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Covid is a once-in-a-lifetime opportunity We need an A-team to heal our economy. And please, no more austerity

Boris Johnson on April 30, 2020. Credit: Ben Stansall / AFP / Getty

Boris Johnson on April 30, 2020. Credit: Ben Stansall / AFP / Getty


May 5, 2020   9 mins

Question: What’s the difference between a recession and a depression? Answer: We’re about to find out — the hard way. Unless, that is, our leaders manage to head off the approaching catastrophe.

Unfortunately, we can’t do much about the recession. It would have happened without the lockdown; it may well have happened without the pandemic. Thanks to the virus, however, it’s going to be worse than anything we’ve seen in peacetime.

A common definition of a recession is two consecutive quarters of negative economic growth. The last time that happened in the UK was in 2008 and 2009, when the economy shrank over five consecutive quarters. It was the deepest recession since the war. The Covid recession will be much, much deeper. GDP will fall (is falling) by percentages never previously recorded. It’s hard to put an exact number on it. But if you look up the figures for previous recessions, they’ll give you a rough idea — as long as you add a nought on the end.

This may be the least of our concerns right now, but the economic historians of the future are going to have a real problem with their graphs. Whether it’s the long-term trend for GDP, productivity, unemployment, debt, bankruptcies, and so on, the figures for 2020 will be so extreme as to flatten all the peaks and troughs in the rest of the series. It’ll be like painting a watercolour of the Chilterns, then dropping in Mount Everest by way of contrast.

I’d imagine the charts drawn up for the 21st century will just leave a gap for what we’re going through right now. Instead of a straightforward reference to the year “2020” it’ll be “2020*” — the asterisk referring to some apologetic footnote. (*Sorry, we do have figures for this year, but they’d completely mess up the y-axis — and, quite frankly, you wouldn’t believe us anyway.)

Whether or not there’s also a 2021*, a 2022* and a 2023* depends on two things: firstly, beating the disease and getting out of lockdown, of which I’ll say no more; and secondly, stopping the recession from turning into a depression.

*

A depression is more than a long recession. If a recession is like a hangover, then a depression is like alcohol poisoning. Both have the same cause — but the latter involves an altogether more serious level of risk and requires active intervention to prevent serious harm or even death. In a depression it’s not just a case of one or more vital parts of the economy slowing down, but shutting down altogether.

Think about the last recession. A build-up of unsustainable debt could have caused the global financial system to collapse (together with everything that depends on it), but governments around the world intervened to bailout key institutions, deal with bad debts and provide emergency stimulus programmes. The global economy was kept conscious, had its stomach pumped and was gradually nursed back to a semblance of normality. Despite the depth of the recession, most countries avoided a depression (Greece being a notable exception).

So what should governments do now? For a start, they need to realise that this time is not like last time. There are no precedents to go on — we’ve never locked down the global economy before. And there’s lots that we still don’t know about the long-term economic consequences of doing that.

Most fundamentally, we don’t know whether the biggest hit will be to supply or demand. Both have been knocked flat, but a huge amount depends on which recovers fastest. The conventional wisdom is that the supply-side of the economy will be be the first to get off the ground. After all, we’re not actually at war. Our towns and cities haven’t been bombed, our transport infrastructure is intact, the factories are still standing, and the working age population is largely untouched. So, in theory, the productive capacity of the economy is still there — much of it forced into inactivity, but ready and waiting to roar back into life.

The demand-side of the economy appears to be in worse shape. Yes, there’s a degree of pent-up demand waiting to burst forth — shaggy-haired mobs will lay siege to every hairdresser as soon as they re-open. But on the other hand, household finances will be seriously depleted — which will have long-lasting consequences for consumer confidence. Add in the return of mass unemployment, the impact on business investment plans and, perhaps, a cultural shift against frivolous consumption, and we can expect demand to be deeply affected for years to come.

In such circumstances the job of government is to provide substitute demand — either directly through its own spending or indirectly by acting to put more money in our pockets (for instance, through tax cuts or by unconventional measures like helicopter money).

Managing to find the funds to provide this demand is going to be a challenge in itself — but that could be the least of our problems if it turns out that the supply-side of the economy isn’t, in fact, ready-and-waiting to bounce back.

