First, we should be very clear that what we are looking at is not a “recession.” It is not a “financial crisis.” This coronavirus pandemic is a profound dislocation of the essential components of economic and social life itself. If it is not addressed in those terms – if, instead, like the Boris Johnson government, we try and treat this as something that can be managed in a conventional economic setting – we will find ourselves facing hundreds of thousands of deaths, as the government’s own modelling showed. To avoid this dire outcome, normal economic and social life must change profoundly.
What this means, in practice, is that while the government’s fiscal response has been inadequate to the task – the much-trumpeted £30bn spending programme of the budget a week ago now looks a little pathetic – any fiscal (or monetary) response is inadequate. It’s true that governments do need to spend, and to spend as John Maynard Keynes recommended in World War Two: without limit, and to complete a task. But the task isn’t managing the economy in any usual sense. It’s not a war effort, requiring the total mobilisation of national resources: in fact, it’s the complete opposite of that. The public health task at hand is to demobilise much of the economy, through social isolation and self-distancing, until the virus has peaked and the immediate crisis has passed – placing society, in effect, in something like hibernation. This is an anti-wartime economy.
Securing that public health goal requires getting money into people’s hands so that they can socially distance and self-isolate with security, and without the need to work unnecessarily. How this is done is less important than that it is done: for an economy with large numbers of insecure, temporary, and part-time workers, something like universal basic payments to everyone would make sense. In addition, the major regular demands on household finances have to be temporarily stopped: not just mortgages, but rents, utilities bills, debt repayments and broadband payments – the latter is, as should be clear now to everyone, an essential. Provision has to be done fairly: containment will only work if it is universal, which means everyone has to be in a position to self-isolate. The health of us all will be determined by the health of the poorest amongst us.
The flip side of ensuring household security is ensuring business security and here the government has been notably more generous, promising £330bn of assistance. Unfortunately, this has been offered in the form of loans; offering more debt to businesses already facing cashflow issues is hardly wise. Grants, not loans, are required, to allow businesses to remain solvent and maintain payments to employees. Tax holidays would be useful, as would a generalised debt amnesty at the end of the crisis period.
Once essential public health measures are secured, then we have to solve the other problems. The issue is not to try and prop up the economy, as might be the case in an ordinary recession where demand (spending by people and businesses) has fallen. Nor is it to try and keep failing economic institutions from bringing the rest of the economy down, as happened in 2008-9. Then, although wildly expensive and ultimately unfair, the bailouts of the banks kept the show on the road. In both cases, the intervention by government works because although markets are disrupted – and perhaps even the major institutions of markets, like the global banks, are disrupted – the disruption is one with its cause in the markets, or the institutions that serve them.
But if we are in a situation – as we now are – where the supply of labour itself is going to be radically curtailed, and where, as result, the supplies of other goods – from engine parts for cars to the food we eat – we will be significantly disrupted, then the standard tools of macroeconomic management do not work. There is no amount of money that can simply conjure products into existence. If food is scarce, the price might rise; but that does not make more food appear. With the pound collapsing in value, reflecting a judgement on the handling of the crisis here in the last few weeks, obtaining the 80% of food we import will become increasingly expensive, whatever happens.
If this sudden, dramatic reduction in the labour supply was going to last only for, say, a few weeks, it would be serious but not insurmountable. Temporary payments and assistance might cover it. But the Imperial College assessment of the government’s modelling suggests a five month period of strict measures being applied – from April until September – and the usual assumption on top is that normal economic life won’t begin to resume until a vaccine is safe for use in perhaps 18 months’ time. The disruption will be prolonged, and, as a result, the interventions will need to be more profound. Advanced capitalism is critically dependent on just-in-time production and delivery: supply chains are long, inventories are low. This makes them fragile – people might remember in 2018 when KFC ran out of chicken for a week after a car crash outside Rugby.
The central economic tasks for government, then, are in providing security of supply: of electricity, gas, water, and – to underline a point – broadband. Next is food distribution. Then, given the emergency, medical care, requiring staff. Then come medical supplies, including ventilators. These things can and should be planned for, over the duration of the crisis, and the steps taken as needed to secure them. After years of austerity, we might have genuine concerns about the British state’s capacity to deliver but we have little choice to try, and by focusing on the essentials the strains on the state can be reduced. Everything else on top is a bonus and can be left to whatever is left of the market.
If the aim is to reduce economic activity, rather than to maximise it, the economic planning problem becomes much easier: only the core has to be guaranteed and delivered. The government does not need to be in the business of trying to second guess consumer demand or maximising GDP: frankly, if both are kept low, there is a sense in which the economic programme will be succeeding. It safe to assume little else will be taking place, or what does happen has to be much of a concern for government. As the motto above Walworth Clinic declares, “The health of the people is the highest law.” This should now be our guiding economic principle.