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Bigger and more nationalistic governments are increasingly likely to be one of the enduring legacies of the coronavirus pandemic.
The governments and central banks of the U.S. and nations around the world have vastly expanded their powers to prop up their economies and restrict the movement of people to halt the viral outbreak. At the same time, the crisis has accelerated a burgeoning backlash against globalism as countries recognize the danger of critical supply chains being too heavily concentrated in places like China.
“Investors should keep in mind that the virus is likely to have consequences beyond the next year. The effects will continue to reverberate long after the lockdowns are lifted,” Capital Economics chief economist Neil Shearing wrote in a new note. “New powers are often easy to acquire but difficult to give back.”
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Age of big government
The most immediate consequence of the pandemic has been a massive expansion of government power.
Washington passed with relatively lightening speed a series of bills totaling nearly $3 trillion to save large and small businesses, provide for tens of millions of unemployed workers and dole out funds for other critical needs. States, for their part, have locked down their economies and required Americans to stay at home and wear masks when they travel.
Other governments in Europe and Asia have done the same.
Central banks have also intervened in extraordinary and unprecedented ways. They’ve slashed interest rates to zero again, loosened regulations and made trillions in loans available to many segments of the economy. Even during the worst of the 2007–09 Great Recession, the Federal Reserve didn’t go nearly as far as it’s gone now.
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“The Fed’s ability to expand its balance sheet is theoretically infinite. The constraint is primarily its political will,” said Neil Dutta, head of economics at Renaissnce Macroresearch. “With many of the Fed’s actions backed by the Treasury through legislation, the Fed’s willingness to continue being bold will not stop.”
Even as the pandemic recedes, the Fed is expected to support the economy indefinitely. Most economists say a recovery is likely to take several years and the repercussions could be felt for a decade or more. It could be a long time before the Fed takes a back seat again in the management of the U.S. economy.
The debate in Washington about the federal government’s role, meanwhile, could put traditional conservatives on their heels. Support for those harmed economically by the pandemic is extremely high and likely to remain so given how many people have lost their jobs through no fault of their own.
A recent Pew poll found that nine in 10 Americans approve of all the congressional aid, and more than three-quarters of those polled think more help will be necessary. Democrats and Republicans alike agreed.
Even before the crisis, younger Americans who flocked to candidates such as Vermont democratic socialist Bernie Sanders were more receptive to socialism and broader government economic intervention.
“The public mood may be shifting — there are signs that the spirit of individualism that has shaped the discourse over the past 30 years is starting to give way to a new spirit of collectivism,” Shearing said.
Globalism under attack
A new spirit of collectivism, however, may not extend to nation-states.
The age of globalism and multiculturalism was already under attack before the coronavirus. President Donald Trump’s fight with China and other countries over trade and the U.K.’s departure from the European Union had signaled a broad shift. Now the recriminations after the pandemic could lead to more splintering.
“The COVID-19 pandemic is driving the world economy to retreat from global economic integration,” acknowledged Douglas Irwin, senior fellow at the Peterson Institute for International Economics.
The role of China, the world’s manufacturing hub, as the epicenter of the pandemic has led to calls from lawmakers to ensure their own nations can produce at home critical products such as medical equipment. Early on, China hoarded many of these goods in its own battle against the virus.
“Largely unable to import supplies from China, America has been left scrambling because we, by and large, lack the ability to make things,” wrote U.S. Sen. Marco Rubio, in an opinion piece published in the New York Times in which the Florida Republican took aim at a “hyperindividualistic ethos.”
Rubio and others have urged Washington to use tax incentives and other policies to bring back “supply chains integral to our national interest — everything from basic medicines and equipment to vital rare-earth minerals and technologies of the future.”
Economists warn a sharp turn inward could go too far and undo many of the gains achieved in the past few decades. They say companies and nations would be wise to reduce their dependence on China, but by diversifying their investment instead of concentrating it somewhere else.
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“Exclusively depending on suppliers from any one nation does not reduce risk — it increases it,” economists Richard Baldwin and Eiichi Tomiura wrote in “Economics in the Time of COVID-19.”
