Time to think big?
Will Hobbs is Chief Investment Officer at Barclays Investment Solutions
The economic crisis that has accompanied this latest pandemic is unlike any other. Necessarily, the corresponding response from policymakers has been muscular. Can we expect the role of government to be permanently altered by this crisis? I take a look at some of the potential influences.
One of the many alarming aspects of this crisis has been the blow to the global labour market. The ILO estimates that working hours fell 11% in Q2 on the same period last year. This is equivalent to over 300 million full time workers [i]. How to reabsorb these workers back into the labour force is likely complicated by the fact that much of the global economy has, by necessity, taken a giant digital leap forward. This is so much the case that one recent research paper argues that as much as 40% of the US jobs lost during this crisis will disappear for good [ii]. If we ally this to the suspicion that we are still only in the foothills of a more seismic technological transformation, now is the time for thinking big and long term.
The harsh reality is that all industrial revolutions come with significant disruption to the labour force. Jobs and industries tend to be created and destroyed at an accelerated pace in such times. Worryingly, in the context of the labour market’s current plight, we often find that job creation can meaningfully lag destruction [iii].
In reply, ideas like a universal basic income (UBI) are being revisited. Some argue that this could create the conditions in which an array of labour-saving technologies could be pursued more freely with fewer negative societal consequences. Of course, such a move is not without downside risk or cost. Many have long speculated that deprived of the need to work, the spectre of anomie and meaninglessness would stalk humanity. Studies of various forms of UBI have so far failed to corroborate this, but these studies have admittedly fallen short of the necessary rigour from several aspects [iv]. The sense remains that more in depth studies are needed here, particularly focusing on some of the longer-term consequences of such a policy move.
In any case, a universal income would still not directly address some of the most important needs of our times. Among many other things, the pandemic has highlighted, and exacerbated, inequality in access to education. It is not only early-years that needs attention in the context of the fourth industrial revolution - the evolving demands of the global economy require states to provide constant retooling of the labour force to ensure skills remain relevant.
Reducing the role of luck (both good and bad) is part of government. Some are also arguing for the state to take on an expanded role in innovation too. Base research across a broad range of disciplines could help fill in some of the blanks left by the private sector [v]. The origin, for example, of much of the technology contained in our smart phones is testament to the potential for this partnership between public and private.
The upfront cost of all this could seem prohibitive, but there are three counter points to bear in mind. First, evidence is building that much of the extra spending on social safety nets, and more evenly distributed opportunities, may pay for itself over time [vi]. Second, it is at least conceivable that the low real interest rates we see today are here to stay and that inflation is, for now, a more distant enemy. In such a context many governments can sustainably borrow more [vii]. Finally, policymakers should give serious thought to what the world will look like in 10 years’ time if radical action isn’t taken now.
Published 5 August 2020
[i] International Labour Organization (2020a), ‘Covid-19 and the world of work’, ILO Monitor, 27 May 2020
[ii] Barrero JM, Bloom N, Davis SJ, ‘COVID-19 is also a reallocation shock, Working paper No. 2020-59, June 2020
[iii] Bresnahan TF and Valery AR, ‘Segment Shifts and Capacity Utilization in the U.S. Automobile Industry,’ American Economic Review 83, 1993
[v] Mazzucato M, ‘The entrepreneurial state: debunking public vs private sector myths, March 2018
[vi] Hoynes HW, Schanzenbach DW, ‘Safety net investments in children’ Brookings, 2018
[vii] Krugman P, ‘The case for permanent stimulus’, VOX CEPR Policy portal, May 2020