Monthly Market Update: From Pandemic-nomics to Sustain-omics: The Return of Big State

Mon 08 Nov 2021

What do the British budget and COP 26 have in common? The -possibly inevitable- return of ‘Big State’.

The 1980s ushered in an era of lower taxes and reliance on consumers to fuel growth. The Covid-19 pandemic, twelve years after the global financial crisis, followed by at least a decade of ‘Sustainability Economics’ may put a tombstone on Ronald Reagan’s chapter of liberalism for western economies.

When this pandemic started and governments stepped in to save companies hit by lockdowns, we argued that the future would see an augmented role of the state in western liberal economies. Our commentary focused on the government’s role in directing industry towards desirable goals. This made sense. The non-financial corporate sector has the heftiest debt load except governments themselves and could not be given a blank check with public money

The British budget revealed another dimension of state intervention. Fiscal spending fueled by higher taxes. The fact that this comes from a Conservative party may look surprising, but it demonstrates how pragmatism and need can easily trample and possibly redefine ideology. And this could be just the beginning. While this is a pandemic-related budget, we have every reason to believe that the coming era of ‘Sustain-omics” may well feature even more consumer dis-empowerment.

During the last crisis, twelve years ago, governments avoided fiscal interventions and instead let central banks and quantitative easing do the heavy lifting. As a result, the financial economy grew exponentially while the high street economy stagnated. And where the latter grew, it did so in the direction of tech products. Consequently, the eight first companies in the S&P 500 belong to the tech sector and account for more than a quarter of the world’s leading equity index. Clearly, what little growth western economies experienced, was neither equitable nor in any way balanced.  Classical economics assumes that aggregate consumer spending will always lead to the wisest economic decisions. But decades of rapid growth have led to the depletion of natural resources to the point where the human species is adversely terraforming its own home. As debts pile for future generations and the air becomes thicker, the prevailing thinking amongst political leaders is that too much is at stake to let consumer randomness decide the next steps of economic development.

As we enter the era of ‘sustainable’ economics, we will have to come to terms with a considerably bigger state and, at least for a decade, possibly higher inflation. Post-pandemic pressing realities may be just the start. In the next few years, the western consumer may not nearly be as empowered as in the previous decades, if the world economy is to be set on a more sustainable path.

George Lagarias, Chief Economist