A few initial thoughts from me on yesterday’s covid-19 financial response package, how it measures up to what is needed, and how we might respond. All with the caveat that this situation is incredibly complex and fast-moving, I haven’t been able to discuss it much with others (big thanks to Laurie Macfarlane, Gemma Bone and Ben Wray for chats that have influenced my thinking), and things may look entirely different in a week.
First, as people seem to be grasping, this is not like 2008. Where the 2008 crash originated in the banking system and spread to the real economy, this is a crisis of real economic activity: people physically cannot go out to work or to consume. This demands a different response.
Moreover, the UK’s economy, society and health systems are dangerously lacking in resilience to a crisis like this, after a decade of austerity and four decades of policies that have systematically transferred wealth from labour to capital. The share of national output going to wages has been falling since the 1970s; the promotion of ‘flexible’ labour markets has led to the rise of the gig economy with large numbers of people under-employed, self-employed or on temporary and zero-hours contracts. Many of these people lack basic workplace rights such as sick pay. This much we know.
We also know that this means huge numbers of people cannot afford to self-isolate: many would lose their entire income with nothing to fall back on. With so many people living hand to mouth, with rent and bills consuming a large proportion of their income, little or no savings, and high levels of personal indebtedness, the alternative to work is destitution. Our lax labour laws also mean that the blow to businesses like pubs and clubs from the new social distancing guidelines is very quickly translating into unemployment: I have already heard several stories of people being let go. Their chances of finding new jobs in the current environment are close to zero.
As well as being a moral outrage, this will significantly worsen both the public health impacts and the economic impacts of the crisis. Sick people will go out to work, and healthy people will tighten their belts in anticipation of losing income. This behaviour will extend far beyond those who are laid off: for instance, as a self-employed freelance mum I am now reconsidering things I had planned to spend money on in the coming months, as events are being cancelled, my son’s nursery has just been closed, and I face major uncertainty about how much income I will lose and for how long.
The government’s response should be judged on how far it tackles this problem, shoring up economic confidence and enabling people to follow public health guidelines. But it should also be judged on whether it addresses or exacerbates the underlying problem of a huge imbalance of wealth and power between capital and labour and a lack of economic security for ordinary people. In other words, what will happen when the crisis is over? On both these counts, the package announced yesterday falls woefully short.
We’re told that further measures will be announced in the coming days, but for now, nothing practical seems to have been done (beyond the measures already announced in last week’s budget, widely deemed inadequate) to enable those on the breadline to self-isolate. Vague reassurances of help tomorrow are not much help for those facing eviction or hunger today. This reflects a more general orientation in the government’s response – to help capital first and worry about labour later. Tories gonna Tory, I guess.
We see this in the row over businesses being “advised” to close rather than shut down, meaning they can’t claim on their insurance. We see it in the swift announcement of ‘help’ for mortgage holders while renters are dealt with as an afterthought. We see it in the announcement of loan guarantees for businesses but still no further detail on wage guarantees for their workers or income support for those laid off.
At a more subtle level, we see it in the mechanisms being used to respond to the crisis. In one way or another, these all amount to ordinary people taking on debts that will have to be paid back. Mortgage ‘holidays’ will allow people to suspend their payments now, but they will continue accruing interest during that period, extending the life of their loan and giving them more to pay back later. The £330bn of guaranteed loans will be delivered through the existing banking system (unlike, say, Germany, the UK lacks a public banking system strong enough to deliver this – it could try and make use of the British Business Bank or the publicly-owned RBS, but these both have their own problems and limitations). In effect, the government is asking businesses that face an uncertain future to take on more debt – as Laurie Macfarlane has pointed out, just at the time when ability to service that debt is reduced. In turn, the cost of the guarantees and other government interventions will presumably be met through large-scale additional public borrowing. Whether, as in 2008, this will be used to justify more austerity when the crisis is over remains to be seen. At the very least, it seems likely that the government’s promises of major investment to ‘level up’ regions outside London may not be delivered.
Finally, we see it in some of the hints that have been given about longer-term steps that may be taken to ‘support business’. I have seen suggestions that rises to the Living Wage could be delayed, or that unspecified ‘regulations’ may be stripped back to make life easier for businesses that are struggling. As Naomi Klein has pointed out, we know this script: it seeks to protect the interests of capital at the expense of society, based on the same flawed supply-side economics that informed the austerity years (i.e. the economy flourishes when entrepreneurs are freed to invest and minimise their costs, as opposed to when ordinary people have money in their pockets to spend). Once again, the people asked to pay for the crisis will be those least able to afford it, while wealthy asset-owners will be largely shielded from the worst effects.
