I suggested that interest rate cuts would not address the economic consequences of the coronavirus before the markets issued their quite emphatic agreement yesterday evening. In that case this post is not an 'I told you so', but rather more a reflection on what really needs to be done to manage the economic consequences of this potential epidemic.
I stress that I am accepting the publicly available evidence on the potential health risks of an epidemic. I am not an epidemiologist. I will accept the current view that at periods over the next six months many, if not most, people UK will get this virus and that at any point in time up to 20% of the working population will be off sick, self-isolating, or caring for members of their family. In addition, and not much is being said about this, maybe 1% of the UK population will die, which doubles the UK average death rate.
The economic consequences of this are, of course, almost staggering in their scale. For the time being thoughts about growth and investment, which so often dominate discussion on this issue, are almost irrelevant. At a time when so much economic disruption is likely the only issue of concern is whether, or not, economic survival for all participants in the economy is possible. That, in turn, comes down to something which is all too often forgotten by government, which is the availability of cash flow. To be blunt, when the chips are down, the only thing that matters is following the money.
There isn't the scope in one blog to consider all the consequences of the cash flow risk that this epidemic will create. Some generic, and particular risks can, however, be identified. I will group them under the broad headings of individuals, businesses and government.
Individuals
Ignoring, for a moment, the health risks that this epidemic brings to us all, the economic risks should be fairly apparent. For many that risk comes from a simple lack an income: that there is a widespread risk to many people resulting from inadequate sick pay has already been highlighted on this blog, and elsewhere. In some ways this is the greatest risk of all because unless it is tackled the actual epidemic will be worse.
The fact that this risk exists does, however, also indicate the crisis that we face because of cuts in our social safety net, and the economic risk that arises from the massive inequality in the distribution of wealth in this country. When more than half the households in the UK have savings of less than a few hundred pounds their resilience in a crisis of the type that we are facing is marginal, at best. They simply do not have the means to weather this storm. And, more particularly, many of those households will have considerable outstanding debt which has to be serviced, and they will be unable to do that. The risk that there will be considerable financial stress for those in this situation, both now and in the future as a consequence of failed credit ratings, is enormous, with staggering social consequences.
It should also be recognised that for generation rent, the risks from non-payment are very high, and the chance that rent defaults over this period will increase is significant. Again, the vulnerability of our social model will be cruelly exposed, with the word cruel being used in a very particular and literal way.
And the risk of debt failure does not end with those in the most marginal situations. Many apparently more resilient households, based at least upon income, are actually dependent upon regular cash flow to meet their obligations. Mortgage rates may be low, but for many households mortgage obligations are proportionately high, as are the obligations to make payment on other loans, including the staggering number of car leases in this country. Again, the risks of default are very high with very long term social consequences unless systems are adapted to allow for the stresses that are going to arise, inevitably. In a country built on debt, where credit status is key to financial viability, a very large number of people are going to see their well-being severely damaged by this epidemic unless action is taken to help them now.
What might that action be? The obvious actions are that:
a) The government will need to declare rent holidays;
b) Mortgage payments must be permitted to be deferred without penalty, simply by extending terms;
c) Lease and other loan obligations must again be subject to loan repayment holidays by the extension of terms;
d) Credit ratings agencies must not be permitted to consider defaults in this period in their future credit ratings.
It is important to note that the only real cost within this is to landlords: I am afraid to say that they are going to have to take a hit as a consequence of this epidemic, and that they above all others can afford to do so.
Businesses
The risk to businesses from this epidemic is little different in some ways to that faced by individuals: the problem will be their cash flow. The loss of profitability and investment opportunity will be things to consider later: what will matter now is their ability to collect what is owing to them and to make the payments that they have to settle on a timely basis. Both are threatened by a lack of staff. They are even more threatened by a lack of demand, as well as an inability to meet demand when staff are off, as well as an inability to secure the supplies that they need to meet their contractual obligations. Put all these factors together and the cash flow risk to many businesses in the UK is substantial, and candidly, many may not survive. Excepting funeral directors, where there is already a lack of supply in most parts of the UK, few sectors can be looking at the crisis to come with any degree of equanimity, whilst those linked to social activities must be particularly concerned. If things are as bad as the government predicts these businesses are going to face a very tough time.
It can, of course, be said that those businesses that face a crisis are what the right wing like to call zombie enterprises. Alternatively, it will be argued by some that those businesses that will fail will be rapidly replaced by new businesses once the crisis is over. Both views are not just naive, but callous, and show a lack of awareness of the enormous human capital that is embedded in most existing businesses which will be lost unless action is taken to help the cash flow of a great many companies who will face enormous challenges over the months to come.
