Transition to the information society (Part 5: Only governments can solve today’s problems but can they?)

Transition to the information society (Part 5: Only governments can solve today’s problems but can they?)

Phuah Eng Chye (11 November 2023)

In the 1990s, governments took a backseat to unleash the private sector and markets to drive economic growth. Technology-driven innovations upended legacy industrial society models and deepened informationalisation, financialisation and globalisation. Governments papered over the adverse social and instability effects of business disruption with QE to keep interest rates low while inflationary pressures were mitigated by global output expansion during the “Goldilocks” era.

However, social dislocation in developed societies have reached a tipping point. Widening income inequalities are being compounded by the precarious nature of gig employment, and rising financial burdens for education, healthcare and housing. The government’s policy woes are being aggravated by fiscal and monetary policy fatigue, rising geopolitical confrontation; and the cumulative effects of pandemic and climate deterioration. These challenges are upending the stability of developed democratic societies. The private sector and markets no longer seem able to solve problems for which they were partially responsible for creating in the first place. The responsibility falls squarely on the shoulders of governments but are they up to the task of overcoming today’s pressing problems. I will start by reviewing the traditional fiscal and monetary policy challenges.

Policy challenges in the anorexic and financialised economy

Today’s macroeconomy works differently from the industrial economy of several decades ago. It is a landscape that has been reshaped by the private sector and markets and forces of informationalisation, financialisation and globalisation. The irony is that despite pro-market policies and government “downsizing” via privatisation and outsourcing, government fiscal expenditures and central bank liquidity support has expanded rather than shrunk. This has given rise to the anorexic and financialised economy.

  • The anorexic economy

The anorexic economy refers to how despite having home-grown world-class corporations, developed economies rely heavily on government spending to support aggregate demand. The anorexic economy behaves differently from the macroeconomy described in textbooks. Textbook models assume a virtuous “multiplier” cycle where additional consumption feeds into employment and wages and generates fiscal revenues to finance higher government expenditures – all of which feeds back into sustaining economic growth. This virtuous cycle doesn’t apply in the anorexic economy where the bulk of fiscal stimulus feeds into profits rather than consumption and wages (as reflected by the dominant profit share of national income relative to wage share). This is caused by corporations expanding profit margins by reducing resource costs (raw materials and labour) and increasing contributions from financial transactions (trading, financial restructuring and reducing tax payments). When corporations choose to return capital via share buybacks rather than invest, capital accumulates at a faster pace than economic growth, corporate profits grow at the expense of wages while keeping asset prices relatively buoyant. The excess corporate savings are invested in government debt which, in turn, is used to finance fiscal spending. And the economy becomes even more dependent on fiscal stimulus to sustain aggregate demand. This explains why fiscal stimulus have a muted effect on economic and wage growth but evokes a highly positive market (stocks and property) reaction. The high profit share of national income is responsible for a breakdown in the traditional textbook relationships between GNP, labour and capital.

An anorexic economy typically emerges in the shift from manufacturing to services and as corporations expand their role in the economy. There are interesting dynamics between government expenditures, service sector growth and costs, stagnating wages and inequality. Governments often spend or provide incentives to broaden public access to education, housing, healthcare and transportation. But their interventions are exploited by the private sector resulting in the indirect transfer of fiscal resources to corporate profits while increasing public dependence on subsidies. It should be noted that because service economies are demand-driven rather than output-driven, government interventions only serve to fuel price increases and worsen affordability; and increase household debt and public sector deficits.

  • The financialised economy

The anorexic economy also tends to be financialised. Despite sophisticated financial intermediaries and markets, developed economies seem to rely on savings from emerging economies while their markets are fragile and constantly rely on central banks to extend liquidity support and bailouts. At the macroeconomic level, financialisation refers to the development of the financial sector or financial deepening as gauged by benchmarking the size of the financial sector or market cap relative to GDP. However, an increase in the financial sector share of GDP denotes an increase in intermediation costs for the non-financial sector. In this context, the success of financial intermediation is assessed not by its growth per se but its ability to mobilise savings to finance growth in other sectors. A large financial sector (means high intermediation costs) will be a drag on economic efficiency if it doesn’t generate higher non-financial output growth.

Financialisation is often maligned because it is interpreted as a form of capitalist exploitation that results in wealth and power concentrations. Hence, financialisation is blamed for making housing unaffordable, shrinking the labour share of income, widening the disparity between top management and worker compensation, for companies preferring to buy back shares rather than reinvest and for causing episodes of financial market stress and debt distress. 

Another feature of financialisation is intangibility as reflected by the rise of the services sector at the expense of manufacturing. New loans are channelled into properties as financialisation enhances their tradability, and education and healthcare are turned into demand-driven debt businesses. In this context, the supply of some services can be inelastic and fuelling demand with debt will aggravate affordability rather than overcome it.

Overall, my perspectives are unconventional. I view financialisation as an information process. An underdeveloped economy is largely physical. In a developed economy, financialisation can be defined as ability of society to monetise value from information assets – e.g. equity, debt and claims (e.g. IP, carbon credits, digital assets and brands). Value is unlocked through a legal and digital infrastructure that endows legally enforceable transferable ownership rights and facilitates real-time tradability. In this context, the line between money and information is blurring with money evolving into an application (such as CBDCs) with autonomous and self-managing capabilities.

I also differentiate financialisation from capitalism. Financialisation is an autonomous information-driven process to monetise value and is structurally abundant. In contrast, capitalism has an ideological bias that exploits scarcity and privileges to capture value. There is overlap in that concentration of information power also leads to exploitation and unequal distribution of wealth. But while capitalism is well explored, there is a lack of a theoretical framework for the monetisation and distribution of value[1] from information.

I consider monetary theory to be a part of information theory rather than the other way round. Most monetary models are constrained by scarcity[2] underpinnings; that money supply should be anchored to the supply of physical collateral or by the value of future cash flows. Hence, money supply expansion accompanying financialisation are perceived as either inflationary or as Ponzi finance structures[3] reflecting assets priced at excessive premiums to book values. The Financial Instability Hypothesis correctly argues that rising debt and asset prices accompanying financialisation makes a financial system more prone to crises. But this is a generalisation that doesn’t take into account the information effects of intangibility. Informationalisation of an economy fosters abundance and creates a deflationary price environment. Under these conditions, money supply expansion or financialisation needs to be rapid to facilitate the monetisation of intangible assets; otherwise it could constrict demand for intangible assets and economic growth.