In the wake of the last recession, government used very low rates of interest and measures like quantitative easing (QE) to defibrillate the economy. There were fears that they’d overdo it — unleashing inflation. In the event, those fears went unrealised — in part because of a globalised, just-in-time economy that’s really good at ramping up supply to meet the level of demand, while continually squeezing out costs. All governments had to do was restore the flow of cheap credit (which got disrupted in 2008) and those hyper-efficient supply chains did the rest. 

This time, however, it’s the supply chains themselves that have been disrupted. It’s not just that borders have been closed and national economies locked down: when the borders re-open and the lockdowns are lifted, we’ll find that the supply chains are missing essential links — key companies gone bankrupt, essential personnel laid-off. And so if a fractured supply-side turns out to be the main constraint, then the default recovery mechanism (i.e. stimulating demand) could do more harm than good by adding runaway inflation to our woes.

Governments can’t stimulate supply as easily as they can stimulate demand. But there are some temporary measures that can help — like the furlough scheme to enable companies to hold on to their employees. Not pushing businesses into bankruptcy through impatient tax demands is also a good idea.

On the international level, I’d recommend not starting a trade war with China — and definitely not a real war. Don’t get me wrong, there will need to be a reckoning — and we should avoid getting any more wrapped-up in the corporate tentacles of the Chinese state. But the longer-term aim of strategic de-globalisation, though necessary, is a dish best served cold.

In the immediate aftermath of the pandemic the last thing we need is to precipitate a global supply crunch. Avoid that, and the task of preventing a depression remains merely gargantuan instead of just plain impossible.

*

So assuming that we are in a position to take a mainly demand-side approach, how should we go about it? There is, of course, the question of where the money’s coming from. That’s something I wrote about last month — in particular, the idea of getting central banks to buy government debt so that the state can spend more. Yes, this is tantamount to turning on the printing presses, but as a one-off response to what we must hope is a one-off crisis, it’s the least worst option. It does, however, require international co-ordination. If, say, Britain goes it alone with the funny-money, then Sterling would collapse in value and then it’s hello hyper-inflation.

In 2008, Britain played an important role on the international stage — catalysing a coherent global response to the financial crisis. It was the one thing that redeemed Gordon Brown’s otherwise miserable premiership. With America embroiled in its turbo-Trumped electoral politics and the EU wracked by another existential crisis, the UK needs to step up once again.

That, however, requires Boris Johnson to field a ministerial team capable of commanding national and international respect. And, right now, he’s not. This is how Tim Montgomerie (formerly of  UnHerd), a stalwart supporter of Boris Johnson, put it in a series of tweets last week:

“I’ve rarely had so much feedback from Tory MPs to a Tweet but my concern at the >>UNNECESSARY<< weakness of the govt frontbench and of the No10 operation seems to be widely shared…

” …while there is recognition that the PM has been ill and that the enormity of events would test event [sic] the most experienced of administrations, Boris should not mistake this goodwill and patience for satisfaction with govt performance…

“…the immediate crisis is only the start. The economic fallout will have greater consequences. Boris can’t continue to surround himself with yes men & women. An A-team of Brexiteers AND Remainers is needed to steer UK away from the rocks. TICK-TOCK, TICK-TOCK! Act soon Boris!”

The current Cabinet is a product of a recent, yet now defunct, era of British politics. Its purpose was to make a political point (i.e. get Brexit done), but the task before us now is to steer this country — and, to a non-negligible extent, the world — away from the rocks of depression.

There seems to be little appetite for a government of national unity, but at least we could have a government of the most experienced and capable people available in the Conservative ranks. Former Cabinet ministers like Penny Mordaunt, Greg Clark and Sajid Javid should not be on the backbenches. Indeed, we should bring back former Prime Ministers — specifically Theresa May and David Cameron — into government. If these individuals aren’t in Parliament, then ennoble them. If others, like David Gauke, aren’t now in the Conservative Party, then let bygones be bygones and readmit them.

Of course, the A-team would, for their part, have to toe the government line on Brexit. They’d also have to put aside any ideological hang-ups about government intervention; because, make no mistake, government will have to intervene left, right and centre — doing whatever it takes not only to beat the pandemic, but to save the economy.

*

There will be bail-outs again — and not just in the financial sector (though expect the build-up of bankruptcy and bad debt to have consequences there too). Government needs to be ready to own (and manage) more of the economy than it has done for decades. At this stage, we don’t know which industries are going to topple over — obviously it’s looking grim for the airlines, things can’t be good for the train companies, and, of course, it’s a calamity for the leisure and retail sectors.

