November 25, 2020

You’re driving a bus full of passengers. A madman has put a bomb onboard — and not just any bomb: it will detonate if your speed drops below 50 miles per hour. Though you’re burning fuel at an unsustainable rate, you have no choice but to keep your foot on the gas.

What I’m describing, of course, is the plot of the 1994 blockbuster, Speed. It’s also a metaphor for the situation in which Rishi Sunak finds himself. Like Sandra Bullock, he’s in the driving seat — in this case, of the British economy.

Sunak is building up public debt like no peacetime Chancellor has done before. He really ought to slow down or stop altogether, but if he does then, kaboom, the economy blows up.

Just imagine lockdown without the furlough scheme and all the other lifelines thrown our way by the Government. We’d be looking at depression-era levels of unemployment and bankruptcy. As bad as things are now, they could have been much, much worse.

But, despite the impending vaccines, the danger isn’t over yet. What we have been through so far is only phase one of the crisis. Phase two will consist of the recovery period following the pandemic. And then after that, there’s phase three, in which we’ll need to find long-term answers to the underlying weaknesses of the economy.

At no stage can the Government afford to slam on the brakes. It must keep flooring that accelerator, injecting enough stimulus into the economy to maintain momentum. Obviously it must do so without crashing the whole thing or running out of money, but nevertheless the need for speed is ongoing. As he unveils the spending review, I just hope that Sunak is prepared for the bumpy ride ahead.

At this point, you might think I’m sounding very Keynesian, wanting government to spend money like there’s no tomorrow — so allow me to explain.

To put it very crudely, Keynesianism is the counter-intuitive idea that the best way to deal with mounting debt is to keep on borrowing. The justification is that debt oils the wheels of growth. Individuals and enterprises borrow to enable the investments that will make them richer in the future than they are now. They also borrow to bring forward purchasing power from that richer future — which has the added bonus of helping to create the demand that stimulates investment in the present.

Austerity, on the other hand, throws grit into the works. It not only immediately reduces the level of demand in the economy, it also creates the expectation of reduced demand in the future — causing others to withhold investment and put off purchases. Therefore, in place of the virtuous circle of credit-fuelled optimism, there is a vicious circle of money-hoarding pessimism. If lenders lose faith as a result, then interest rates go up and your debt problem becomes a whole load worse.

That’s why Keynesians believe we must spend (and, if necessary, borrow) our way out of recession — with a special responsibility on government to substitute for any lack of demand from the private sector.

It’s a strong argument, but I don’t buy into it completely and never have. That’s because not every economic crisis is primarily a crisis of demand. Sometimes, it’s more structural than that — a crisis in the systems that underpin the everyday business of buying and selling, borrowing and lending. For instance, if people lose confidence in the value of a currency — then you’ve got an inflation crisis on your hands and you have to deal with that first.

13 years ago, the number one problem was a global financial meltdown. Governments had to intervene to stop the banks from collapsing one after another. The banking crisis then morphed into a sovereign debt crisis. Having panicked about the value of mortgage-backed securities, the markets panicked about the value of debt issued by countries with big economic problems. This nearly brought down another house of cards — the European single currency.

In the midst of a solvency crisis, stimulating demand is clearly not the top priority. Rather, it’s convincing your citizens that their savings are safe and the money markets that your country is still capable of honouring its debts. This means bailing out the banks and getting control over public spending. It’s only when the danger of bank runs and sovereign defaults is over that governments can even think about rekindling the ‘animal spirits’ of the economy.

That’s why, 10 years ago, when George Osborne took the driving seat, the British government made the right call. Never forget that Britain was in a perilous position. With our outsized financial sector, we were fully exposed to the global financial crisis; and, to make matters worse, our nice little earner — North Sea oil — was running dry. This was no time to test the confidence of the money markets.

Osborne (though he also made a big mistake that I’ll come back to) was right to defy his Keynesian critics. The subsequent jobs miracle would vindicate his position.

So, no, I’m not a raving Keynesian. The fact is there are some economic emergencies in which the go-to Keynesian solutions are not appropriate. I’d also like to add that the online obnoxiousness of certain Keynesians really gets up my nose. Admittedly, that’s a rather less important consideration, but I mention it to make it clear where my personal biases definitely don’t lie.

It thus gives me no pleasure to admit that in the context of 2020 the Keynesians are right. We really do have to borrow our way out of this one. That’s because this is unequivocally a crisis of demand. Rishi Sunak, unlike George Osborne, must spend spend spend to stop the economy from blowing up.