Again, there are obvious actions that might be taken:
a) Business loans must be subject to repayment holidays, with loan periods being automatically extended, and without interest penalties being applied;
b) The same must apply to leases and similar arrangements;
c) Business rent holidays must be granted for periods of up to three months, and maybe longer;
d) Tax payments must be deferred and in some cases may need to be waived. Although I am not convinced that a blanket waiver process would be appropriate, I strongly suspect that a bias to wards smaller enterprises will be required if they are to survive. This will impose a significant cost on government.
Government
The UK government is in an entirely different position to every other participant in the economy when it comes to a cash flow crisis because it can never have one: it can always create the money it needs to settle any obligation that falls upon it. What is more, it is always capable of extending credit to anyone within the economy, precisely because it has its own bank that is fit for this purpose. Unless, and until, this is understood by those in central government, the Treasury and the Bank of England we will have a crisis.
When those agencies realise that it is their job to address the country's cash flow crisis then the biggest challenge that we face will be over.
So, the government can agree to defer tax payments.
And the government can agree, if it wishes, to support banks if they face cash flow crises as a consequence of non-repayment of loans.
The government could agree to increased expenditure to support people in society, because that is their job.
And the government could even agreed to support particular businesses that were in trouble.
All of this can be done with government-created money.
And all of that government created money can be cancelled and taken out of circulation when necessary by what I have called coronavirus quantitative easing. And there should be no pretence that when that happens the debt in question would ever be reissued: it would be cancelled.
Over the coming months the government really has to be the banker of last resort to the UK economy, providing our country with the liquidity it needs, on demand, to ensure that however bad the health situation becomes, the economy does not need to suffer as much.
Summary
If these suggestions become the basis of an economic plan then the economic consequences of coronavirus can be tackled. But, without such broad-based thinking everything could be very much worse than is necessary. This government faces an unprecedented challenge. The hope must be that it has the ability to address it.
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“Workers not-entitled to sickness pay” were advised by a BBC2 Newsnight panelist (3rd March), a GP and MSM broadcaster, to use universal credit! In contrast the SNP’s Philippa Whitford MP was excellent – who was not introduced as a medical doctor or Gaza medical volunteer. Newsnight seemed balanced and informative in the absence of a Govt minister; Mark Urban accurately reading aloud – ‘we asked to speak to a Govt minister but none was available’.
THEY don’t have a clue about UC – what about the 5-week wait period unfunded, for starters. And perhaps they’d expect the sick to turn-up for interview to prove the claim?
Perhaps a popular policy would be to arrange ‘training’ for Tory politicians on UC for ‘job experience’ of, say 4 weeks and find out how they would manage. Thus providing valuable ‘hands on’ experience of the Govt’s ‘toolkit’ and ‘in one word’ how Johnson’s ‘technology’ – ‘research’ – ‘science’ solutions will ‘mitigate’ the effects of the Govt’s own epidemic – UC.
[…] have already discussed the potential economic implications of coronavirus this morning. The purpose of this blog is to summarise the underlying economic logic of what I have said. We […]
….but as you pointed out two days ago, for the government to take the necessary actions the government has to care……… about the right implications of its response.
For those committed to the creative destruction of a no-deal Brexit this current looming crisis will look like manna from heaven.
Accepted….
How about a mass MP surgery visit where every UC applicant asks their MP to help fill it in
If we had a government whose first thought was the well being of the people then it would pursue the kind of programme that you outline. However, we have a government which sees the people purely as an abstract (the “will of the people”) rather than as a living, breathing mass which has a variety of needs that cannot be fulfilled by market outcomes alone. The last decade has seen the deliberate targeting of the poor, the sick and the vulnerable (austerity, universal credit, cutting flood defences etc.) and the transfer of wealth from those who can least afford it to those who already have it in such abundance that they haven’t noticed the difference. I cannot see that this government is going to be any different than Cameron’s or May’s in terms of how they care for the people’s well being. What we will get with the response to Covid-19 is the spectacle of care, backed by a campaign of propaganda that will be lapped up by the media, which no longer has the intelligence or the time to investigate properly the progress of the virus and its impacts.
As this spectacle is going on, people will die and, while the government will express its sorrow and regret over such deaths, its tears will be crocodilian. The World Health Organisation currently has the mortality rate at 3.4% and, as the risk of dying increases with age (all cases: 60-69 years 3.6%; 70-79 8%; 80+ 14.8%), there are probably people in the government already calculating the level of deaths in these age cohorts and what the positive effects these levels might have in relieving the strain on the NHS and social care. It is also true that pre-existing conditions increase the risk of dying from Covid-19 (all cases: cardiovascular disease 10.5%; diabetes 7.3%). Again, similar calculations are probably being made here.