Not only do ministers need to make extremely rapid, strategically sound decisions about what to save and what not to save — they must also act for the common good. Justice, not just efficiency, must be served. Corporate big-hitters who used share buy-backs and use other tricks to engineer their way to short-term financial gain should pay a heavy price. Private equity firms that bled their holdings dry should expect to lose everything. Landlords should be treated with as much — or as little — mercy as they’ve shown to their tenants. Oh, and companies registered in tax havens can be bailed out by those tax havens.

But, beware, not every corporate malefactor is on its knees. Look up, and you’ll see the vulture capitalists circling in the sky — hoping to gorge themselves on distressed assets. The recovery will be impeded if we allow the wealth extractors of the rentier class to eat themselves sick. National and local government must be primed to buy up property — especially high street property — before the scavengers swoop down. The Chancellor should take forward plans to shift the tax burden onto land speculation — that should put the vultures off their dinner. Tory Georgism, your time has come!

The Covid crisis is a shattering experience. Even if we avoid a depression, we’ll be living in its shadow for a generation. Yet it’s also a once-in-a-lifetime opportunity.

In the wake of the 2008 crisis, government just wanted to get things back to normal. They succeeded all too well — restoring good things like job creation, but also preserving the worst features of neoliberalism.

The effect of QE on asset prices gifted unearned wealth to speculators. Fat, lazy companies got even fatter and lazier thanks to the dynamics of market concentration — leaving the economy starved of the investment and competition on which real growth depends. The tech giants were allowed to privatise our data while turning tax avoidance into an art form. And, of course, the biggest corporate scam on the planet — China’s debt-generating, export-led economy — was all but unchallenged (as was the boutique version of much the same thing, i.e. Germany).

This time, the new normal needs to be different from the old normal. Right now, the economy’s on the operating table awaiting life-saving surgery — and, obviously, saving the patient’s life is the priority. But while we’re at it, let’s take the chance to remove buried shrapnel, reset badly-healed fractures and cut out the cancers that were slowly killing us anyway.

*

Of course, any doctor would tell you that elective surgery is generally best delayed until the recipient has recovered from the emergency operation. But this is an economic, not a medical, intervention. An economy doesn’t just run on things like money supply and investment (the equivalents of blood pressure and vital nutrients), it also depends on intangibles like hope and optimism.

After the crisis of 2008, which was the consequence of a self-inflicted debt-fuelled binge, people wanted a return to discipline (even if the worst offenders did get off too lightly). The current crisis, though, is of very different kind. We did not bring the catastrophe upon ourselves. This is something that was done to us — our economy broken and traumatised by an external cause.

Perhaps we did need to wake up to the multiplicative risks of our hyper-connected world. But now that we know that we can’t take stability for granted, we need something more than materialistic complacency to keep us going.

We need purpose and vision, and though these are things that should be drawn from many sources, government policy must play its part, including economic policy. As during the Second World War and in the immediate post-war period, we need a sense of mission — of building a better, fairer, safer world.

In short, to avoid depression we need inspiration. But one thing’s for sure: it won’t come from a second decade of austerity.


Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.

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Nick Whitehouse
Nick Whitehouse
4 years ago

Peter are you having a joke?
Bring back Teresa May – perhaps in charge of Brexit negotiations?

Jean Noir
Jean Noir
4 years ago

Well that article went down the toilet half way through didn’t it!
Why not say what you really mean and ask for Blair?
Hint – you won’t get him!

Nigel Clarke
Nigel Clarke
4 years ago
Reply to  Jean Noir

It did, didn’t it!

Richard Cooper
Richard Cooper
4 years ago

Austerity means “living within your means”. If you live beyond your means, you have to borrow money, or in this case, print it.
If you borrow money you have to repay it sometime. In government terms that means your children will have to pay it – and possibly your grandchildren. How generous to leave them a debt!
If you print money you are putting more money out there in excess of the supply of goods. That means the goods will cost more. That means inflation. That means we all have to pay more in order to match the money printing (“quantitative easing”, “helicopter money”, call it what you will.)
Wise men practise austerity. Fools print money.

Roy Levien
Roy Levien
4 years ago
Reply to  Richard Cooper

Fools print money to address structural issues. In an emergency, “fools say fools print money”.