Recent theoretical beliefs have been coloured by the “Goldilocks”[4] era of low interest and inflation rates that persisted despite large-scale QE. This gave rise to the Modern Monetary Theory (MMT) which “asserts that monetarily sovereign countries (such as the U.S., U.K., Japan, and Canada) which spend, tax, and borrow in a fiat currency that they fully control, are not operationally constrained by revenues when it comes to federal government spending” [5]. I argue MMT is flawed as it overlooks the role of massive central bank sterilisation in supporting the “Goldilocks” economy. This is proven by the fact by Western economies are confronted by rising inflation and interest rates as they unwind QE and as export-led economies unwind sterilisation.

Financialisation has changed the global monetary landscape. Initially, the private sector drove financialisation but over the past two decades, central banks drove financialisation on two fronts. First, they massively expanded their balance sheets via QE and sterilisation. This positioned central banks as the de facto price setter for domestic interest rates. Second, they imposed regulations constraining global banks from over-leveraging. Central banks thus ended up at the centre of a financialisation process that positioned asset prices as the dominant force influencing economic conditions.  The willingness of central banks to use their balance sheets to support market liquidity has transformed central banks into the role of market-makers and as significant counterparties to systemic risk. The self-fulfilling belief that central banks will “support” prices and liquidity has shifted the responsibility for managing liquidity risks from the private sector to the regulator. This has increased the value of central bank forward guidance and diminished market discipline.

Central bank monetary policy thus needs to be re-conceptualised in relation to changes in market structure. Traditional monetary theory tends to analyse central bank interventions as operating through money multipliers and credit channels. The willingness of central banks to hold large amounts of private and foreign assets distorts money multipliers and strengthens linkages between monetary policies and leverage, portfolio allocations, market liquidity and asset returns. The financial landscape has transformed from a simple loan-deposit model to a tripod comprising markets, the asset management industry and central banks. The global banks, rather than markets, provide liquidity and connectivity and sit at the centre as the aggregators and integrators of risks. The effects of policy interventions are transmitted through asset prices and portfolio fund allocations rather than through loan channels. The asset management industry has outgrown global banks and their influence on the financial system is significant. In the meantime, QE increased the proportion of short-term liquidity relative to long-term risk assets.

In this paradigm, the central bank policy rate is connected to the rate of returns for different assets by the willingness of global banks to foster asset substitutability[6] via financing leveraged trading strategies, carrying inventories and acting as market-makers. The tightens the linkages between the policy rate and the rate of return for investors but it also distances monetary policy from non-financial economic activities. Market illiquidity emerge as the critical vulnerability from deleveraging, the unwinding of counter-party concentrations and the speed of the transmission of contagion shocks. Central banks increasingly find themselves being called upon to act as the liquidity provider of last resort.

The much-overlooked lesson from the Goldilocks era is that the main restraint on liquidity creation is external rather than domestic. A central bank can expand liquidity (via QE) as much as it wants providing there is sufficient external demand to absorb the excess liquidity over domestic demand. Hence, countries with large fiscal and current account deficits can suffer from a loss of external confidence which can trigger a run on the currency and the domestic banking system. So far, the USD has been the exception because other central banks have been willing to accommodate the excess USD liquidity. However, de-dollarisation is likely to reduce the level of external accommodation. In the meantime, QT and rising US interest rates is triggering cross-border deleveraging which reduces external USD liquidity and puts further upward pressure on US interest rates. The contraction in cross-border intermediation is reflected by the relative stagnation of global bank balance sheets and this is leading to growing illiquidity, widening spreads and rising volatility.

Governments need to find effective macroeconomic responses

The same macroeconomic policy advice keeps being dished out. But the emergence of the anorexic and financialised economy signifies textbook policies did not work in recent decades and are unlikely to be effective in the future. For example, some economists have identified China as being vulnerable to “Japanification” and advised them to adopt aggressive fiscal and monetary stimulus. However, they seemed to have overlooked that despite following such advice, Japan failed to avert its lost decades. A more plausible explanation for the durability of Japan’s lost decades was its failure to achieve structural breakthroughs that would reinvigorate public administration and revitalise entrepreneurship in Japan.

In this context, not only do there need to be greater recognition of the limitations of fiscal and monetary policies but there is also a need to face up to the hard policy choices ahead. With rising inflation and interest rate sensitivity, the days of free-flowing fiscal and monetary stimulus are over. The policy challenge is to manage a transition out of the Goldilocks era to avoid the worst outcomes from fiscal and monetary discipline. Two main adjustments need to be made for the policy mindset. The first is to discard traditional policy frameworks and to evolve new approaches based on the changes in macroeconomic circuitry described earlier. The second is for policy-makers in developed societies to create a vision for a post-Hayek[7] world and to widen the scope of structural reform.

  • Fiscal policy

In the post-pandemic era, governments are under great pressure to tighten the belt. But if governments cut fiscal expenditures at a time when the private sector is retrenching, the end result could well be a steep and prolonged economic downturn which could lead to governments being voted out of power.  Hence, governments have to manage a fiscal and monetary policy transition that would allow them to safely navigate a socio-political minefield.

My view is that a practical and effective fiscal strategy has two prongs. The first is that governments need to simultaneously reduce their involvement in the economy to create space for the private sector while at the same time prevent the recession from cutting too deep. The transition strategy should be to re-prioritise and re-allocate expenditures particularly to make fiscal cuts in areas that are already taking up too much fiscal resources. That would include a phased withdrawal of interventions (fiscal support for poorly-performing companies and subsidies), a loosening of price controls, and modifications in the types of interventions. The objective is to facilitate market clearing and creative destruction to create a void that would serve as an economic base for private sector-led regeneration.

The second is to address income inequality. In this context, the policy swing in favour of markets, globalisation and the elevation of the pursuit of shareholder value[8] underpinned rapid economic growth. But it fostered widening inequalities. Even those unmoved by the adverse social effects should be concerned by the macroeconomic implications of funnelling wealth and income into a narrower base. Concentrating economic income into fewer hands reduces future sources of consumption, investment, tax revenue[9], opportunities and growth and renders fiscal stimulus and tax cuts ineffective in overcoming anorexia.

