How Governments Can Deal With the ‘K-Shaped’ Recovery

Today: I participated in a panel discussion with Kim-Mai Cutler, Margaret Mulligan, Michael Stothard, and Pat Wilson.

Feb 25, 2021

The Agenda 👇

The pandemic as an accelerant of preexisting trends
Governments have been gaining power recently
There’s nothing worse than clueless policymakers
What should be done? A checklist
America and Europe in the global race for dévelopment

Ever since the pandemic started about one year ago, there has been constant questioning about its impact on the economy and how we would make our way out of the crisis. Part of that discussion was about the form of the post-pandemic rebound: would it be a ‘V-shaped’ recovery, whereby everything would go back to normal, or a ‘K-shaped’ recovery in which some would find themselves better off than before the pandemic, while others would end up in a worse place for the long term.

Yesterday afternoon I participated in a panel discussion as part of the online event Building tech ecosystems in a distributed world, brought to you by Dealroom, Sifted, and European Startups (the European Commission’s effort to foster tech entrepreneurship on the continent). The focus of my panel was precisely on this idea of a ‘K-shaped’ recovery and what governments can do to mitigate its adverse consequences. Here are the ideas I shared over the course of the one-hour session.

1/ The pandemic is an accelerant rather than a disruptive change in direction

Namely, I don’t see any trend these days that weren’t already foreseen by people who take an interest in the shift to the Entrepreneurial Age (adding links when I wrote about the topic):

Entrepreneurship is booming. Link
Investors are more interested in tech startups. Link
Legacy organizations must reinvent themselves. Link
Work from home is becoming more of a norm. Link
Delivery is rising at the expense of stores and shops. Link
The restaurant industry is being displaced. Link
Homeschooling has become the new frontier in education. Link
Some countries are rising, others are collapsing. Link
There’s increasing tension between surveillance and privacy. Link
We’re making progress toward building a new social safety net. Link

The problem we have is that few governments see things that way. For every clear-sighted policymaker, there are dozens, if not hundreds, of others who a/ are not aware of the current shift, b/ are not interested in understanding it, and c/ are determined not to take action.

Therefore we’re in a very dangerous and precarious situation. The paradigm shift is accelerating due to the pandemic, but most of us are governed by people who are not aware of that shift and remain convinced that everything will go back to normal—as in, people will go back to the office, restaurants will reopen, etc. Yes, some of that will definitely happen; but we’ll end up far from being back to normal.

2/ Governments are more powerful than ever

It’s a problem to be governed by clueless policymakers as those same individuals emerge from the pandemic more powerful than ever. Indeed, two things happened during this difficult time:

Everyone—households and businesses—turned to governments for help and support when COVID-19 struck. In response, governments have deployed a broad range of resources and claimed unprecedented power in the process, including in the realm of regulating individual behaviors. Now, although the pandemic might be receding, my bet is that this increased governmental power is here to stay, at least for the foreseeable future.
Meanwhile, international organizations proved to be largely irrelevant in the face of the pandemic. The World Health Organization has been mired with problems linked to China’s influence in its governing bodies and the Trump administration’s tantrums; meanwhile, the European Union delivered a subpar performance when it came to coordinating efforts by its member states and delivering critical resources such as vaccines.

The result is that nation states are now probably at their most powerful (even without mentioning singular events such as Brexit), and they’re once again seen as the most relevant level at which policymakers can act and deliver results. I’m not sure if this return of the nation states is here to stay, but we must at least take it into account for the next 2-3 years as the recovery progresses and government intervention is called for by left, right, and center.

3/ The ‘K-shaped’ recovery will be made worse by governments’ cluelessness

What happens when the government is more powerful than ever, but those who lead it are clueless as to the current paradigm shift? Nothing good.

What I expect is a general effort aimed at getting back to business as usual, which will aggravate the consequences of the pandemic and the transition it’s accelerating:

Those who are on the winning side of this transition—mostly tech companies, especially the bigger ones—will still have free reign to make the most of the opportunity while governments look the other way. Even worse would be if governments do indeed have a look, then concluding that tech companies thriving is an anomaly rather than a paradigm shift and then enacting stupid regulations that will make it even more difficult for challengers to enter the market and contend with dominant tech companies. I’m convinced that in the Entrepreneurial Age, competition is one of the most effective levers around to tame large tech companies, but clueless governments could end up stymying rather than fostering it.