Julian Hartley
Julian Hartley
4 years ago
Reply to  Richard Cooper

I would be prepared to bet several hundred pounds that a majority of people in the UK do not understand that the government is required to pay interest on the national debt.

sean9
sean9
4 years ago
Reply to  Richard Cooper

UK Gvt needs to fund the Demand side and make big proper meaningful infrastructure investments and reduce taxes so as to fund massive GROWTH, which will in turn generate increased tax revues to pay down debt. Interest rates should go up to circa 3% to make a real cost of capital and to support the currency given all the printing.

David Bell
David Bell
4 years ago

“Government needs to be ready to own (and manage) more of the economy than it has done for decades.” No kidding Sherlock! There is a reason the government do not own and manage more of the economy – they are absolutely useless at it!!

Civil Servants do not know how to manage factories, Civil Servants do not know how to run railways and Civil Servants don’t know how to buy next years fashions.

The government should supply selective support to help business back to normal but they must not take major shareholdings and control. The private sector must get it’s own house in order and those business that can’t survive must go to the wall. People talk about the “new normal” after lock down, well government can’t try and stop that for the sake of socialist dogma. Business will go under, people will become unemployed, then new business will emerge and new employment will be created. We cannot stop evolution, lets not spend billions trying!

nickandyrose
nickandyrose
4 years ago
Reply to  David Bell

Civil servants know very little about anything. Except perhaps why Persephone must return to Hades for half of each year.

Ralph Cunningham
Ralph Cunningham
4 years ago
Reply to  David Bell

The private sector certainly don’t know how to run railways, so we’re in a right pickle on that one!

David Bell
David Bell
4 years ago

National Rail is a public body and they make running a RoC impossible!

Michael McVeigh
Michael McVeigh
4 years ago

This is Project Fear Version 3. The author does not know how exactly the economy will go in another 6 or 8 weeks time as more & more scientific advice starts showing the opposite of Ferguson’s blunder.

Jean Noir
Jean Noir
4 years ago

Is the deal with unherd that you can’t say the article is rubbish?

David Booth
David Booth
4 years ago

On the economic part of Peter’s piece, I think it really is time for him and everybody who comments on his arguments to mug up a bit more on modern monetary theory: Wray, Modern Money Theory; Mitchell and Fazi, Reclaiming the State, or Stephanie Kelton’s forthcoming (June) The Deficit Myth. It’s not credible to call for no more austerity without explaining what was wrong with the justifications for austerity given by previous Tory (and Labour) governments. It makes it even less credible if you repeat some of those same errors yourself, as if they were self-evident (danger of Sterling collapse, hyperinflation, need to pay off ‘national debt’ etc.). It is true that all these standard objections are in the basic, and even some of the not-so-basic, economics textbooks; but Wray, Mitchell and Kelton have shown comprehensively how we have been miseducated by these textbooks. The unthinking majority of economists are stuck in a time warp and have failed to adjust to how macroeconomies are actually managed in countries like the US and UK today.
On the political leadership, the A-Team we need are people who understand all this and are prepared to lead a paradigm shift. I am not at all persuaded that the pre-Boris Tory old guard are likely candidates in this regard.

David George
David George
4 years ago
Reply to  David Booth

Thanks for nothing David. Fat lot of good telling everyone to understand something then fail to offer even an outline, in quite a lengthy post, of what you’re on about.
Perhaps something as simple as “shake the magic money tree” might have, at least, given us a clue.

P N
P N
4 years ago
Reply to  David Booth

Great comment, lots of people commenting here seem to be basing their views on seriously outdated economic theory that has proved harmful to people and planet. We need to do things differently and remind ourselves what and who the economy is for.

Dougie Undersub
Dougie Undersub
4 years ago
Reply to  David Booth

As Roger Bootle has pointed out, modern monetary policy isn’t modern, it isn’t really monetary and it isn’t a theory.
https://www.telegraph.co.uk

nigel roberts
nigel roberts
4 years ago

“Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.”

In other words a mouthpiece for leftie orthodoxy. I knew what the article would say before I read it. I read it anyway in the hope I was wrong but wasn’t.

