#economicsfest: Is Big Government back?

Lockdown measures around the world show that governments can still make deep interventions in the economy. As the costs of mitigation policies mount, it looks likely that the state will need to provide large-scale fiscal support for months to come.

The measures imposed to combat coronavirus are both unprecedented and large-scale. But from an economic perspective, it remains open to debate whether these policies are simply necessary for crisis management or whether we are entering a new era of ‘Big Government’.

It is currently unclear whether the Covid-19 interventions mark a decisive turning point in the role of the state in the economy, and, if so, what the future role of the government will be.

With these questions in mind, I attended the Festival of Ideas: Bristol Festival of Economics online event, ‘Is Big Government Back?’, with Kim Scharf, Suresh Naidu and Nick Pearce, hosted by Bart van Ark.

Access the recording here.

Even before the pandemic, several issues were already causing researchers to rethink how governments should interact with the economy and with people’s lives. Brexit, climate change, the 2008/09 global financial crisis and the rise of populist ideology have all thrown into question the optimal position that the state should occupy.

Should governments adopt a ‘laissez-faire’ approach, allowing market forces to dictate outcomes? Or should the state step in and use policy to shape the behaviour of its citizens?

What is the relationship between government, the economy and society?

With Covid-19, it has been argued that we may have reached a ‘tipping point’ in terms of the role of government in modern society (The Economist, 2020). But the debate surrounding the role of the state in the economy and society is not new. This question has been well researched not only in economics, but in sociology, political science, law and history too.

The economic rationale for government intervention is usually framed in terms of ‘market failure’. When market forces alone are unable to achieve the optimal distribution of resources, or when the market creates an unwanted additional outcome (often known as a ‘negative externality’ or ‘public bad’), it is down to the state to step in and ‘correct’ the market through policy interventions such as taxes, subsidies, regulations or tariffs.

Another established economic rationale for government intervention is the creation of some form of ‘public good’. An example is the provision of state-funded care for the elderly. Governments tax their citizens to raise fiscal revenue, and this money is then spent on a service that is seen as ‘good’ for society. Caring for the elderly or infirm, the protection of the environment and green spaces, and investment in public infrastructure are all examples of state interventions in the name of creating a public good.

The counter argument is that too much state intervention creates an unnecessary cost burden on businesses, hampering profits. This ‘market fundamentalist’ view asserts that we should avoid Big Government at all costs, allowing the market to regulate itself through prices and competition.

How has Covid-19 changed the role of the state to date?

To contain the spread of Covid-19, governments around the world imposed a range of policies to tackle both the economic and public health challenges posed by the virus. In the UK, measures including bans on mass gatherings and stay-at-home orders were coupled with mandatory mask wearing and quarantine periods for people exposed to possible infection.

The arrival of the virus also led to a surge in public spending (Institute for Government, 2020). Not only was the state directly commanding people to change their individual actions, the government was also forced to introduce substantial fiscal tools to combat the economic impacts of lockdown. According to the Office for Budget Responsibility (OBR), extra state spending for the current financial year could total £15 billion on health services and local authorities, £8 billion on welfare, £10.5 billion for the self-employed, as well as £28 billion for small business grants and a business rates package (OBR, 2020).

The UK government’s Coronavirus Job Retention Scheme (CJRS) – or furlough programme – provides an example of how the role of the state has had to adapt in the face of the pandemic. By asking people to stay at home, the state essentially halted work in numerous sectors, above all travel and hospitality. Among groups of employees unable to move to remote working, this risked causing mass unemployment. The furlough scheme was implemented to avoid such an outcome and to ensure that the public adhered to the stay-at-home orders.

Quantitatively, the UK government’s economic responses, including the CJRS as well as loans extended to struggling businesses, mean that in 2020/21, public spending is set to rise by between £85 billion and £400 billion depending on the length of lockdown (Pabst, 2020).

This example highlights just how much the state has become entwined in people’s everyday lives during the pandemic. Governments are implementing measures to control the spread of the disease and, in so doing, are forced to create additional mechanisms for employment protection so as to avoid plunging millions of people into joblessness.

What next for Big Government?

A question that is frequently asked in the context of Covid-19 is whether society will ever return to ‘normal’. What seems apparent is that at least in the short and medium term, the state will continue to play a significant role in people’s day-to-day lives (Nature, 2020). Until an effective vaccine has been developed and deployed, the cycle of infection tracing, social restrictions and employment protection schemes is almost certain to continue.

