May 5, 2020

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.

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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.