Nigel Clarke
Nigel Clarke
4 years ago

Of course, the A-team would, for their part, have to toe the government line on Brexit. They’d also have to put aside any ideological hang-ups about government intervention

…and there is the problem. Latterly, ideology trumps reason and rationality, need and necessity, truth and reality.

sean9
sean9
4 years ago

Peter, you have clearly been drinking the LibDem Blairite masquerading as ‘Conservatives’ Kool-Aid…. !

May, Cameron, Gauke, Clarke…. have you lost the plot! NO WAY! May as well make Olly Robins PM…. and give the EU the whole of the UK…

One Problem with Bojo’s Cabinet, is too many ‘Remainers’. Voting ‘Remain’ was about a ‘Mind Set’ and a LACK of ‘UK plc & Self’ Confidence to thrive as an Independent Sovereign Nation, NOT just about ‘Brexit’.

Another Problem with Bojo Cabinet is that he did not include more experienced and strong and business minded proper “Conservatives” like John Redwood and Steve Baker.

Fine for Penny Maudant, BUT what the Cabinet needs immediately is Steve Baker, John Redwood and more MPs of same calibre and skill set.

juliandodds
juliandodds
4 years ago

This a very long winded article that could be replaced with “we should have stuck with the original plan” which also happened to be the stated policy of all 4 UK country governments, the NHS and it’s scientific advisors for 9 years. The NHS pandemic infuenza plan, written in 2011 says ‘we will not be able to contain a new virus’. What it should have said was ‘we will not be able to contain a new virus without totally f*****g up the country and people’s lives for years and years to come’. That plan expected babies, children and mothers to die in equal measure, nothing like the incredibly kind Coronavirus that blows through healthy under 45s like a Tsunami of warm air.

nickandyrose
nickandyrose
4 years ago

Had I seen this four weeks ago, or even three weeks ago, I would be thinking time to go for it. Too late now. Far, far too late. It’s going to be a hungry winter.

Dougie Undersub
Dougie Undersub
4 years ago

And you were doing so well, Peter. Bring back Theresa May? I usually try to respond to articles with something considered and polite but, in this instance, I can only say, are you mad?!!!
First, Penny Mordaunt is not on the backbenches, she is Paymaster General. Greg Clark was a complete nonentity at BEIS. Saj is bright but totally lacking in charisma – we’re much better off with Rishi. Cameron is quite an attractive personality but does he have any particular skills? I’m not sure chillaxing is in great demand at the moment. And Gauke spent several years at the Treasury seemingly enjoying putting Britain’s small businesses out of business by championing IR35. He was totally captured by HMRC and is the last person we need anywhere near our economy right now … or indeed, ever.

Daedalus
Daedalus
4 years ago

Bring back the Maybot, the Broone and Bliar????????? I think not. Although I would agree that the front bench needs beefing up with the likes of Maudant.

haroold.stewart078
haroold.stewart078
4 years ago

it took you a long time to try to make your point can you honestly say that are you objective with no political bias

Robert Price
Robert Price
4 years ago

I think we must do better than bringing back Cameron, May, Gauke and Clarke.

sean9
sean9
4 years ago

Another thought….:

Given how successful and efficient the Army were at building the Nightingale Hospitals…., and that Healthcare is clearly now part of National Defense for Bio-Warfare…

Maybe the NHS should report into and be run by the Army….

and ex Forces people should run and staff the a new Border Force.

ex Forces people should also fill the Civil Service ranks

Tim Beard
Tim Beard
4 years ago

I have a new financial idea that will help fix this

Email The1beard@hotmail.com

If you are interested

Peter James
Peter James
4 years ago

David Cameron (bad) and Theresa May (worse) were awful Prime Ministers. David Gauke was a dreadful minister. None of this lot should be let anywhere near the corridors of power ever again. You may as well go on to suggest that they ask in John Major, Tony Blair, Gordon Brown, Ed Miliband and Jeremy Corbyn. Some others, like John Redwood and Peter Lilley would be well worth asking back.

Your point on vulture capitalists buying up distressed assets is well made. We should not allow either China or Germany (who bought a lot of Greek assets during their crisis) do this.

AC Harper
AC Harper
4 years ago

Is this a teaser for running a ‘Fantasy Cabinet’ competition? Or perhaps it is a camouflaged version of ‘hate Brexit, hate Boris’?

Otherwise bringing back politicians who resigned or were sacked would undermine the authority of the present incumbents, especially the PM. The last thing we need during a crisis.