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Aftershock

The “new normal” – lessons from history.

2 September 2020

People are longing to get back to what they know, to the “old normal” – but this comes with considerable risk. What will the “new normal” look like after COVID-19, and what can we learn from history?

Authors
Thomas Falkner
Author

I.

Slowly but surely, the world is starting to shake off the profound shock of the first COVID-19 wave. The initial reaction to protect public health at all cost came at a high price, not least for the global economy. As governments and the public continue to search for the best way forward, other priorities such as economic development, fundamental rights, arts and culture, or social interactions are coming back into focus as well. The decisions that are currently being considered by policy-makers will set a course for the post-COVID age. Almost everyone agrees that we will not – that we must not – simply go back to the ‘pre-COVID normal’. Beyond this general consensus, however, there is a clear rivalry between competing economic and political orientations. While many strategies are based on supposed historic certainties, a closer examination of history displays how there are many more ways to cope with socio-economic collapse than we might think.

II.

Before us lies a global recession of unknown dimensions. Recent history has not seen any event of a similar magnitude. We would have to go back as far as World War II for any kind of equivalent event.

In the 1950s, the United States are clearly an exception when compared to much of the rest of the world. Not only was their industry essentially untouched by the war’s destruction, the US also managed to increase its capacity and its advantage in productivity. In contrast, the Western European countries involved in the war saw their economic performance shrink to 30 or 40 percent of pre-war levels (in Germany this fell even to 20 percent).

From today’s point of view, it might seem surprising that the industrial infrastructure in the UK, France and (West) Germany was relatively intact and rather modern after the war. These countries had considerably increased their production during the war years, and the destruction brought this back to about pre-war levels. There was almost no dismantling of industrial capacity in (West) Germany for reparations. The primary economic crisis that hit France and (West) Germany was mainly caused by a lack of raw materials, the destruction of the transport infrastructure, and insufficient volume of vehicles.

III.

During the reconstruction of the economy and of the economic system in Western Europe, it became clear just how much the Great Depression and its long-term fallout had nurtured doubts about the functioning of liberal market economies. The economist William Henry Beveridge responded to these doubts with his idea of a “planned market economy”, which was to provide “full employment in a free society” (which was also the title of his most important work, published in 1944). The white paper on employment policy that Churchill’s coalition government had presented in 1944 was strongly influenced by Beveridge’s reflections.

The first British post-war government led by Clement Attlee based many of its economic and social policies on Beveridge’s proposals. Labour nationalised many industries that were already strongly influenced by the government, including ailing sectors like coal mining and the railroad, but also profitable ones like the iron and steel industry or road transportation.

The key words in France were “dirigisme” and “planification”. A planning commission made up of economic leaders and government officials devised the reconstruction plan. In the first planning period six key industries – electricity, coal, steel, cement transport and agricultural equipment – received preferential treatment when it came to accessing loans, cash and resources, and company mergers that would increase international competitiveness were encouraged. Later “the emphasis was on the quality and efficiency of production, rather than simply its expansion. …(The) second plan, … marked the beginnng of the passage from a plan of priorities to a plan of harmonised growth.”

IV.

The result of these efforts was a swift and dynamic economic revival which lasted well into the 1960s in the UK, and continued until the first oil crisis in the 1970s in the case of France. Then, the economic conditions changed, and the economic systems of the post-war era were no longer flexible or innovative enough.

In (West) Germany, the equivalent of “Les Trente Glorieuses” (the glorious thirty) was the “Wirtschaftswunder” (economic miracle). The country had taken a different path after the war: Initially, the main focus had been on breaking up the big conglomerates that had had close ties with the Nazi Party. Later on, (West) Germany’s development was mainly guided by ordoliberalism, which – combined with the idea of “popular capitalism” that was to bring, as Ludwig Erhard put it, “prosperity for all” – developed into the concept of a social market economy that would endure.

Yet, when trying to revive an economy that has partially collapsed but whose capital stock is mostly intact and modern, the post-war experience of the UK and France, as well as Beveridge’s ideas, can certainly serve as inspiration. They indicate that the state could play a central role and could carry great responsibility where market economies are still fully functional, acting as

− an active economic agent
− a macroeconomic regulator and
− a provider of basic public services (including stockpiling) that the market cannot provide by itself.

V.

It is also important to remember the – as some authors put it – “almost meteoric rise” of social security after the war. Many of the ideas in this area were based on Beveridge’s work, including the much-cherished National Health Service (NHS), which was created based on his recommendation and which.

While post-war policy aimed mostly at guaranteeing full employment in the industrial sector (as one precondition for an effective social security system), the current crisis throws into stark relief the precarious situation of many small companies, self-employed people, and solopreneurs, who have no access to any effective social safety net. The welfare state must develop the necessary measures for these groups because the number of solopreneurs will only continue to rise as models of value creation change, technology cycles get shorter, and work becomes decentralised and more flexible.

VI.

But how are we going to finance all this? You can often hear people talk and dream about the introduction of a “new Marshall Plan”. However, when the Marshall Plan came into operation in 1948, it was actually less about simply giving countries endless amounts of gold or money as the mythology around the programme sometimes seemed to promise. Rather, it was a financing system that not only aimed at keeping the growing trade deficit under control, but also enabled Western European nations to buy the goods they urgently needed from the powerful US market without having to pay in dollars. In order to achieve this, the US government bought products and raw materials on the domestic market for dollars and shipped them to Europe, where the amounts due were paid into counterpart funds in the respective national currencies. European countries and the United States then jointly decided on how the money in these counterpart funds would be used.

