The state is back. But nobody knows what to do with it. Owing to Covid-19, the world’s advanced economies are operating with almost unprecedented levels of debt, central bank support and explicit state guarantees to businesses and banks.
As the crisis subsides, the textbooks – still barely revised after the austerity debacle of the early 2010s – dictate either spending cuts or tax rises. Human need – and for the West’s fragile democracies, geopolitical survival – dictates the opposite. So policymakers need to learn fast.
The economic crisis of 2020 reduced UK GDP by 9.9 per cent, matching the severity – though not yet the length – of the collapse in output after the First World War. But the slump of 1920-21 was caused by the withdrawal of state spending and military demobilisation. Ours happened despite a dramatic expansion of the state, with the UK’s 2020-21 budget deficit forecast to reach 19 per cent of GDP and debt is around 99.4 per cent.
As the vaccines take effect and a recovery – of sorts – begins in the retail, hospitality and entertainment sectors, we face a choice: put rocket boosters under the economy, with more borrowing and more spending, or embark on a second decade of austerity and, quite possibly, a third. This is not, fundamentally, a choice about greater state intervention; that is inevitable.
Faced with the threat of further mutations and new viruses, the NHS will have to become permanently larger and de-marketised. The care home and transport sectors will need greater subsidy and supervision. And the army, which the Tories are briefing will have to lose four battalions in order to pay for investment in new technologies, should be expanded and strengthened at a time when pandemics, climate disasters and geopolitical crises might coincide.
Neither the Tories nor, paradoxically, Labour, wants to admit this, but the state will need to be large, paternalistic and supervisory for the foreseeable future – a period that takes us beyond the pandemic and towards the net-zero carbon era.
There is still a choice, however. We can either embrace the arrival of a new, state-directed kind of capitalism or resist it. We can understand the enormous power for good that lies in a dirigiste state, or we can use it warily, always nostalgic for the era of balanced books, privatisation and neutral monetary policy.
After the opening weeks of the Biden administration, it is clear that the choices of the major geopolitical players are diverging. The US president’s call for a $1.9trn stimulus, on top of the $3trn already spent under Trump, is intended to push the American economy far beyond mere recovery mode. It is designed to finance a green transformation of the energy industry, boost access to education and reverse the decades-long strangulation of public goods and infrastructure.
Biden’s plan has the nabobs of neoliberal orthodoxy in a panic. If it works, it means the years of misery they inflicted on their own populations in the 2010s, fuelling the fire of far-right populism and destroying a generation’s future, will be seen as a vast and stupid mistake.
Naturally, the sharks are circling. According to neoliberal orthodoxy, any concerted attempt to stimulate the economy using borrowing and spending should soon flounder as the “output gap” – the difference between actual and potential growth – is filled and growth translates into inflation. There is strong evidence, marshalled by Robin Brooks of the Institute of International Finance, that the output gaps measured by major international institutions – above all the European Commission – are grossly underestimated. They have become an ideological justification for poverty and stagnation and, in the hands of both treasuries and central banks, a weapon in the class struggle.
Biden, backed by his new treasury secretary, Janet Yellen, has not only defied conventional wisdom, but called on the rest of the world to join the US in doing so. If it passes Congress in anything like its intended form, Biden’s stimulus – which amounts to almost 9 per cent of US GDP – will give permission to policymakers everywhere to follow suit.
[See also: James Meadway on why long-term Covid could mean long-term Conservative rule]
But will they? The EU, despite its tortuously agreed Covid stimulus plan, shows no sign of breaking with self-strangulation. By contrast, Japan, which is accustomed to breathing the oxygen of central bank money, looks well placed to mimic a strong, state-led US recovery.
Which leaves the UK. Johnson has pledged to “build back better” and to “level up” – and one of the first tangible signs of this was the £16bn pledged to modernise the armed forces over the next four years, with an emphasis on naval shipbuilding. The promise, targeted towards Clydeside, Glasgow, is a crude but admirably clear attempt to use fiscal expansion to address a political problem – namely the popular demand for a second Scottish independence referendum.
But Conservative backbenchers, and the perennially pro-austerity Treasury, do not sound ready to follow the Biden administration down the path of state-led growth. (Though they’ve been happy to pour money into the aviation and construction industries, and to line the pockets of the chumocracy through no-bid Covid contracts.)
Successful government intervention – regardless of your stance on social justice – demands acknowledgement that public spending can be a multiplier of growth and well-being; that a tramline laid between point A and point B creates passengers, jobs, retail outlets and time for digital consumption, as well as reducing carbon emissions and pollution. It means recognising that technological innovation allows you to raise the level of potential growth even as the economy reaches full employment.
Here, Labour is in a strong position. Though the shadow chancellor, Anneliese Dodds, deftly retreated from the party’s 2019 manifesto commitments, she pledged that Labour would adopt a “rolling, forward-looking target of current budget balance which allows the government to borrow for additional investment spend when interest rates are low, and which provides flexibility during times of economic shock”.
With no formal commitment to a debt ceiling, these words give Labour’s front bench permission to match the scale and ambition of Biden’s stimulus. It would be easy to make a case, ahead of the Budget on 3 March, for the UK to borrow and spend £200bn on infrastructure in addition to what the Tories have already promised. It is a round figure and though only half of what Labour’s 2019 manifesto promised, that was a ten-year spending plan, primarily focused around the Green New Deal.
Yes, there is a political obstacle: the small-town xenophobic pensioners who get excited about statues of Robert Baden-Powell and Cecil Rhodes, and who hated the idea of free broadband for their grandchildren, will no doubt wonder where the money’s coming from. But on behalf of millions of young people, working people and the children emerging into adulthood under a fragile socio-economic order, Labour has the duty to confront such arguments and defeat them. Because Biden’s accession to the White House is both an opportunity and a threat. If the US accelerates out of this crisis, while Europe endures another decade of self-inflicted stagnation, the fulcrum of political instability will migrate from Washington to Rome, Paris, Athens and Madrid.
Britain, which has monetary sovereignty, belongs in the category of countries that can borrow, spend and print money at will. Though it should not raise the tax burden immediately, the UK could restructure taxation even now to reap some of the gains in asset prices and to force the tech giants to book profits onshore.
For decades, economic elites have used states to impose market norms of behaviour on to civil society. The Covid-19 pandemic demands an end to this. From now on, the state should be used to drive productivity, growth, well-being, public health and access to culture. That is the essence of Labour’s difference with the Conservatives, even if both end up committed to a bigger state – and it’s what needs to be translated into a few clear proposals, summarised in plain language. Given that the biggest winner from the pandemic has been state-capitalist China, the prize we’re playing for is not simply economic recovery, or social justice, but the legitimacy and survival of democracies.
The Democratic half of the US political elite gets it. Does the Labour-voting half of ours?
[See also: Stephen Bush on Anneliese Dodds and Labour’s new approach to economics]