Big government is back

The coronavirus crisis has led to the unexpected return of the visible hand of government after decades of small government consensus throughout the West. The pandemic has demonstrated how the erosion of public services has made capitalist societies vulnerable to disruption, less internationally competitive, and ultimately less resilient.

From massive monetary and fiscal stimulus to benefits for unemployed workers, the public sector has significantly increased its weight through deficit spending in the past year. This emergent neo-statism runs counter to the free-market doctrine that held sway in the West for 40 years.

In 2008, the state bailed out the financial sector; in 2020 it had to bail out the entire economy. Had leaders followed the monetarist prescriptions of so-called sound finance to balance the budget and not increase the money supply—preached by the likes of Milton Friedman, Margaret Thatcher, and Ronald Reagan—the pandemic would have caused an unraveling of capitalism worse than the 1930s Great Depression.

Some of these lessons are increasingly being accepted by central bankers and international financial institutions across the globe.

The world is facing a paradigm shift in thinking about the state and the market. 2020 has been for monetarism what the stagflation of the 1970s was for Keynesian doctrine: a moment of hegemonic crisis. In fact, Keynesianism—the use of government policy to manage aggregate demand, promoted by British economist John Maynard Keynes—is now experiencing a revival.

The coronavirus crisis has become a credibility test for Western democratic capitalist countries, whose pandemic response has paled in comparison to Asian developmentalist states. Not only communist China, but also capitalist democracies such as Japan and South Korea have managed to minimize deaths. This is due to greater preparedness in the aftermath of 2002-04 SARS outbreak that hit the region, but also because, contrary to what happened in Europe and the United States, these countries had never entirely abandoned the view of the state as an engine of economic development and a protector of the citizenry.

Now this persuasion about the need for a strong state is also making inroads in the United States, where suspicion of big government has remained high since the 2008 financial crisis. Biden's campaign slogan "build back better" is reminiscent in rhetoric to Roosevelt's New Deal. Furthermore, a number of newly launched initiatives, including his America Rescue Plan, providing direct payments to US citizens, his promotion of a $15 minimum wage, and of "Buy American" public procurement rules, all prefigure a return of state intervention. Until a few years ago any talk of state interventionism would have been seen as heretical; it is now increasingly accepted as a matter of necessity and security.

This return of the interventionist state and its seemingly progressive goals will likely face major opposition. From the financial industry to digital oligopolists to large sections of the public, the adversaries of big government are many. While ailing industries may welcome state subsidies and bailouts, few entrepreneurs will rejoice at greater government regulation.

Furthermore, the return of state interventionism does not necessarily imply a progressive turn. Some politicians see greater state intervention only as a temporary necessity to protect ailing companies, rather than to address social inequality. In fact, as Covid-19 continues to wreak havoc on advanced economies, radically different visions of state interventionism are emerging—some progressive, other regressive—with considerably diverging implications for policymaking.

The return of big government is a surprising political twist, coming in the aftermath of 40 years of neoliberal anti-statist hegemony. The Austrian school of economic thought, which in the mid-20th century with Friedrich Hayek and Ludwig von Mises first formulated the key tenets of neoliberalism, cautioned against the tendency of the state to interfere with private economic freedoms and presented Keynesianism as the Trojan horse of socialism.

In the United States, the founder of monetarism, Milton Friedman, similarly railed against an active role of the state in the economy, saying: "Government should be a referee, not an active player." This is the creed voiced by conservative think tanks such as the Heritage Foundation and the American Enterprise Institute, which have long influenced economic policy in the United States, and whose ideas have been exported around the world.

Yet, Friedman's argument is dubious in the face of the current pandemic. The state has already become an active player, and it has done so as a matter of necessity: to save the market from collapsing. The real question now is not whether but how the state should intervene.

