Economic thinking is at a crucial inflection point

Soaring energy prices have encouraged another form of inflation, this one rhetorical. Comparisons of our current challenges with the economic and political struggles of the world in the 1970s are now dipping in.

Comparisons are fair as far as they go. Oil prices quadrupled in 1973 and doubled again in 1979. While they have “only” roughly doubled in the last two years, gas prices in Europe have increased five to ten times since before the pandemic. Headline inflation is the highest in decades, and many fear we face a repeat of the scourge of 1970s stagflation.

The similarities stop at the effects on political and economic thought. Once the troubles of the 1970s discredited post-war mixed economies, they paved the way for the market-liberalizing transformations pioneered by Margaret Thatcher and Ronald Reagan.

At the time, economic failure produced something akin to a consensus that “government is the problem,” as Reagan put it. But today the opposite is happening. Energy prices, rising costs of living and rising tensions in labor relations are fueling calls for the government to come to the rescue. The economic ills which, in the 1970s, pushed the State to withdraw, today bring it back to where, for almost half a century, it feared to venture.

The pro-market philosophy of governance that triumphed in the 1980s is on the defensive. Government-administered prices are now the order of the day, from cars and fuel oil to electricity and, of course, carbon emissions. The push for windfall taxes on fossil fuel companies seems unstoppable, and governments across Europe are digging deep into their coffers to help struggling households.

Even direct cash payments to households, with little or no tying, are in vogue, echoing North American experiments with universal basic income in the 1970s.

This raises two questions. Why this difference in the political consequences of apparently similar economic crises? And is today’s shift to a more interventionist state permanent or a flash in the pan?

The simplest answer to the first question is that when things seem intolerable, people blame the status quo and demand change. In the 1970s, that meant deregulating a rigid economy. Today, that may mean re-regulating a rampage.

But the return of the state predates today’s sudden rise in inflation and its main causes – the pandemic, soaring energy prices and Vladimir Putin’s attack on Ukraine. . Confidence in the post-1980 socio-economic model was already fraying under the pressure, so to speak, of both the past and the future.

The populism of Donald Trump, Brexiters and others (including some on the left) represents nostalgia for a previous social settlement that is (rightly) remembered as more controlled and (wrongly) as more prosperous. Meanwhile, the rise of the climate agenda responds to a widespread belief among voters that current economic arrangements jeopardize their future.

There are of course huge differences between these two positions. On the one hand, a carbon-free economy is possible, while going back to the 1950s is not. But as realistic as their goals are, they both presuppose a more interventionist and controlling state.

This helps explain the evolution of conceptions of the management of the economy among centrist politicians and guardians of economic orthodoxy. Putting more emphasis on social cohesion and actively reshaping the structure of the economy is more than a temporary response to emergencies.

For now, 2022 feels like a moment in 1945 or 1979 – a historical turning point or paradigm shift. Yet the transition to a new philosophy of economic governance could still be derailed. The pandemic years have brought about state interventions not seen in decades – the rapid recovery of incomes and jobs being proof of their success. But a revisionist vision is taking hold that aims to discredit the policies that have produced a historically rapid recovery.

In this story, the current surge in inflation overshadows the triumph of a labor market that makes it easy to find better jobs. We have so forgotten what a good labor market looks like that we risk thinking it is an aberration. Admittedly, central bankers have been bullied into adopting a more hawkish stance than is wise.

The current economic debate goes well beyond managing the pressures of the cost of living. The question is whether we will finally put the past 40 years behind us and settle for something better.

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