The populist reaction of imposing higher taxes or a wealth tax on the super-rich should be handled with caution. Trying to collect more fiscal revenue from the rich is easier said than done. Tax evasion and avoidance and capital flight will minimise the tax revenue. On the other hand, the government needs the support of the rich to engineer a private sector-driven recovery. The reality is that rich families and profitable firms control capital and consumption power and count among their ranks talented and capable individuals. Hence, governments should tread cautiously to avoid antagonising the rich with punitive or “punishment-oriented” tax measures. Instead, governments should manage the relationship to convince rich families and firms to marginally increase their tax contributions and to increase their participation in creating opportunities for others. Ultimately it matters less that wealth is captured by a few individuals and firms. It matters more that governments are collecting a fair amount from rich individuals and firms and whether it use the revenues to effectively address social needs. Generally, I favour reforms that reduces tax exemptions and eliminate loopholes while retaining tax rates at reasonable levels.

The more direct approach is to focus on broadening the income base as this will reduce dependence on the rich (for tax revenue, consumption and investment) to finance the rest of society. Broadening the income base creates a virtuous cycle between higher income and higher taxes to address inequality and demand deficiencies. As a result, taxes and wages should rise as a proportion of national income. There are positive multiplier tax and consumption effects on aggregate demand. However, the implication is that profits as a proportion of national income will shrinks and this will likely have a negative impact on asset prices and portfolio returns. The income base can be further broadened by establishing a framework for active management of public assets complemented by basic income schemes. Hence, public assets can be specifically earmarked to generate fiscal revenues to support welfare, unemployment or debt repayment assistance, to improve access to public goods or create business opportunities for the low-income group.

There is certainly room to cut back on pandemic-related expenditures, tax breaks, subsidies and in other areas. To address anorexia, there is a need to reduce the net fiscal outflow by withdrawing related subsidies and guarantees to large firms and privatised entities. Tax policies should be re-balanced to achieve neutrality between virtual and physical operations; and tilted in favour of promoting employment and wages for the low-income group and small companies relative to large companies. In tandem with this, the incentives for savings, investment and consumption should be re-balanced as the rich are the biggest beneficiaries. There is a case for reviewing incentives for savings particularly when excess savings are not being deployed to generate long-term growth but are instead chasing yield and liquidity. In some countries, tax systems have become regressive with large increases in value-add tax (VAT) and this may need to be redressed given the consumption shortfalls.

Overall, governments need to display economic leadership at these critical times but fiscal reform is a challenging task. If governments are over-eager to ward off a potential downturn, their interventions not only interfere with market adjustments but it also builds dependency on the government as a source of aggregate demand or establish it as an immovable competitor to the private sector. Government spending cannot be expected to pick up the economic slack on a permanent basis. This means fiscal budgets should comprise a mix of limited spending increases and expenditure reductions. The aim is not to stimulate aggregate demand but to create opportunities and conditions for governments to stage a fiscal exit and to establish the groundwork for a sustainable private sector-led economic recovery.

  • Monetary policy

While narratives tend to revolve around managing inflationary expectations and unemployment, the main challenge for Western central banks is to unwind the massive amount of intervention assets accumulated during the “Goldilocks” and pandemic eras. This process has started in the US, Japan and EU where the process of normalising or shrinking central bank balance sheets have begun.

As the US Fed wrings excess liquidity out of the financial system, interest rates have risen. QT has several policy objectives. The first is to correct structural anomalies such as credit mispricing, yield curve inversion and bank deposit vulnerabilities (due to money market fund arbitrage). In this regard, rising US interest rates and QT tightens short-term liquidity supply with a view to correcting the pricing of long-term liquidity and credit. The second is to manage the asset overhang that emerges as central bank liquidity ebbs. This would require central bank intervention, when required, to buy time for financial intermediaries to unwind mismatches in a manner to avoid triggering contagion. So far, central banks have been skilful at containing contagion threats from asset price collapses, liquidity withdrawals and debt crises. The third is to pro-actively nip debt crises in the bud and accelerate the rebuilding of private sector balance sheets to establish a base for a private sector recovery.

But central banks are running out of room to manoeuvre with governments incapable of cutting fiscal spending. Interest rates are reaching levels where it could trigger a severe asset price correction, a recession and worsen financial distress. The policy choices are unattractive. If the Fed continues to further tighten its balance sheet, this will cause interest rates and the USD to rise even further and crowd out[10] private sector investment, induce private sector balance sheet retrenchment and aggravate a global debt crisis that will entrench stagflationary or recessionary conditions.  

The alternative is for the Fed to resume QE to finance the huge fiscal deficits. The constraint is that the US government borrowing requirements are staggering to the point where even the Fed would face difficulty absorbing excess issuance on its balance sheet. In conjunction with QE, the Fed can target interest rates. If the interest rate target is set too low (near-zero bound), they would end up following Japan’s example and be implementing yield curve control (YCC). The consequence would be to trigger a sharp USD sell-off with inflationary and dire geopolitical consequences. For this reason, the Fed’s interest rate target needs to be set at levels relatively higher than other countries to maintain sufficient positive carry to attract foreign buyers of US government debt. The drawback is that at higher interest rate levels and given the record levels of US debt, the interest servicing costs may become onerous and the damage to global balance sheets may be irreparable. But maintaining higher interest rates would carry a hidden warning to governments to rein in fiscal deficits and to markets to rein in irrational exuberance.

It should be acknowledged monetary policy is losing its ability to affect real output. In an environment of interventionist policies and deglobalisation, consumers and private businesses react by rationing (rather than expanding) demand and supply. Policy uncertainty (especially beggar-thy neighbour policies) has increased global risk aversion. Private sector firms prefer to maximise profits rather than contest for market share. In addition, Western governments face a potential threat from de-dollarisation (as well as reduced use of Euro, yen and sterling). This makes it difficult to re-leverage global liquidity (which has shrunk due to cross-border deleveraging). There are growing risks of a liquidity trap, typically associated with global deflation and war, where low interest rates and ample liquidity no longer stimulate economic growth because private sector credit is constrained by risk aversion and credit rationing. Central banks should thus seriously consider ending “endless” QE.