In phase one — i.e. the pandemic itself — government has had to support household incomes so that employers can retain staff and workers can pay for basic necessities.

In phase two — i.e. the recovery — we’re going to have to work out how to get people consuming normally again. It’s barely been noticed, but for the first time in decades, Britain’s trade balance is back in the black. As Frances Coppola points out, that’s not because we’ve suddenly become an exporting powerhouse, but because we’re saving our money like mad.

Believe it or not, this is an age of surplus — of £3 coffees and unused gym memberships. It’s not just the top 1% who can afford the second or third family car or the second or third family holiday. Abundance, while far from universal, is sufficiently widespread to allow millions of us to spend substantially more than we need or even truly want. Indeed, a lot of spending is motivated by nothing more than habit — and habits, in this pandemic, have been broken.

As soon as those with spare cash have the confidence and opportunity to spend it again, there will be some rebound in consumerism. But we can also expect an enduring downshift in lifestyles — in some cases out of preference, in others because we have no choice but to pay off debts, rebuild savings and compensate for lost income.

It all adds up to a long-lasting loss of demand, which must be replaced if we’re to get back to full employment and anything like normal GDP. Government must be ready and willing to provide the stimulus needed to get recovery truly underway. ‘Eat out to help out’ was just the beginning — and truly radical ideas, like experimental shots of universal basic income, should be actively considered.

Obviously, there are limits. We can’t push fiscal and monetary policy much beyond that of comparable economies. If the money markets take fright, interest rates will go up — a disaster when you’ve accumulated so much debt. However, it’s not just the absolute size of each country’s debt pile that the markets are comparing. They’re also looking at other metrics like debt servicing costs as a proportion of GDP. It’s therefore really important that things like growth and productivity look good compared to other nations.

This brings us to phase three of the challenge facing us as a nation — how to tackle the underlying weakness of the British economy. In this respect, Rishi Sunak must not repeat George Osborne’s big mistake. Though the Coalition government was right to get current spending under control, it was wrong to stick to Labour’s spending plans and slash the capital budget. Instead, stimulus took the form of quantitative easing — funny money pumped into the financial sector. This helped to inflate share values and house prices, but what we didn’t get was the real investment that we actually need, the sort that supports innovation and enterprise and therefore growth.

We’ve just had a decade of ultra-low interest rates, low inflation and no pay rises. This was a perfect opportunity for the corporates to invest in the future; instead they busied themselves with share buy backs and other get-rich-quick schemes. They had their chance, so now government must lead the way. That will require the Chancellor to have some difficult conversations with his fellow Conservatives — especially over tax policy. Raising sufficient revenues in the next years will not be easy, but it makes sense to target idle wealth in preference to job creation.

Ten years ago, George Osborne had to face down his Keynesian critics, but most of those were in the Labour Party and other hostile institutions. Rishi Sunak has the harder task of taking on vested interests and free market ideologues on his own side. Nevertheless he must do so if he is to swing the power of the state behind the productive use of capital.

As long as we’re not doing really stupid stuff, like building nuclear power stations, we shouldn’t hold back on public investment or sharper incentives for private investment. It’s not that there’s any lack of work to be done. We have entire regions of the country to level up, houses to build and natural environments to regenerate. Under-investing, as we have done for decades, will only damage our growth prospects and thus make our debts less bearable.

One has to ask whether Rishi Sunak really gets this agenda. It’s still too early to tell, but he’s already gone much further than any previous Chancellor — Tory or Labour — would have dared. He’s made the state the wage-payer of last resort and gone halves with us on lunch. Looking ahead, he sees the sense in tackling this country’s greatest structural weakness: the economic disparity between North and South.

Later today we’ll get an idea of how big a commitment this government’s willing to make, but there has been one encouraging sign. It’s reported that a National Investment Bank will be established. If true, this would reverse the most telling error of the previous decade — which was when the Green Investment Bank, only set up in 2012, was flogged off five years later to a private equity firm. As well as being an incredibly shortsighted thing to do in itself, it was symbolic of a misplaced trust in the neoliberalism that’s failed us over and over again.

While the Chancellor has an economy to save, he shouldn’t feel so protective about our current model of capitalism. Even before the virus came, it was falling to bits and running out of road.

So, let’s not blow this chance to move on.