The Covid-19 crisis has caused an unprecedented contraction of the global economy.
While it is remarkable how quickly and decisively governments and central banks reacted to the pandemic to bolster their economies, prevent the collapse of financial markets and seek to preserve jobs, our attention must now turn to how to deliver a sustainable economic recovery.
The overarching challenge is neither cyclical nor, indeed, Covid-related, but structural — as growth has been declining for decades and prospects are currently poor. Potential annual growth has fallen from over three per cent to less than two per cent over the past 40 years and annual productivity growth has fallen to less than one per cent over the past decade.
Some argue that a more interventionist approach is needed to fix our economic and social problems, with governments pursuing ever higher public spending, industrial policies and protectionism. Their calls are based on the claim that too much market economy is somehow an obstacle to growth and wellbeing.
But, as I argue in my new paper for Politeia (Preparing for Economic Recovery: More Market, Better Government), the evidence indicates that there is a better way. We must turn to a market-friendly reform agenda to allow markets to do their job and governments to become better at their own core tasks.
It is asking too much of governments to insure us against all contingencies and fix all our problems via more regulation and more spending.
Yet governments are increasingly under pressure to channel public funds into certain sectors on the dubious assumption that they know which are the industries of the future or for which products the country has a comparative advantage. While there may be a limited number of instances where such projects make sense (such as in space), the government is generally not better at knowing the future and is a poor manager of private companies and projects, as repeated experience has shown.
Instead, once the Covid dust has settled, the government should scale back its interventions and allow markets to determine which players survive and scaling back state interventions and guarantees.
If there is anything that our chequered history of crisis and poor growth has taught us, it is the need for returning to rules-based economic policymaking. Our leaders should have an incentive to meet sound macroeconomic objectives and improve the quality of government with better rather than more spending to enhance prosperity, equal opportunity and social inclusion.
What we need now are clear fiscal rules on deficit, expenditure and debt, to allow the adjustment path for public finances to be tailored to the needs of sustainability and the economic environment.
There is, however, one prerequisite for fiscal rules to be effective: they must be implemented and enforced. In many countries that have gone down the path of economic calamity, the culprit has been lack of implementation, rather than bad rules.
Market-friendly domestic economies, open borders for trade, and healthy and sustainable finances are the triangle of stability that we need to secure for the future. This is all the more important given all the challenges — from population ageing to financial uncertainty, social stability and climate change — for which we need well-performing and solvent governments.
Main image credit: Getty