China first reported pneumonia cases from unknown causes in Wuhan, Hubei province, to the World Health Organization on 31 December 2019. But it was only in late January that the Chinese authorities scrambled to get a grip on the unfolding crisis—made worse by attempts to suppress the outbreak—and began sealing Wuhan.
By this time, the World Economic Forum was congregating at Davos, where US President Donald Trump dismissed questions on the outbreak. He remained in denial and rejected concerns as fear mongering for weeks.
Would the virus have spread unchecked if the US, UK, Spain, Italy and India had been proactive early on? These countries were slow to enforce testing or quarantine strategies and travel bans, and therefore failed to control the outbreak. The UK and the US, in particular, downplayed the severity of the crisis for weeks. The insouciance boomeranged. As the infection got out of hand, supplies of testing kits, masks, ventilators and other medical essentials ran short.
Despite the formidable public health systems and substantial economic resources at their command, the spectre of developed countries (in particular) struggling to control the pandemic should have served as a reminder of the state’s chronic incompetence. But since the crisis has—ironically —necessitated an expansion and change in the nature of government’s role, an age-old debate has been revived. The debate about big government.
Big government is back in the US and Europe. Blurring the lines between the public and the private, right-wing governments are even directly subsidizing private sector wages in rich countries. Countries are spending like never before—not even during the wars had governments blown budgets to the skies as they are today. The Bretton Woods Sisters (the International Monetary Fund and the World Bank) are egging them on; the concept of deficits has vanished from their lexicon.
Whatever it takes
The new battle cry is: whatever it takes.
“We are going to nationalize the wages and the P&L [the financial accounts] of almost all our businesses," French President Emmanuel Macron told Financial Times in an interview last week. “All our economies, including the most [economically] liberal are doing that. It’s against all the dogmas, but that’s the way it is."
Macron is one of the European politicians arguing for corona bonds to be raised and guaranteed jointly by EU member states to provide emergency assistance to the countries according to their need rather than the size of their economies.
Then, British Prime Minister Boris Johnson contradicted his Conservative predecessor Margaret Thatcher’s famous endorsement of pure individualism made in 1987, “There is no such thing as society". In a self-shot video released when he was recuperating from covid-19, quarantined behind closed doors in his flat above No 11 Downing Street, Johnson thanked the National Health Service (NHS) and said, “…the coronavirus crisis has already proved is that there really is such a thing as society".
But as mentioned earlier, the crisis is an outcome of state failure. Not market failure. The state has little option but to step in because lockdowns have suspended markets, creating a vacuum. This is a temporary phase, but the scale of state intervention is unprecedented. The economy has been switched off by the state and can only be brought back to life by the state.
So, will the public-health crisis tilt the balance in favour of the welfare state?
To be sure, the economic relief being administered across countries is strikingly interventionist. Right-wing governments are paying wages of private sector employees in emergency job-protection programmes. They are also bailing out small businesses with state-backed loans and informal workers with watered-down temporary variants of the universal basic income.
But these are temporary distress mitigation policies with a short shelf-life. They will survive only until coronavirus is brought under control by a vaccine. They won’t be a lasting legacy of the crisis. Fact is, governments even in the largest economies cannot afford to keep such large spending programmes in perpetuity.
The US Congress has approved fiscal spending of $2 trillion. Small-sized companies can take bank loans to cover running costs, wages and rent for a couple of months. If they don’t retrench workers, the US treasury will repay the loans.
EU member countries are not limiting salary protection to employees of small businesses. Germany’s kurzarbeit (short-time working) programme has covered wages for about two million private sector workers. The German development bank, KfW, has promised an unlimited supply of business loans. Denmark, Netherlands and South Korea’s employee-retention schemes are covering 75%-90% of salaries to fend off lay-offs.
Even distress relief bears tell-tale signs of the state’s weakness. The most vulnerable are to receive the least. Sizable populations have no recourse to the state support announced. Programmes in most countries have left out workers with no formal contracts and those self-employed. A large number of Italians—informal contract workers, care providers, cleaners, construction workers, waiters, couriers, drivers and farm workers—have no refuge in wage protection or the one-time handouts offered by the country’s relief package of 1.4% of gross domestic product (GDP).
In India, the Narendra Modi government will foot the bill for the Employees’ Provident Fund (EPF) contributions of both the employee and the employer sides for 8 million organized sector workers earning up to ₹15,000 a month in private companies. It is front-loading targeted cash transfers due through the year—with small hikes—to select sections of the distressed population covered under existing programmes. But the package leaves out millions of informal workers and the unorganized sector. India is rationing bailouts just as it is rationing testing kits, masks and personal protective equipments (PPEs).