The left must not make the same mistake it made in 2008 and assume that a massive expansion of state intervention is by definition progressive, or is somehow paving the way to socialism. Instead we must be relentlessly asking: who wins and who loses from these measures? Who is taking the economic hit and who is being protected? What shape of economy will this leave us with when the crisis is over?
At the moment, the picture doesn’t look good. Essentially, borrowing is being used to tide us through the next few months, but ultimately the costs of the freeze on economic activity will still be borne by ordinary people. This will leave an already fragile and over-indebted economy in an even worse state than it is now, and will almost certainly be used as an excuse to further undercut pay and conditions for the least well off. Meanwhile, no apparent sacrifices are being demanded from banks or profitable businesses.
Of course, this approach has a certain logic to it. Unlike 2008, this should in theory be a time-limited situation. Borrowing through the financial system is precisely designed to ‘smooth’ incomes during difficult periods – that is one of its economic functions. And the government must be worried about triggering a systemic financial crisis if banks and insurers start to rack up losses. My initial instinct was to say that the big winners from our extractive economy should be asked to bear more of the burden – so mortgages, rents and utility bills should be written off rather than just suspended – but it’s possible this would just be a reckless move that triggered wider problems, ultimately requiring government bail-outs anyway.
Nonetheless, we urgently need to come up with ways that the costs of this crisis can be spread through means other than a massive expansion of private debt – as well as pushing for much stronger and more immediate help for workers, carers and renters. So what could this look like? The situation is so complex and fast-moving that it’s very difficult to absorb its full implications, so what follows is offered solely as a contribution to the ongoing discussion.
On the incomes side, the unfolding crisis has convinced me that the only adequate measure is some form of temporary Universal Basic Income. I have never been the biggest fan of UBI as a transformative policy measure in normal times, but it seems to me the only way to face up to both the public health challenges and the economic challenges we currently face. On the public health side, any government-provided income support with conditionality attached will involve a time lag in claiming and will be administratively complex. This will unavoidably result in people facing immediate hardship continuing to go out to work when they should be self-isolating.
On the economic side, with so much uncertainty, as I’ve noted above, spending is going to be withheld far beyond those who are actually sick or who get laid off. Those with childcare responsibilities are also already suffering, as entire households are required to self-isolate and parents cannot continue working whilst caring for their children. (I already know one person who has been told by her employer she will not be paid during this period.) Now schools are to close, these impacts will multiply enormously. The resulting effects will reach far beyond those sectors currently being targeted for support, such as hospitality and retail, into a whole range of consumer goods and services. Only an across-the-board income injection can hope to touch this problem. Yes, there would be some ‘deadweight’ support to people who did not really need it, but on the balance of risks this is far preferable to providing insufficient support to shore up confidence and protect public health.
Of course, there are issues in the execution of this idea. As various people have pointed out, a UBI provided directly to individuals does nothing to stop mass lay-offs which could have long-lasting social consequences. In effect, it amounts to just another way for the state to take the burden of providing for people off companies. I’ve therefore seen it suggested that we should follow the Danish model of guaranteeing a certain percentage of people’s wages up to a given cap, with employers being asked to guarantee the rest. This protects jobs and incomes whilst also requiring the high-paid and businesses to share some of the burden. Something like a UBI could then be provided by combining this with separate support for the self-employed (excluded from the Danish scheme but critical in the context of the UK labour market) and those not in work. The priority, though, has to be that this can be delivered at speed – which might point towards using existing systems, whether led by DWP or HMRC, rather than trying to set up something new.
Since this is a crisis of the real economy and not the monetary or financial economy, there are also questions over whether even these kind of measures will be enough to safeguard livelihoods. As Ben Wray pointed out to me, giving people money isn’t going to help them get by if the problem is a shortage of essential goods; it could just trigger inflation and price bubbles. Maybe the people being laid off in sectors like hospitality and retail will find work helping to fill shortages due to sickness in sectors like food production and distribution or care, thus mitigating the economic effects on both sides. But it’s hard to know yet how these impacts will ripple through the economy, and some disruption seems inevitable. The rapid expansion of the solidarity economy and mutual aid may help to plug this gap to some degree.
There is then the question of how these measures should be paid for. It seems to make sense that central banks should be involved in the crisis response rather than all of the burden being placed on fiscal policy, possibly including some form of people’s QE (or as Frances Coppola suggests, indirect support for state spending). I wouldn’t claim to be an expert on the details of how this could work, but it seems important for minimising the risk of another ten years of political obsession with government debt, as well as expanding the horizons of economic possibility in the crisis aftermath.