Finally, developed country central banks are in a position to steer policy to avoid catastrophic scenarios as an affluent economy should be able to live off its wealth – by disposing local and international assets. Fund decumulation need not pose a systemic threat so long as balance sheet assets and liabilities are closely matched, risks are well diversified and debt vulnerabilities are minimised. Systemic vulnerabilities are created only due to the lack of prudent management of risks such as excessive leverage, concentrations and unsound financial practices. Central banks should facilitate market clearing to restore financial soundness; assist the private sector to repair their balance sheets and promote a shift from liquidity-driven to information-driven price discovery to re-establish market discipline.  

Structural reforms

Much of what governments needs to do lie beyond fiscal and monetary policy. However, the global institutions (IMF and World Bank) structural reform agenda tends to be based on industrial society model – ranging from accelerating the shift from manufacturing to services and from production to consumption; reducing subsidies, liberalising industry competition and markets; strengthening corporate governance; tackling labour rigidities and working conditions; and moving towards achieving diversity and environmental goals. But how valid can this advice be if even developed countries are abandoning these policies in favour of agriculture and industrial production self-sufficiency and technology proficiency. The scope of conventional structural reforms is too limited to correct the cumulative policy and organisational deficiencies. The agenda for structural reforms should be bold and aspirational to have a meaningful impact.

  • Clarify public and private sector roles

The pro-market fervour is receding and the ideological pendulum has swung from markets to governments. It is justifiable for governments to retake the reins for economic leadership because markets are incapable of sorting out society’s current ailments. But the switchover is creating confusion over the roles of the public and private sectors. It is important to clarify the new roles; otherwise there may be gaps as the public and private sector waits for each other to solve the problems, or collaboration and efficiencies may deteriorate if the public and private sector are pulling in different directions or clashing with each other. Public communication is critical to ensure alignment between the public and private sectors.

It is easier to start by scoping the role of the private sector and markets. The heydays of the private sector and markets are over and I think most agree the private sector should be left to do what it does best – compete, innovate and generate profits – and similarly for markets – price discovery, discipline in capital allocation. In recent years though, the private sector has been burdened by a multitude of non-profit objectives such as minority representation, LGBTQ, ESG and geopolitical loyalty. As society became more polarised, businesses often found themselves caught in the middle of a shootout and pressured to take sides by politicians, regulators, investors, banks, and customers. Policy uncertainties created an unhealthy environment for businesses already struggling to cope with information disruption, higher interest rates, sluggish demand and supply chain shocks. If Keyne’s animal spirits[11] are in confusion, they are likely to retreat. Therefore, even as governments become more interventionist, they need to communicate the scope of interventions to assuage the private sector that there will be limits to government exercise of power, that it would strictly follow due process and allow market forces space to work. Public communication is also needed to remind ministries and agencies to voluntarily restrain their exercise of power and to curb mission creep and not stray too far and too often from public interest objectives.

In developed societies, recent government interventions have not inspired public confidence and this indicate governments are not clear on what their roles should be. Policies have been weaponised to achieve geopolitical and national security objectives and even politicised to curb domestic rivals and errant firms. This creates the impression of bias and vindictiveness. As polarisation deepens, policies (e.g. environment, minority rights, immigration, competition law) are reversed when governments change. Frequent policy reversals create much long-term uncertainty. In the meantime, governments have become more sensitive to their decisions being challenged and have adopted more coercive policies. A sense of accountability among politicians and officials is also sadly lacking.

In developed societies, there is a need to clarify the objectives for reindustrialisation.  While reindustrialisation is a legitimate goal, it can have economically regressive effects when it is driven as a whole-of-society response to a geopolitical threat or, worse still, as an industrial middle-class renaissance. Reindustrialisation policies need to recognise the constraints of a matured or “hollowed-out” economy and manage the creative destruction of traditional industries and the shift to new industries. In the process, governments should remember the lessons from past costly attempts to direct resource allocation and control the economy.

Informationalisation adds a new dimension to the public-private roles. The advancement of societies depends on its ability to gather and use data. There are legitimate privacy concerns. It all comes down to who we should entrust with our data – governments or private firms and billionaires? Unfortunately, neither is not a feasible answer om the information society. In any case, both sides are unlikely to give up their rights to collect and use other people’s data. The private sector will use data for profits and that’s fine. But it doesn’t mean that their power over data should be absolute. There needs to be checks and balances. This means that ultimately, governments should have the rights to oversight and discipline the private sector from abusing their information privileges and assert sovereign rights over virtual space controlled by foreign platforms. Most importantly, governments need to improve how it is using data for the public good. As a matter of reflection, governments should try to manage data for the country the way platforms manage it for their business.

Finally, governments need to sort out the mess in the private sector provision of public goods. Privatisation, public-private partnerships and outsourcing were popular policy choices to reduce the government’s financing burden and to tap private sector efficiencies. The major disappointment is that despite shifting the delivery of public goods to the private sector, government expenditures continued to rise while the negative social impact is become more evident. To be fair, the long-term negative outcomes were not surprising as the private sector and market mechanisms are oriented towards optimising profits rather than social benefits. Ultimately, the burden falls on governments to make good on social shortfalls.

A Eurodad-European Federation of Public Service Unions (EPSU) report highlighted eight reasons why public-private partnerships (PPPs) are not working:

  • PPPs do not bring new money – they create hidden debt.
  • Private finance costs more than government borrowing.
  • Public authorities still bear the ultimate risk of project failure.
  • PPPs don’t guarantee better value for money.
  • Efficiency gains and design innovation can result in corner-cutting.
  • PPPs do not guarantee projects being on time or on budget.
  • PPP deals are opaque and can contribute to corruption.
  • PPPs distort public policy priorities and force publicly run services to cut costs.

