A brave new fiscal world

by Brigitte Granville*

Contemporary political economy has been serving up plentiful lessons for one of history’s core questions – about change and, especially, when and how any real change occurs. Or, if not lessons, then at least case histories (the raw material of lessons). The rich world, aka the advanced industrial democracies, lurches from crisis to crisis. There is nothing like the onset of a proper crisis to raise perceptions or expectations that the future must be ordered differently, and long-festering problems addressed. In Russia, this feeling was captured by the use of a stock phrase in the title of an epoch-defining film of the perestroika period – “we can’t go on living like this (tak zhit’ nel’zya)”; and the ensuing collapse of the USSR had as strong a claim as any event to qualify as a real change (if not ‘a change to end all changes’ as implied by Francis Fukuyama’s much travestied “end of history” tag).

However, as we contemplate the possible implications of the coronavirus pandemic and accompanying blows to economic growth and employment, scepticism about change may seem in order. After all, the generation-long experience since the Soviet collapse has been one of chronically recurring crises like violent squalls leaving, beneath the surface debris, all-too-familiar problems unresolved. There would be nothing new about such scepticism. In his L’Ancien Régime et la Révolution (1856), Alexis de Tocqueville argued that the Great Revolution of 1789 had changed little – “plus ça change.” Giuseppe Tomasi di Lampedusa’s historical novel The Leopard (1958) describes how whole states and ruling dynasties disappeared at the time of the unification of Italy in the 1860s. This episode had all the trappings of political upheaval but in many key respects the economic and social order remained unchanged. The maxim of the aristocratic hero of the novel Tancredi Falconeri summed it up: ‘If we want things to stay as they are, things will have to change’.

Nevertheless, some aspects of the economic policy response to the Covid-19 crisis may signify a more substantial shift than was seen after the last big shock – the Global Financial Crisis (GFC) of 2007. To start with what might seem a surface detail: in its 18 March report of a Zoom debate about the Biden Administration’s $1.9 trillion rescue package between two of the best known US macro-economists, Lawrence Summers and Paul Krugman, The New Yorker magazine highlighted Summers’s present position as an “outsider”. What a turnaround for this hitherto consummate insider!

One aspect of the critique of the “American Rescue Plan” as previously set out by Summers in the Washington Post was that this package might reduce the political headroom required for a different sort of fiscal effort that he strongly supports. This is materially larger government investment spending – on infrastructure, and particularly ‘green energy’, projects. As the next chapter in this saga may show, however, the Biden administration could equally well have established the political momentum required to give its mooted “Building Back America” proposals some chance of being enacted.

This, in any case, will be the decisive test of real change. Global output is now entering into its immediate post-pandemic bounce-back phase after last year’s ‘Covid’ recession. The question is what happens to the world economy after that recession-then-bounce-back episode is over and done with. Against the background of a ‘lost decade’ in which hopes of growth being driven by private business investment in response to market signals were disappointed, the only answer is government investment, creating incremental demand by raising employment and labour participation.  This will result in higher wages (because of worker bargaining power) and higher productivity (as firms invest in new equipment to offset rising labour costs).

A useful perspective here is to contrast the potential prospect of a new and more inclusive growth cycle post-Covid with what happened post-GFC. That previous recovery of the 2010s was lacklustre to put it mildly. It left many households with lower real disposable incomes and poorer job quality and security. In the OECD area, real wage growth fell well short of pre-GFC trends: average annual wage growth in real terms declined from 2.4% in Q4 2007 to 1.5% on average in Q4 2019.

The mediocre post-GFC recovery stemmed ironically from the authorities’ very efforts to improve the economy. Fiscal austerity was combined with ultra-loose monetary policy. Historically low interest rates degraded the quality of such growth as was seen in that post-GFC decade. The widening inequalities from asset wealth expanding on the back of QE, with the ‘trickle down’ effect largely limited to the creation of low-paid jobs in the hospitality sector, aggravated the scarring caused over a generation by globalization and technological change – hollowing out mid-skilled/paid jobs in rich countries. A minority in those middle brackets may have been able to up-skill, while the majority slid down the scale in income and status.

This loss of status and dignity for this squeezed middle class and the working poor must account – alongside the relentless pressure on material living standards – for the social and political backlashes on both sides of the Atlantic. The importance of social recognition was well brought out by the German philosopher Axel Honneth. The lack of social recognition is reflected in attitudes of detachment and disenchantment towards politics intensifying into a disgust and desire to break the system. This alienated section of society has simply lost all confidence that government can change anything and the result is a political landscape that is increasingly difficult to decipher. ‘Trump & Brexit’ are the most conspicuous symptoms of this problem, but continental Europe has seen its own versions – including the unprecedented ‘yellow vests’ (gilets jaunes) protest movement in France that has been a focus of my own recent work.

If the promise of genuine change in the wake of the pandemic may be taken seriously, it remains all too far from being a foregone conclusion. In Europe, for example, there are announced increased spending plans at both the EU and the national levels. There is so much to be done, from restoring crumbling infrastructure to rebuilding energy systems, installing digital technology backbones everywhere and training the workforce in digital technology. . . But are the bureaucrats capable of spending the money efficiently? Like many other economists who follow closely monetary and fiscal policy developments, I will believe it only when I see it.

As for the US, the country’s deep polarization remains a serious obstacle to the Biden administration’s ambitions. On both sides of the Atlantic, economic uncertainty and declining living standards have created internal tensions and fractures turning a large section of society in on itself – and away from a threatening and alien wider world. Unless trust and dignity are restored, overcoming widespread poverty and despair, these tensions will not go away.

*Brigitte Granville is Professor of International Economics and Economic Policy at the School of Business and Management, Queen Mary, University of London, and the author of What Ails France



Carney, M. 2021. “A new dawn for globalisation”. FTWeekend, 20/21 March 2021.

Di Lampedusa, G. (2007). The Leopard. New York City: Pantheon Books.

Granville, B. 2013. Remembering inflation. Princeton and Oxford: Princeton University Press.

Honneth, A. 2006. La société du mépris. Vers une nouvelle théorie critique. Paris: la Découverte.

Wallace-Wells, B. 2021. “Larry Summers Versus the Stimulus”. The NewYorker, March 18, 2021.

One thought on “A brave new fiscal world

  1. This is so true: “‘… are the bureaucrats capable of spending the money efficiently?” The more money they get to spend, the more troubles we will face.


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