Economic Letter

David Bond is a retired bank economist who resides in Kelowna.

The COVID-19 pandemic has shown us clearly just who is providing vital services. It’s not the financial wizards who bring home millions in annual remuneration.

Rather, it is the vast army of individuals doing menial jobs such as cleaning, driving trucks and buses and manning the grocery stores. Together with skilled health-care providers such as nurses and physicians, they have all served on the front lines of the battle against the pandemic.

I also suspect that one day in the not-too-distant future, we will look back and recognize that the massive financial aid provided to individuals and businesses by the federal and provincial governments and the Bank of Canada rang down the curtain on the era of neo-liberal economics.

Just what is neo-liberal economics, you might ask. In the opinion of neo-liberals, government is a drag on the economy. Its activities, they believe, add nothing to economic growth and thus should be minimized, permitting lower taxes. This leaves more funds with individuals who, it is posited, invest those funds in worthwhile new ventures.

In other words, government’s role is to provide good infrastructure and attractive tax breaks and then get out of the way.

Under neo-liberal thought, which gained wide acceptance in the last half of the 20th century, state enterprises were privatized, unions were curtailed and social benefits were reduced.

Most importantly, taxes were cut, particularly taxes for the very wealthiest. Thomas Piketty, a French economist, showed that in the U.S. in the first decade of the 21st century, income inequality was as high as it was in the 1920s.

Another economist calculated that, even after the Great Recession of 2008-09, the 400 richest Americans paid taxes at a lower rate than every other income group.

Further, neo-liberal economics advocates not only for minimal government, but also for each sector of the economy, including health care and education, to be turned into a marketplace. Taken to the extreme, such a doctrine holds that even in the face of a natural disaster, competing companies should be the ones to take charge of organizing relief.

Recently, however, an interesting group of economists, mainly women, posited an opposing theory.

Mariana Mazzucato in her 2013 book, The Entrepreneurial State, documents that government not only provides basic services such as education, health care, garbage collection and mail delivery, but also produces real, financially successful innovations. She uses the iPhone as an example. Every bit of the technology in the smart phone (internet, GPS, touchscreen, battery, hard drive, and voice recognition) was developed by researchers on a government payroll. She finds state investment everywhere.

Some government investments, it is true, turn out to be duds, but that is true in the private sector as well.

To Mazzucato, the problem with most private venture capitalists is that they are not willing to venture all that much.

For example, after the 2003 SARS outbreak was quelled, private investors quickly pulled out of coronavirus research. It wasn’t profitable enough. Meanwhile, the US government paid $700 million for publicly-funded research and, if a vaccine is developed, in large measure it will because of that funding.

To Mazzucato, such government funding is fine and the results should be made available to the private sector provided government gets back its initial funding plus interest.

But, as she points out, the corporations getting the biggest boosts are also some of the biggest tax evaders, with billions placed in tax havens around the world.

All of this means, as the venerable Financial Times said in April this year, that governments now see “public” services as investments rather than liabilities. It was echoing the viewpoint of the anti-neo-liberal philosophy.

Just how the decline of neo-liberal economics will evidence itself in public policy is not yet entirely clear, but some things are certainly evident. Taxes will rise and the highest marginal rate, particularly for the top 1% to 5% of earners, will rise significantly.

Tax codes will become simpler with a significant reduction in exceptions to the general tax rates.

Government expenditures on social services, including income support, will increase. This shift will not occur all at once nor will it happen without†struggle, but it will occur.

David Bond is a retired bank economist who lives in Kelowna.