Amy Kapczynski, Reshma Ramachandran and Christopher Morten notes the public–private partnership Operation Warp Speed (OWS) showed that while “government funding, expertise, and leadership can build mRNA R&D and manufacturing capacity in record time”, there were serious weaknesses. “Instead of leveraging the enormous public investment to facilitate fair vaccine prices over the long term – or using its power to press companies to share intellectual property and data to enable more rapid and sustainable production of vaccines abroad – OWS deliberately disavowed these kinds of moves…Another crucial limitation of OWS is that it has done nothing to prepare us for the next pandemic”. “The United States built no significant new capacity or rights to undertake public mRNA research…and the U.S. public cannot easily leverage its enormous past investments in mRNA…because drug companies, not the U.S. government or other publicly accountable entities, control a growing majority of the relevant patents, trade secrets, contracts, laboratories, manufacturing plants, and distribution networks. These companies also employ most of the scientists and engineers with hands-on experience and tacit knowledge in mRNA. As a condition of employment, these companies can and do impose non-disclosure, non-compete, and other restrictions that can make it hard for employees to disseminate information without the companies’ permission – and hard even to quit…the United States has allowed this new technology to become more and more embedded in private – and even secret – for-profit infrastructures, which have little history of investing in public health threats. Companies are quietly reverting to their pre-pandemic scientific playbook – claiming proprietary legal rights in research data to keep it secret and choosing exclusive licensing over licensing multiple manufacturers, concentrating manufacturing in just a few places, walking back on promises to build capacity abroad. All this undermines resilience”.

Amy Kapczynski, Reshma Ramachandran and Christopher Morten suggests “how things could have been different…OWS did require drug companies to share trial data and other research data with the U.S. government, which acted as a clearinghouse and facilitated sharing some with other companies. It also spent much funding and energy on expediting clinical trials and data sharing. That effort helped expose problems with vaccines that were less successful…Absent OWS-like oversight, drug companies often delay disclosure of new product testing…The upshot, as we envision future industrial policy, is that the U.S. government (and other governments) could have attached strings to their investments in mRNA and other vaccine technologies – strings that would have mandated data sharing for years to come and required public and academic researchers have access to the new mRNA platforms for research purposes. Companies could have been compelled to share more details of their clinical trials and other R&D. Useful knowledge of what works would be disseminated more quickly and more widely, catalyzing breakthroughs at home and around the world. In addition, by reserving the rights to the platform, the U.S. government could have shaped the subsequent science being built on publicly funded knowledge. For example, the government could have funded and directed further research applying mRNA technology to diseases endemic to low- and middle-income countries, such as malaria and dengue. Or the government could have directed development of vaccines that can be inhaled nasally rather than injected via a needle, improving uptake…Better yet, the U.S. government could have built its own R&D and manufacturing infrastructure…Building public capacity, knowledge, and networks will thus be critical to redirecting R&D to public purposes. For a fraction of the investment OWS gave to Moderna and other companies, the U.S. government could have expanded facilities, hired and retained personnel, and concentrated knowledge of mRNA and other cutting-edge technologies within the NIH…Concentrating scientific expertise and capacity within public institutions yields incredible technical breakthroughs…Public pharma could also yield stable, high-paying jobs for domestic scientists, engineers, and other workers, many of whose salaries have flatlined and whose jobs have become increasingly precarious as the pharma and biotech industries become more financialized, consolidated, and outsourced. Building government infrastructure for mRNA R&D and manufacturing would have enabled the government – and through it, however imperfectly, the public – dictate the scientific agenda, instead of a handful of self-interested corporations. In our technologically mediated world, this kind of path dependence matters. An industrial policy that fails to invest in public infrastructure will allocate technical power to industry instead, which will use power to its advantage. Industry control then undermines the viability of the next effort to build public capacity”.

Amy Kapczynski, Reshma Ramachandran and Christopher Morten concludes “as the future of industrial policy is being written, we need to talk in the same breath about how public investment must yield public infrastructure, public rights, and public power…Large public investments in R&D and procurement that can be feasted on is part of the essential formula of high neoliberalism: socialized risk and private profit. Industry prefers this arrangement, but it generates and exacerbates many harms we need to remedy today…The case of COVID-19 vaccines shows that removing last-mile roadblocks between promising science and commercialization is a worthy undertaking for government. But it also shows the need for all this to be coupled with public infrastructure, public rights, and public power…public funding deals with private companies can and should include fair pricing provisions…With our long history of supply-side liberalism in mind, we must also experiment with forms of industrial policy that build constituencies and political power for more muscular and democracy industrial policy over the long term. We should consider governance roles – board seats and more – for workers, patients, and other stakeholders, and build coalitions that can durably support public authority, and also hold it accountable”.

I believe there are grounds for a comprehensive review of public-private arrangements; particularly in relation to its impact on living costs and fiscal expenditures. The review  should analyse the pluses and minuses in the private sector’s delivery of public goods and assess whether the benefits are reaching the intended targets. It should consider options for addressing shortcomings including strengthening oversight of projects and maintenance, mechanisms to reduce subsidies, restructuring and bail-out processes, and establishing best practice models for new collaborations. Incentive systems should be designed ensure private goals and behaviours are aligned with public policy objectives.

The public-private review should be part of a broader review aimed at establishing an agenda for a complete re-organisation of the provision of public goods[12]. At the extreme, the public-private sector roles should be streamlined by removing social obligations from businesses and by governments taking overall charge for delivering public goods. This is conditional on the private sector transferring sufficient resources via taxation or wages to the government and employees. Cost and quality baselines should be established for public access to goods such as education, healthcare, transportation, accommodation and utilities. Hence, governments should explore innovative approaches, scaling best-practice models and supply interventions to ensure low-cost and pragmatic solutions. For example in healthcare, governments can ring-fence the costs of basic medicines and treatments, be disciplined on scope and adopt transparent benchmarking. Rather than restrict affordable housing to building low-cost homes, governments can build or subsidise short-tenure rentals taking into account changing family structures and urbanisation patterns.

  • Reform government administration

Governments are intervening more frequently but the critical question is whether they have the capabilities to be effective. In many countries, government administrations have suffered significant damage from decades of downsizing, privatisation and outsourcing. The prestige, culture, implementation and operational capabilities of government administration is generally a shadow of what it once was.

