Policymakers reverted to the status quo after the last recession. This time must be differentby Simon Tilford / March 26, 2020 / Leave a comment
Western governments were slow to appreciate the risks of coronavirus. This was mainly because they were complacent about the chances of it really taking hold beyond East Asia, believing it to be largely a repeat of the 2008 Sars outbreak. Even once the scale of the Italian lockdown was apparent, major investment banks were forecasting relatively shallow recessions in Europe and the US, followed by a rapid bounce-back. All that has now changed. It is clear that Europe and the US face unprecedented recessions: estimates vary but economies could easily contract by 20 per cent between April and June. And there is considerable uncertainty over the timing and strength of the rebound. This has prompted a huge fiscal response, including unparalleled support for firms and households and aggressive action by central banks.
For some, the scale the current crisis and the centrality of the state to combating it makes a return to the small state, free market status quo of the last 40 years impossible. They argue the crisis has demonstrated that the state ultimately underwrites the whole of the private sector and shown that rules are not set in stone; things that were considered impossibilities prior to the crisis have quickly become realities. Some economic liberals are alive to the risks in all this, with the likes of Arthur Laffer (of “Laffer curve” fame) and Stephen Moore arguing that crisis measures by governments to support households could discourage people from working. Others argue that the cure risks being worse than the disease.
Will the crisis discredit a whole way of thinking, by demonstrating that the state is not an obstacle to economic resilience but the indispensable guarantor of it? Or are we destined to repeat the mistakes of the financial crisis, when governments failed to draw the obvious lessons? Much will depend on the depth of the crisis and the speed of the bounce-back. But there are reasons to believe that this time things will be different.
The first reason why change now looks inevitable is the 2008-09 financial crisis itself. The bailout of the financial sector, and the subsequent return to business as usual combined with austerity after the crisis, was one reason for the erosion of trust in governments and elites and the rise of populist forces in…