'We are all democratic socialists now, not social democrats!'
Governments in most Western nations, with the support of central banks, have mustered immense financial firepower to prevent economic collapse – the collateral damage in the fight against the coronavirus pandemic.
Why have all the rules of conventional economic policy been thrown out of the window in the last few weeks? Why is now the right time to cast aside all prudence and caution, and create money like there's no tomorrow?
On every continent, whole populations are facing an existential threat from Covid-19, and the measures being taken to slow transmission and prevent widespread loss of life come at an enormous economic cost. Governments feel they have no option but to intervene in the economy to protect jobs and maintain household incomes when people can no longer work.
In the 2008 financial crisis, governments intervened to save the banks at the expense of economic stagnation and lower real incomes for the majority. They created a ‘zombie economy’ of businesses in some sectors that 'just about' service their debts but don’t create new jobs or improve productivity. However, in the 2020 crisis, governments are intervening to save the real economy first, and hoping that financial institutions (which are more resilient now than they were in 2008) will weather the storm.
The effect of this brand new economic policy is to increase resilience in local communities, to protect families and ensure the vast majority of the population survives both the medical and economic threats of the coronavirus.
Somehow the tables are being turned; international coordination by political and economic leaders is no longer to protect the interests of the financial elite, but the citizens of each country. Governments are leaning on banks as they bend over backwards to enable local communities to survive.
If it is suddenly possible to put people and communities first, why was this not possible before? Is there then some truth in the idea that conventional economic arguments were mainly used to justify the status quo and acquiesce to vested interests, ignoring the real needs of the majority? Another question then follows: why is money allocated in such a lopsided way among the few in financial markets, while the real supply and demand is found in communities around the world for basic needs such as healthcare and household necessities?
The battle to save economies that have stalled due to coronavirus isolation measures is being financed by massive new borrowing – usually only seen in wartime. The debt to GDP ratios coming out of this will put huge pressures on government. The only way to get them down again will be either through keeping interest rates at zero for a generation or else by allowing inflation to take off into double digits – rescuing borrowers but punishing savers and those on fixed incomes.
An unintended consequence of this unprecedented threat is to turn the economic system upside down. Could this be the beginning of a new economic and international system that no longer serves vested financial interests but the collective of cities, towns and local communities up and down the land and across the globe? One thing is clear; our local communities are best served by international cooperation that sees markets as instrumental for meeting the needs of real households instead of a vehicle of wealth creation for the happy few. Whether we end up moving in that direction depends on whether firms and banks are bailed out again (protecting vested interests) or forced into administration and restructuring, which will transfer wealth from creditors and shareholders to other stakeholders.
It is obvious that we now (more than ever) need a relational and family-oriented economy, and government and policymakers should take steps in that direction. We don't need to become democratic socialists but we do need a different kind of economy.
Now is the time to call for such a radical change, while the whole world is focused on saving ordinary lives and not on shoring up the old economic system which was geared to the financial interests of a small minority. Let’s recover the real purpose of markets and finance – to enable each person to develop their skills, find meaningful work, support their families and serve their communities.
Johannes de Jong is director of Sallux, the think tank of the European Christian Political Movement.