When chaos theory first became fashionable some years ago the imagery of choice was a butterfly flapping its wings in the Amazon impacting the weather in China. Bats rather than butterflies appear to be the more likely source of the Covid-19 pathogen but there is no doubting its subsequent widespread impact on public health and the global economy.
The threat to global health has reached alarming proportions and has exposed a lack of national preparedness and international solidarity. Much the same is true of the economic chaos. Twelve years after the financial crisis, the response to another economic shock has been woefully inadequate, both nationally and multilaterally.
The current crisis isn’t a replay of 2008, it is potentially much more damaging and will require a public mobilisation of resources on a scale more in line with wartime. With a sudden-stop in financial markets, a lender-of-last resort can prevent panic, but we also need a carer-of-last resort for those who require urgent health assistance and income support, and after the immediate health risk is contained, a buyer-of-last resort will be needed to jumpstart the economy.
Still, policy makers only woke up to the economic threat when asset prices began to nosedive and an impending squeeze on profits exposed a dangerous fault line through high levels of corporate indebtedness; priority was given to steadying financial markets with the Federal Reserve taking the lead followed gingerly, and in the case of the ECB confusingly, by other leading Central Banks. Only in recent days, as the world economy began to shut down, have the credit taps been turned full on.
While the Federal Reserve took the lead in easing monetary policy, the fiscal response – which all now agree needs to be on a massive scale – was a good deal more ad hoc; the UK chancellor beefed up his post-Brexit budget and the Italian government pleaded for more fiscal tolerance from Bruxelles. But the US Treasury, the European Commission and the Chinese and Japanese governments promised “bold steps” but offered little detail. The G7 has promised to employ “all appropriate tools” but left appropriateness undefined.
As the scale of the challenge dawned on politicians this ad hocery has shifted to doing “anything it takes.” However, as Barry Eichengreen has suggested, after years of public sector degradation under austerity programmes, a lack of “administrative competence” could pose a serious constraint in many countries. The spread of the virus has already exposed the massive underfunding and unpreparedness of public health services everywhere, but particularly in the US, and wider the lack of structures to mobilise collective action.
In the face of recent events, former UK Prime Minister Gordon Brown has rightly asked “why, when a world recession now threatens, is there not yet an attempt at a combined effort on the part of governments and central banks to deliver a global economic response?” Brown laments the lack of global leadership and the recent tit-for-tat tariff skirmishes which have not helped advance a spirit of international cooperation. But multilateralism’s disorders predate President Trump and the leadership demonstrated by the G20 in 2009 proved ephemeral.
The bigger failure, not unique to any single government, is neglect of the systemic imbalances of a hyperglobalised world, prone to the neo-mercantilist protectionism of leading economies. Private solutions to public problems, whether national or global, have been endlessly touted as the way to deliver more efficient outcomes while preserving a business-friendly climate. In reality, resorting to public private partnerships, de-risking, securitisation and blended finance has not only failed to boost investment and productivity, but has provided technocratic cover for the revival of rent-seeking capitalism with an increasingly predatory twist.
What is to be done now? Containing the threat to human health and returning to a sense of normalcy in economic life is the first order of business. Here, at least, macroeconomic and health goals converge on a big government spending package. However, more innovative measures will be needed to ensure that any prolonged absence from work does not leave the most vulnerable carrying the biggest burden.
It is also clear that states must work with private creditors to coordinate a cancellation of debts for the most vulnerable households, firms and countries. If central banks can save financial markets, then surely policymakers can find equivalent support for people in need.
But this should not be simply about getting back to business as usual. We must never return to our extractive economic model, rooted in a toxic combination of unregulated finance and concentrated market power, which has rigged the economic rules of the game since the 2008 crisis. A return to progressive tax structures, strategic industrial policies, the revival of public banks and a willingness to take on vested interests, including large pharmaceutical companies, will be required if economic recovery is to pave the way to a healthier, more inclusive and sustainable future.
But, in our interdependent world, these measures will prove insufficient without a multilateral system that promotes and protects the wellbeing of all people above short-term financial gains and the needs of itinerant international firms.
Seventy five years after the international community called for a united front “to promote social progress and better standards of life in larger freedom,” a new Dumbarton-Oaks meeting is needed, this time with genuine democratic representation and fully committed to a multilateral agenda built around prosperity for all, caring societies and a sustainable planet.