Western economies can’t return to ‘business as
usual’ after the pandemic
Michael
Jacobs
Today’s challenges demand radical action. The old
orthodoxy of free markets and hands-off government won’t cut it
Canary Wharf. ‘Wage stagnation, precarious work
and , rising inequality are inevitable outcomes of the way that western economies
are organised.’
Tue 31 Aug
2021 12.00 BST
As western
economies emerge from the pandemic, their governments face a choice: do they
seek to address the profound problems that Covid exposed, or try to return to
“business as usual” as quickly as possible? Their problem is that many of the
issues exacerbated by the pandemic, such as wage stagnation, precarious work
and rising inequality are not bugs in an otherwise well-functioning system, but
inevitable outcomes of the way that western economies are now organised. So a
business-as-usual approach simply won’t work. Much more fundamental change is
needed.
The US
government seems to recognise this. Joe Biden’s economic plans are a radical
departure from the era that stretches from Reagan to Obama, when governments
sought to keep taxes and public spending low and focused principally on
globalised trade and the education and training of the workforce. Unlike his
predecessors, Biden is pursuing large-scale public spending and taking advantage
of ultra-low interest rates to borrow for infrastructure investment. His
stimulus plans target the climate crisis while creating green jobs and
expanding health, education and childcare – the “social infrastructure” that is
essential to the economy but has often been ignored by mainstream economists.
Biden is
not afraid to raise taxes either. He has proposed significant hikes to
corporation tax and the top rate of income tax, and a near doubling of capital
gains tax. In the labour market, his administration is committed to running
what the US Treasury secretary Janet Yellen calls a “high-pressure economy”,
where sustained demand pushes wages up and improves working conditions. He is
also taking on big business, introducing a raft of measures to clamp down on
anti-competitive practices by monopolistic corporations.
Biden’s
policies have surprised many, but they did not emerge from thin air. His
administration has drawn on a wealth of new thinking that has emerged in
response to the economic crises of the last decade. The 2008 global crash
demonstrated that a new form of capitalism dominated by finance had become
deeply unstable. This was followed by long years of austerity and slow growth,
stagnating wages, stalling productivity and extreme inequality. Meanwhile,
climate and environmental breakdown threatens catastrophe for even the richest
economies. Grappling with these problems, a growing number of economists have
explicitly rejected the orthodoxy of free markets and hands-off government that
has dominated western economic policy over the past 40 years.
Some of
their ideas revive the economics of John Maynard Keynes, who saw that
government spending is needed to stimulate demand for goods and services during
a recession. More recently, most economists have recognised that in an era of
ultra-low interest rates, fiscal policy – spending and taxation – should play a
major role in how the economy is managed. Many also now acknowledge that there
are no absolute constraints on public debt. As long as low interest rates keep
the cost of borrowing affordable, and borrowing is used to fund investment
(which raises future national income and therefore brings in more taxes), the
ratio of debt to GDP will ultimately fall. By contrast, trying to reduce debt
through austerity policies is self-defeating and harmful, as the last decade
has proved.
Economic
thinking is shifting in response to the climate and nature crises. It is no
longer sufficient to use a few market-based environmental taxes and product
regulations. To achieve net-zero emissions, the whole economy needs to be
geared towards these goals. At the same time an active industrial strategy is
needed to support greener technologies and consumption patterns, with job
creation programmes for workers and communities adversely affected by the green
transition.
The new
economics recognises that cutting inequality will mean tackling the “rentier
economy”, which has concentrated asset ownership in the hands of the wealthy.
This will mean curtailing monopolies and regulating the financial sector to
focus on long-term investment not short-term wealth extraction. Wealth and land
should be more highly taxed, while using public procurement to support
community wealth building can ensure that local economies retain their wealth
and jobs. Welfare reform, such as a guaranteed minimum income, is needed to end
poverty. Systemic gender and racial inequality must be eradicated. These ideas
come together in the Green New Deal.
Above all,
many are starting to realise that economic policy needs to end its fixation
with growth. Growth was never the only aim, but economists long assumed that it
would solve most other problems. It’s now clear this was never the case. New
ideas for “post-growth” economics are emerging, which focus on environmental
sustainability, reducing inequalities, improving individual and social
wellbeing and ensuring the economic system is more resilient to shocks.
During
previous periods of economic crisis, prevailing ideas about how the economy should
be organised and managed were overturned in favour of new theories. The Great
Depression of the 1930s led to the Keynesian revolution and the full employment
welfare state. The crises of the 1970s led to the deregulation and
privatisation doctrines of Thatcher and Reagan. It is still too early to tell
whether such a paradigm shift is occurring today. Biden must still get his
economic plans through Congress. In the UK the major parties are still
pondering how to “build back better”.
Both Boris
Johnson and Keir Starmer have acknowledged the priority of tackling climate
change and “levelling up” inequalities. But neither they, nor most
commentators, seem to have recognised how economics is changing in response to
current crises. The issue is no longer simply about how much a policy will cost
or how it will be paid for. There is a wealth of new thinking on which they can
draw to address the deep challenges our economies face. The old orthodoxies
have failed. The post-pandemic world will ask new questions, and new answers
are needed.
Michael
Jacobs is professor of political economy at the University of Sheffield, and
managing editor of NewEconomyBrief.net
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