Brink Lindsey explains “the concept of state capacity – the ability of a state to collect taxes, enforce law and order, and provide public goods…illuminate the strong institutional contrast that parallels the economic contrast between rich and poor countries. Rich countries are all distinguished by having large, strong, and relatively capable states; poor countries, by contrast, are generally characterized by weak and frequently ineffective states, while those polities dysfunctional enough to be characterized as failed states are among the poorest and most miserable on Earth…The most obvious and basic deficit in American state capacity is the fact that today’s federal workforce is not adequately staffed to accomplish the many tasks for which government is now responsible. The ability to translate words into action, to move from legislative and regulatory directives on paper to effective policy on the ground, hinges on having the right people in place to plan, direct, supervise, coordinate, and execute. And that is precisely what we lack at present. Since 1960, government spending has increased some fivefold after accounting for inflation. Over this same period, the scope of federal responsibilities, the number of agencies, and the corpus of laws and regulations to be administered have all mushroomed as well. Yet the federal public service today consists of about 2.1 million civilian employees, only slightly more than in the closing year of the Eisenhower administration. To compensate for the growing gap between workforce and workload, the federal government has increasingly been forced to rely on intermediaries – state and local officials on the one hand, and an ever-expanding army of government contractors and nonprofit grant recipients on the other – to carry out the laws of the land. Today, the annual outlay for contractors is roughly equal to the total payroll costs for federal workers, and in a number of agencies contractors outnumber employees many times over. There is nothing wrong, in the abstract, with using government contractors – the practice dates back to the Revolutionary War. But the scale of outsourcing today is clearly excessive, as there is not enough in-house capacity to properly supervise contractors’ work and evaluate their results…We have too few federal bureaucrats monitoring too many federal grants and contracts, and handling too many dollars. The hollowing out of the public service contributes to government dysfunction in various ways. First, it raises the risk of capture, or the perversion of government programs to serve narrow insider interests. Among the interests in question are those of government contractors, who can be counted on to lobby vigorously for their gravy train to continue regardless of whether the programs in question actually serve the public interest. Furthermore, the lack of sufficient in-house supervision and coordination is a recipe for kludgeocracy, as there is nobody around with the needed experience and clear authority to cut through red tape and work around the inconsistencies among directives that accrete over time. It is unsurprising that the Government Accountability Office’s high-risk list of programs especially vulnerable to waste, fraud, and abuse is dominated by the operations of agencies heavily dependent on outsourcing…There is often a presumption, however baseless, that contractors are more efficient because they are private businesses; in addition, outsourcing creates the appearance of holding the line against big government by resisting the expansion of the permanent bureaucracy. But the hollowing out of public service has also been the path of least resistance for pragmatic reasons. Overly restrictive civil service rules on hiring, firing, and compensation now make it extremely difficult to attract and retain qualified professionals”.

Brink Lindsey thinks that “to reverse the hollowing out of the federal government, it will be necessary, first, to recognize the vital importance of professional, well-trained, and properly compensated public servants to the operations of government. Beyond that, though, we will also need to reform the civil service system to improve flexibility, sharpen incentives for good performance, and provide better career tracks to retain top talent. While the inadequacy of the federal workforce to shoulder the government’s wide-ranging responsibilities is a serious problem now, the outlook for the future is even more alarming. Of the full-time federal workers who were employed as of 2019, 35.5 percent will qualify for retirement by the end of 2024. Only 6.8 percent of federal employers are younger than 30, compared to 20 percent of the overall U.S. labor force. And among IT workers, those over 50 outnumber those under 30 by an astonishing 19 to 1. To rebuild state capacity, we need not only a larger federal service, but a younger and more diverse one as well. The political appointments system that supplies the executive branch’s top leadership is also badly in need of reform. There are far too many political appointees (some 4,000), and it is far too difficult and time-consuming to vet and confirm them. As a result, the quality of leadership at agencies often suffers as department heads are picked for partisan or ideological loyalty rather than skills and experience. And far too frequently, there is no leadership at all, as posts go vacant for months on end while replacements are hung up in the appointment and confirmation process. Finally, the personnel problems that afflict the executive branch extend to Congress as well…slash legislative and professional staff as well as congressional budgets…Without adequate staff to evaluate policy options and draft legislation, lawmakers have been forced to outsource these vital tasks – mainly to lobbyists with clients’ axes to grind”.

There is no getting around the need to reform governments. The much-needed reforms are not about cost-cutting or KPI efficiency. We’ve had enough of those. It is not about delivery of government services. Those will mainly be digitalised and increasingly handled through a platform. In this context, government administration should not be modelled on commercial best practices. You can’t afford to have government administrations run as though they are platform companies. In this regard, government capabilities have been weakened by decades of pro-market policies. Politically-appointed officials parachuted into government administrations and external consultants further damaged the civil service by treating it as bureaucracies to be culled rather than focusing on the internal cultivation of culture and talent. In a weakened government administration, politicians find it easier to over-ride the civil service without taking on accountability and to weaponise government policies. The loss of neutrality and independence undermines the government’s prestige. Mismanagement and loss of prestige results in staffing shortages across various government professions.

There is a need for a blueprint to guide the transformation of government administration for the 21st century. The keys to successful reform are the restoration of the civil service prestige and ethos – a dedication to serving the public and an independence that acts as a check and balance on political and business influences –  

and decent incomes and career paths. The restoration of the prestige of the civil service is key to ensuring there is intense competition to join the government; which will enable the government to recruit talent. Thought should also be given to provide relevant training – via link-ups with universities and other institutions – to fast-track graduates keen on a government career.

Salaries are another key sticking point. In the post-World War 2 period, civil service jobs were well-renumerated. This is no longer true as government wage growth lagged the private sector and low-middle ranked civil servants hardly earn enough to maintain a comfortable family life. In some countries, government staff take on second jobs to supplement their income. This should not be acceptable for conflicts of interest and other reasons. We should accept that governments are unable to compete with the top firms and government wages are likely to be at a considerable discount to the top firms. In any case, the motive for working in the government should be non-pecuniary. In reforming wage structures, I think extreme versions of performance-linked pay spoil the government’s culture and ethos and should be avoided. The largest wage increases should take place at the bottom to ensure all civil servants enjoy a reasonably comfortable life. Caps should be placed on the difference between the highest and lowest paid staff. As with the private sector, perks and benefits should be transferred to centralised and portable schemes.

In my view, the civil service wage structure should be designed to anchor the stability of the lower middle-income class. You can focus on efficiency and costs to the point where you design a system where civil servants do not earn enough to support their family, own their homes, and have to work under unreasonable (private sector-like) working conditions. This is where past downsizing exercises went wrong. In fact, one of the factors causing the labour share of national income to decline is a fall in the share of government wages. Governments should therefore structure a baseline for wages, working conditions and benefits for public employees. The permanence of government employment can offset the transience of private sector gig employment. The reassurances of a government job can act as to provide an anchor of stability for the economy and society.

