As western economies emerge from the pandemic, their governments face a choice: do they seek to address the profound problems that Covid exposed, or try to return to “business as usual” as quickly as possible? Their problem is that many of the issues exacerbated by the pandemic, such as wage stagnation, precarious work and rising inequality are not bugs in an otherwise well-functioning system, but inevitable outcomes of the way that western economies are now organised. So a business-as-usual approach simply won’t work. Much more fundamental change is needed.
The US government seems to recognise this. Joe Biden’s economic plans are a radical departure from the era that stretches from Reagan to Obama, when governments sought to keep taxes and public spending low and focused principally on globalised trade and the education and training of the workforce. Unlike his predecessors, Biden is pursuing large-scale public spending and taking advantage of ultra-low interest rates to borrow for infrastructure investment. His stimulus plans target the climate crisis while creating green jobs and expanding health, education and childcare – the “social infrastructure” that is essential to the economy but has often been ignored by mainstream economists.
Biden is not afraid to raise taxes either. He has proposed significant hikes to corporation tax and the top rate of income tax, and a near doubling of capital gains tax. In the labour market, his administration is committed to running what the US Treasury secretary Janet Yellen calls a “high-pressure economy“, where sustained demand pushes wages up and improves working conditions. He is also taking on big business, introducing a raft of measures to clamp down on anti-competitive practices by monopolistic corporations.
Biden’s policies have surprised many, but they did not emerge from thin air. His administration has drawn on a wealth of new thinking that has emerged in response to the economic crises of the last decade. The 2008 global crash demonstrated that a new form of capitalism dominated by finance had become deeply unstable. This was followed by long years of austerity and slow growth, stagnating wages, stalling productivity and extreme inequality. Meanwhile, climate and environmental breakdown threatens catastrophe for even the richest economies. Grappling with these problems, a growing number of economists have explicitly rejected the orthodoxy of free markets and hands-off government that has dominated western economic policy over the past 40 years.
Some of their ideas revive the economics of John Maynard Keynes, who saw that government spending is needed to stimulate demand for goods and services during a recession. More recently, most economists have recognised that in an era of ultra-low interest rates, fiscal policy – spending and taxation – should play a major role in how the economy is managed. Many also now acknowledge that there are no absolute constraints on public debt. As long as low interest rates keep the cost of borrowing affordable, and borrowing is used to fund investment (which raises future national income and therefore brings in more taxes), the ratio of debt to GDP will ultimately fall. By contrast, trying to reduce debt through austerity policies is self-defeating and harmful, as the last decade has proved.
Economic thinking is shifting in response to the climate and nature crises. It is no longer sufficient to use a few market-based environmental taxes and product regulations. To achieve net-zero emissions, the whole economy needs to be geared towards these goals. At the same time an active industrial strategy is needed to support greener technologies and consumption patterns, with job creation programmes for workers and communities adversely affected by the green transition.
The new economics recognises that cutting inequality will mean tackling the “rentier economy”, which has concentrated asset ownership in the hands of the wealthy. This will mean curtailing monopolies and regulating the financial sector to focus on long-term investment not short-term wealth extraction. Wealth and land should be more highly taxed, while using public procurement to support community wealth building can ensure that local economies retain their wealth and jobs. Welfare reform, such as a guaranteed minimum income, is needed to end poverty. Systemic gender and racial inequality must be eradicated. These ideas come together in the Green New Deal.
Above all, many are starting to realise that economic policy needs to end its fixation with growth. Growth was never the only aim, but economists long assumed that it would solve most other problems. It’s now clear this was never the case. New ideas for “post-growth” economics are emerging, which focus on environmental sustainability, reducing inequalities, improving individual and social wellbeing and ensuring the economic system is more resilient to shocks.
During previous periods of economic crisis, prevailing ideas about how the economy should be organised and managed were overturned in favour of new theories. The Great Depression of the 1930s led to the Keynesian revolution and the full employment welfare state. The crises of the 1970s led to the deregulation and privatisation doctrines of Thatcher and Reagan. It is still too early to tell whether such a paradigm shift is occurring today. Biden must still get his economic plans through Congress. In the UK the major parties are still pondering how to “build back better”.
Both Boris Johnson and Keir Starmer have acknowledged the priority of tackling climate change and “levelling up” inequalities. But neither they, nor most commentators, seem to have recognised how economics is changing in response to current crises. The issue is no longer simply about how much a policy will cost or how it will be paid for. There is a wealth of new thinking on which they can draw to address the deep challenges our economies face. The old orthodoxies have failed. The post-pandemic world will ask new questions, and new answers are needed.
Michael Jacobs is professor of political economy at the University of Sheffield, and managing editor of NewEconomyBrief.net