How governments respond to crises reveals the explicit moral choices they make and the underlying ideological framework upon which that choice sits.
Responses to the financial crisis are particularly revealing in this regard. Contrary to the lessons of history, the aftermath of the financial crisis in 2008-2009 witnessed austerity in Britain, the legacy of which has been deeply felt during the COVID-19 pandemic.
Fiscal support dried up even as central banks simultaneously intervened to spray money at financial markets on an unprecedented scale via quantitative easing (QE).
Yet this paradox, and the social and economic suffering attendant to it, risks being repeated as the world seeks to recover from the COVID-19 abyss.
There is a curious cognitive dissonance at the heart of right-wing economic thinking. The standard-bearer for this ideology once declared that ‘government is not the solution to our problem, government is the problem’.
The right has consistently put forward a litany of complaints against government involvement in economic affairs, with the stagflation of the 1970s seen as the high-water mark of socialist economic decay. Broadly speaking, this ideology posits that efficiency and government intervention are mutually exclusive.
This exclusivity often draws upon historic success to justify contemporary policy choices, as manifested in the British policy response after the Great Recession, grounded as in Gladstonian balanced budgets when Britain was at its imperial zenith.
There are two problems with this analysis. The first is that such analysis is historically lacking. Conspicuous by its absence from the debate, the critical point about the 1970s was that it was an oil price shock layered on top of fraught industrial relations which produced high inflation, a phenomenon not seen before nor since. Furthermore, as Pomeranz has illustrated, British Victorian success was not remotely owed to fiscal rectitude but to the Empire and the slavery that the Empire was built upon. Secondly, and more significantly for today’s world, it surreptitiously removes policy choices from the debate.
The consequence is that ‘government intervention’ is hermetically construed to the extent that the only choices open to politicians seem to be spent and tax (or not, as the case may be). In so doing, removed from democratic and public view is the ostensibly technocratic actions of central banks. Far from being technocratic, policy choices always have distributional consequences, none more so than QE in the last decade or so.
The ingenuity spawned by the pace of the crisis has indeed been commendable. The Chancellor introduced a multiplicity of schemes designed to keep money in individuals and businesses' pockets when the economy shut down, as a supply shock quickly morphed into demand deficiency. Government commitment to supporting incomes whilst restrictions are in place is not only logical but sets a precedent for future crises. It will be difficult for the state's tentacles to be removed from the nation's economic life, even long after the virus has receded.
Yet, it is clear from the Chancellor's mutterings and those in government that they believe that support can be withdrawn as the virus recedes in potency. Not only is this questionable epidemiologically, given the new strains of the virus, but it is questionable on social and economic grounds.
As central banks continue to print money on a scale and at a pace that has never been seen before, the government is simultaneously contemplating measures to ‘plug’ the pandemic's fiscal hole.
Three thoughts immediately manifest themselves:
- Firstly, if conventional wisdom is adopted and ‘balancing’ the current budget is thought desirable and possible, then arithmetically, this would require summersaults given the level of spending during the crisis and ensure that the austerity years look timid in comparison.
- Secondly, this would result in a replay of the last decade as fiscal and monetary policy pull in different directions, with adverse consequences for business investment, productivity and thus living standards of working people.
- Thirdly, and most significantly, engaged observers will undoubtedly highlight the paradox that the most vulnerable members of the community are asked to shoulder the COVID burden as state largesse continues to be doled out to the wealthy.
This last thought has profound implications for wealth inequality as ultra-loose monetary policy continues to provide a fillip to asset prices. Herein we arrive at the crux of that willful cognitive dissonance as monetary policy is regarded as the exclusive domain for the technocracy hidden from public view. In contrast, fiscal policy is necessarily considered ripe for manipulation.
The most likely trajectory will, therefore, simply be an exacerbation of existing trends. As COVID has shone the brightest of lights on the bifurcation in the jobs market, it will also accentuate the wealth inequality that has accompanied the last eleven years' policy response.
Far from ushering in a new social contract and the consent contingent upon that, the legacy of COVID will see Britain heading into the 2020s with a greater polarisation amongst different social groups. Much as the government sought to extract itself from economic life after the First World War, the initial collectivist response to the pandemic will fade into history. The policy creativity will be but a mere aberration.