Historically, there have been radically different forms of state interventionism: from communist regimes and fascist dictatorships, to New Deal liberalism and postwar social democracy which presided over the most prosperous phase of Western capitalism. Similarly, alternative visions of state interventionism are now emerging. These include the property-focused protectionism of national populists such as former US President Donald Trump and UK Prime Minister Boris Johnson; the social-democratic and green state interventionism supported by the Left, and new policies such as a universal basic income or a job guarantee; the model of state capitalism championed by China; and the moderate protectionism supported by liberals such as French President Emmanuel Macron and US President Joe Biden.

The return of the state is becoming controversial on many levels. The first has to do with monetary and fiscal policy. The 2008 crisis already led major central banks to break with the neoliberal orthodoxy of tight money. Over the course of the 2010s, quantitative easing programs created unprecedented amounts of dollars, euros, and yen to keep the financial system afloat. However, as asset prices increased, inequality increased, with rents and unemployment cutting into workers' wages.

In 2020, the stakes are even higher. When interest rates are already at zero, or negative, and monetary policy has exhausted its firepower, while the threat of deflationary meltdown remains present, the only way to exit the depression trap is to resort to massive fiscal stimulus by means of deficit spending. Several mainstream economists have advocated this. For example, former European Central Bank chief—and likely next Italian Prime Minister—Mario Draghi, credited with saving the European monetary union from collapsing, called on states to create "good debt" in the Financial Times in the first weeks of the Covid-19 crisis.

The first measures by new US Treasury Secretary Janet Yellen suggest that the Biden administration will move steadily in a Keynesian direction.

Even the institutions of the Washington Consensus, associated with contractionary economic policy, are now urging governments to "spend as much as you can," as expressed by the International Monetary Fund chief Kristalina Georgieva. The world seems to be witnessing a decisive break with the conservative paradigm of structural adjustment, which had ruled unchallenged over economic policy since the end of the Cold War.

The first measures by new US Treasury Secretary Janet Yellen suggest that the Biden administration will move steadily in a Keynesian direction, using government intervention as a means to facilitate an ecologically sustainable conversion of the economy and ensure that a greater portion of national income goes to wages. Biden has recently unveiled a $1.9 trillion rescue package which he wants Congress to pass quickly. It features a new $1,400 coronavirus stimulus payment to those who qualify and a $400 weekly federal unemployment benefit.

In fact, conservatives and national populists have also come to accept that government spending is needed to avoid economic collapse and uprisings, as seen in the UK with Chancellor Rishi Sunak's programs subsidizing furloughed workers and investing in a major infrastructure program, and the Trump administration's limited stimulus program.

Yet, the right's incipient neo-statism is focused purely on property. It sees stimulus only as a temporary measure to revive the economy and subsidize private companies while it opposes progressive income taxation and a boost in public employment to remedy the hemorrhage of private jobs in services and retail caused by the pandemic.

More controversial still is the return of state-led industrial policy. As American author Michael Lind's noted in his book Land of Promise, US governments have often intervened to create a manufacturing base and achieve supremacy in strategic industries.

Even Silicon Valley, the technological utopia of contemporary American capitalism, was not merely the product of entrepreneurial ingenuity as computer nerds dreamt big in suburban garages. It was also the result of major government investment in R&D and electronics during World War II and the Cold War, as the economist Mariana Mazzucato argues. Yet, many on the right resist this view of an activist state as tantamount to dirigisme.

The return of some degree of state interventionism has become more urgent for geopolitical reasons, too—as Western powers appear to be falling into a double-dip recession while China posts quick returns to growth.

No matter their ideological differences, countries like China and South Korea have long embraced developmentalism. They have pursued government planning and activist industrial and trade policy to crown homegrown corporate champions. The fear of being overtaken by China in technology may lead the US government to boost state intervention in research and development, much like President Dwight Eisenhower did in response to Russia's Sputnik challenge in the 1950s.