A crucial related consideration is to what extent the surge in state invention is here to stay. One area that is likely to continue to experience a substantial increase in government involvement is the provision of care. Large-scale disruptions such as the pandemic often lead to increased demand for ‘caring labour’. This includes looking after children who are unable to attend school in person or caring for vulnerable citizens who have been forced to shelter.

In either case, one long-run effect of the Covid-19 crisis may be a continued need for state support in the provision of this caring labour, which could come in the form of subsidies such as benefits or direct spending on care services. Some researchers are also predicting a rise in the demand for unemployment services such as retraining programmes, work counselling and careers advice.

Lessons from history

Historically there is a ‘ratchet effect’ whereby after a major downturn, the size of government does not tend to revert to its pre-crisis level. Examples include the aftermath of the two World Wars and the Great Depression of 1929-32 (Pabst, 2020). This suggests that some of the increases in state intervention could be long lasting.

When studying a period of crisis, it is important to consider the historical and economic context of the crisis itself (Turner, 2020). It is worth noting that as Covid-19 began to tear through Europe and North America in early 2020, both regions were still feeling the latent effects of another crisis 12 years before.

The effects of the 2008/09 global financial crisis and the policies introduced in response are likely to have shaped the role of the state in the face of Covid-19. In the UK, a mixture of fiscal austerity and monetary easing were deployed following the global financial crisis. On the one hand, at the onset of the pandemic, this period of austerity was coming to an end and more government money may have been available (as well as a greater willingness by elected officials to dig deep and spend back into a deficit).

On the other hand, several years of severe cuts to local services and funding may have left particular regions accurately vulnerable to the pandemic (Ghazaryan et al, 2020). An under-funded health service, for example, could well have aided the virus in its spread through the population.

Related question: How will the economic effects of coronavirus vary across areas of the UK?

In either case, it is difficult for economists to establish whether Covid-19 is itself a turning point for the role of the state, given the importance of recent history in shaping the government’s response.

What can we expect during the next phase of Covid-19?

While it remains difficult for economists to forecast during a period of such acute uncertainty, it is possible to make some projections.

From a public health perspective, the role of the state is likely to remain significant in a number of areas. The implementation of a widespread test and trace system, the issuance of personal protective equipment (PPE), and the rollout of a vaccine will almost certainly remain policy priorities for governments around the world. Such policies will see the state playing a significant role in the logistics and regulation of public health. In addition, public health messaging encouraging compliance with social distancing and mask wearing are unlikely to be abandoned any time soon.

Related question: How can public health messages promote compliance with protective measures?

Similarly, the increased strain on the care sector is likely to require greater government intervention and financial support to meet the demands in a world where diseases such as Covid-19 continue to threaten vulnerable members of the community.

To tackle the task of health and social care, as well as ‘levelling up’ the economy in the UK, the government will have to rethink the top-down model of public policy-making (Coyle, 2020). The state will have to consider how to devolve both the responsibilities and the resources to the ten city-region authorities.

There are also questions about how the state can involve other regional and local institutions in boosting investment, raising the country’s skills base and driving technological transformation in the wake of the crisis (Pabst, 2020).

As long as the state is required to step in and curb certain actions to prevent infection hotspots from turning into new epidemics, employment protection programmes will remain a key feature of policy. These may take a more targeted form than previously, but in many sectors, government controls will continue to play a significant role (Disney, 2020).

The combination of these new challenges and associated policy tools indicate that Big Government may well be back. But as we move into the next phase of the Covid-19 crisis, and as medical research continues to point to the creation of an effective vaccine, the question shifts to discerning how long this change will last, and whether the government can ever expect its place in society to return to normal.

Where can I find out more?

Mitigating the COVID economic crisis: act fast and do whatever it takes: Richard Baldwin and Beatrice Weder di Mauro edited a collection of essays from leading economists from around the world, who make the case for decisive and coordinated fiscal stimulus to mitigate the economic damage from the global pandemic.
Institute for Government Coronavirus hub: Evidence from a range of research projects exploring the UK constitution and emergency powers during the pandemic, the role of central government, devolution, the economy and public services.
Chatham House: A report on Covid-19 and the state-public relationship, with a focus on the decline of fiscal conservatism in the face of crises.
New Statesman: Article by Adrian Pabst and James Noyes, focused on the effect of coronavirus on the central state and the free market.
OpenDemocracy: An interview with Nick Pearce, discussing how local democracy can ‘built back better’ in the wake of the pandemic.