The coronavirus crisis: A Misdiagnosis?

The coronavirus crisis: A Misdiagnosis?

Looking at the the huge economic consequences

So it begins. The emails announcing that this or that restaurant is to close its doors, temporarily they hope, and regretfully, as they let go treasured and valuable staff. A few offer takeaways, in the hope that a diminished service and reduced costs will keep the place alive until better times come. Other venues – museums, for instance – emphasise their digital offering. Yet others hope to keep alive online.

But slowly Britain’s social life – any place where any group consisting of more than a family in their home congregates – is disappearing or retreating: restaurants, cafes, pubs, bars, music venues large and small, hotels, theatres, concert halls, choirs, museums, galleries,Women’s Institute meetings, amateur societies, village halls, sports meetings of all types, fairs, festivals, shows, garden parties; on and on the list of “Cancelled”, “Postponed” and “Closed” goes. Religious services which might, in times when “Earth’s joys grow dim”, provide comfort to some, are curtailed, funerals perfunctory, wedding parties limited. Even personal services are affected: beauty, physical fitness, health, one-to-one learning. And as for escape – forget it.

This is not just a loss of company and activity and interests. This is a massive loss of business across all sorts of sectors, in all parts of the economy, affecting not just the obvious businesses but all their suppliers, caterers, cleaners and ancillary services of all types. And when there is a loss of business, there are job losses. These have already started. No-one knows for how long this retreat into isolation will last: 12 weeks seems likely. Longer very possible. And it is all through the spring and summer months when demand and activity is normally at its highest.

Normally”. Not this year. So the Chancellor unveils his £300 billion plus rescue package. Surely this will be enough? It is such a big number. And there is more to come, we are promised.

Promising as some of the measures are, the package is fundamentally misconceived. Why? Like generals fighting a new war the government is using the tools for fighting the last one. The closure of so many places of business is not a market failure. It is not a lack of credit. Or liquidity. It is not caused by failures in one specific market or by an artificial boom bursting. It is not caused by concerns about their viability. It is not caused by banks failing or being unable to lend.

The collapse in demand is caused solely as a result of government action to suppress demand – and therefore the income of these businesses and all the employees affected. That it is being done to deal with a health emergency is irrelevant. The motive is honourable and necessary. The health consequences – if it works – eminently desirable. The economic consequences, however, are not. Governments rarely – in peacetime anyway – take such measures. But they have now.

That income for the months of this emergency will never return. This spring/summer season’s takings, the income lost by those being made redundant or out on short-time working have lost are never going to be replaced, no matter how often people return to their favourite venue in future. This point is not well enough understood. So, having – effectively – terminated the income for all these individuals government needs to replace that income for the duration of this emergency.

It could choose not to – and watch businesses fail and individuals get into financial distress. That risks undermining public support for a policy which seeks to protect the lives of the vulnerable (mostly the elderly though not exclusively) at the financial expense of the young and those less at risk. Maybe not now – at the start – but in 3 or 4 or 6 months time?

Why are the measures inadequate? All the workers unable to work / all the businesses closed by the virus have been turned into NINJAS (No Income, No Jobs – and in many cases – No Assets). Lending them money did not work out so well in the lead up to the 2008 financial crisis. Why on earth is it being adopted as policy now?

The vast bulk of the money announced on Tuesday is guarantees to banks enabling them to make loans to businesses. But businesses without an income do not need loans. How are they to repay them if they have no income? The income lost will never come back so how are they to repay them out of future income? Loans simply make matters worse in the future. They increase – or create – indebtedness at a time when there is no means to repay and when it cannot be repaid out of future earnings. Creating indebted businesses will not save them; it will more likely ensure their future failure. Non-repayable grants which replace income do help. But the amounts (£10,000 for small businesses and £25,000 for larger ones) are simply too small for the scale of the problem.

Similarly, with individuals who have lost work – rent holidays don’t help if arrears are built up and the individual ends up with a bigger debt than before. Not being evicted is a short-term help but simply postpones the pain if the individual is unable to replace the income they have lost permanently. Nor do SSP or UC replace the income they have lost. What are they to live on in the meantime?

Essentially, the government has to replace the income it has taken away. It needs to give money to those affected. Not lend. At a 100% replacement rate (or as near as damn it). For the 3 or 4 or 6 or however many months that it will take to protect the vulnerable and help the NHS and its employees cope. Turn the whole £330 billion into non-repayable grants. Make it conditional on keeping employees on and paying wages. Provide the self-employed, “gig” workers unable to work with an equivalent income for the duration of the emergency.

The government can do little to remove health anxieties beyond what it is doing now. But it can do a great deal to remove financial anxieties. It has come up with a big number. Good. Now is the time to ensure that it goes directly to all those affected as a grant.

Whatever the legal technicalities, the government has – in the advice it has issued and the measures it is likely to enact in the coming days/hours – de facto acted as the owner of millions of businesses / the employer of millions of employees. It should not now leave them them facing bankruptcy or indebtedness or financial hardship. In reality it may well be that in future loans will not be repaid. If that is the likely outcome, “If it were done when ‘it’s done, then ‘twere well it were done quickly.


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