By Mohamed A. El-Erian, chief economic advisor at Allianz and president of Queens’ College at the University of Cambridge
COVID-19 has turbocharged an economic, social, and political phenomenon that was partly visible going into the pandemic but, until now, lacked sufficient roots and momentum. Current events and history suggest that this phenomenon will be with us for a while, can deliver important gains for society, but also risks overshooting.
After almost four decades of deregulation and liberalization, governments in many advanced countries have reversed course and are reinserting themselves into their citizens’ daily lives. The catalyst is a pandemic that has inflicted tremendous human suffering, dislocated lives, worsened the inequality trifecta (of wealth, income, and, especially, opportunity), exploited economic and social vulnerabilities, exposed glaring fragilities in our systems and institutions, and simultaneously eroded social cohesion and individual resilience.
Most people can agree that governments had no choice but to step in and stop a calamity from becoming a multigenerational disaster. Setting aside all known limits on government budgets, states provided unprecedented direct income support to citizens while also protecting many businesses from bankruptcies. They funded vaccine innovation and deployment on a previously unknown scale. Some are pressing forward with massive infrastructure programs. And the list goes on.
While the scale and scope of these interventions have been unexpected, historic, and truly stunning, the direction of travel is not new. Going into the pandemic, the public sector had already been expanding and intervening after too many years of low and insufficiently inclusive growth.
Responding to intense feelings of alienation and marginalization in parts of society, both sides of the political spectrum were busy crafting new approaches. This was seen not just as an economic and social necessity but as politically attractive as well. Reacting to widespread grassroots pressure to address massive failures in the provision of critical public goods — such as protecting the planet, anchoring corporate social responsibility, and enhancing governance — governments got interested in launching multiyear responses that engaged many segments of society.
Meanwhile, led by the US Federal Reserve and the European Central Bank — the world’s two most systemically important monetary institutions with powerful printing presses in their basements and an appetite to run those presses at turbo speed — central banks had been maintaining and intensifying their post- 2008 market interventions in ways that were previously unthinkable. They, too, have started being pulled into supporting a broader set of public goods, including climate policy and combating inequality.
While all this was notable pre-pandemic, it pales in comparison with today’s realities on the ground — as well as what lies ahead.
COVID-19 also accelerated the process of corporate concentration and power, particularly in Big Tech. With pressure fueled by many increasingly visible mishaps in the private sector — involving national security, data leaks, fake news, platform surveillance, behavioral manipulation, and other issues — governments are also taking a wider and more serious look at enlarging and modernizing their regulatory and tax purview over the economy.
Judging from history, this swing of the pendulum will likely be long in duration and big in scope. If the return of government is well designed, it offers us the opportunity to address long-standing challenges, implement midcourse corrections to avoid future ones, adjust to new realities, and emerge stronger and wiser from a terrible pandemic. But this will need a degree of self-discipline that governments — and even central banks — have often struggled to impose in the past: that of avoiding market failures being compounded by failures of public sector institutions and governance. Already there are concerns about civil liberties, resource misallocations, and inflation.
Coming out of the 2008 global financial crisis, many policymakers declared “mission accomplished” in winning the war against what could have been a global, multiyear depression. In their haste, they inadvertently lost sight of the importance of also securing a lasting, durable, and comprehensive economic peace.
Today, vaccines and continued vigilance against infections and new virus variants offer us encouraging prospects to win this new war — this time, against a pandemic. Whether we can also win the peace will depend, to a large extent, on how governments navigate their much greater involvement in our lives.