Policymakers are in crisis management mode, after the emergence and rapid spread of Covid-19. But what will the world look like when we emerge from our cocooned existences and try to kickstart our economies? Two of the world’s top economic thinkers ponder this question, in this virtual discussion hosted by the World Economic Forum. Martin Wolf is the highly respected chief economics commentator for the Financial Times. He was awarded the CBE (Commander of the British Empire) in 2000 “for services to financial journalism”. Wolf examines the question from the British perspective. Mariana Mazzucato, who has Italian-US roots, is Professor of Economics of Innovation and Public Value; Founder and Director, Institute for Innovation and Public Purpose, University College London. She is the author of The Value of Everything: Making and Taking in the Global Economy, which was shortlisted for the Financial Times-McKinsey Business Book of the Year Award. They share fascinating insights on a situation that could easily re-shape the world on the scale that followed World War II. – Jackie Cameron
Marianna Mazzucato: And what’s interesting about this crisis; it’s really revealed so many problems that we have in our current way of doing capitalism. There’s different ways to do capitalism. Davos this year – I know all the talk was about purpose and stakeholder capitalism – and I think this is the moment to say, ‘OK, if we’re serious about that – let’s make sure that we bring back lends of stakeholder capitalism, of collective value creation to the table and how we structure the details of things like the bailouts’ – and I just want to pause on the bailouts because that’s really quite striking how quickly so many companies which often pretend that they want the state to stay away… in bad times then ask for the state to come in, and of course the state should come in and help companies of all sizes but how to really make sure that we bring conditionality, not in a punitive way, but in a way that really also lays the path for the kind of economy that we want to have in the next 10 years – both because we need to have a recovery now but even without the Covid crisis. So more inclusive – more sustainable economy – there’s really interesting lessons coming from around the world. And I think in the US; Elizabeth Warren has been very clear on the kind of conditions she thinks should be in place; both in terms of for example the airline industries receiving the bailouts that they’re asking for only if they promise to reduce their carbon emissions, there’s all sorts of different ways that you could also make sure that the companies that are receiving part of their wage bill paid for is conditional also on not laying off the workers. It’s quite striking how in the UK for example that hasn’t actually been done, so something like 80 percent of the wage bill will be paid but there aren’t strong conditions in place that even make sure that the layoffs won’t happen – so it’s kind of potentially counter-productive. But also, the level of financialisation of our economy and this includes by the way lots of the health companies; the pharmaceutical companies that we are also asking to collaborate with state entities to help us get a vaccine. We know that the corporate governance model of these companies has been highly problematic with, in some cases like Pfizer, a very high percentage of the net income being earned being distributed through dividends and share buybacks. So again, that is becoming an issue itself not just with the companies, also with banks – to be making sure that any saving of businesses is conditional on not losing these share buybacks and dividend payouts in a moment that we really require this reinvestment.
Facilitator: Last week, Martin Wolf, you were saying that you hadn’t had a great opportunity to look at the measures being put in place but the ones that you thought were getting it right potentially with the UK and German responses. Have you had a chance to look in more detail at those responses and have you got any further reflections on who’s putting in place measures that look to be robust and who needs to go further?
Martin Wolf: Well I’ve looked mostly at the G7 and I think it’s pretty clear, as far as I can see, that the worst that I’ve looked at of the major countries is the US. And I think, as Marianna indicated, they all have – of these major countries – they all have problems, partly because it’s genuinely difficult to create completely new systems for dealing with the problem that no one anticipated overnight. So I give them a lot of credit for managing to do anything. But, we know what we’re trying to do in theory; we’re trying to protect the incomes of the vulnerable as long as the closures continue, we want to maintain demand in line with the reduced supply, we want to shift resources into the health sector, and we want to maintain economic potential – so we don’t want businesses to disappear completely with all their labour forces and so forth. Doing all that at the same time, while making sure that the money gets through to individuals who are the first thing and vulnerable – is really quite difficult. I’m very sympathetic to the idea of basic income in this situation. I’m very happy with policies that pay people for short time work, which is what the Germans have been doing, conditional of course on their continuing on the books. I think that’s something that Marianna has stressed and I agree with that. We have a lot of questions about how we maintain economic potential since we don’t want to bail out all the bad debts in the economy but how to leverage companies which use this in order to gear up equity returns. At the same time, we don’t want to get gigantic chains of bankruptcy running through the whole economy. It’s going to be very very complicated and the situations in individual economies differ very much in the extent of leverage and where it is. So one can’t easily compare them all.
