Sign up to myFT Daily Digest to be the first to know about Coronavirus economic impact news.
“It is clear then that the best partnership in a state is the one which operates through the middle people, and also that those states in which the middle element is large, and stronger if possible than the other two together, or at any rate stronger than either of them alone, have every chance of having a well-run constitution.” Aristotle, Politics
Covid-19 has been a global shock. But will it be a transformative one? The answer is that it might be a transformative event for a number of western societies, notably the US and UK.
For western liberal democracies, the era after the second world war can be divided into two sub-periods. The first, running roughly from 1945 to 1970 was the era of a “social democratic” or, as Americans might say, a “New Deal” consensus. The second, starting around 1980, was that of the “global free market”, or the “Thatcher-Reagan consensus”.
Between these two periods came an interregnum — the high-inflation 1970s. We are now living in what seems to be another interregnum, which began with the global financial crisis. That crisis damaged the ideology of the free market. But, across the western world, valiant attempts were made to restore the ancien régime, through the rescue of the financial system, tighter financial regulation and fiscal austerity.
The New Social Contract
Coronavirus has exposed frailties of our economic and social model. In a series of articles this week, the FT explores how the pandemic is forcing a rethink of the role of citizens, the state and business.
In the event, the rise of populist nationalism followed this attempted restoration. With his protectionism and bilateralism, promise to preserve social security and initial (since forgotten) emphasis on rebuilding infrastructure, Donald Trump became leader of his party because he was not a traditional free-market Republican. With his commitment to levelling up poorer regions and favourable references to Franklin Delano Roosevelt’s New Deal, Boris Johnson has also indicated a new direction of travel. These leaders have buried Ronald Reagan and Margaret Thatcher.
Coronavirus has also now caused a still more dramatic return of government than the financial crisis. This may mark the end of the second postwar period of transition.
Around what idea might politics, society and the economy now revolve? The answer should be citizenship, a concept that goes back to the city states of the Greeks and Rome. It is more than just a political idea. As Aristotle also said: “man is a political animal”. We are only fully human, he thought, as active participants in a political community.
In a democracy, people are not just consumers, workers, business owners, savers or investors. We are citizens. This is the tie that binds people together in a shared endeavour.
In today’s world, citizenship needs to have three aspects: loyalty to democratic political and legal institutions and the values of open debate and mutual tolerance that underpin them; concern for the ability of all fellow citizens to lead a fulfilled life; and the wish to create an economy that allows the citizens and their institutions to flourish.
Anger and despair at the system
The most important reason for emphasising citizenship today is that outlined by Aristotle almost two and a half millennia ago. A necessary condition for the stability of any constitutional democracy is a thriving middle class (by which is meant people in the middle of the income distribution). In its absence, the state risks turning into a plutocracy, a demagogy, or a tyranny.
With the hollowing out of the middle class, even established western democracies are now in danger. As Eric Lonergan and Mark Blyth argue in Angrynomics, the combination of adverse economic developments with manifest unfairnesses has made many people angry.
In Deaths of Despair and the Future of Capitalism, Anne Case and Angus Deaton argue that these developments have also driven many into severe ill-health. They note that the death rates of middle-aged white Americans have risen since 2000. Something similar seems more recently to be happening in the UK. “Deaths of despair”, they suggest, “are prevalent among those who have been left behind, whose lives have not worked out as they expected.”
How did we get here? How does Covid-19 fit in? And how might our ideas and policies need to change?
The postwar settlement worked well, for a while. It was egalitarian and economically dynamic, especially in countries devastated by war. Western governments took an active role in managing their domestic economies, while simultaneously liberalising and expanding foreign trade.
Intellectually, this should be called the Age of Keynes. But it died with the surge in inflation, which precipitated the labour unrest and economic slowdown of the 1970s. The Keynesian era was then followed by that of Milton Friedman, characterised by globalisation, liberalised markets, low marginal taxes and a focus on controlling inflation.
This new global era saw striking successes, notably reductions in global inequality and mass poverty. It also was an era of important innovations, notably in information technology. Not least, it was the era in which Soviet communism collapsed and the ideal of democracy spread across the world.
Yet a number of big weaknesses emerged. Economic growth in high-income countries tended to be low relative to that achieved in the postwar era. The distribution of income and wealth became more unequal. The economic value of relatively uneducated labour fell relative to that of college graduates. Labour markets became more “flexible”, but earnings were more precarious. The more unequal the society, the lower its social mobility.
In cultures that emphasise the obligation to look after oneself, inequality as such may not be so socially or politically destabilising. But the sense of deteriorating prospects for oneself and one’s children certainly matters. So, too, does a strong sense of unfairness.
This is where the idea of “rigged capitalism” is relevant. One aspect of this is the inordinate growth of finance. Another is the shift towards the maximisation of shareholder value as the sole goal of companies and the associated tendency to reward management by reference to the price of stocks.
Another aspect is the decline in competition, documented for the US by Thomas Philippon in his book The Great Reversal. Also relevant is tax avoidance, notably by corporations. US multinationals have been allowed to report a huge proportion of their foreign profits in small, low-tax jurisdictions. Such opportunities and many others in different areas are not just being exploited. They are being actively created, through lobbying.