The economic concept of a welfare state is quite different from how the term is politically used. A welfare state takes on twin roles: it provides (not necessarily produces) merit goods such as healthcare and education to everyone. It may also redistribute incomes so as to alter the income distribution created by markets.
For instance, the welfare state may tax one section of the population to finance income support payments to a chosen set of people. Income support may be given as pension, childcare allowance and unemployment benefit etc. Basic income is similarly a fiscal policy intervention for reducing that income inequality which results from productivity growth for labour being slower than productivity growth for capital.
But, as economist Rathin Roy has written, the welfare economics principles governing the use of such interventions for altering income distributions were written for economies in which all resources, labour and capital, have been fully employed. The framework cannot be applied in emerging economies like India.
Defining the welfare state
Most rich countries built their welfare state institutions—safety net schemes, high public spending, powerful trade unions, universal benefits, support for women to stay in the workplace, free or subsidized healthcare and employment rights—post-war in the mid-1950s. Faith in the welfare state started waning from the 1970s.
The history of the British welfare state is instructive. The term welfare state, in fact, became popular after the publication in 1942 of the Beveridge Report, the blueprint for the construction of the British welfare state by the Labour Party at the end of World War II. It lasted four decades until the arrival of Margaret Thatcher.
The welfare state is sometimes mistakenly believed to be a left-wing creation. Actually,William Beveridge, former director of the London School of Economics, had proposed it as a complement to free markets. Following the publication of his report, an all-party commitment in 1944 paved the way for changing the role of government to maintaining a high and stable level of employment. This went beyond just establishing conditions in which full employment might be attained by the market. The idea was to make freedom from poverty, that had been a privilege of the rich, the right of all, wrote British social policy historian Rodney Lowe.
In 1948, the Labour government introduced universal welfare institutions such as the National Health Society (NHS) and National Insurance. By the 1960s, social security supplanted defence as the most expensive item of government expenditure. Post-war Britain saw 30 years of high employment and rising affluence.
But by 1975, unemployment exceeded one million and inflation reached an unprecedented 27%. Public expenditure shot up to 57% of GDP. Dependency culture increased. The creation of an all-powerful state threatened to diminish individual freedom. Despite policies aimed at the creation of a healthy, educated, mobile and well-motivated workforce, the welfare state could not eradicate poverty: Five million people remained on or below the official poverty line.
Acceptance for the welfare state withered away, although spending did not shrink significantly. In 1987, the government’s role was redefined as the financier and regulator, not the provider, of services. (The return to non-interventionist policies could not prevent mass unemployment.)
Lowe writes that to succeed, the Beveridge welfare state needed tremendous improvements in administrative capacity, which Britain politicians and civil servants could not achieve. Why did the welfare state fail? The gap between the income distribution kept rising. So did the burden on taxpayers consequently.
Economic history of other countries with large welfare programmes shows that growth slows down after the fiscal burden of the government is increased. Sweden’s GDP grew 3.02% from 1920 to 1965. But the rate slowed to 1.93% between 1966 and 2010. In 1970, before the explosion of its welfare state, Sweden had an income per capita equivalent to 115% of that in the average Organisation for Economic Co-operation and Development (OECD) country—the fourth-highest in the pecking order. By 1995, Sweden’s income per capita was only 95% of the OECD average, and it had fallen to 16th place in the ranking.
The welfare state attracts new clients and politicians begin to add new programmes. The number of people living off government exceeds the number of taxpayers who finance the government. A famous newspaper cartoon depicts this as a boat (a Viking ship) of galley slaves, i.e. taxpayers, towing a political party boat filled with people who live off the state. In Denmark, a third of the population was on the boat when the welfare programmes were started in the 1960s.
By 2014, two-thirds of the population was riding on tax money. Denmark is taking corrective steps and now outranks the US as a good place to do business.
Poor countries subsist hand-to-mouth from budget to budget, but it is hard to see even rich countries returning to large, permanent welfare programmes. The covid-19 crisis follows a decade of difficulties. The world economy has not recovered from the Global Financial Crisis of 2008. The financial system remains fragile. Fiscal authorities are severely constrained.
China’s stimulus is muted compared to its response in 2008. The EU is handicapped by lack of consensus among member states over a common fiscal policy union. There is a risk of the return of the post-2008 sovereign debt crisis in the eurozone. And even in the US, less than 10% of the fiscal stimulus spending is earmarked for its stretched healthcare sector.
Will the crisis change the role of the state significantly and irreversibly? Given the scale of intervention, government balance sheets will have to be re-designed. The laws of public finance and monetary policy will have to be rewritten. Once the crisis ends, which it will once a vaccine is ready, the state will pull back. The question is: by how much?
Puja Mehra is a Delhi-based journalist