I was told by an economist today that the situation that we face now is exactly like the 1930s. Without wishing to name the person in question, I fundamentally disagree with them. In my opinion the crisis that we face now is nothing like that of 1929 and what followed then, or 1987, 2001 or 2008. There is very good reason for saying so, and it is fundamental that this be understood if we are going to get the reaction to this crisis right.
All of those crises, and the downturns that followed them, were of fundamentally similar type. Overheated financial markets crashed. The result was a decline in demand (largely neutered, it must be said, in 2001 but otherwise very apparent). That downturn in demand then lead to supply-side problem as businesses reacted to the falling demand for their products, and in turn this then lead to unemployment and spiralling economic issues of varying degrees of significance on each occasion.
The important point to note though is that the cycle was:
- Financial crash
- Fall in demand
- Supply side response
- Economic issues as a consequence of multiplier effects
This time the cycle is very different. The crisis has started with a real issue in the economy. A pandemic has created what, initially, was a supply-side shock: lockdown resulted in almost immediate supply-side issues, appreciation of which was only deferred by the Chinese New Year. Thereafter, and in this case not long after, two demand-side issues emerged. One, arising as a result of fear and further lockdowns, has been the virtual collapse of demand for certain goods and services, whilst simultaneously there has been panic buying of a limited range of other products. And then, but really only then, have financial markets realised the scale of the crisis that 21st-century capitalist economies are facing as a result, and massively marked down share prices.
In other words, the sequencing this time is:
- Supply-side causation
- Demand-side reaction
- Resulting financial crash
- Massive potential economic consequences as a result of multiplier effects
The net outcome is the same, but the route to it is utterly different.
As a result to pretend that this downturn can be treated like others, for example like that of the 1930s, is at this moment wholly inappropriate. It cannot be.
The immediate reaction that the 1930s required was a demand-side boost i.e. an increase in the income of households to ensure that they could spend more and so keep the supply-side of the economy going. In every subsequent downturn this lesson has been learned, and so effectively in 2001 that we do not even really recognise what actually happened.
But this time a demand-side stimulus is wholly unnecessary at this point in time, precisely because the continuing physical threats within the economy created by the pandemic mean that many people are simply unable to spend at present, because they cannot even go out, and even if they could there is nothing to spend upon precisely because so many outlets are closed.
In that case discussion of demand-side stimulus at this moment is irrelevant: all that is necessary with regards to current financial support for people impacted by the pandemic, in whatever way, is that they can keep essentials going. So, for example we must:
- keep food on peoples tables;
- keep people in their homes, which means that mortgage, council tax and rent holidays are essential:
- keep people's credit records intact so that they can buy again (given out debt-dependent economy) when this crisis is over, which is why other bank loan, lease and credit card arrangements must all be put on hold at present with regard to repayment;
- keep people's utilities connected whatever happens right now, including their mobile phones, which is why the government should be covering these costs for a number of months;
- cancel other outgoings e.g. on council tax, tax payments, and so on.
The aim is to, quite simply, keep households solvent, safe and fed.
But that is an insufficient condition for an upturn to happen. There can be no economic upturn to come if during the enforced downturn that we are now suffering the supply-side, i.e. business, collapses because companies have received inappropriate support from the government to keep them afloat during this crisis, for example because they have been offered loans when they need grants or equity injections instead.
So, the priority at this moment is keeping households with sufficient cash income to cover basic needs, whilst waiving their fixed obligations, and at the same time providing as much support as is necessary to preserve as a large a part of the UK economy as is possible during the course of the crisis that will unfold during the course of the next few months. Hence my suggestions that:
- Companies should have complete tax holidays;
- Pension contributions need not be paid during this period;
- Business rates should be waived for all businesses;
- Support should be provided to ensure that businesses can keep on all their employees on the books even if they have no work to do at the present point in time, and their payrolls should be used as a mechanism to supply the support noted above to those households where employees are impacted (other arrangements are needed for the self employed, those without work and so on) with the government covering the costs;
- Bank loan deferrals and rent holidays should also be available to businesses.
Only if we do this can we hope to have an upturn, at all. And, without this sequencing with this sense of priority to keep the supply-side going this is going to be a very long and serious recession.
