Coronavirus and Budget Blackmail

Next week the UK government has promised to announce its plans to ‘reopen’ the economy after the lockdown period imposed due to Coronavirus.

The economy isn’t ‘closed’ currently. People are still buying what they need, though less of it. But many people aren’t buying what they need, because they can’t. Despite the Jobs Retention Scheme, the Self-Employment Income Retention Scheme, etc., many are facing the prospect of a long period with no access to adequate income.

People just entering the job-market now, for example, have neither jobs nor self-employed income to ‘retain’. Their option is Universal Credit, which at £409.89 per month allows a single adult to fall into penury at a gentle clip. A couple gets £594.04 per month, and similarly inadequate child benefits allow the whole family to starve or enter debt servitude together.

Meanwhile firms are facing solvency problems. In principle, government grants are meant to let parts of the economy go into a temporary freeze. Paul Krugman calls this “the economic equivalent of a medically induced coma, in which some brain functions are temporarily shut down to give the patient a chance to heal”.

But the life-support systems are inadequate. The comatose patient is on a ventilator but not being fed. Liquidity-support is given; overheads are covered through the Job Retention Scheme, operating costs via other grants. But there isn’t much solvency support. Most of the grants do nothing to stabilise asset prices or support balance sheets. And so various firms — private and public bodies — fall towards insolvency.

The result of this is a piece of self-imposed blackmail. Maintaining social distancing, and phasing it out slowly and carefully, is the right thing to do in terms of the medical risk. But the economic risks become equally serious when people are falling into deep poverty and indebtedness and firms go bankrupt. The risk of ‘reopening’ the economy is weighed against the continuation of an economically intolerable situation. But the government could always just make the situation tolerable.

Dirk Ehnts and Warren Mosler’s oddly-titled ‘Brave New Europe’ proposal contains three recommendations for Eurozone countries that could also apply to the UK:

4.  Establish minimum retirement income support of €1,000-1,500 per month to support seniors.*

5.  Increase the minimum unemployment compensation to €750-1,500 per month and make it available without restriction to all of the unemployed.* 

6.  Offer ECB funded jobs through qualifying nonprofit organizations to allow them to employ anyone willing and able to work for €500-1,500 wage.*

The proposals are for Eurozone countries, but it’s easy enough to adapt them for the UK.

As for keeping firms solvent, banks need to keep lending to them and to roll over their existing debts at low interest until their income recovers. Letting financial markets try to work out which firms will hold up and which ones won’t is like medically inducing a seizure rather than a coma. There’s too much uncertainty for anything to get priced properly; we get panic and chaos. If parts of the economy are meant to be going into sleep mode, the goal should be to freeze asset prices in place.

One article in a VoxEU document called Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes asks the question: “can we put the economy in the freezer without damaging it?” For one thing, the Treasury can temporarily take assets onto its own balance sheet and park them there. Once the assets are off the market, their price is no longer an issue, and firms can temporarily stop worrying about insolvency. Banks will hold government cash instead of wobbly securities, and they can be directed to extend credit and solvency support to firms in exchange for their own liquidity support from the central bank. They won’t make big profits, and their share prices will fall, but at least they too will get to survive.

What about the enormous government debt that will result? Robert Peston harassed Boris Johnson about this in a recent briefing. I’m convinced that there is a catechism that British economics reporters have to pronounce before they qualify, and two points on it are: (1) the unspeakable barbarism of ‘austerity’ and (2) the criminal irresponsibility of issuing a single penny of government debt. So there’s no point trying to make the media happy.

And the debt is forecast to be off the scale in any case:

Adam Tooze has a rundown of the various ways to ‘finance’ this debt. The truth is that issuing it is pretty meaningless with interest rates scraping the floor. You can have the Debt Management Office sell a bond to cover a government purchase, and then have the Bank of England ‘print money’ and buy the bond, to hold down the interest rate. Issuing a bond to cover spending and then ‘printing money’ to buy it back is a lot like not issuing the bond at all and simply ‘printing money’ to make the payment. HM Treasury’s purchases are ultimately settled in excess reserve balances paying low interest.

Unless the interest rate does some sort of Lazarus routine, treasuries can keep rolling over their debt without explosion, with central banks soaking up enough bonds to maintain the interest rate (another point on Ehnts and Mosler’s proposal is to fix the rate at 0 permanently, but that is a different topic).

Is there an inflationary risk here? Always. But almost certainly not during the crisis, which has driven key prices like the crude oil price through the floor. In any case, CPI is haywire at the moment, since the ‘basket’ of commodities ‘typically’ bought by consumers is not its usual self. Inflation targeting shouldn’t be the priority of central banks; keeping the economy in the freezer should.

After the crisis there can be inflationary pressure insofar as people continue to catch the income-stream generated by government spending alongside new income streams generated by recovering activity. We should, however, remember that before the crisis hit, while Britain boasted of its economic performance against the rest of Europe, there were still 1.3 million officially unemployed against 850,000 vacancies. The chances that the UK economy — or any developed economy — will go roaring up the Philips Curve as soon as the crisis is over seem slim; anyway, what will count as ‘over’?

Still, there’s no question that there will come some point when the taps will have to be turned off. How concerning is that? Economics textbooks teach us that politicians are subject to a ‘deficit bias’; once they get in the habit of making life easier for their citizens they just can’t help themselves. I can’t say I’ve noticed any such bias within the UK Conservative Party. I think we can credit them for all the hard work they’ve put into convincing us that they’ll make cuts when necessary. I may have even spotted them doing it when not necessary.

Given this, I think we can justify spending enough now to keep people alive and financially solvent. We can keep the economy in the freezer without damaging it — or, rather, without damaging people. If instead the government sets up an economically precarious scenario and then insists that we need to put people at risk to get out of it, we shouldn’t be fooled.