Bouncing Back

Rebel(lious) visions for a post-Covid-19 society

Economic recovery demands a strong, smart but restrained government

The corona crisis is having a significant impact. Companies and individuals have been hard hit and many have turned to the government for support. Nevertheless, a dominant role for government today does not mean that a dominant role will be needed in perpetuity. We are calling for a strong, smart government but one that knows when not to intervene.

The government should not merely throw money at the economic problems caused by the corona crisis. ‘Right now’ is not the best time to do things that we have always wanted to do anyway. In our view, the way forward is smart investment based on a clear leitmotif which relies on resilience, proximity and measures that are appropriate to the national context.

But who should be responsible for pursuing this leitmotif? The government? The private sector? Society at large? Again, we have little confidence in pat answers (“at this time there is an important role for…”). Rather, we need to examine and analyze the situation and draw lessons from the past – just as we did when formulating the leitmotif.

Black swan

The government is now playing a major role in mitigating the negative economic impact of the corona crisis. We see parallels between the current situation and the financial crisis of twelve years ago. Both involve low probability risks which have a major impact when they actually come to fruition: the ‘black swan’ described by Nassim Nicholas Talib in his 2007 book. We can insure ourselves against many types of risk: sickness, road accidents or storm damage, for example. However, there is no mature insurance market which will cover the financial impact of a banking crisis or a global pandemic. Very few insurers offer relevant products and very few customers demand them. The only actor able to respond to a ‘black swan’ is therefore the government.

Government as ‘retroactive insurer’

When a government mitigates negative impact, it is taking on the role of a ‘retroactive insurer’. Premiums will be collected at some later date, perhaps in the form of reduced expenditure on public services or as dividends claimed from national airlines.

Within the public debate, this role is often conflated with an entitlement to determine the future form of our economic system.

 

❝ ‘He who pays the piper calls the tune,’ would seem to be the thinking. When responsibilities are assigned, the government claims the lion’s share at the expense of the private sector and the citizen.

 

Historically, we see many examples of a major crisis leading to the reframing of the relationships between the various actors. In the 1950s, the government was dominant in the post-war reconstruction process. The oil crisis of the 1970s was one of the triggers for the wave of privatizations seen in the subsequent two decades. The fall of communism was one of the factors that inspired the ‘third way’ espoused by Tony Blair and others.

Our preference: a strong, smart but restrained government

The corona crisis need not automatically create an ongoing dominant role for the government. Ideally, all actors will come together to make agreements about their future responsibilities and the degree of discretion that each will enjoy. We wish to see a new division of responsibilities in which the government acts in a strong, smart but extremely restrained, ‘hands off’ manner. It must be strong, not only because there will be damage to repair but because clear frameworks must be established. The government can be extremely active in both spheres. It must be smart because it is desirable for government to act in accordance with the latest scientific knowledge and insights. But it must also be restrained, allowing the private sector and society ample room to maneuver within the established frameworks. Government should not intervene unless absolutely necessary. An overly dominant role at this time will inevitably lead to suboptimal solutions and disappointing results.

By: Rebels Lenny van Klink and Enno Gerdes.

 

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