generated electricity within a decade, while his Chancellor of the Exchequer is nervously contemplating how and when to start pumping out discouraging signals of forthcoming ‘hard choices’.

It feels like Winter is Coming – and not just in the Northern Hemisphere.

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