For a fleeting moment after the 2008 financial crisis, received wisdom held that the damage wrought by anything-goes financial capitalism presaged a reshaping of the market economy. The bankers would be reined in and the playing field remade to distribute more fairly the gains from technological innovation and globalisation. These good intentions dissolved when central banks set the printing presses running in defence of the status quo.
The enduring consequences of the crash turned out to be political. By exposing the inequalities of Washington consensus economics, the crash gathered up a ready army of supporters for populists of both the right and left to rail against elites. Government austerity programmes cut wages and suppressed welfare payments, compounding the grievances of society’s left-behinds. The popular insurgencies feeding the UK’s Brexit decision and Donald Trump’s election as US president were scarcely coincidental.
Four years later, and nearly a year into the coronavirus pandemic, the skies suddenly seem to have brightened. Vaccines have brought into sight if not the elimination of Covid-19 then at least the capacity to bring it under control. It is perfectly possible to imagine that by mid-2021, at least in rich societies, life will have returned to something like normal. Economies will pick up, unemployment will start to fall and borders will reopen. To the extent that the virus persists, it will be manageable.
There have also been shards of light on the political front. Mr Trump’s palpable disdain for the rule of law and other basic democratic values has been a gift to authoritarians everywhere. Democracy had been on the back foot, challenged even in the EU by rising illiberalism in formerly communist states. How to make the case for tolerant, open societies when the leader of the world’s most powerful democracy cannot hide his admiration for Russia’s Vladimir Putin?
The simple fact of Joe Biden’s US election victory changes this calculus. The president-elect, with a long record of backing a rules-based international system, wants the world’s liberal democracies to make common cause. There is a lot of rhetoric here, but it matters that the autocrats have lost an ally in the White House and that the words about democracy are now on the right side of the argument.
The danger is that history may repeat itself. We are told that the damaging legacy of the Covid-19 pandemic, like that of the financial crash, will be economic, visible once more in mountains of government debt. Yet a narrow counting of the cost in dollars and euros risks obscuring once again the potentially higher political risks.
Trillions of dollars have been spent to soften the shock on output and employment of lockdowns. The UK alone has allocated £280bn to meet this cost. Tax revenues have shrunk. The vast majority of businesses have cut back investment. Even with most economies still in some form of lockdown, finance ministries across the world have started drawing up fiscal retrenchment programmes to restore sustainable budgets.
What’s worrying is that, as happened in the aftermath of the crash, such plans envisage the cost of any post-Covid-19 austerity falling heavily on the least affluent — the people most hurt by the pandemic — through cuts in public spending.
The biggest victims of Covid-19 have been the low-paid, the unskilled and those in insecure jobs — a great number of them in hospitality industries and the so-called gig economy. Higher up, a large proportion of skilled employees have been able to adapt to remote working or been cushioned by government-financed furlough programmes. Many of the relatively affluent have seen their savings swell during lockdowns.
A sensible official response would see any budgetary tightening delayed until economies have clawed back fully the economic output lost to the pandemic. It would then ensure that, where retrenchment is needed, it comes in the form of broad-based increases in taxes for those on middle and high incomes. Instead, the finance ministry reflex has been to cut spending programmes that are skewed towards the least well off. In such cases, the left-behinds are asked to pay twice.
Nothing could be better calculated to give populism a second wind. The 2008 crash exposed the inequalities of laissez faire financial capitalism. Covid-19 has underlined the frightening precariousness of life near the bottom. If politicians are serious about rescuing democracy, they must start by restoring a measure of fairness to the operation of the market economy.