30 April 2020

We need to get real about the coming economic tsunami


There’s a withering John Maynard Keynes quote for almost any conceivable economic situation. Naturally, most of them are apocryphal, including – probably – the one that seems most cuttingly appropriate for our current Covid-addled nightmare. Still, Keynes’s alleged Depression-era anxiety that “the market can remain irrational longer than you can remain solvent” must surely carry an uncomforting echo of reality for national accountants and business owners alike.

Yet not even this gloomy perspective quite does justice to the strange world of pandemic economics. Keynes’s great achievement was to forge a consensus, hegemonic in democratic societies for a generation, that economic demand both could be managed and that Government’s should be doing it. This consensus unravelled eventually of course, but every time we face a crisis on the scale of the Depression and War from which Keynesianism emerged, then the old theories get a dusting down.

Well, not so much this time. To be sure, the lifeblood of demand is absolutely what our economy and businesses so desperately crave. However, in a pandemic stimulating demand can also stimulate danger and death. In that terrifying context our markets are far from irrational – that would be an easier problem to fix. It is more that for vast swathes of the economy, the market simply no longer exists.

The early data on the Government’s furlough scheme provides some indication of just how severe this situation is in particular sectors. According to ONS estimates, a staggering 80% of employees in the hospitality sector may have been furloughed. For arts and entertainment, it is at 67%, whilst construction and manufacturing come in at 40% and 29% respectively.

At the RSA Future Work Centre we have translated this sectoral data into an assessment of local labour markets. Unsurprisingly, areas that are heavily reliant on those sectors – often close to or nearby England’s national parks – come out worst affected. But perhaps the biggest finding is just how universal the pain is. Our estimates suggest only one local authority district in the country – Oxford – sees less than one in five employees furloughed, and even there the level is 19%. The overall rate of furloughing, across the country, is 27%.

If, as seems a reasonable counterfactual given that policy’s expressed purpose, those workers were made redundant instead then that would equate to easily the highest unemployment levels this country has seen since we became an industrial economy. Higher even than the Great Depression Keynes fought so hard to alleviate.

Perhaps, quarantined away in my metaphorical bunker, I am reading the national mood all wrong. However, it strikes me that we have yet to fully process the size of this economic tsunami about to hit us. In part, this could be down to the success of the furlough scheme in staving off the more visceral effects for a little while longer.

Yet what seems more likely is that an unrealistic level of hope is being invested in the economic effect of ending the lockdown. For the key to really boosting demand has nothing to do with the formal trading rules set out by government but – as Keynes really did say – the “animal spirits” of our behaviour. On this, countries like Sweden, which has not fully locked down its economy, might provide a guide to where we are headed. A bit better, yes. But nowhere near enough to generate the income needed to sustain a business cost base that can maintain employment at anything like its current levels.

No, sadly the blunt truth is many businesses have no realistic shot at viability before a vaccine or credible treatment pathway. The furlough scheme has bought us valuable time and should stay – weaning us off it now would be catastrophic. Yet the announcement on Tuesday that British Airways will make 12,000 staff redundant despite the availability of an 80% wage subsidy feels like it marks the beginning of a new phase. With mass unemployment potentially on the horizon, now would be a good time for the Government to start modelling what a Universal Basic Income world might look like in practice. But, more importantly, in the short term the Government needs to work out how it can effectively act as a guarantor of last resort for those sectors that have no credible route to prosperity.

If that seems a little premature, then the political reality is that the 2008 crash set a precedent when the Government did just that for the banks. Now it is pubs, airlines, travel agents, cafes, restaurants, cinemas, hotels, theatres and shops that need bailing out, it could in theory demur. But the political firestorm that would ensue in that situation might only encourage more depressing parallels with a world Keynes thought he’d led us out of for good.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Alan Lockey is Head of the Future Work Centre at the RSA.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.