The next question is whether it is possible to make capital shoulder more of the burden without triggering systemic financial issues. For instance, rather than relying on mortgage and rent ‘holidays’, could we call for at least some level of write-down or haircuts on these repayments, so that banks take a hit as well as ordinary people? If this is impossible during the immediate crisis due to fears about systemic repercussions, could we mobilise around demands for debt writedowns or debt jubilees once the crisis is over, in recognition of the sacrifices that have been demanded of ordinary people? The same issues apply to utility bills.
And given that part of the reason we are in this mess is the imbalance that has been allowed to develop between wages and profits, and the ability of businesses to quickly pass on the pain of an economic downturn to their workers, could we call for a windfall tax on corporate profits or a solidarity wealth tax? At present, the government’s approach is to shore up business and hope that they will pass on these benefits to their workers. This may be necessary to stop small and struggling businesses from going under, though we know that such ‘trickle down’ approaches are unlikely to help those at the sharp end of economic exploitation. But it is hard to argue with the idea that businesses with the resources to do so should make a fair contribution to weathering this storm.
Some on the left are starting to talk about whether the crisis can be seized to ‘lock in’ positive changes to the structure of the economy beyond the temporary measures taken to see us through the next few months. To be honest, I am quite sceptical about the possibilities for this. There is clearly a tension between the need for drastic measures to be taken very quickly, and therefore easy to implement within existing systems and power structures, and the desire for long-term structural change. I think that rather than pushing for the immediate crisis measures to be designed in a way that allows them to ‘carry over’ unchanged once the crisis is over, it’s more important that we think about the bigger picture.
How will this crisis change the way people think about the economy? What principles can be established that can then be used to push for changes to be adapted later into more permanent arrangements (for instance, better sick pay and worker’s rights)? Lots of analogies are being made with wartime: for me, this isn’t about designing WW2 mobilisation in a way that could continue into peacetime, it’s about preparing to build the NHS in the aftermath. It’s now as plain as day that when we don’t give everyone in society a secure livelihood – when millions of people can’t weather just one or two weeks of sickness without risking destitution – we all suffer. Just as it seemed obscene to people that soldiers could put their lives on the line but didn’t have access to decent homes or healthcare, we must hope it will seem equally obscene that essential workers can put themselves on the frontline of a pandemic yet can’t afford to get sick.
It’s being pointed out that, like WW2, this crisis will normalise massive state intervention in the economy – not just through bail-outs and income support, but everything from companies being repurposed to produce ventilators through to possible rationing. Perhaps this could be built upon to push for a green industrial strategy (although it’s just as possible that the opposite will happen, and an austerity mindset will set in). But I’m not sure this is the heart of the story here. This crisis could change the way we think about labour markets and welfare, and more generally about how we provide for each other.
Because this is a crisis of the real economy, it will inevitably focus minds on what really matters. This isn’t about numbers on a balance sheet, it’s about millions of people suddenly not feeling confident they will continue to have access to the basic means of survival. In all sorts of ways – from the inability of gig economy workers to self-isolate, to the shockwaves that will reverberate through economies when parents lose childcare – the crisis is exposing the ways our economy fails to support human health and wellbeing, and highlighting the value of people and activities that our system undervalues. And the UK is now likely to see a massive rise in mutual aid and ‘solidarity economy’ activities of the kind that became widespread in countries like Greece during the Eurozone crisis. The big shift here could be in changing how we relate to the market, and normalising a new concept of collective solidarity that could become the basis for a new set of social relations. Whether this will happen in practice remains to be seen.
In the meantime, we should push to ensure that the design of emergency measures as far as possible does not exacerbate the economic imbalances that helped get us into this mess, in particular the imbalance of power between capital and labour and our over-dependence on debt. It may be too much to hope that they could be designed in a way that actively redresses those imbalances – but at the very least, we must prepare to relentlessly highlight them and push for them to be addressed as the crisis wanes.
May 19, 2020 at 7:32 pm
Any chance you’ve been following the Indian economy and its supposed stimulus package? I’m a journalist and would like to know your observations and prescriptions going forward, and would therefore like to contact you. Please write me a line if you’ve got the time.
September 14, 2020 at 1:33 pm
I have read some of your comments regarding Covid-19 and the economy. Have you considered that perhaps we’re being completely mislead about the actual meaning of the increasing number of “cases” being reported?
Please watch the following video. Ivor Cummins is a Bio-engineer based in Dublin. His explanation is succint and worth the 37 minute it takes to watch it.