The return of the state: How government is back at the heart of economic life

By John Plender

For the best part of three decades, policymakers in the developed world followed Ronald Reagan and Margaret Thatcher in seeking to roll back the frontiers of the state. The triple mantra of privatisation, liberalisation and deregulation held sway.

Yet the problems that began in credit markets a year ago now cast a cloud over the strong market orientation of western policy. After the collapse of banks such as Bear Stearns in the US and Northern Rock in the UK, and against the current background of mounting speculation about the viability of mortgage giants Fannie Mae and Freddie Mac, the Anglo-American approach to capitalism appears badly flawed.

So is a more intrusive state about to stage a comeback at the free market’s expense, emulating the governmental response to the economic crisis of the 1930s?

Any comparison with the deflationary interwar period stretches the point, not least because policymakers in the US and Europe know the lessons of that era. Mindful that pre-emptive action can stave off a depression, governments and central banks are already responding to the credit crunch and the weakness in housing markets. Soup queues are not in prospect.

In the US, monetary policy has been substantially loosened, while Keynesian-style fiscal activism is back in fashion. A $150bn (€100bn, £80bn) budgetary boost in this presidential election year is probably just a start. Purse strings will be loosened again in response to mounting calls for tax cuts and increased infrastructure spending.