The FT's editorial this morning noted that:
The OECD suggests that each additional month of shutdown will lower growth this year by two percentage points. Unless the cessation of activity is brief, this will be the biggest contraction in history.
No one wanted to live through such times. Doing so is unprecedented, by definition. But what is clear is that the number who will suffer directly and indirectly as a result of this crisis is staggering, and will always remain untold, such is the scale of it.
And yet it will pass. One day - although we do not yet know when - there will be no threat from coronavirus. We will be able to live more normal lives. The sooner, the better is clearly everyone's wish. It is the FT's too: as they say in the conclusion to their article:
Yet now come the crucial weeks. Governments have rightly decided to close their economies down. But they must make the sacrifices worthwhile. Having to do this again would be agony for societies. There is but a brief period in which to gain secure control over the disease and so be able to reopen the economy relatively safely. That opportunity must not be thrown away. Make these lockdowns work. All the blundering of recent months has to end.
So, they pass the buck: they say it is for the government to decide how the blundering must end. The implications is clear, and is that they have faith in those who have blundered not to do so again.
I have not got that faith. My own contribution, which I am in effect already working on is to think about Tax After Coronavirus (TACs) for which the website is already registered: the whole of tax and its role in society has to be rethought after this crisis.
That, though, is an issue for time to come. The restart after the closedown is an issue requiring planning now. If, as everyone would hope, this happens within weeks or a couple of months or so at most - and it is hard to see how it cannot, at least in some form - then what is that recovery going to look like?
We already know we are going to have an economy radically different from now. That is because whole sectors will have simply ceased to exist unless radical action to save them is taken. The FT does, for example, wonder today who, if anyone, in the High Street fashion market will survive what is happening right now. That's not going to impact me too much, but it will millions. I offer it as indication of so much that is failing.
The question arises in that case as to how the capital that is being destroyed now can be recreated? That is a massive issue. And I see no way around it without what will, in effect, be job grants to get businesses going again.
What might a job grant be? Effectively it would be a tax holiday, to a limit. An employee on earnings of up to around £30,000 might have to receive their net pay, after tax, but some or all of that tax bill may need to be waived for an employer who might but for that waiver fail. We are seeing wage subsidies now to stop people working. What we are going to need to get matters going again - for those who can - is a wage subsidy to get people back to work.
This, though, cannot be unconditional. The grants must have a condition attached, not least because they will be abused otherwise. That price will have to be in capital terms right now: it will be in the form of mandatory loan stock issued to the government (or a National Investment Bank) in exchange for the grant. In effect, the government would take a stake in every such business involved. And the companies would have to agree - and agree to do the accounting involved, at personal cost to directors if they fail to do so.
The stake would behave like share capital at first and might remain that way if losses were incurred. But when balance sheets began to repair then conversion into loans that might then become at least partially repayable will be necessary.
Over time these stakes should reduce. One reduction might be by way of cash repayment to the government. The other - which should probably always be on the agenda - should be by retention of a stake for a national wealth fund. This is about claiming prosperity for our long term out of the role taken by the state now. And how big will that stake be? That depends on the support provided, of course.
But what this implies is that we cannot think now just about the short term costs of revenue support to business. That makes almost no sense when what has been created is a long term crisis.
Nor can we for one minute think solely about the government walking away from this issue as soon as it thinks recovery starts: that will be impossible. So capital solutions - that focus on the recreation of balance sheet strength (an almost forgotten part of accounting, so keen have most companies been to undermine their balance sheets in recent decades by piling them high with debt whilst distributing every penny to shareholders that they can) will have to come to the fore in accounting for time to come.
And that means new rules, new accounting, new objectivity and the replacement of mark-to-market accounting of the type we have now with something that looks very much like historical cost accounting plus sustainable cost accounting to allow for environmental impacts - which will have to remain in the mix - will be the direction of travel down which we will need to go, and very quickly. And into that equation will be new forms of capital accounting for government loan funding of types previously unknown.
We can recreate worth, but only communally. Business can restart, but only with support in many cases. We can have prosperity of a new kind, which will endure. But at its core will be new forms of thinking about funding that will take us to places where few have thought it necessary to ponder to date.
This requires a lot of work.
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For me the fundamental question is “if you were starting from scratch would you build the economy to look like it did?”
We are in huge danger of, once again, throwing gazillions into a system to save a system that doesn’t really work that well. It seems that we have an economy that relies on every increasing debt-fuelled consumer spending to function. A few months of people not buying coffee out shouldn’t destroy the world. In reality it should lead to old businesses closing and new ones forming to sell coffee if demand exists.
As I see it there is sufficient wealth – in terms of shelter, food, and material goods – to provide everyone with a basic standard of living. A guarantee that everyone regardless of how distasteful the Daily Mail finds them gets a roof over their head and a meal on their plates every day. I’d do it through a UBI.
After that I’d favour a high tax, high spend economy where government exists to make the public realm really, really nice.
Tim Universal Basic Income (UBI) is in my opinion just a begging bowl. Begging bowls will never deliver economic justice. That is because of the unequal relationship between the beggar and the doner class. For there to be justice equality should obtain.
[…] even so, I still think further support of the type I have recently discussed will be required as the recovery begins. Cool heads will be needed then, but right now Germany is […]
I agree with all the points being made but I think it’s important to remember that the current setup *does* work for the people that ministers hang around with and the people that give ministers advice.
Unless external pressure is put on politicians I can’t see why they would change anything. From their point of view, everything is OK.
Keir Starmer has appointed Bridget Phillipson to be Shadow Treasury Secretary. It looks as though like Anneliese Dodds, the Shadow Chancellor, the Starmer economic development line will be interest rates are at an all time low so it will be foolish (post coronavirus and Brexit economic impact) for any government, including a future Labour administration not to borrow. Here’s a statement from a Bridget Phillipson article in last month’s New Statesman:-
“It seems implausible that the government would engage in a such a significant expansion of public spending, however cheap money currently is, unless they were looking at fairly grim projections of what will happen to the economy in the years ahead.”
https://www.newstatesman.com/politics/economy/2020/03/labour-rishi-sunaks-budget-opportunity-also-danger
This approach differs significantly from John McDonnell rabbiting on about how any UK government has to watch it because government operates on a credit card!
https://labour.org.uk/wp-content/uploads/2017/10/Fiscal-Credibility-Rule.pdf
Let’s hope….
I did think during the financial crash that we would become a much less consumerist society, content to have shelter, food, clothing, health care, education and a few treats along the way. That we would eschew personal debt and act more responsibly.
I was wrong then, and I think we will return to the trough soon enough. It will however leave even more folk in squalid conditions.
We will become more American Dream* than before – with many living in trailer parks (they exist locally in what is a fairly wealthy area). Longer working hours, shorter holidays and the promise that anyone can make it big. Except most won’t.