Like wars, pandemics drive changes that are bound to outlast them. The Black Death in the mid-14th century helped raise wages across Europe, since labor had become scarce and workers could command a premium from landowners. Similarly, the Covid-19 crisis looks set to have long-term consequences on the economy — in no small part because of how much power the state has seized across much of the rich world. Unless managed carefully, this return of the Leviathan could hamper economic growth and productivity for many years to come.
The pandemic prompted governments to intervene in two primary ways: Politicians issued unprecedented restrictions, such as lockdowns, on companies and individuals to slow contagion and reduce pressure on health-care systems. At the same time, they provided large-scale economic support, including loan guarantees and equity injections, to struggling businesses. In Europe, the bloc temporarily loosened its state-aid rules so it could deploy this all-important safety net.
The case for such public intervention in the economy was overwhelming. Throughout history, pandemics have been temporary shocks, with life returning to normal once the health crisis ended. So it would make no sense to let viable businesses go to the wall only because they face passing liquidity constraints. A wave of bankruptcies would simply delay the expected economic recovery.
However, European governments seem reluctant to play only a temporary role in supporting businesses. Even before the Covid crisis, the view gaining popularity was that the market by itself could not be trusted to deliver prosperity. After the financial crisis, regulators intervened to fix the flaws in the banking system. Politicians, especially in the European Union, had begun to target “Big Tech” companies, as they feared their growing dominance would unfairly squeeze out competitors.
The pandemic has strengthened this belief that the government must step in. From Italy to the UK, politicians increasingly see themselves as better than private entrepreneurs at investing in winning technologies of the future. In Britain, the government has been at loggerheads with the EU in Brexit negotiations over its plans to relax state aid rules to invest heavily in the tech sector. In Italy, Cassa Depositi e Prestiti SpA, the state lender, has become the central player in several industrial battles, as it aims to expand its remit further into telecoms and highways.
Of course, the public sector has a role to play in helping the economy recover from Covid-19. This goes beyond providing unemployed people with a livelihood. “Operation Warp Speed” in the US and Germany’s financial support to BioNTech SE both helped accelerate the development and distribution of Covid vaccines.
But the risks of a return to the old interventionist ways that characterized Britain in the 1970s and Italy in the 1980s are just around the corner. British Leyland, the troubled car company, and Alitalia SpA, Italy’s chronically loss-making airline, are two reminders of how nationalizations can lead to endless waste of public money without any real turnaround.
Should governments fail to relinquish control of failing businesses after the pandemic, it would add substantive costs to public purses at a time when that money could be directed toward helping families directly.
Competition would suffer, especially if political connections become more important than efficiency in getting access to public resources and procurement.
This would also pave the way for a rise in state-backed zombie companies — those which wouldn’t be viable in the long run if it weren’t for government support. These firms would prevent workers and capital from moving to more productive rivals. Such stagnation would ultimately be a drag on productivity growth.
The challenge for governments will be finding the right balance between providing essential support and letting some companies fail. Some businesses will simply be unviable as a result of the pandemic and its long-term effects on consumption and production habits. For example, the retail industry is bound to look very different, as more households become used to online shopping. Business travel could also become curtailed, as we have become more used to teleconferences.
Politicians shouldn’t seek to keep all of these businesses afloat, as this would interfere with those workers pursuing newer, more useful paths. They should instead help workers train for new jobs in sectors seeing increased demand.
As the Group of 30, a body of leading academics and financiers, including former top central bankers Mario Draghi and Raghuram Rajan, wrote in an influential report in December, “governments should encourage necessary or desirable business transformations and adjustments in employment. This may require a certain amount of ‘creative destruction’ as some firms shrink or close and new ones open.”
The politics of allowing for and even encouraging this transformation will be extremely hard. It is much easier to continue pouring money into a struggling company than to shut it down and retrain its workers for new jobs. However, a long-term recovery from the pandemic hinges on the ability of politicians to understand their own limits. The power of the Leviathan must be kept in check.
Bloomberg
