Move over, markets. Big government is back.
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Ned Temko Correspondent
| London
The pandemic has upended a lot of accepted wisdom. Its latest victim is a long-standing piece of Western economic orthodoxy – that governments should stay out of the economy as much as possible.
Today, big government is back, and with a vengeance. On both sides of the Atlantic, the authorities are drawing up ambitious post-pandemic recovery plans and pouring trillions of dollars into their implementation.
Why We Wrote This
Over the past half-century, most Western governments have shrunk their ambitions and handed the economic initiative to private enterprise. But the pandemic has changed all that.
This is a far cry from Ronald Reagan’s famous declaration, in his 1981 inaugural address, that “government is not the solution to our problem. Government is the problem.” Such thinking has guided many countries since. But the new – or revived – approach holds that national governments still matter, and that there are some things that only they can do.
For the time being, the U.S. public seems to agree with President Joe Biden that this is the case. Voters also support higher taxes on businesses and wealthier Americans to raise the money to pay for ambitious new infrastructure schemes.
Whether that stays the case could be a key signal of whether big government is back for good.
Ronald Reagan, Bill Clinton, Margaret Thatcher, and Tony Blair make odd bedfellows in many respects. But they all rode, or embraced, the same powerful political wave that has swept major Western democracies for nearly half a century: distaste for the work of national governments.
Has that wave now passed, overtaken by the effects of the pandemic?
Big government is staging a dramatic comeback, and U.S. President Joe Biden’s $2.6 trillion infrastructure and investment plan is just the latest sign. After all, his predecessor, Donald Trump, signed off on nearly double that amount in pandemic spending.
Why We Wrote This
Over the past half-century, most Western governments have shrunk their ambitions and handed the economic initiative to private enterprise. But the pandemic has changed all that.
Across the Atlantic, the government of British Prime Minister Boris Johnson has broken with the orthodoxies of Ms. Thatcher and his other Conservative predecessors to announce billions of dollars in new spending, along with higher taxes to pay for it all.
German Chancellor Angela Merkel – once the very embodiment of fiscal restraint – has signed off on stimulus and recovery plans to the tune of nearly $1.5 trillion. She’s also embraced the idea that an activist government should support and even buy into companies critical to Germany’s future economic strength.
Last year, governments spent money to relieve the immediate effects of an economic tsunami. But the new packages are longer-term, aiming to build modern post-pandemic economies with an emphasis on digital and low-carbon initiatives.
The world might, perhaps, return to the “old normal” once the pandemic has passed. Yet so far there’s been wide political and popular support for more muscular government.
And it’s hard to overstate the magnitude of the change.
The old orthodoxy took root in the 1980s, when American economist Milton Friedman helped convince President Reagan and Prime Minister Thatcher to challenge the prevailing Keynesian model, which had underpinned massive government intervention in national economies in the wake of World War II.
This approach was not just misguided, ran the new philosophy, but an affront to the way democracies should work: It elevated government’s role above the independence and initiative, the lives and interests, of the governed.
“Government is not the solution to our problem. Government is the problem,” Mr. Reagan declared in his first inaugural address, in January 1981. Ms. Thatcher lamented that too many people had been taught to think that when they faced a challenge, “it is the government’s job to cope with it.”
Their revolution has resonated ever since.
“The era of big government is over,” U.S. President Bill Clinton declared in the 1990s. Britain’s Labour government, under Prime Minister Blair, revived spending in some areas. But it generally followed the Thatcherite course of favoring private sector funding, or public-private partnerships, over old-style public sector projects that had to be financed by taxes or borrowing.
Just four years ago, French President Emmanuel Macron came to power vowing to pare back state subsidies of his country’s railways, and to reform the costly national pension system, policies Ms. Thatcher might have applauded.
And the political knock-on effects of the shift toward smaller government made a rethink more difficult and unlikely. Until the pandemic struck.
The better-off welcomed the lower taxes. Business people favored less regulation and fiscal policies that made their companies more competitive in a globalized economy.
Those who needed the government assistance that was being scaled back or eliminated felt resentful and angry. Yet the populist politicians who harnessed their anger directed it not so much against a particular government as against government itself. Many people lost their trust in presidents and prime ministers, of whichever party, to do anything to help.
The pandemic and the economic shutdowns that followed upended all of this.
The stark and sudden message was that national governments still mattered. Indeed, there were some things that only national governments could do.
President Biden’s calculation, as he pushes for a spending program bigger than anything America has seen since World War II, is that this new appreciation for the role of government will last. Prime Minister Johnson, Chancellor Merkel – and President Macron, too, whose government has unveiled a “France relaunch” plan of its own – are making a similar bet.
To judge from polling in America, where there’s been public support among both Democratic and Republican voters for the infrastructure plan proposed by Mr. Biden, they may prove to be right.
But it’s worth noting the main argument Republican politicians have been making to chip away at that support. They are not opposed to government investment in national infrastructure as such – and the plans rival the New Deal’s rural electrification and the postwar construction of interstate highways in their scope and ambition.
But they are taking aim at the way President Biden plans to pay for it, through tax increases on businesses and wealthier Americans.
For the moment, most voters don’t seem to have a problem with that. Whether such an attitude holds, however, could be a key signal of whether big government is back to stay.