There are few signs of government reforms moving in this direction. It should also be acknowledged there is likely to be substantial internal and external resistance to reforms that involve massive organisational and renumeration changes while attempts to reinforce the culture and independence of the civil service is a delicate balancing act. I have three suggestions on developing a blueprint. The first is that is the reforms should be employee-centric. That is building governments around its employees and the type of jobs, careers, skills, cultures and their ability to contribute to their families and communities. The second is that government administration is reorganised based on an environment shaped by information, technology and transparency. A government AI-driven platform should be a key project. The third is to scrutinise public-private partnerships, outsourcing and consultancy contracts with a view to reducing the least effective contracts and to identify areas to be replaced by building the government’s own capabilities.

  • Education for the 21st century

The education system evolved from a time when information was scarce and physically delivered, when families were large and migrated to cities for careers in industrial and later to service jobs. The landscape has changed. Information is abundant and physical interactions reduced as the digital economy expands. Families have become modular and employment transient. But has the education system kept pace with the changes in the landscape? I think many would agree the existing education system has shortcomings in preparing our children for the 21st century.

Important questions include: Does education prepare our children for the transition to an information society? Is school, university and vocational education relevant for work in government or private sector? Does it prepare them for social life (raising a family; looking after dependents) and give them a knowledge of laws, finance (including taxes), individual rights and work cultures? Which skills, knowledge and beliefs should be imparted onto students? What should be taught and what shouldn’t, given most information are available on the internet? While there is passion on educational reform, it is difficult to build consensus on what should be taught due to strong personal preferences based on different religious, ideological and scholarly beliefs.

In my view, past failures in educational reform largely stem from insufficient attention being paid to the capabilities and welfare of teachers. In several countries, the teaching profession is underpaid and working conditions have deteriorated. As a result, there are shortages of skilled teachers. Therefore, educational reform should be centered around rebuilding the prestige of the teaching profession in terms of a stable career and more conductive teaching conditions. The administrative workload needs to be reduced. The teacher’s role and teaching methods need to be modified with greater integration of technology (AI and internet).

The role of education in addressing inequality should also be enhanced. Historically, the education system was geared towards creating an elite civil service. This changed in the 1950s as education was seen as a vehicle for strengthening social mobility and promoting meritocracy. But today, education has become competitive, business-oriented and certificate-oriented. It is expensive and many students accumulate large debts by the time they graduate; which is a form of an indenture system in a society. Student loans need to be strictly controlled. Governments could divert funds used for student loans or institutional grants to fund the expansion of low-cost public sector education. The reforms should also focus on enhancing the education system for the bottom half of the student population. Educational facilities should be relocated in poorer communities to lower operating costs and courses can focus on improving employment or income-generating projects.

Education also plays a critical role in bridging the digital and physical worlds. The potential pay-off from integrating technology into the education is tremendous. But as the teaching process becomes more virtual, it alienates students from the physical community. The education system therefore should be re-purposed to increase student physical participation in community activities – farms, crafts and industrial workshops – and to promote a sense of civic responsibility. Students should also get more engaged in discussions on community development, municipal management and in poverty alleviation.

Overall, it is timely to address the many shortcomings in the education system and to undertake forward-looking reform for the 21st century. It is unlikely there is a single solution and governments should facilitate experimentation in diverse models to facilitate a faster pace of innovation.

Policy paradigms for an information society

Many of today’s challenges facing governments arise from the transition to an information society. The problem is that many economists are trying to solve these challenges using outdated industrial policy paradigms. For example, large doses of traditional stimulus have failed to re-establish industrial society features such as trade unions, middle-class jobs, social mobility, adequate welfare and healthcare support, and affordable housing. Some developed countries are attempting to reindustrialise but targeting higher output and exports may not be appropriate for matured economies with sufficient physical stocks, a shrinking workforce and rising consumption of intangibles. Industrial policy paradigms should thus be discarded as they are ill-equipped to deal with (1) aging societies experiencing shrinkages in population, labour force, output and consumption and (2) information economies which are intangible, modular, polarised, transparent, transient and complex. Several new stress points have emerged.

  • Information-led creative destruction. In many industries (e.g. the car industry), technology and data are leading, rather than supporting, transformations. The use of AI and robotics is proliferating and accelerating creative destruction in legacy industries. Governments should design policies to manage the transition from the fall-out and to tap the new opportunities.
  • Social contract obsolescence. The industrial-era social contract is obsolete with shrinking household sizes, alternative work, rising costs and corrosion in welfare support. Governments need to rewrite the social contract to adjust to aging demographics, ensure adequate arrangements for the bottom 50% of the population, address the mismatch between the gig economy and social needs, and use technology to expand low-cost access to high-quality education, healthcare and finance.
  • Sources of risk. Risk aversion works differently. Traditional credit risks are reduced by information disclosures, transparency and immediacy. Nonetheless, financial institutions and investors face risks from portfolio mismatches, liquidity runs, asset mispricing and asset overhang. It should be recognised regulators have made substantial advances in risk management, nonetheless they need to remain vigilant; particularly as unwinding of past excesses are on-going.

New paradigms are needed to manage the transition to an information society. The key challenge is to manage a matured economy where population and family sizes are contracting and demand for physical products is saturated. Different types of growth models are needed. There is angst over demographic[13] trends but we should not be worrying about over-population and demographic aging at the same time. We should consider de-prioritising legacy policy goals such as output growth as this would enable a reframing of economic challenges and a reset of policy objectives to favour “quality” over “quantity”.

However, it is difficult to get over our fixation with output. Expanding output is not important for its own sake but rather because of the knock-on effects on unemployment, income, aggregate demand, financial stability and national competitiveness. In this context, the consequences of output contraction are so abhorrent that even sustainability advocates refrain from recommending this as a solution to relieve environmental pressures. The risk is that once output contraction is triggered, it can gain momentum and be aggravated by outflows of talent, youth and capital. The consequences of depopulation are visible as evidenced by former industrial cities with high unemployment and crime rates, derelict facilities and the barrenness of rural towns. Hence, the fear of entropic decay traps policy within the population-and-output-expansion paradigm.

