The pandemic and the economic crisis: what lies ahead for the Western model?

While we will overcome the pandemic and the severe economic crisis, these twin calamities will leave deep scars and entail profound changes. The ensuing transformation will be hastened by the digital revolution and the climate crisis. The challenges ahead of us require a major overhaul of public policies.

As a start, we must acknowledge the crisis at the heart of our Western model. Our societies suffer from a variety of ailments, including unrestrained globalisation, market fundamentalism, the neglect of social issues, business misconduct, lack of proper regulations, disregard for climate action, and the inability to reform the European Union, among others.

The fallout from the current crisis will likely reshape our approach to capitalism. For instance, governments will probably shift towards a stronger focus on essential public goods and industrial policy, not least due to geopolitical concerns. Inclusion and fairness will also acquire more prominence, and climate change and public health will become stronger national concerns.

The Nordic states seem to be the best of what ‘the West’ has to offer in this regard. They rely on a very high level of economic and social development, with adequate redistribution of resources and innovative markets. There is an all-encompassing model, which embodies the EU’s principles and values. That’s not to say they’re perfect – they also have flaws derived from the incompleteness of the euro area, the shortfall of fiscal arrangements, and the neoliberalism that underpins the single market.

Future policy debates should, therefore, be about the type of capitalism we want, and whether markets can be reined in to achieve more inclusion and fairness. Economists Raghuram Rajan, Paul Collier, and Martin Sandbu have outlined how we can move forward on this, calling for the rediscovery of ‘the middle ground, the community’. Samuel Bowles adds that this will require a society with ‘good citizens’. This brings us to the issue of ethical conduct.

Social and economic dynamics could become tenser as the middle class is increasingly eroded by new technologies. The digital revolution will likely displace large groups of people from the labour market. While ‘start-up nation’ is an exciting word, an entire society cannot be transformed into Silicon Valley.

Handling this looming tech-induced crisis will require fairer economic policies. Industries have to be properly regulated and undue rents need to be downsized, if not eliminated. Tax regimes also have to be re-evaluated. Massive tax evasion and avoidance need to be fought against resolutely, especially since public budgets are under so much strain and income distribution has gotten so skewed. A carbon tax is a must both internationally and nationally, as are digital taxes on giant companies that pay almost nothing in countries where they operate.

Finance will continue to change, not least due to new technologies. The regulation and supervision of finance will have to consider new systemic risks that come from capital markets and the advent of digital currencies. Central banks rightly factor in climate change as systemic risk and see rising income inequality with worries. The shareholder vs. stakeholder distinction should not be a formal one. It’s time to make ‘corporate social responsibility’ more than just a buzzword.

Mounting public debt is also going to become a major issue. Fuelled by the current economic crisis, these growing financial obligations could translate into a clash of generations. Very low natural interest rates may work, via monetary policy rates, as an exit in advanced economies, but not as a permanent fix.  Younger generations may resent the higher taxation this will entail. Climate change also adds further anxiety to the fiscal sustainability conundrum.

Global issues should not be underplayed. Not only because there is a geopolitical competition for resources and supremacy, but also because we all face the common global challenges, among which climate change is paramount. Other challenges include the fate of very poor countries, as well as large disparities in economic and social development around the world.

Underpinning all of these issues is the importance of truth. With the advent of social media, perpetuating fake news and mass manipulation has become all too easy. Truth is indispensable to democracy and the growing tendency to distort is worrying. This is the only way to combat boundless populism and demagoguery. Strategic alliances are needed between those who believe in values of economic freedom, compassion, and solidarity.

We need to be lucid and mindful of deep trends and change public policies. Xenophobia and chauvinism will only open the door to more authoritarian, illiberal tendencies, fuelled by social and political anger. The impact of climate change and the threat of other pandemics may reinforce temptations to use authoritarian means in public governance. Policymakers must take heed if we are to maintain our liberal democratic models.