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The hand of the state post-corona

By April 20, 2020 No Comments

What happened?

Governments are taking unprecedented measures to cushion the economic blow of corona. Take, for example, the American Congress, which has already spent twice as much as it did after the financial crisis of 2008. These types of measures give government a larger role in the economy. The current crisis may be temporary, but what will become of this more extensive role of government? How quickly will it disappear after the crisis, or will anything remain, permanently?

What does this mean?

For centuries, the role of governments in the economy has been growing (government expenditures have increased from about 5% in the 17th century to nearly 40% of GDP now). Large crises are turning points. Think of wars, when the state takes control of production of markets and increases taxes. The current crisis isn’t a war but is comparable to times of war. That’s why it’s important to understand that this effect is often permanent. How is this possible? Take the welfare state that arose in Europe after World War II. Higher expectations of government made its larger role permanent (which we’re already seeing with Gen Z). Moreover, the pressure governments face to maintain or even further extend their role, is higher than the pressure to relax their control.

What’s next?

In what way will the government’s role be permanently visible after the crisis? National debts will rise enormously, forcing many countries to increase their taxes in any case. Another possibility is that new generations will ask for more state interference in matters such as the climate and inequality. But perhaps the most important potential for change lies in the fact that many countries are reconsidering which industries are vital or strategic. The military or energy may have previously fallen under that heading, but now the debate centers around food, medicine and computer chips. If this type of thinking gains momentum, we can expect to see more government intervention in these sectors.