None of this does, of course, ignore the fact that there is an ongoing financial crisis as well. It would be wrong to do so, but what I have already noted elsewhere is that if any financial support is to be provided to larger companies (and there will, undoubtedly be many that will require it) then some quite stringent conditions need to be attached including binding undertakings to:
- Keep employees on during this crisis;
- To pay a living wage after it is over;
- To pull out of all tax haven activity;
- To sign up to a tax transparency standard like the Fair Tax Mark;
- To commit to full country-by-country reporting;
- To prepare a published plan on how to become net zero-carbon;
- To include financial reporting on progress to achieve that aim to be net zero carbon in its audited financial statements hereafter.
There should be no such thing as a free lunch for big business this time round. But, the point, to reiterate, is that this package is in some ways the lowest priority: the sequencing is different this time. I just hope the government realises that, because if they do not they will get all this very wrong.
Coronavirus is nothing like anything we've seen before. And it is most certainly not like the 1930s.
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Great, The only thing I’d add is total pause in ALL rents, ( Being the charge for use of any capital good, e.g Mobile Phones, but not the usage and including debt interest).
In effect the world economy needs to be put on “Pause”, until the viral threat is neutralised. Only then can we tentatively restart the system.
My thought – rightly or wrongly (I don’t claim any expertise) – is that the nearest comparable situation – in anything like recent memory – to where we are now (or may imminently be) is that which Germany found itself in 1945 (far closer than its position in the 1920s or 1930-32).
You may well be right
“I was told by an economist today that the situation that we face now is exactly like the 1930s. Without wishing to name the person in question, I fundamentally disagree with them. In my opinion the crisis that we face now is nothing like that of 1929 and what followed then …”
Yet…
“Richard Murphy says:
March 18 2020 at 3:20 pm
Unless we take action very quickly (days, a week or two) then I foresee 1930s style recession, or worse …”
Which is it, Richard?
As I aid the outcome is the same eventually which completely reconciles those two statements…but how we get there is quite different
There is no ambiguity at all
You make some very valid points, but without trying to sound critical, at what point does money printing and underwriting various costs become an issue for an economy?
Many countries are running record levels of debt, accumulated as a response to bailing out previous financial crises; the growth of debt has far outpaced growth in productivity over the last decade, hence it is conceivable that some of these countries may become unable to service this debt and become insolvent.
With interest rates at record low levels, this does not appear to be a significant problem, but there is a very real possibility that negative yielding debt will become unattractive at some point in the not too distant future, creating an even greater financial crisis than the one we are currently teetering on.
It is critical that the focus to this crisis is on the wellbeing of the population rather than that of the many corporations that seem to frequently benefit from government attention, otherwise the aftermath will be a broken populous and a collection of trophy assets for the incumbent administration to revere.
– I am sure the nations beloved Boris will disappoint!?
Have you noticed Japan?
And after a decade of countries trying to create positive inflation rates have you noticed how successful they are?
You are also aware that any amount of debt can be cancelled at will via QE?
There is no chance of a sovereign debt crisis
Thee is a chance of almost everything else, but not that
Agree a sovereign debt crisis is not the issue..the restriction with this approach will always be debasing the currency and inflation, with the former adding to the charge of the latter..
Does money creation by private banks debase the currency?
When they won’t be creating money why does central bank substitution create what their activities do not?
Please explain
“Does money creation by private banks debase the currency” – it most certainly it does..it doesn’t matter if via private banks or the state it’s the scale of money creation (and obviously its purpose). Have a look at the scale of GBP money creation compared to CHF and correlate with the GBP/CHF fx rate over the last 10yrs or so..says it all
I note you have not published your workings
Is that because fag packets aren’t online?
“I note you have not published your workings”…Is that because fag packets aren’t online?
Very odd response for something which is simply a factual statement and is absolutely correct.
If it’s so obvious you’d be able to show it
A very fair request has been made, Mr Jones. Speaking for myself, I am always interested in disinterested evidence. You made the claim, now show the evidence.
Greg Clarke, Conservative MP and ex-Minister has broken ranks with the appalling inadequacy of the Chancellor’s two fumbled, obtuse, hapless (but predictable) banker’s ideological attempts to a address a problem he does not appear even to understand (including off-balance sheet financing; hw would, wouldn’t he?); presumably because Clarke is not prepared to accept that the Government economic response has been adequate to the crisis. It isn’t. Clarke suggests that the urgent need is to direct aide directly to the employed; by using the current efficient, functioning PAYE tax/NI system (or so I interpret him in a short interview), but using it in reverse for Government to directly to support individual businesses, but individually to each employee, as I understand him, to keep the emplyees employed (after all, the PAYE system is on an individual basis).
