When the dust from the pandemic settles, there will be a lot of people in developed economies wondering why, their systems failed them.
The Covid-19 pandemic has forced governments around the world to take extraordinary steps to limit the damage of the outbreak. While reducing the number of deaths, these measures have triggered a major economic recession, predicted to be a crisis of greater magnitude than the Great Depression of the 1930s.
Businesses have ground to a halt, and millions have been laid off. However, just like any other major crisis, this one offers a moment of reflection and an opportunity for long term reform of the economic and political system. In this turn of history, the Covid-19 crisis may arguably lead to a paradigm shift in policymaking in the developed economies of the West, first and foremost the US.
A revolution in economic governance had already been in the making, especially in the aftermath of the 2008 financial crisis. Now, amid a pandemic, the flaws of the neoliberal order are exposed more than ever, so this process of change could accelerate.
Neoliberal ideology dominated policy across western economies, especially in the US and the UK, in the early 80s. Governments transformed their approach to the economy in favour of a less interventionist, hands-off model, based on the idea that unfettered markets are best suited for creating economic efficiency.
The approach involves deregulating the labour market, trade and finance liberalisation, and an increased role for the private sector in all aspects of the economy. Minimalist, neoliberal states have replaced big welfare states of the post-war period.
Less employment regulation meant that it became easier for employers to fire and hire workers. Lowering trade barriers led to an age of hyper-globalisation; taking advantage of an increasingly integrated global economy manufacturing industries migrated to wherever labour was cheaper, and taxes were lower.
The liberalisation of capital movement forced countries to compete for freely floating capital, consequently, shifting the tax burden towards the labour and middle-class. Governments privatised or reduced spending on essential services, including education, healthcare, and even security.
All of these changes amounted to less job security and lower pay for the lower classes and increasing inequality across the populace in major economies. Real wage growth fared much worse than it used to before the neoliberal era, while income and wealth inequalities reached levels that were last reached in early 20th century.
Overall, neoliberalism failed to deliver what was promised and led to disappointing results on many accounts. In fact, even before Covid-19, there were already calls for a critical evaluation of the prevailing neoliberal paradigm in policy circles and academia. Notable economists denounced neoliberalism and called for radical reform, especially after the 2008 financial crisis.
It became clear that increasing marketisation does not always translate into a better life for society at large. The overwhelming majority of Americans and to a lesser extent in other developed economies, are left exposed to the sudden fluctuations in the market and feel financially insecure.
Millions of people lost their jobs and property after the mortgage crisis while governments could do nothing but bail out big businesses and the rich with taxpayer money. Traditional policy tools failed to revive economies.
In a desperate attempt, central banks lowered interest rates into negative territory, assuming that this will be a short-term adjustment, and flooded the markets with liquidity. Even this unprecedented monetary experiment failed to boost businesses and employment, and normalisation could not be achieved. After more than ten years, growth rates were still not back to pre-crisis levels, and not nearly enough good jobs.
There also seems to be a direct relationship between the increasing discontent of the people with the current political order and the rise of protest movements across developed countries.
The Yellow Vest Movement in France, the Trump Presidency in the US, Brexit in the UK and the rise of far-right politics across Europe are all expressions of people’s resentment with mainstream politics. People are searching for a voice in politics, often empowering xenophobia and populism.
As Covid-19 hits the system at a deeper level, fear and anger are more prevalent among vulnerable social groups. They are angry because they live in some of the most affluent societies on the planet, but they do not feel safe and secure. The constant sense of precarity has been a phenomenon in these countries long before the virus. Now, it is at its peak.
The US’s decentralised and mostly privatised healthcare system is proof that the increased role of the private sector does not always bring better results. Long after the virus started to spread among Americans, hospitals were still charging people for Covid-19 tests. People are still being billed for treatment unless they have insurance, which many Americans lack. The virus is universal, but the US healthcare system is not.
In just six weeks, 30 million Americans have lost jobs, which is not surprising because the US labour market does not have any ‘automatic stabilisers’. In the UK, ten years of austerity has left the National Health System (NHS) severely underfunded. Even before the Pandemic, the NHS was in trouble, having seen the longest waiting hours on record in 2019.
Despite aggressive government efforts in recent weeks, the country is still far from reaching the adequate ICU and personnel capacity necessary to counter the pandemic. The UK has one of the highest death rates in the world, considering its population size.
Health care staff complain that they do not have adequate PPE while citizens ask why the sixth-richest nation in the world is not capable of producing life-saving ventilators or even face masks but wait for aid coming from the so-called ‘third world’. People have come to realise that ‘making things matters’ after all, and maybe it was a bad idea to outsource production to China.
After the pandemic is over, politicians will face the challenge of countering an entirely legitimate disappointment with the current system. Unless they succeed at implementing substantial reforms, we will likely see people expressing their grievances with the prevailing system in more radical ways. One way or another, it will not be ‘business as usual’ after the pandemic.
The Covid-19 pandemic, in and of itself, may not be a reason for a systemic transformation. However, it will surely accelerate trends that have already been underway since the 2008 global financial crisis.