Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 12 April 2021

Two types of recovery from the COVID recession, or how you cannot effectively fight plutocratic populism by returning to the recent past.


I don’t normally talk about forecasts, but last week’s IMF World Economic Outlook illustrates a point a number of people have made. While both the UK and EU countries are prepared to gradually return what they believe as their non-inflationary level of output from below, the approach in the US is to overshoot, running the economy slightly hot for a period. This table from the Outlook shows expected GDP growth. The key figure is the last column, which shows overall growth from the start of the pandemic to when the recovery is largely complete. It shows how focusing on just 2022 growth, as I’m sure many in the UK and Europe will, is completely misleading.

IMF Economic Outlook April 2021 Forecasts

GDP growth





United States





Euro area





United Kingdom





These are forecasts of course, but they reflect something that has already happened: the US has enacted a large stimulus package ($1.9 trillion mainly directed to individuals followed by at least $2 billion on infrastructure), while any expansionary measures in Europe are projected to be more modest (750 bn recovery fund). I pointed out the planned undershooting for the UK after the March budget. You can see the under and overshooting more clearly by looking at forecast output gaps, although all output gap numbers should be taken with a big pinch of salt..

IMF Economic Outlook April 2021 Forecasts

Average Output Gaps

Average, 2020-21

Average, 2022-23

United States



United Kingdom









The OBR agrees that the UK is planning to approach ‘normal’ from below. As I noted after the budget, forecast UK inflation remains below target and so expected short interest rates hardly rise. The main measure Sunak announced in the budget to stimulate the economy, fiscal incentives to bring forward investment, is modest compared to the US stimulus. The rationale for and limitations of this stimulus are set out by James Smith here.

So what are the relative merits of undershooting compared to overshooting and thereby running the economy a little hot after the recovery? With interest rates stuck at their lower bound, the answer is unambiguous. First, it makes sense to end recessions as quickly as possible, rather than the more gradual end that undershooting implies. Second, running the economy with near zero short term interest rates has various undesirable consequences. Assets prices (including house prices) remain high and banks or other financial organisations may go on risky searches for yield. Economies where interest rates cannot fall are more vulnerable to negative shocks, because fiscal policy often responds more slowly (and erratically) than interest rates.

Third and finally, we need to think about risks. The risks of a more rapid recovery are not a problem in either case, because they will mean a mild inflation overshoot and a quicker rise in interest rates. The chances that any above target inflation (or inflation due to higher commodity prices) becomes entrenched in the US, UK or Euro area is zero. The downside risk is also not a problem if you are trying to run the economy hot, because you will just be running it cooler.

The downside risk if you are planning to undershoot are serious, because that means a more prolonged recession with interest rates unable to fall because they are stuck at their lower bound. It is particularly a problem if you have governments that are committed to some kind of deficit target, because they are unlikely to respond to an unexpected slow recovery with a fiscal boost. This is exactly what went wrong in the UK with 2010 austerity: the expected recovery failed to happen because of the Eurozone crisis, and Osborne kept to his austerity plan.

Yet despite the lesson from the UK and Eurozone of a post 2010 recovery that crashed because of unwarranted deficit concerns, both the UK and Eurozone seem to be making the same mistake (albeit in a more modest way) after the pandemic. They should follow Biden’s example, and use fiscal stimulus to end the COVID recession rapidly once vaccination is complete.

Of course the significance of the Biden plan goes well beyond the macroeconomics of ensuring a good recovery, as both Philip Stephens and James Meadway discuss. (Noah Smith has a much more detailed analysis.) I personally find it rather hopeful that someone who was tagged as being rather dull before an election can turnout to be very different in government. But it is important to realise that anything dull following Trump would be a recipe for a near certain return to Trump. Biden’s plans are not so much seeing the beginning of the end of neoliberalism as a serious attempt to keep the US out of the hands of a party that no longer believes in democracy.

As I have argued elsewhere in 2017, neoliberalism in the two countries where it was created has already been turned into a plutocracy. I wrote

“It would be wrong to say that Brexit or Trump represent an evolution of neoliberalism. Both promote strong restrictions to trade, and so it would be more accurate to view Brexit as a split within neoliberalism. What is clearer to me is that populism is a consequence of neoliberalism as reflected in the policies of the political right.” [1]

And as I argued here, this plutocracy cannot be fought with a return to what went as normal before, because what went as normal before created the plutocracy that we are trying to escape from. Fighting for democracy requires a turn to the left (in economic terms), and that is what we are seeing in the US. The reason is quite simple - without radical economic change in a left wing direction the reasons why enough people in the US voted for Trump will re-emerge. Moving left does not guarantee that will not happen, but it gives democracy a fighting chance. Returning to the neoliberalism that created Trump is just asking for a return of Trump.

[1] Talking about a split in neoliberalism seemed right at the time, but now seems misleading. The opposition to Trump or Brexit on the right has all but disappeared (or more accurately been extinguished), and those on the right who oppose either say nothing or start supporting the opposition to plutocracy. So now I would call Trump and Brexit as just one final stage in the evolution of UK and US neoliberalism into populist plutocracy.

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