So it seems, Martin And Marianna, that both of you sort of agree that essentially we need big government right now, we need a government to step in to bail out, and of course, to the benefit of people first and foremost but in any case – a big government.
So this raises lots of questions. First of all; governments have decided for health policy reasons, which are going to become increasingly controversial – we can see this, to close down the economy. It’s a conscious decision. So this is not a normal recession. It’s a policy decision. I think it’s almost certainly the correct policy decision. It’s going to be very controversial as time passes. If a government does that, and of course a lot of it is happening because people are doing it too – they’re just stopping, they are not going to buy anything or so forth, then government is the insurer of last resort for the economic system. That’s what governments are for; they are the insurers of last resort – period. So then, what you call big government is an absolutely inevitable consequence of the situation we find ourselves in – there’s nothing in the least surprising. This raises two big questions. The first is that a permanent shift in the nature of government ongoing operation in the economy and my guess will be it will vary. We’ll see, but I think it will vary. The second big question which you’ve raised is; what sort of situation are you going to be in at the end of this? Well there are some things that are perfectly obvious as you said; there will be much larger debt – public debt, there will be very very large fiscal deficits, and there will be long term economic damage. There will be very interesting questions raised, not dissimilar to the questions raised after the financial crisis, about what the response should be and the debate over austerity quote unquote will quite certainly reemerge.Â
Thank you. Marianna, I know you wanted to come in on that.
Yeah, I think it’s very important not to confuse big government with smart governments. I don’t know if you’ve seen the recent story about the ventilator procurement in the US that went terribly wrong. It’s interesting to compare that with how the military does its procurement. So, when we really think something is urgent – like winning a war or going to the moon and back again, which required procurement to Honeywell, Motorola and General Electric – somehow the state has been very smart and how it negotiates the deals, the contracts, the conditions – telling the private sector ‘no that doesn’t work, please try again’, not just accepting anything that it produces. Here it’s very important to learn that we don’t just need money to be pouring into the system; we need smart state institutions also to manage it. And I can tell you because I’ve studied this quite a bit – I wrote a book about it; the outsourcing from government to the private sector in the last 30 years has also resulted in a fall in the capabilities and capacity within government institutions to do their job.Â
The big difference between me and Marianna is that this is temperamental – not intellectual, is that she believes in the capacity of the state to reform itself on a higher level than I do. I will be very very happy if we get through this – which I think will be an enormous test in something close to one piece with functioning societies and functioning economies at all – I’m that worried about where we are now heading. Right at the moment, where the emergency invention every week stage, every policymaker is throwing money at the wall because it has to get there at once, and a lot of this is not very subtle and it is very very likely that they are going to be reinventing some of what they’ve done. It’s going to be very very messy. Depending on how long the stop phase is or the stops – let’s be clear, it could be two years that we are in, not like this, but we’re in stops. Then it may be possible, indeed the force may be very powerful, to really rethink how we do business. To do the sorts of things Marianna said you need a long time. So the second world war transformed the British economy in many ways; but it was effectively six years. The moonshot project was much longer. If it’s going to be two years, then you might well see people coming back and thinking very very hard about the way the institutions of society should differ from what they are now. But right at the moment, my very strong impression is no policymaker is really thinking about this – so it’s a time for the intellectuals to think about that. They’re just trying to get us through week by week in what is of course staggering uncertainty about how long this will last, whether they can get hold of it and reopen economies – we’re seeing this happening in China. We don’t know what the consequences will be and they will make an immense number of mistakes. It’s absolutely clear and they will have to try and correct them as they go along.
