Life after the Covid-19 pandemic will never be the same as before. Digitisation will be far more advanced and the geopolitical balance of power will be more tilted towards China. Moreover, the state will have completed its ascendance, underway since the Great Financial Crisis of 2007/08, to commanding heights over western societies and economies. Thus, the dialectic process, which began with the collapse of communism and the Soviet empire, progressing to the rise of a liberal order until the financial crisis and its decline thereafter, will be finished by the return of state; now in the role of the all-round insurer and pivotal “entrepreneur”. Unfortunately, this will have unpleasant consequences.
When the spread of Covid-19 incited fear among populaces and threatened to overwhelm health systems, states stepped in and imposed lockdowns. They compensated the losses of income, much as insurance agencies would do for damages incurred as a result of a natural disaster. However, while insurance agencies give out compensation from funds accumulated beforehand, states, unable to save in good times to tie over us in the bad times, need to borrow. Interest rates would have remained unchanged if borrowing by the states had matched the surpluses of private money savings over investments. During the recession caused by the lockdowns, however, central banks wanted to push interest rates down at the same time as states increased borrowing. As a consequence, central banks, in conjunction with commercial banks, added large sums of new money to existing private money savings, and thus financed part, or all, of state borrowing through money creation.
The legacy of this action is a sharp rise of money stock over GDP, a so-called monetary overhang, reflected in a sharp increase in private money savings. When the pandemic subsides, the lockdowns wind down, and the economy recovers, excess savings will be spent. Given their size, the transformation of excess savings into consumption is unlikely to be accompanied by a commensurate increase in supply. Hence, prices are likely to rise to restore balance. This puts central banks in a bind. If they raise interest rates to counter rising inflation, they risk mass defaults of overindebted entities and a new financial crisis. If they ignore rising inflation and leave interest rates unchanged, they risk losing their credibility as guardians of price stability. A way out could be to talk inflation down and pray for an increase in supply to match demand. Should the prayers remain unfulfilled, out of control inflation could bring us (again in a dialectic sense) back to the “stagflationary” of the 1970s.
Many politicians and economists see the economic destruction caused by the pandemic as a chance to rebuild the economy according to ecological blueprints. The economic planners want to put the “entrepreneurial state”, a term coined by the US economist Mariana Mazzucato, in the driver’s seat of the carbon free economy. Mazzucato’s narrative of the entrepreneurial state has powerful supporters. For example, as early as 2019, EU Commission President Ursula von der Leyen spoke of her “Green Deal” as Europe’s “man on the moon moment”. During the Covid-19 pandemic, she took over the central planning of Europe’s vaccine supply. The World Economic Forum, led by its founding director Klaus Schwab and Prince Charles (the Prince of Wales), wants to use the partial destruction of the economy created by the “lockdowns” as a “Great Reset” to rebuild sustainably.
What Mazzucato and her supporters overlook, however, is that the state has only been successful when it has acted as a buyer rather than as a supplier in the market. The US state was willing to put a lot of money on the table for the moon landing in 1969. This spurred scientists and entrepreneurs to deliver what was wanted. It was the same with vaccine supply in 2020. The US, Great Britain and Israel offered high prices, while the EU Commission stalled and haggled. No wonder, then, that the countries of the EU are now at the back of the queue of those wanting to be vaccinated. Where the state has been the “entrepreneur”, the results have generally been meagre. The series of past disappointments ranges from: the collapse of centrally planned economies in the era of socialism; and the demise of state-owned industrial enterprises in Europe in the 1960s and 1970s; to the present blunder of the German state over vaccinating against Covid-19. But, as is well known, the fruits of knowledge never stay fresh for long.
With the rise of the state, the western world loses its key advantage over state-led China: its liberal order. A liberal society unleashes creativity and creates efficiency by putting individual freedom and free markets at its centre. As the failure of EU bureaucracy to rapidly procure urgently needed vaccines and the failure of German bureaucracy to distribute them efficiently has vividly demonstrated, the western world will never be able to match the central planning skills of the Chinese state. Thus, by promoting the rise of the state as the all-round insurer of the economy and individual wellbeing and all-round entrepreneur in the “green economy”, the western world promotes its own descent and China’s ascent in the world.