Then there is the case for using the virus as a massive reset for the economy. We know from Brexit that this is a government that is perfectly willing to see businesses collapse in pursuit of an ideology. Covid-19 presents another opportunity for the destruction of wealth so that new wealth can be created for those happy few who are already well placed to take advantage (Tory MPs, Tory donors etc.). I would not be surprised if there were influential figures in and around government arguing that the virus should be allowed to run its course unimpeded so that it can work the destruction that so many in the Tory party seem to want.
I think the 3.4% is a proportion of known cases. Most cases aren’t known because the symptoms are too slight to report so the proportion of people infected who will die will be much less. Though I suppose though we’ll all be exposed not all will get the disease in any degree so a further reduction. But even if the death rate is 1% of 20% of 50% = 0.1% that’s still c60,000 deaths in say one year. An awful lot. I think the adjective is well justified here.
I suspect 60,000 understates it
Danny Dorling’s work has shown ordinary flu can create 130,000 excess deaths if there are hospital shortages
I fear you are being optimistic
The economic consequences of this are, of course, almost staggering in their scale.’
Richard, what we are in danger overlooking is that this does not in any sense from the perspective of the 1% and their political handmaidens (the Nasty Party & allies) constitute a crisis. To them what would constitute a crisis is the remedy that you propose — debt forgiveness.
Finance Capitalism now reigns king in North America, Europe and Japan. In the world of Finance Capitalism debt and therefore debt obligations are sacred and therefore any attempt to suggest otherwise is a blasphemy which denies the very existence of God and good order.
The remedies you propose are very sensible, but they carry with them the mortal danger that the 99% may be encouraged to believe that Socialism works and therefore develop an appetite for more of the same. Capitalism only exists because we believe in it. Once that belief is withdrawn (as it has already in the system of slavery) it is game over. If the 99% figure a practical path to a better future Capitalism as a system will collapse.
The question is therefore can the Nasty Party and allies like Franklin D Roosevelt previously risk such an outcome. Do they feel they have enough confidence with their control of the MSM, their ability to infiltrate and corrupt the official opposition, how far can voter fraud be relied on before the populous suss?
As the great black nationalist Steve Biko stated, ‘the greatest weapon in the hands of any oppressor is the mind of the oppressed’ As the Millie Downer episode showed belief can turn on a sixpence. For Johnson & co it may well prove a sixpence too much.
It’s my belief needs simple measures around which opposition can be based
That’s why I out forward ideas
I fear you are right Andy
For the far Right (which the Tories have become), Brexit and the potential chaos is the chance to indulge their wilder fantasies. Corona adds they’ve chaos – andgor them the potential opportunities
On the other hand, at the risk of sounding morbid, it’s those older Tory/Brexit voters who are most at risk so it might accelerate the demographic shift
It would be ‘interesting’ to know to what extent the government is being influenced by Dominic Cummings. I’ve just read this piece (below) in The Atlantic which suggests he is a philosophical disciple of Warren Buffet. I’ll not pursue the theory in depth here, except to say if what the author states is true says about Cummings, and that it translates into government policy, then Johnson might be persuaded to take the radical action required to deal with the crisis, by-passing any ‘institutions’ he (and Cummings) judges to be blocking rapid response & progress. As the author summarises in his penultimate para: “This is a project to remake Britain into a country agile enough to adapt quickly to the dramatic change that is inevitable and unpredictable, not to perfect an existing system that avoids unwanted shocks.”
In the current emergency, maybe this could be effective strategic policy? The danger is that the baby is expelled with the bathwater. Just sayin’ …….
https://www.theatlantic.com/international/archive/2020/03/boris-johnson-britain-dominic-cummings/607363.
Definitely time for (another) coffee. Barista!
Nullifying the standard 4 day wait for Statutory Sick Pay is not especially radical. Nor was the PM’s suggestion at PMQs that cash-flow issues could be assisted by Universal Credit.
Perhaps I’m being unkind, but agility doesn’t seem to be the name of the game yet.
I note in passing that the decision to make Covid-19 a notifiable disease has only just been taken at UK level – Scotland did so last month, and both parts of Ireland I believe.
I agree with you
The state of awareness in No 10 seems quite extraordinarily low
@ George S Gordon
Agreed. I wasn’t in any way attempting to ‘big up’ the govt response thus far. I was just interested to read that somewhere in the corridors of power there apparently lurks a philosophy that could be ‘activated’ to meet the demands of the escalating crisis. But … ‘to know and not to do is not to know’.
Well, speaking of a perceived lack of awareness, if one considers what ‘Bonking’ Boris has actually been concentrating on lately viz a viz the state of certain Carrie Wotzerface…………….
What was it that the late Robin Williams said?
“God gave men a willy and a brain, but only enough blood to run one a time”.
I rest my case M’lud.
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