COVID-19 spurs the resurgence of the state

| April 28, 2020

The outbreak of the coronavirus pandemic has set in motion an alignment of social, political, and economic forces that are likely to engender an enlargement of the state sector not seen since the postwar era.

The public health crisis and the economic consequences of the suspension of large segments of the private sector have dramatically enhanced the societal need for increased government intervention and an expansion in the provision of public goods and services.

In a rather brash rebuke of Ronald Reagan’s inaugural proclamation that “government is the problem,” the coronavirus pandemic has thrust government into a position where it is indispensably the predominant solution. The resultant effect is likely to be a shift in the political and social consensus towards a more pronounced socioeconomic role for the state.

As states rush to alleviate the social and economic consequences of the pandemic, far reaching fiscal measures have been implemented across the globe, unprecedented in size and scale.

The magnitude of fiscal spending, tax deferrals, and credit guarantees administered throughout a significant number of the world’s largest economies, including the United States, Japan, Germany, France, Italy, United Kingdom, Canada, and Australia far exceed the levels injected during the 2008 financial crisis.

The urgency of fiscal policy across the developed world is compounded by the low interest rate environment, itself a product of the 2008 financial crisis, that has constrained the effectiveness of expansionary monetary policy, forcing central banks to rely on additional unconventional policies to manage the ongoing crisis.

As the pandemic has further reinforced the near-zero-interest-rate regime, the enhanced role of fiscal policy will be an entrenched feature of the global economy going forward.

A Revised Role for the State

More consequential than the quantitative magnitude of the interventions is the qualitative feature of the measures. The exigencies of the crisis have precipitated a fundamental reassessment of the societal role of the state.

Political leaders have been compelled to deploy the organs of state to the maximum capacity permitted in mitigating the effects of the crisis, regardless of their own ideological proclivities.

Accordingly, over the past several weeks, we have seen governments across the political spectrum expand welfare provisions, suspend mortgage payments, provide free childcare, enforce a moratorium on evictions, guarantee wages through subsidies, impose price controls, and federalise supply chains. Additionally, nationalisation is once again back on the agenda.

The enlargement of the state apparatus that these initiatives have contributed to is unlikely to wane post-crisis, as the enhanced operational capacity of states has already been organisationally solidified.

Furthermore, this enhanced structural capacity of the state will itself strengthen the public’s inclination to call for elaborate state measures in dealing with contemporary social and economic challenges.

An inclination that the coronavirus outbreak has likely already amplified, as a greater percentage of the citizenry find themselves reliant on state initiatives and provisions for their personal and economic wellbeing.

Structural Changes and Political Shifts

The socioeconomic and political shifts underway have the potential to reverse the balance against the public sector and public goods that began during the Thatcher-Reaganite era and which has since been particularly pronounced in the English-speaking world.

The belief that prosperity is best achieved by minimal government interference has been extraordinarily influential in orienting public policy towards privatisation, outsourcing, supply-side economics, welfare liberalisation ,and austerity.

Yet such a model, failing to address the social and economic demands of the time, is likely to expire. While there was much indication that the policy paradigm had long reached the limits of its efficacy, COVID-19 appears to have consolidated that process.

History would suggest that when alignments of social, economic, and political forces develop, the structural pressures shape the ideological consensus of the age, shifting the political spectrum in one direction or another.

Indeed, it is significant to recall that in the postwar era, the imperatives of reconstruction and the great social craving for personal and economic security established a consensus on the welfare state and of government stewardship that prevailed amongst Christian and Social Democrats in Europe, Republicans and Democrats in the United States, Conservatives and Labour in Britain, and the Liberal and Labor Parties in Australia.

In a similar fashion, the economic turmoil of the 1970s with stagflation, high interest rates, and balance of payments crises shifted the consensus towards economic liberalisation and fiscal conservatism across party lines in the United States, Britain, and Australia.

The outbreak of the coronavirus pandemic has undoubtedly brought both state and society into uncharted territory. Yet the indices of social change are ever present.

As the economic and social consequences of the pandemic develop, we may look back at Boris Johnson’s refutation of Margaret Thatcher’s negation of society as a seminal moment in political history that signified the decisive end of one era, and the beginning of another.

This article was published by the Australian Institute for International Affairs.