by Lombard Odier

A post-Covid economy designed for everyone

Martin Sandbu, the FT’s European Economics Commentator, explains how the pandemic could help us to build a fairer economy.

The pandemic and the lockdown have brought home how we literally depend for our lives not just on doctors and nurses but also on the humbler jobs of cleaners and care workers, shelf-stackers and bus drivers, delivery couriers and cashiers.

But in many rich countries, decades of economic polarisation have left people in these humbler occupations not just underpaid, but having to accept short-term contracts, erratic shift patterns and unpredictable earnings.

In the late 1970s, we moved from an economy of belonging to an economy divided between the successful and the left behind.

Factories no longer absorbed the same workforce. Growing productivity through automation and better know-how meant ever fewer hands were needed on assembly lines.

Job-altering technological transformation did not stop with factory work. Roughnecks and dockhands gave way to automated rigs and container cranes. Computing put an end to many clerical jobs. The internet has upended in-person retail. Too often, those who rely on such jobs have had to accept worsening conditions to remain employed.

New jobs were not all created equal: manual and routine work lost out to knowledge work, as pay and job security increasingly depended on workers’ educational background and on where they lived.

The last effect — regional inequality — is perhaps the most corrosive for our politics. Highly paid jobs and capital (but also low-paid service jobs to serve high earners) have been concentrating in the big metropolitan areas, capital cities above all, while peripheral regions have been drained of capital investment and good job prospects.

Lockdown causes more pain for those already suffering from low pay and job insecurity, because it preponderantly affects manual jobs that require physical presence. In the UK, one-third of the lowest-paid quintile have lost work, against 15 per cent of the top quintile, according to the Resolution Foundation.

The moment of moral clarity triggered by the pandemic opens a political opportunity to “rebuild better” so as to make the economy work for everyone.

In the past, the deepest crises have also been opportunities for the greatest social improvements. In the US the Great Depression led to the New Deal. In Europe the shock of the second world war produced the post-war welfare state.

Even before the pandemic, I frequently argued that a Roosevelt-style “centrist radicalism” was necessary to stave off a much greater — and potentially much nastier — disruption, of which signs could already be seen in the rise of authoritarian populism.

I think such a programme would need to achieve five goals.

First, it would jettison business models based on using low-productivity (and therefore low-paid) labour, and harness automation rather than resisting it.

Second, the programme would aim to shift more labour-market risk from employees to employers and the welfare system. That means lower tolerance for erratic earnings and avoiding aggressive means-testing of benefits, which, when combined with tax, leaves many lower-middle earners facing effective marginal income-tax rates of around 80 per cent or more.

Third, we can reform taxes to counteract economic divergence instead of intensifying it. That means lowering taxes that penalise hiring. To pay for this, other taxes have to go up.

The best candidates are a net wealth tax — which favours those who put their capital to the most productive use — and removing the gaping loopholes in multinational taxation, as well as increasing tax revenue from carbon emissions, in line with the climate challenge. A particularly promising proposal is the “carbon tax and dividend”, where revenue from higher emissions taxes would be paid out as a universal basic income. Calculations show that such a policy can leave poorer households significantly better off, even after fuel-price increases are taken into account.

Fourth, macroeconomic and financial sector policy can be reformed in favour of the left behind. That means sustaining a “high-pressure economy” to keep job creation high, in the knowledge that those on the margins of the job market are fired first in a recession and hired last in a recovery.

Fifth, and most challenging, greater policy efforts are needed to give regions, where possible, a critical mass of knowledge jobs so they can connect with the leading economic activity in national centres.

With the pandemic causing widespread economic damage to already polarised societies, continued radical policy action cannot be in doubt. What we are going to find out is for what — and for whom — that radicalism will be used.

We have the tools and we have the policies to make economies work better for everyone.

What we need, is the political will.

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FT Rethink series focuses on the people, technology, strategies and systems moving us from an economy that is wasteful, idle, lopsided and dirty towards one that is circular, lean, inclusive and clean. The channel alternates between independent reporting from FT journalists and business perspectives from Lombard Odier