Several aeons have passed since I began thinking about covid-19 bailouts (IFG pamphlet out shortly, watch this space), and still I struggle to get my thoughts straight. During that time, the blogosphere and in particular VoxEU have drenched us in high-speed, quality thought, even as the facts on the ground have shifted at speed. Just a month or so ago, it was possible for the superlative Richard Baldwin to write the clause “given the transient nature of the underlying medical shock”. This presumed transience has helped to condition the policy advice in turn, which I will shamefully attempt to summarise:
- Non culpability: The shock is an unforeseeable one-off that hits the economy irrespective of prior behaviour (unlike, say, a tidal wave that affects everyone who chose to live near the coast)
- Preservation: the economy that went into this crisis is the one you want coming out of it. So try to “freeze financial time”: stop the accumulating bills from burying the hibernating economy when it re-emerges into the Covid-free sunlight
- Fiscal superpowers: whatever the bill, it can be afforded.
- Treasury man is dead The Man from the Treasury is the nagging voice on one shoulder* making awkward points like:
- “Doesn’t this just discourage the company seeking private sector help?”
- “Won’t this distort competition – what about all the companies well-run enough not to need our help?”
- “Don’t believe these sob-stories about lost jobs – new jobs are always being created – aid just postpones necessary change”
So there sprung into life many proposals that were best captured in this piece by Gollier and Straub as “the state as insurer of last resort”:
The containment strategy is a necessary collective sacrifice for the common good. This effort must be shared fairly from an economic and financial point of view …. Ex-post solidarity is ex-ante insurance. Only the state can set up such an insurance mechanism as a last resort.
We didn’t all buy pandemic insurance, but now the infinite-pocketed state needs to act like we did, and pay out, in proportion to the losses brought about by the enforced hibernation. For, as James Bullard of the US FOMC put it, the coronavirus shutdown is “not a recession but an investment in survival”. Bullard says it very simply: match any lost wages. Match any lost business. No questions asked.
And that is what Chancellor Rishi Sunak’s Treasury implicitly set out to do with his “whatever it takes”, through a rolling landslide of welfare payments, furlough schemes, sickness pay, tax holidays, grants, low-condition guaranteed loans, Bank of England purchased loans, and so on. It was easy analytically but an impressive achievement administratively, given how hard it is to identify all those pockets of lost income in our complicated economy full of varied employment models.
But at least we did not have to worry about those dumb, forward-looking Treasury questions. No one when claiming insurance has to explain what the money is for. They just need to show they are entitled to it. In fact, that is how much of the to-and-fro commentary between Treasury, business and its representatives went in the following weeks – it was about entitlement. “Firms/people that are entitled to money are not getting it – go back and find another scheme”. And so they did. The preservation assumption is a great fairness rule – it avoids awkward decisions about desert. None of you caused coronavirus, so you should be helped (never mind that, as Grumpy Economist observes, individual companies are seldom “culpable” for a recession).
Which is all right – for so long as we are in that world of V-shaped, temporary passing recession expected those aeons ago. But what about if or when we are not?
In some regards, the Bullard assumptions were never going to be aimed for, let alone met. No one believes in making investors whole, for example: the point of corporate aid is to help the underlying people, social and organisational capital, not give the fund manager a retrospective put.
And are all companies really blameless for current financial distress? What about one that financed itself such that the smallest downturn was always going to blow it away – should it be rescued by covid? Or what about a start-up taking a long-odds bet on space travel – is it the state’s job to keep that particular dream alive?
But the grand ex post social insurance idea has been steadily crumbling for a while. At some point in April it became horribly obvious that the preservation assumption was not going to be fit for purpose. The economy due to exist in May 2021 was not going to be the same as May 2019.
We can’t be disingenuous about the shape of the future economy. Oil has collapsed from $50 to $20. Some of the lost income pre-to-post Covid was premised on higher oil. It doesn’t make sense for the government to keep hosing money towards companies as if oil was still $50 because, hey, coronavirus was not their fault and we would love November 2019 back. Oil is only the most visible financial market emblem of a new world. What are your assumptions about: hotel bookings, flights, restaurant visits, commercial property transactions, sales conferences organised, and so on? Imagine how many pre-covid business propositions are riddled with assumptions about economic inputs like those, and now need rewriting.
At some point, the Treasury has to work towards the economy of Christmas Future, not Christmas Past. If it sticks with “no questions asked”, the money keeps inflated a corporate structure built for the wrong time, and the chances of a robust return to growth are undermined. And this is incredibly important, because while I believe the Fiscal Superpowers assumption, this is very much premised on a one-off, 1%-cost investment now yielding great returns in terms of the future pathway. Pull up a spreadsheet and work out how much it costs to finance £300bn of extra borrowing, repaid over 20 years – it is not all much, arguably not as expensive as, say, committing to raising the income tax threshold all the darned time.
But lower the future growth pathway by 0.5% and suddenly we are in deep trouble.
To be precise, the point is not what the Treasury thinks about any particular business (many of those guys struggle to get served in bar, let alone evaluate a business case 😉), but what the market does. That is why commercial tyre-kicking has value, and dropping it for ideas like a 100% loan guarantee is dangerous. More to the point, the sifting of business opportunities into sheep and goats is a phenomenal job of work, one that only a million private sector interactions can pull off. If, for example, there will need to be 20% fewer restaurants in post Covid Britain, that can only be done through countless nagging and unpleasant conversations between lenders, investors and managers.
Business organisations will continue to clamour for maximum, conditions-free money; they are doing their job. Whatever your assumption about the political economy of business lobbies, their payoff matrix is not “the average level of productivity of the business class”. It is much more related to survival, and you should not expect hymns to creative destruction. Turn on the TV, listen to the stories of any entrepreneur and I would challenge you to feel or act otherwise.
But the Treasury has to look out for the health of the whole economy, and handle what I think may be the most difficult pivot ever in economic policy-making: the one from “every business insolvency is bad news, everyone is entitled to help” to “the market is working again, and we need it to”.
*you decide which