Perhaps I misunderstood, but I would welcome opinion.
I have been arguing exactly for this and did so in a discussion between NGOs working on universal basic incomes today and how we get payments to people
I had thought so, but wondered if there was some disguised and treacherous nuance I was missing (we are, after all dealing with a Government we have come familiarly to know, principally as glossy snake oil salesmen); but it is strange to hear a Damascene conversion, on the Conservative benches. I listened to the Commons debate; it wasn’t just Clarke (even Ian Duncan Smith was obliged to reculé); the Government benches are feeling the heat; very sober, earnest and frankly most of them look scared witless. Reality is biting; hard.
They no doubt think all this is a strange anomaly, but what they may be observing is their ideology on its way to a less than gentle extinction; the end of all ideology.
I had little time to notice today but by parliamentary ‘ears’ were as astonished as you by the Tory backbenchers
I heard this on the radio and I missed who was speaking. He is spot on.
I originally thought it must be a Labour voice. But at last some Tories are getting it….
Because there are no atheists in foxholes.
Oh yes there are
[…] wrote yesterday about why it is that the recession that we are now facing as a result of coronavirus is not the […]
Can anyone explain why Unions are asking for percentage support rather than uniform support on incomes?
Because households have spends geared to incoimes
Historical spend, yes,
Current Need, no
Everyone finds it difficult to understand, history is dead! There is little that historical experience is going to offer us in this unique crisis.
As someone who has been rehearsing apocalyptic scenarios for some years, even I am finding I had assumptions that are based on a system that doesn’t exist any more!
Liabilities are not dead yet
History is not dead. Corona virus has a history. Even COVID-19 has a history. History is just difficult, not dead.
Exceptionalism is almost invariably misplaced; typically because we do not understand, or insufficiently study the influence of history on the present, or its influence of how and what we think; of what we think we understand.
If you at a video of a rock slide, you can see the Rock that started it. That knowledge does not help predict which rock will cause the next one!
My approach is to relax all possible parameters of a problem, and then see which ones are significant when reintroduced.
[…] Cross-posted from Tax Research UK […]
“To sign up to a tax transparency standard like the Fair Tax Mark”
Your really are something..sign up to line the pockets of Richard Murphy or else!!
Take about exploiting the situation
The word like was key
But you ignored that
I wonder why?
You seem to be enjoying all this turmoil. Does it suit what ever agenda you have?
It takes a warped mind to think anyone is enjoying this
Where I do not agree with you Richard is where you look to the more distant future and hope for an “upturn” to happen….
No way!…. now it is true that in that “upturn” that you describe you would try to exercise some steer by your conditions to companies in return for assistance in staying alive. However, from an ecological perspective the problem is that the global economy is already too large compared to the ecological carrying capacity. If you take “ecological footprint analysis” we are operating as if we had 1.7 planets. That means degrading the ecological system – for example degrading forest ecologies so that the habitat of bats changes and become closer to that of humans – which is where we probably got Ebola and Covid 19 from.
So the global economy has to shrink and Covid 19 has done a brutal and unpleasant job on that one… but please please let us not start “growing the economy” again.
You say you want companies to publish a plan of how they will become “net zero carbon” in return for all the state support that kept them alive…. however from a degrowth perspective the chief thing of closing down “inessentials” is that it gets rid of non essential energy and carbon uses.
But if you get your eventual “upturn” the emissions will go shooting back up where there are still cheaply available fossil fuels to burn – a plan is words on paper. There has been an endless stream of “words on paper”
So…if your plan manages a non inflationary way of protecting the essential parts of the economy and keeping people safe it also a platform and a starting point for another kind of programme .
Such a programme would actually address where the total crisis has come from: not an upturn in inessential consumer goods but a transfer of resources to the health service and care work that have been cut to the bone; a transformation of the agricultural system and real estate markets so that the land use changes that are unleashing health problems are stopped – like ebola, covid-19, Lyme disease, diseases resistant to anti-biotics – all of them brought to us by a toxic food system and by a hyper connected global economy that guzzles carbon fuels and also transmits diseases rapidly. All of these need structural changes in the economy with training and a large scale redeployment of labour in a degrowth agenda . No upturns please – structural change so that people stay safe because the ecological crisis is properly addressed.