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ASCM Insights

Long Road Ahead: Reviving Global Growth

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Experience shows that during societal inflection points, such as a global pandemic, the hand of government becomes significantly heavier. Moreover, such interventions tend to reverberate long after the crisis subsides. Government has a profound influence on the competitive environment in which companies and their supporting supply chains operate. Understanding these influences will help supply chain professionals anticipate the myriad changes that will shape the post-COVID world.

History is replete with examples of pivotal disruptions that spurred a reframing of the role of government. The Great Depression led to a collection of programs known as the New Deal and was one of the reasons for the rise of fascism and the Nazi party, which led to World War II. World War II gave rise to new multinational organizations, such as the United Nations, the International Monetary Fund (IMF), and the North Atlantic Treaty Organization, as symbols of a “rules-based international order.”

A central theme of these global-scale changes was the return — or reinforcement — of big government. In his 1996 State of the Union address, President Bill Clinton declared, “The era of big government is over.” Although the United States never really had big government compared with other major countries, many big shocks to the system have expanded the role of the U.S. government through the years. For example, the Cold War triggered the construction of the Interstate Highway System; the September 11 attacks led to the creation of the Department of Homeland Security; and the 2008 financial crisis engendered acceptance of enormous deficits as the Federal Reserve (and other central banks) fought the financial meltdown.

COVID-19 is no different. To fight the economic effects of the virus, the U.S. Congress appropriated trillions of dollars for the biggest U.S. government spending program ever. The Federal Reserve launched an array of financial market interventions to inject more liquidity into the financial system. New laws mandated temporary prohibitions on evictions due to unpaid rent and provided the right to the forbearance of mortgage payments.

The United States was not alone in pumping unprecedented amounts of money into its economy, nor was its aid package the most generous. As of June 2020, the Japanese government’s stimulus package amounted to 21.1% of its gross domestic product, and Canada’s was 15%; the U.S. stimulus package was 13.2 percent.

Increased expectations of governments

These massive injections of taxpayer money into the economy accompanied a rise in government interventions. Some international leaders framed these actions as a response to a warlike crisis; others moved with warlike speed to solve social problems that had bedeviled their societies for many years. With the stroke of a pen, the city of London ended the problem of people sleeping on the streets by providing free hotel rooms, at state expense, to all those in need — 1,400 in all.

In implementing such changes, governments have likely increased expectations among their constituents. The result is the so-called Ratchet Effect, in which surges in government spending during a crisis do not taper back down afterward. Likewise, short-term regulation enacted in a crisis often lingers on the books long after life has returned to normal.

A 2019 Pew Research Center survey found broad support for maintaining or increasing a variety of government programs. The implication of this support is that, going forward, citizens will simply expect more from their governments in many facets of life.

Another area in which governments will increase involvement is setting industrial policy. The sad state of the World Trade Organization means that governments are likely to continue the beggar-thy-neighbor policies of tariffs and export restrictions to reduce their dependency on manufacturing in foreign lands. For example, Japan has a $2.3 billion fund to pay companies to leave China.

Governments also are likely to double down and intervene in purchasing and inventory policies, providing subsidies to industries considered critical, increasing buy local requirements and so forth. While some of these policies existed in the past, the type of manufacturing deemed essential to national security is likely to be much broader.

A growing web of regulation

Companies commonly interact with government agencies over regulatory issues, and these interactions could become more frequent as pandemic-inspired interventions increase. In the United States, a steadily accumulating body of regulations, such as the Sherman Antitrust Act (1890), Fair Labor Standards Act (1938), Consumer Product Safety Act (1972) and Food Safety Modernization Act (2011) have imposed a growing number of restrictions and obligations on businesses. These acts, plus innumerable other regulatory activities, have enlarged the accumulated corpus of U.S. federal regulations from 10,000 pages in 1950 to 186,000 pages in 2019. 

Despite campaigning on an anti-regulation platform, the Trump administration wrote nearly 200,000 pages of new language in its first three years, and the total body of regulatory code at the end of 2019 was no smaller than it was at the end of the Obama administration in early 2017.

Other governments are not far behind. Since the Treaty of Rome in 1957, which created the European Economic Community (a forerunner of the European Union), the European Union has adopted more than 100,000 legislative acts, including directives, regulations and decisions.

The size of the regulatory system will inevitably increase in response to the pandemic and as the country recovers from the crisis. Future regulations that affect businesses might appear in areas such as customer data privacy, autonomous vehicles (both on the ground and in the air), trade, cybersecurity, gig-economy labor and the environment. The direction and nature of some future regulations — such as on trade or the environment — may go in diametrically opposite directions in different countries as well as in the aftermath of the new U.S. administration taking office in 2021. The growing complexity of technology, business and world affairs will likely spur a growing complexity in regulations.

The bottom line

Taxation is another area where the public and private sectors interact. Given the parlous state of government finances in the aftermath of the pandemic, companies can expect the tax burden to increase. “The steep contraction in economic activity and fiscal revenues, along with the sizable government support, has further stretched public finances, with global public debt projected to reach more than 100 percent of GDP this year,” the IMF said in its “World Economic Outlook Update” in June 2020. As of mid-May 2020, the G10 countries, plus China, had unveiled an estimated $15 trillion in combined stimulus spending and loan guarantees, with more stimulus in sight as COVID-19 showed signs of resurgence. Average financial liabilities in the countries making up the Organisation for Economic Co-operation and Development are also expected to rise considerably.

While many governments may have ambitious spending plans — be it the Green New Deal, new social protections or a beefed-up military — the money may not be there. In the United States, state and local governments cannot borrow money to handle increased spending and decreased tax revenues. Most must balance their budgets, which forces them to either cut spending or raise taxes and fees during a crisis. Similarly, developing countries face constraints tied to high sovereign debt levels even before the pandemic struck. Servicing the preexisting debt constrains what these countries can do to recover from the pandemic and damages their long-term financial stability.

Ultimately, government debts must be unwound via taxes, inflation or default. All three strategies can have negative effects on future economic growth. Even if countries choose to roll these debts over in perpetuity, the interest payments will be money the government must extract from someone but which they cannot use for other beneficial purposes. Thus, post-pandemic, one can expect a period of slower growth around the world.

This topic is discussed in-depth in the new book by Yossi Sheffi, “The New Ab[Normal]: Reshaping Business and Supply Chain Strategy Beyond Covid-19,” available on Amazon.com.

About the Author

Yossi Sheffi

Yossi Sheffi is Elisha Gray II Professor of Engineering Systems, MIT, and Director of the MIT Center for Transportation & Logistics. He may be contacted at sheffi@mit.edu.

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