As for those on the losing side, they’re likely to be disappointed once they realize there’s no such thing as going back to normal:

Some will be out of a job for the foreseeable future because the company that used to employ them has been downsizing or has gone bankrupt, necessitating either a difficult career switch out of a dying industry or at least a struggle to find a new job in a market where supply largely outstrips demand. Others will keep their old job, but in such an adverse context that their condition will be made worse as a result: harder work, lower wages, less of a social safety net.

Think about those essential workers working in healthcare or proximity services: can you expect them to go back to the old ways in the post-pandemic context, with indebted governments unable to provide the financial support so as to lift everyone up and hasten the transition?

What could happen is that clueless policymakers align themselves with clueless business owners, and that those who end up suffering are all the people that depend on their decisions: customers who will be served lower-quality products at a higher price, and workers who will be paid lower wages for a less rewarding job.

Isn’t this what should be avoided in the coming recovery?

4/ What should be done?

First of all, governments will come out of the pandemic bearing a heavy debt, which there are two ways of dealing with:

Either you count on inflation to erase most of that debt, but inflation that high usually comes at a heavy price—namely the fact that everyone holding cash ends up with much less (or even nothing), which eventually bears consequences.
Or you make sure that economic growth is strong enough so as to generate that extra value add which then turns into more revenue for the government.

However, you need a special context for this kind of thing to happen—governments taking charge and changing everything. The simplistic view is that a brutal crisis such as the Great Depression or World War II is enough to put things in motion, but there are so many counterexamples, such as the 2008 financial crisis, that it’s less of a thesis and more of a hope.

The more nuanced view is that you need a specific context to effectively move the needle, namely the convergence between four different parties:

Angry people who demand radical change because they’ve had enough of the status quo: I think we’ve been there for some time, and the meta-explanation is provided by Martin Gurri in his book The Revolt of the Public.
Intellectuals (journalists, scholars, think tankers) can bring new ideas forward and amplify these ideas until they end up moving from the fringe to the center. These days, intellectual work on “What should we do?” is distributed across a constellation of online writers.
Policymakers determined to take ideas shaped by intellectuals and turn them into action, thus responding to angry people. I’m not sure we have many of those at the moment! Even France’s Emmanuel Macron, who was elected promising to implement new ideas, has ended up being more of the same.
Finally, what Hilary Cottam calls the “new industrialists”: business founders and/or CEOs who have succeeded at the helm of innovative companies and are able to recognize that innovation on the business side must be matched with innovation on the institutional side.

5/ America and Europe in a two-part race

Yesterday’s panel gathered people from Europe (Margaret Mulligan of the European Commission, Michael Stothard of Sifted, and me) as well as from the US (Kim-Mai Cutler of Initialized and Pat Wilson, who is in charge of economic development in the state of Georgia). I didn’t have the time to mention this theory of mine during the panel, but I thought I would articulate it once again in this edition:

No country can succeed through a paradigm shift if it doesn’t win a race that’s made of two parts: first, you need to grow successful companies in the new paradigm; second, you need to put in place the institutions that will make it possible to realize the value created by these companies in the most inclusive and sustainable way.

Up to this point, the US has been a clear winner of the first part of the race (growing successful tech companies), but it didn’t seem really interested in tackling the challenge of institutional innovation. To be fair, Obama expressed interest, but he didn’t advance the cause much; then Donald Trump not only made it clear that he wasn’t interested, he even took actions to erase some of the tiny bits of progress achieved by his predecessor.

Now we’ll have to see if Joe Biden can be a Franklin Roosevelt for the Entrepreneurial Age!

As for Europe, well, it’s the exact opposite. So far we have failed at growing successful tech companies with a clear shot at dominating their market at the global level. On the other hand, many people in Europe are interested in the second half of the race: building new institutions so that the Entrepreneurial Age is more inclusive and more sustainable. Many of us are working hard on catching up in the first half, in hopes that maybe after that we’ll be able to start working on the second half with the right tools.

In concrete terms: it’s difficult to make progress on the institutional innovation front if you lack any one of the four parties which together can make radical change happen. In the case of Europe, I’m sure we have the angry people, plenty of intellectuals, and the occasional policymaker willing to undertake bold experiments. What we’re lacking is our own group of “new industrialists”—and that’s a problem, since you need a successful homegrown tech industry to lend constructive support to radical innovation in the realm of institutions!

We’ll see how it goes. In the meantime, you can still attend the second day of the event by following this link. And I’ll make sure to share the replay video of the panel I was a part of, assuming it’s eventually published online!

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From Munich, Germany 🇩🇪

Nicolas

European Straits