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COVID-19 has revived the social contract in advanced economies—for now. What will stick once the crisis abates?

Massive government spending has sought to shield individuals from the economic consequences of the pandemic, reversing a long-term trend of institutional pullback in the social contract.

Since the onset of the COVID-19 pandemic, G-20 economies have announced fiscal packages already exceeding $10 trillion, which in real terms is about three times the support provided during the 2008 financial crisis and 30 times the size of the Marshall Plan, which helped rebuild Europe after the Second World War. These large-scale policy interventions have significantly buffered risks faced by individuals, reversing a two-decade long trend in the social contract, the arrangements and expectations, often implicit, that govern how economic risks and gains are shared between individuals and institutions.

In the 22 advanced countries we studied, governments have increased fiscal spending as a percentage of GDP by an average of 20 percent in 2020 from 2019 and by as much as 39 percent in Canada (Exhibit 1). Countries such as the United States and the United Kingdom that were typically lower spenders on the social contract before the pandemic have raised their expenditure by significantly more than economies such as Denmark, which previously had ranked among the higher spenders. In 2020 alone, governments in the European Union are expected to spend an additional $2,343 per person compared to 2019, while in the United States, spending will be $6,572 higher.

In addition to this increased public-sector expenditure, the private sector in some cases also provided protection to its employees, at times in partnership with government. In the short term, companies did not—or could not—cut their costs as quickly as revenues declined. This is reflected in a decline of about $1 trillion in corporate profits in the United States and European Union, on an annualized basis, in the first half of 2020. This may have been driven by the stickiness of their underlying cost structures due to factors including labor laws or long-term contracts, as well as corporate decisions to retain employees for the rebound of economic activity. In addition, some companies have actively invested in the well-being of their workforce, such as by providing one-time bonuses to vulnerable workers or improving benefits.

As a result of this combination of public and private sector protection, disposable income (in the United States) and employment (in Europe) have been largely protected, even as GDP fell sharply in the second quarter of 2020. Indeed, in the United States, disposable income has actually risen as a result of stimulus programs, based on our estimates. Taking a long view, the support packages put in place over the course of just a few months in this pandemic year have generated increases in disposable income for the US median worker that are comparable to those delivered over the past 20 years, after accounting for the costs of basic goods and services including housing.

Comparable data in the European Union is not available, but there, employment declined much less than the drop in GDP would suggest, as governments and companies together guaranteed continued employment at more or less full pay to large swaths of the workforce.

The social contract is a broad concept, covering multiple facets of everyday life, including notions of economic, social, and political arrangements as well as values, justice, and other aspects of society and social arrangements. In our research, we use the more narrowly defined economic aspects of the social contract, and specifically the three key economic roles for individuals as workers, consumers, and savers. By any definition, while the social contract has evolved in fits and starts for centuries, such sudden and massive movement as has taken place in 2020 is highly unusual. As a result, the social contract may momentarily be stronger and more effective in buffering risks and guaranteeing basic needs for individuals than it has previously been in this century.

That is not to say inequality has been tamed; to the contrary, the pandemic has both revealed and exacerbated deep economic and social divisions in societies globally. Moreover, the huge fiscal packages being used to address the short-term effects of the COVID-19 economic fallout are like a bazooka firing in all directions without the fine targeting needed to address key underlying issues that are driving inequality, particularly among vulnerable groups.

The critical question in the months and years ahead is whether the pendulum will swing back just as sharply once the COVID-19 crisis abates, or whether at least some of the intervention and innovation will remain as permanent features of a renewed social contract.

The critical question in the months and years ahead is whether the pendulum will swing back just as sharply once the COVID-19 crisis abates, or whether at least some of the intervention and innovation will remain as permanent features of a renewed social contract.