The conditions for creating and implementing the Marshall Plan can hardly be compared to the current situation. All industrialised countries have been equally hit by the ongoing COVID-19 crisis, and there is no oversupply on one side facing unmet demand on the other.

What is to be done?

As we enter the fourth quarter of 2020, the world is not “moving on”. Instead, COVID-19 continues to wreak havoc. People are longing to get back to what they know, to the “old normal” – but this comes with considerable risk. Governments are focused on the question of how many restrictions they can lift without risking another lockdown.

And yet, any decision taken during this crisis – no matter which urgent situation might be the reason – is already a decision on how to overcome the crisis and on what the “new normal” might look like. Most developed countries have mobilised immense – mainly financial – resources and will not be able to do so again anytime soon. The way those resources are allocated and used now will therefore shape the success or otherwise of the transformation of our societies, and of our economies in particular. This transformation is inevitable and has already begun. This is why now is the time for long-term strategic decisions: on climate action; on energy, agriculture and transportation systems; on digitalisation and its social repercussions, on ensuring societies can cope with the ever-increasing speed of innovation.

This will not work if we simply copy and paste what has been done in the recent and the distant past. And it will not work if we are held back by seemingly eternal truths. COVID-19 very quickly made clear just how important the role of the state is and should continue to be; how sometimes, there are other political priorities than economic welfare and individual liberties; and how important the right timing and the right timeframe can be.

Perhaps the most important question governments and stakeholders are currently faced with is: How much influence will the state have on the economy and on society in the future?

Considering the seriousness of the present crisis, it would be impossible for the state to simply withdraw from its commitments. What would be important to decide, however, is whether the state should limit itself to supporting companies and industries with the potential to survive or whether it should actively intervene in favour of the imminent transformation process. In recent decades, the market increasingly decoupled itself from the state. Yet, as the UK and France demonstrated very clearly in the mid-20th century, it is certainly possible to have a market economy where the state takes important decisions that can generate progress.

At the same time, it is true that “to every [thing there is] a season, and a time to every purpose under the heaven”. This applies in particular to the relationship between the state and society, between the state and the individual. Daniel Möckli, an expert on constitutional law from Switzerland, concedes that “the issue with ‘emergency measures’ … is the danger of perpetuation. The executive branch does not want to let go of its powers because they’re very convenient.” When the Second World War started in 1939, the Swiss parliament gave its government emergency powers and the possibility to act by decree. Those powers were only repealed in 1952, seven years after the end of the war. Based on this experience, Möckli states that the following conditions must be met:

− “There has to be a legal base, a public interest, and the limitation of basic rights must be proportionate”;
− “It is vital that basic rights guaranteeing critical and democratic oversight are not curtailed: freedom of the press, freedom of science, freedom of expression. These freedoms are essential for preventing the abuse of a state of emergency”;
− “Measures should be temporary.”

In almost all modern countries of the Western world, social security systems were robust enough to deal with the onset of the COVID-19 crisis but the pandemic also revealed certain flaws that had to be fixed with the help of comprehensive emergency programmes. However, it is impossible to simply “fix” these flaws as they also point towards more widespread issues. In Germany, for example, it became clear that solopreneurs had been (and still are) operating outside the social security systems – despite their ever-increasing numbers and their already foreseeable increasing importance for the economy. The German “Hartz IV” system, which is the most basic level of social safety, was exposed for how insufficient it really is. Systemic innovations to address these shortcomings are inevitably on the agenda. The move towards a new socio-economic paradigm, with inclusive growth, is imperative.

What remains is the ever-present question: How are we going to finance all this and what should our financial system look like?

The Marshall Plan provides precious few answers as to how the West can handle this problem. Looking at the bigger picture, however, we have to ask ourselves what role China can and will play in the foreseeable future. The country still holds large cash reserves in U.S. dollars. Even before the crisis, China made huge investments to secure and expand its position as a leading economy.

Oxford Economics predicts the Chinese economy will grow 6% in the second half of the year and by as much as 2.5% for all of 2020, “supported by improved sentiment after the successful containment of Covid-19 and significant fiscal and monetary policy easing.” The early return to growth for China could foreshadow good news for the rest of the world.

After World War II, the USA sought sales for its own overproduction and had the financial means to turn its partners into its customers. China not only has enormous surpluses, not only has enormous investment power and not only has enormous real and potential production capacity – it is increasingly innovative and is also a huge market. In the era of KP chief Xi Jinping, the country is increasingly turning this into global influence. The possibility of becoming a global leader is accompanied by interest and activity.

But there is a difference between the role of the global leader after World War II, the United States, and that of a possible new leader after Corona, the People’s Republic of China: political, economic and value systems differ fundamentally. For the West, therefore, it will be important in dealing with the Corona crisis not to be guided by possible short-term effects, but to do everything possible to develop and maintain an open and critical partnership with China on an equal footing. (Whether the trade war with China initiated by President Trump, however, opens a path in this direction is very doubtful).

Equally important is the question of how the crisis will affect the trade balance disparities within the European Union and how these will develop afterwards. If Germany maintains its considerable trade surplus – which has been problematic for its European partners for years – it might be worthwhile to reconsider the idea of counterpart funds (as described in point VI above), at least temporarily.

Lastly, there is the problem of disparities between the financial industry and the real economy, and the issue of money creation itself. This topic requires thorough discussion. The key question for policy-makers will be if (and how) it is going to be possible to redirect meaningful parts of the huge surplus of virtual money to investments in society and the real economy.

Authors