However convenient it is to blame foreigners, they are not the guilty parties. Trade, especially the sudden expansion of manufactured imports from China in the first decade of this century, generated local shocks. Yet Harvard economist Elhanan Helpman concludes a review of the literature by stating that “globalisation in the form of foreign trade and offshoring has not been a large contributor to rising inequality”.
Changes for the workforce
Far more important has been technological change. Particularly significant has been rapid productivity growth in manufacturing, as Martin Sandbu argues in The Economics of Belonging. Also important has been the rising demand for skilled labour relative to unskilled labour.
The decline of manufacturing as a source of employment has had adverse effects on towns and regions in which they were concentrated. When factories close or lay off a large proportion of their workforce, the wider local economy is also adversely affected. Such “left behind” regions have become a crucial element in the coalitions of the disaffected. Meanwhile, cities, especially the great metropolises, are dynamic hubs for educated people and new activities, as Oxford university economist Paul Collier has noted.
The global financial crisis was the outcome of financial liberalisation in the context of rising macroeconomic imbalances, as argued by Matthew Klein and Michael Pettis in Trade Wars are Class Wars. The most important outcomes were the sudden economic collapse, the rescues of the financial system, the subsequent emphasis on curbing government spending and the post-crisis slowdown of economic growth. In the eurozone, this was exacerbated by the way in which creditor countries lectured the strugglers on their alleged irresponsibility.
Mr Trump became president of the US and Mr Johnson became prime minister of the UK because of their success in incorporating the resentment of those “left behind” into their conservative coalitions. This, in turn, was partly a reaction of large parts of the old working classes to the transformation of the traditional parties of the left (Labour and Democrats) into ones more representative of university-educated cosmopolitan voters, and ethnic and cultural minorities.
Impact of the pandemic
Some argue that viewing these political shifts in economic terms is an error. These are, they argue, responses to cultural changes, such as immigration, the changing place of women and new sexual mores. This is unpersuasive, for two reasons: first, cultural and economic changes cannot be separated from each another; and second, culture does not change so quickly.
What needs explaining is the shifts in voting behaviour. The answer is the changing allegiances of people who have come to suffer from status anxiety — the fear that they live on the edge of an economic cliff or are already falling over it.
Into this already fraught situation has come the thunderstorm of Covid-19. This in turn has had at least five big effects.
First, it has caused an economic shutdown to curb the spread of the disease. This came at the expense of the young, who are relatively immune to the effects of the virus, and in favour of the old, who are the most vulnerable.
Second, it has tended to hit women harder than men and the unskilled harder than the skilled. This is explained by the relatively high intensity of female employment in some hard-hit (and risky) service sectors and to the ability of a higher proportion of skilled people to work securely from home.
Third, coronavirus seems set to exacerbate many prior inequalities. Some of the largest support has gone to the financial sector, as happened in the financial crisis.
Fourth, the pandemic has forced vastly greater fiscal spending even compared with the financial crisis. This now raises the question of how this debt is going to be managed and who is going to pay.
Fifth, the virus has demonstrated the power and resources available to the state. Reagan used to say that “the nine most terrifying words in the English language are: I’m from the government, and I’m here to help.” That was the best encapsulation of the philosophy of the era he helped create. Today, the demand not just for help from government but for help from competent government is back.
A new civic context
So what might a return to the idea of citizenship mean, in this new context?
It does not mean that the state should have no concern for the welfare of non-citizens. Nor does it mean that it sees the success of its own citizens as a counterpart to the failures of others. On the contrary, it seeks mutually beneficial relations with other states.
It does not mean that states should cut themselves off from free and fruitful exchange with other societies. Trade, movement of ideas, movement of people and movement of capital, properly regulated, can all be highly beneficial.
It does not mean that states should avoid co-operating closely with one another to achieve shared goals. This applies above all to actions designed to protect the global environment.
What it does mean is that the first concern of democratic states is the welfare of all their citizens. To make this real, certain things follow.
Every citizen should have the reasonable possibility of acquiring an education that would allow them to participate as fully as possible in the life of a high-skilled modern economy. Every citizen should also have the security needed to thrive, even if afflicted by the ill luck of illness, disability or other misfortunes.
Every citizen should have the protection at work needed to be free from abuse, both physical and mental. Every citizen should also be able to co-operate with other workers in order to protect their collective rights.
Successful citizens should expect to pay taxes sufficient to sustain such a society. Corporations should understand that they have obligations to the societies that make their existence possible.
The institutions of politics must be susceptible to the influence of all citizens, not just that of the wealthiest. Policy should aim at creating and sustaining a vigorous middle class while ensuring a safety net for everybody. All citizens, whatever their race, ethnicity, religion or gender are entitled to equal treatment.
Citizens are entitled to decide who is allowed to come and work in their countries and who is entitled to share the obligations and rights of citizens with them.
How precisely such aims might be achieved is what politics must be about. But this does not mean going back to the 1960s. The world has changed too profoundly and in most ways for the better.
We are not going back to a world of mass industrialisation, where most educated women did not work, where there were clear ethnic and racial hierarchies and where western countries dominated. Moreover, we face, with climate change, the rise of China and the transformation of work by information technology, very different challenges.
Yet some things remain the same. Human beings must act collectively as well as individually. Acting together, within a democracy, means acting and thinking as citizens. If we do not do so, democracy will fail. It is our generation’s duty to ensure it does not.
Letters in response to this article:
Get alerts on Coronavirus economic impact when a new story is published