Crisis could usher in new era of big government

World leaders from Donald Trump to the Queen have invoked the wartime spirit as they rally citizens to defeat the coronavirus.

The Queen invokes wartime spirit in the battle with coronavirus. Picture: PA

World leaders from President Donald Trump to President Emmanuel Macron of France and Queen Elizabeth of Britain have invoked the wartime spirit as they rally citizens to defeat the coronavirus.

Like the great wars of the 20th century, some analysts and historians think the crisis could fuel a new era of big government in which public officials control more of the levers of the economy, for better or for worse.

“National institutions tend to get significantly better funding during wartime, and it’s very difficult to reverse that when people are used to it,” said Tony Travers, a professor of government at the London School of Economics who advises the UK government.

During World Wars I and II, government spending rose sharply in the US, the UK and other countries to finance wartime production and research, and it remained higher after the fighting ended.

To be sure, wartime analogies only go so far. People and businesses are now hunkering down, not mobilising for combat, and nations aren’t fighting each other but a common enemy — the virus.

But as the coronavirus pandemic has escalated, Western governments have made economic interventions long considered unthinkable outside wartime: They have pledged astronomical sums to support stricken businesses and workers, cajoled or ordered chunks of industry to shut down or switch production to essential goods, seized control of supply lines to procure vital equipment, and considered investments in key sectors such as airlines.

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Central banks have pledged to buy nearly unlimited amounts of sovereign debt to backstop government borrowing. Meanwhile, world powers are in a technological race to find a vaccine.

The interventions are proving popular. Mr Trump’s approval rating has jumped, as has that of German Chancellor Angela Merkel’s ruling Christian Democratic Union party.

When the crisis is over, “it will be very hard for any government not to increase spending on health”, and to fund new areas such as medical research and vaccine production, said Mr Travers.

A similar shift happened after the depravations of World War II, when countries like the UK pushed up taxes to finance sweeping new social-safety nets, including universal healthcare programs.

In the US, “the virus could improve prospects for some aspects of social safety nets, such as in health care,” said Maurice Obstfeld, a former chief economist at the International Monetary Fund who now teaches at the University of California, Berkeley.

Some recent decisions go even further than World War II, with governments around the world directly supporting the pay of millions of idle workers.

Policy makers are realising that in public health emergencies, as in wartime, worries about budget deficits go out the window, said Mark Harrison, emeritus professor of history at Warwick University and an author of books on the economics of both world wars.

In the US, government debt could soon rise to 130 or 140 per cent of gross domestic product, versus around 100 per cent last year and higher than the level after World War II, when debt reached around 120 per cent of GDP, estimates Mr Obstfeld.

Such a burden is only sustainable if interest rates remain low. That has been aided by central banks, which have lowered rates and switched their focus from controlling inflation to supporting governments and businesses.

The Federal Reserve and European Central Bank introduced open-ended bond-buying programs that echo the Fed’s actions during and after World War II, when the central bank committed to pin long-term US government borrowing costs below 2.5 per cent.

The Fed’s actions “are as close to monetary financing of the deficit as we have come”, and risk some inflation down the road, said Mr Obstfeld. High inflation after World War II helped the US government to reduce its debt as a share of economic output, without actually paying it down.

During World War II, allied nations including the US, the UK and the Soviet Union gave over as much as half their national output to producing aircraft, warships, weapons, and other materials and equipment essential for the war effort, said Adam Tooze, a professor of history at Columbia University.

The goal of policy makers now, unlike in wartime, isn’t to reorient the whole economy toward fighting the virus but to do almost the reverse, Mr Tooze said: Shut most of it down to prevent the infection from spreading.

And while major economies grew rapidly at the start of World War II, they are now shrinking. That means governments need to do more with less money, triggering an explosive rise in borrowing.

The scale of new deficits suggests governments won’t be able to control their debts through spending cuts, as after the financial crisis.