Economic policy has undergone a major reorientation in recent years. The time of exception that we have gone through – first due to the pandemic and then due to the war in Ukraine – has led to extraordinary measures. Now, can we say that we have entered a new paradigm of economic policy? Reviewing our recent history can help answer this question.
It is very unusual for the same generation to experience two major economic crises in a short period of time, thus being able to compare them. But that is precisely what has happened to us with the 2008-2012 financial crisis and the Covid-19 pandemic, in which radically different measures were applied.
During the Great Recession two ideas guided economic policy: “expansive austerity” and “internal devaluation.” On the one hand, cuts in investment and public spending should lead to greater financial stability and, with it, a rapid recovery, while labor deregulation and salary reductions would improve external competitiveness.
However, the joint application of these two ideas failed, leading to a lost decade: in 2018 the level of employment that Spain had ten years before had not yet been recovered. Wage and welfare state cuts widespread social unrest and unnecessarily prolonged the recession.
The Covid-19 crisis was faced in a diametrically opposite way. The coalition government promoted a strongly expansive policy, with the aim of sustaining demand, companies and employment. At the same time, EU states mutualized their debt to undertake an ambitious Recovery Plan. Keynesian economics thus took its intellectual revenge on Alesina.
In Spain, this shift in economic policy was not limited to the fiscal sphere, but went further. In labor matters, instead of accepting layoffs as an adjustment mechanism, they opted for ERTE, following the model of the German kurzarbeit: with public money the reduction of workers' hours was supported. Instead of promoting a new labor reform that – like those of 2001, 2010 and 2012 – continued to make dismissal cheaper and more flexible, a reform was chosen – that of 2020 – that prohibited contractual figures that generated job insecurity. And instead of keeping the SMI almost frozen, as Rajoy did during his mandate, the progressive coalition raised it by 50%.
This new economic policy also entered the territory of industry, leaving behind the old mantra that the best industrial policy is the one that does not exist, the one driven by the market itself. Thus, through the PERTE, Mariana Mazzucatto's approach of promoting large missions focused on sectors with a particular capacity for innovation, transformation and drag of the productive fabric, to modernize it, has been taken up.
During the previous legislature, the first steps were also taken in a tax reform aimed at raising the level of public income in the Spanish economy – bringing it closer to the EU average – and our social protection system was reinforced. While during the Great Recession our country cut benefits, in the middle of the pandemic the Minimum Living Income was born (an aid that must be improved, but which has been an undoubted step forward to build a network of last resort for citizens). While in the Great Recession pensions were delinked from the CPI, in the last legislature the purchasing power of pensioners was ensured, with a reorientation of the reforms towards improving Social Security income, and not towards cutting benefits .
At the end of 2021, our economy left the impact of the pandemic behind. However, the outbreak of war in Ukraine – and the consequent increase in international energy costs – once again faced an enormous challenge in February 2022. It was quickly assumed that the fight against inflation could not rest on monetary policy or conventional recipes, and the regulation of the wholesale electricity market – through the cap on gas – made it possible to control the increase in prices that this sector radiated to the rest of the the economy.
All these new developments in economic policy – clearly Keynesian in nature – have not been without problems, logically, but they have in any case demonstrated notable effectiveness in meeting the planned objectives: employment took just a year and a half to reach the previous level. to the pandemic, and not ten years as happened with the financial crisis; We have witnessed a rapid reduction in temporary employment (9 percentage points) after the last labor reform, replacing one and a half million temporary jobs with permanent ones; The increase in the SMI has been compatible with a strong pace of job creation; inequality in 2023 – according to the Gini index – was lower than what existed before the pandemic; inflation was reduced by 8 points in just one year; and the public deficit has gone from 10% of GDP in 2020 to ending the year 2023 at around 4% (a faster rate of reduction than that achieved with Rajoy's cuts).
The differences in the management of both crises are enormous. Can we say then that we are witnessing the birth of a new paradigm of economic policy? Have we left behind the neoliberal phase in the management of the economy?
It seems rather that we are in a kind of interregnum, in which signs of overcoming the old neoliberal economic policy coexist with unmistakable elements of orthodoxy. Few economists today would discuss the usefulness of ERTE or an expansive fiscal policy in times of crisis; or the need for an “entrepreneurial state”, or for an effective minimum rate of Corporate Tax that avoids tax dumping. And, at the same time, the majority of economists maintain intact the conviction that inflation must be controlled through a contractionary monetary policy (even at the cost of bringing the Eurozone to the brink of recession), or that it is necessary to establish strict rules in the EU (even if this undermines some crucial public investments in the medium and long term).
A period in which different economic policy paradigms coexist is always interesting from the point of view of intellectual discussion. But disregarding the lessons learned during these years and returning to the old certainties of neoliberal orthodoxy will be of very little help to address the challenges that our economies face.
Nacho Alvarez He is a professor of Applied Economics at the Autonomous University of Madrid.
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