Hence, it becomes imperative to explore non-output based economic paradigms. In this context, the ability of technology to solve the production challenge by using less resources, less people and less capital should be embraced. Falling output may pose less problems than feared. What is required is a macroeconomic policy framework that expands policy tools to manage the adverse impact of output contraction and entropic decay. There is greater room to redesign policies to manage income and wealth effects from capital destruction in matured economies as they are affluent and asset-rich. Declining corporate prospects can be managed through right-sizing (mergers and asset sales) and returning capital (share buybacks) while it should be possible to extinguish debt and equity in a manner that does not undermine financial stability.

More importantly, non-output based paradigms also lead societies down sustainable pathways. There is probably more value to be derived from conserving natural resources rather than capital because matured economies possess excess financial capital but finite natural resources. Towards this end, we need to move beyond the “sustainability hype” and design “smart” development policies that produce substantive outcomes in actually lowering physical output. Interventions are also needed to induce a meaningful reduction in physical, time and information waste. Promising approaches include the adoption of degrowth[14] strategies and the management of circular flows to minimise wastage.


We are shifting from a global landscape shaped by the private sector and markets to one shaped by government policies and intervention. We therefore have to rely on governments to make the right policy decisions. But how many governments in the world would be regarded as having the capability to manage a modern society. Governments can’t seem to get to grips with problems such as inequality, pandemic and climate change. Citizens have become more polarised, are feeling more insecure and struggling to cope with higher living costs. The world has become less peaceful; economic cooperation is breaking down and military actions are escalating. Governments have difficulty taking and sticking with hard decisions. The frequency with which incumbent governments are being voted out affirms few citizens think governments are on the right track. Massive reforms are needed but government reform and transformation will likely to be a Herculean task and to stretch over decades. But government reform is the first step if we are to rely on governments to lead society into the 21st century.


Amy Kapczynski, Reshma Ramachandran, Christopher Morten (2 October 2023) “How not to do industrial policy”. Boston Review.

Brink Lindsey (November 2021) “State capacity: What is it, how we lost it, and how to get it back”. Niskanen Center.

Christopher Olk, Colleen Schneider, Jason Hickel (December 2023) “How to pay for saving the world: Modern Monetary Theory for a degrowth transition”. Ecological Economics.

Eurodad, European Federation of Public Service Unions (EPSU) (14 December 2020) “Why public-private partnerships are still not delivering”.

Jason Hickel (19 March 2019) “Degrowth: A theory of radical abundance”. Real-World Economics Review – Economics and the Ecosystem.

John Cassidy (3 February 2020) “Can we have prosperity without growth?” The New Yorker.

John Rubino (10 November 2023) “Are there too many people or too few?” John Rubino’s Substack.

Lev Menand, Joshua Younger (2023) “Money and the public debt: Treasury market liquidity as a legal phenomenon”. Columbia Law School.

Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.

Phuah Eng Chye (29 July 2017) “Macroeconomic frameworks for the information society”.

Phuah Eng Chye (16 September 2017) “The services economy: Service sector growth and the information society”.

Phuah Eng Chye (15 August 2020) “Economics of data (Part 3: Relationship between data and value and the monetisation framework)”.

Phuah Eng Chye (10 October 2020) “Hayek: The coordination problem, prices and information”.

Phuah Eng Chye (24 October 2020) “Hayek: Economic models in the context of a pandemic and the information society”.

Phuah Eng Chye (17 July 2021) “Global reset – Monetary decoupling (Part 3: Consequences of diverging policies)”.

Phuah Eng Chye (18 December 2021) “Global reset – Economic decoupling (Part 1: China’s socialism big bang)”.

Phuah Eng Chye (12 February 2022) “Global reset – Economic decoupling (Part 5: Growing divergence between governments and MNCs)”.

Phuah Eng Chye (26 February 2022)  “Global reset – Economic decoupling (Part 6: MNCs in a deglobalizing world)”.

Phuah Eng Chye (11 March 2023) “The China model (Part 1: A balanced perspective)”.

Phuah Eng Chye (8 April 2023) “China’s model (Part 2: Digital China and the information society)”.

Phuah Eng Chye (27 May 2023) “Transition to the information society (Part 1: Disruption of households and work)”.

Phuah Eng Chye (8 July 2023) “Transition to the information society (Part 2: Disruptive effects of transparency)”.

Phuah Eng Chye (19 August 2023) “Transition to the information society (Part 3: Disruption of content, narratives and the implications for democracy)”.

Phuah Eng Chye (14 October 2023) “Transition to the information society (Part 4: Citizens as data)”.

Simon White (19 October 2023) “When the US government is the only borrower it’s no wonder yields rising”. Bloomberg Markets.

[1] See “Economics of data (Part 3: Relationship between data and value and the monetisation framework)”.

[2] The extremes in perspectives are illustrated in debating the merits of cryptocurrencies versus the gold standard.

[3] See Hyman P. Minsky “The Financial Instability Hypothesis”.

[4] “Global reset – Monetary decoupling (Part 3: Consequences of diverging policies)”.


[6] See Lev Menand and Joshua Younger on structural changes in the US government debt (treasuries) market.

[7] “Hayek: The coordination problem, prices and information”; “Hayek: Economic models in the context of a pandemic and the information society”.

[8] The pursuit of shareholder value typically involves optimising capital structure to leverage returns from matured businesses, the use of financial and corporate transactions and operational rationalisations  to increase corporate profits and market value. Strategies to maximise firm-level shareholder value that reduce business activities have a long-term deleterious effect on aggregate demand and social welfare.

[9] Rising inequality and the shrinking middle class is shrinking the base number of contributors to income tax which implies that fiscal revenues can only be increased by taking more from less people.

[10] See Simon White “When the US government is the only borrower it’s no wonder yields rising”.

[11] In the Great Depression, John Maynard Keynes referred to “animal spirits” as “a spontaneous urge to action rather than inaction”; on the role of entrepreneurs in lifting an economy out of the depression.

[12] See “Transition to the information society (Part 1: Disruption of households and work)”; “Transition to the information society (Part 4: Citizens as data)”.

[13] See John Rubino.

[14] Degrowth strategies are based on embracing zero or negative GDP growth targets. See Christopher Olk, Colleen Schneider, Jason Hickel;  Jason Hickel; and John Cassidy on Degrowth theories.