Martin Sandbu on the Post-Pandemic Brave New World
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Bibliographic details
- Authors: MARTIN SANDBU
- Published: December 1, 2020
Executive summary
- Policymakers’ choices during the COVID-19 disruption could shape their economies for decades to come.
- The pandemic intensified existing societal fault lines—inequality, precarious and informal work, geographic divergence, and environmental risk—and accelerated shifts in public spending, central banking, and government intervention.
- Large-scale, ambitious policy programs—comparable in ambition to the New Deal or the Marshall Plan—are argued to be necessary to achieve broadly shared prosperity rather than a return to the status quo ante.
Sharpened societal contradictions (key findings)
- The pandemic struck a global economy that already was profoundly unsustainable—socially, environmentally, even intellectually.
- Over the past four decades almost all advanced economies have become more polarized, with increasingly unequal income distributions.
- Developing economies lifted billions of people out of poverty, but in the process they, too, created their own rising inequalities and social tensions.
- The global economy’s lopsided growth has brought us to the edge of catastrophic climate change.
- Lockdowns caused much greater hardship for people in jobs that could not be done from home; white-collar, knowledge-intensive jobs were better rewarded relative to manual jobs in pay, security, and predictability.
- Women and the young are hit particularly hard because they are overrepresented in sectors (hospitality and tourism, delivery, retail, and basic care) most exposed to lockdowns or contagion (as documented in the IMF’s latest World Economic Outlook).
- The pandemic accentuated the policy challenge from gig work and other irregular labor—state bureaucracies often failed to identify and reach workers outside regular jobs.
- A growing “precariat” in rich countries leaves many with exceedingly thin financial buffers; even unprecedented government income-protection steps were generally insufficient to offset disproportionate damage to the worst off.
- The sudden shift to remote working is likely to increase the productivity and rewards of those in “modern” cognitive jobs, plausibly exacerbating bifurcation between good and bad jobs.
- Geographic effects: COVID-19 raises new questions over globalization and has potential to alter the geographic distribution of prosperity within countries, given shifts in where white-collar work is carried out.
Policy program (Sandbu’s proposed components)
- Embraces productivity growth and the technological upgrade of jobs by demanding more from employers.
- When unproductive jobs give way to more productive ones, work becomes safer, more pleasant, and better paid.
- Examples: ambitious minimum wage increases and strong and strictly enforced workplace standards.
- Nordic-style wage egalitarianism can spur productivity growth by making low-productivity labor uneconomical and incentivizing investment in productivity-enhancing capital.
- Produces a high-pressure economy with strong demand growth.
- Calibrate monetary and fiscal policies to keep demand always slightly ahead of the economy’s capacity (“running the economy hot”).
- Necessary to encourage companies to pull more people into the labor force and seek productivity-enhancing improvements.
- More feasible in large, rich economies, especially reserve currency issuers.
- Lowers the cost of leaving a bad job and finding a better one.
- Greater spending on skills, well-resourced active labor market policies, and social security reform to untie benefits from jobs.
- Direct and unconditional payments, including a basic income or negative income tax, to avoid low-income traps and improve living conditions for the worst off.
- Reforms tax systems to encourage high-quality work.
- Shift taxes away from labor; make up revenue by placing a greater tax burden on capital—ideally through a net wealth tax.
- Significantly increase carbon taxes and redistribute proceeds as a “carbon fee and dividend” or “carbon checks.”
- Fix international corporate taxation to level the playing field between multinational and locally employing firms.
- Reforms financial systems and tax rules to be less favorable to debt and more favorable to equity-type funding.
- Equity funding is more conducive to productivity growth and restores an appropriate balance of risk between workers and investors.
- Governments should convert COVID-related rescue loans to companies that struggle to repay into tradable equity stakes.
- Incentivizes a broader geographic spread of the highest-value-added jobs.
- Invest in transport and IT connectivity, local infrastructure, and amenities; make financing available for new ventures in declining areas.
- Use the shift to remote working as an opportunity to deploy tax or regulatory incentives to move good jobs from large central cities to more remote locations.
Reinterpreting the world (structural shifts and opportunities)
- Old macroeconomic rules have been disrupted: politicians presiding over record-breaking deficits opened budgetary floodgates to sustain incomes and liquidity.
- Public spending structure shifted significantly (example: United Kingdom designed a European-style wage subsidy; United States boosted unemployment benefits; advanced economies implemented generous loan programs).
- The state is taking on risks previously borne by the private sector; many of these shifts are unprecedented or accelerations of prior trends.
- Central banks have adopted a dovish shift—accepting low interest rates and a greater tolerance for “running the economy hot”—supporting early and comprehensive action to sustain demand and financial market functioning.
- Rapid accumulation of remote-work technology and organizational know-how suggests permanent change in work practices and consumption patterns (online retail, substitution of online connectivity for physical travel).
- Opportunities exist even for lower-income economies: policy revolutions in rich countries can inform conditions attached to financial aid and debt relief; remote working may improve prospects for attracting outsourced high-value-added service jobs.
Revolutionary questions for leaders (policy scenarios)
- Reallocation or restoration?
- Reallocation: use policy to shift capital and labor into new activities when COVID-19 makes some activities permanently less profitable.
- Restoration: aim to return to precrisis patterns as quickly as possible, minimizing resource reallocation.
- Building back better or back to business?
- Building back better: use the disruption to reengineer the economy (e.g., doubling down on climate goals, raising pay and work standards).
- Back to business: minimize adjustment and return agents to prior activities with minimal friction.
- Are states ready to embrace planning?
- Building back better presupposes state capacity to coordinate and steer private-sector behavior toward sectoral reallocation, regional convergence, or other goals.
- Signs suggest planning may be returning due to climate change, geopolitical upheavals, rapid technological transformations, and the pandemic.
- Whether governments have the capability or leaders the temperament to govern more actively and strategically remains an open question.
Source: Martin Sandbu, "The Post-Pandemic Brave New World," F&D Magazine, December 2020. Opinions expressed are those of the author and do not necessarily reflect IMF policy.
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