Unlike Trump, Biden has globalist instincts, so that a de-escalation of the trade war with China is likely. However, the promises he made to voters and unions to revive American manufacturing, could lead to government subsidies to strategic industries, perhaps disguised as government procurements, which ultimately is a form of indirect protectionism.

Climate policy also requires a more active state role. Since the 2015 Paris Accord, the target of carbon neutrality has become a policy objective shared by most major countries. Biden has promised a $1.7 trillion climate plan to move the US economy away from coal and oil and toward wind and solar power.

This initiative will encounter fierce opposition from Republican quarters, where skepticism about man-made climate change is still dominant. But the momentum in favor of green capitalism aided by state planning is just too strong. Even the conservative government of Johnson in Britain has pledged to ban the sale of gasoline-powered automobiles by 2030, following a similar regulation by the State of California. On other fronts, though, opposition to state interventionism will remain formidable.

Biden and other Western politicians aiming for a measure of state interventionism will face opposition by proponents of small government, particularly in the states, regions, and German Länder below the central government. Business-friendly advocates of the minimal state (which handles nothing more than justice, defense, and taxation) will fight hard to avert a return to the social democracy prevalent in the postwar capitalist boom.

The growth of the financial system during the neoliberal decades has been made possible by a retreat of the interventionist state and a relaxing of regulations on banking. That is why the finance sector is so suspicious of any talk of a return of state intervention, as seen in the unease of Wall Street at the new financial appointments made by Biden, including Gary Gensler—who already served under former President Barack Obama and has the reputation of a tough regulator—as head of the Securities and Exchange Commission.

The US-based digital economy may also lose from a return of state interventionism at an international level, as this may present an obstacle to the tax evasion tactics used by tech giants. The European Union's plan to introduce a web tax on digital companies and China's competition in this area can only be bad news for Silicon Valley, whose stocks, which have recently ballooned, could suffer. Yet, state subsidies could also help the formation of new companies and jobs in this area.

Business leaders fear that government activism may lead to a resurgence of union power and a rise in wages, which would squeeze their profit margins. It is true that a growth in average wages, which have been stagnating since the 1970s, would help boost demand for a resurgent manufacturing sector. But given the internationalization of Western corporations, an increase in domestic wages is often viewed more as a threat for global competitiveness than a boost for sales. It is hard to see corporate titans like Amazon's outgoing CEO Jeff Bezos following in Henry Ford's footsteps to agree to a new pact between labor and capital.

Suspicion of state interventionism is also strong among those owning assets, such as shares, bonds, and real estate that have been inflated by financialization and kept afloat by quantitative easing and would be threatened by a redirection of investment toward the manufacturing sector.

Biden must prioritize measures that enjoy strong popular support and will be hard to take away once implemented— such as a promised child credit which would lower taxes for families by $3,000 per child.

Finally, it should not be underestimated how deeply ingrained the suspicion of state wastefulness is in the public mind, not only in the United States, but also in many Western European countries. For 40 years, the dominant narrative across many Western countries was that state intervention was inefficient and markets were best left alone.

These anti-statist reservations may soon coalesce in movements linking social discontent at the crisis and conservative demands to curb state spending, much like the Republican Tea Party did during the first Obama administration. Therefore, it is essential to prioritize measures that enjoy strong popular support and will be hard to take away once implemented, such as the child credit payments promised by Biden which would lower taxes for families by $3,000 per child.

To showcase the positive role of the state in a mixed economy it is also imperative that large state investment programs such as Biden's climate plan and the European Recovery Fund are transparently managed and geared toward the creation of well-paid jobs, especially in depressed regions that have become a strong base of support for the populist right.

It is a tall order, but if it succeeds economic policy in the West is likely to move steadily away from the small-government consensus.

Paolo Gerbaudo is a sociologist and political theorist at King's College London. He is the author of the forthcoming book The Great Recoil: Politics After Populism and Pandemic. Twitter: @paologerbaudo.

Disclaimer: This article first appeared on foreignpolicy.com, and is published by special syndication arrangement.