Next with Covid 19. Is it the economy, stupid?

Newspaper subs are calling it “Manic Monday.” Are they right? How is it with you? Flash in the pan or setting a trend?  This week marks the landmark of a return to shopping, the essential activity for economic revival while Covid is still active. It throws into relief the stark choice everybody hopes to finesse – health or wealth? The need for a strategy for revival is as vital as one for easing out of  lockdown.  In the UK neither is particularly clear although it must be encouraging that the death rates are falling steeply. Whether this is a beginning of the end or just a breathing space remains to seen.  Few people are echoing Boris Johnson’s familiar eternal optimism that the economy will “bounce back” and stay bouncy. In the immediate future the Guardian stable offers no simple left /health versus right/ wealth dichotomy. The one glimmer of light was spotted in the financial markets last month by Gavyn Davies  in the FT

The relatively optimistic forecasts for the advanced economies seem to treat the 2020 downturn in a similar fashion to a recession caused by a natural disaster, which has a catastrophic immediate effect but then disappears extremely rapidly. If that pattern is repeated this year, the implication is that share price valuations may be only minimally affected by discounted future profits. 

Markets being nervous ninnies, confidence won’t be helped by fear of a second Covid wave in China.  Yet despite the BLM waves of violence in America over the past ten days, the stock market went its own sweet way, responding  to encouraging employment figures.  The Fed chairman was less impressed, as Sky News reported last week.  

The S&P 500, America’s broadest stock index, has rallied by some 48% and the Dow Jones Industrial Average, its best known, has risen by 51%. The Nasdaq, dominated by tech stocks, is up by some 50% and is now ahead by 15% for the year as a whole. All of which made a lot of investment professionals worried that markets were becoming detached from reality. More than 16 million Americans had lost their jobs during the last three weeks and that the Dow had enjoyed its best weekly gain since 1938.

This week, however, an element of reality has finally caught up with stock markets. With many investment professionals nervous that equity markets had rallied too far and too fast, they were given an excuse to take some money off the table when, on Wednesday night, the Fed offered a gloomy prognosis of the US economy.

Warning that the central bank was likely to keep US interest rates close to zero until at least 2022, Jay Powell, the central bank’s chairman, said the US economy was likely to contract by 6.5% this year, before rebounding by 5% next year.

Twenty-two, 24 million people – somehow as a country we have to get them back to work. They did not do anything wrong. This was a natural disaster.

“It is a long road. It is going to take time.”

Guardian Economics editor Larry Elliot plumps for a reconciliation between health and wealth in favour of a return to work, reinforced by crumbling consent for lockdown.

By the end of April, according to initial estimates by the Office for National Statistics, the economy had shrunk by 25%. If anything, that will prove to be optimistic because of the difficulty in getting data from companies forced to close…. Evidence of the harmful side-effects of the lockdown have also emerged. The number of suicides is up. Domestic violence has increased. Mental health is suffering. Unemployment figures out this week will illustrate the human cost of a 20.4% drop in national output in just one month. The jobless total is heading for 3 million this summer despite the fact that the government is currently paying a third of the workforce.

As the Institute for Fiscal Studies pointed out last week, the crisis has deepened Britain’s class, ethnic, gender and generational divides.

The likelihood that Covid-19 will resurface a second and perhaps a third or fourth time makes the case for a measured approach to future lockdowns even stronger. All the evidence is that six months without going to school is more than twice as damaging as three months. The same applies to youth unemployment. The longer the spell out of work the deeper the scars.

Getting young people to abide by a second lockdown would be problematic. They want to work, to meet their mates, go on demonstrations and have some fun. They know they are low risk and will do their own cost-benefit analysis. Many will simply not comply, deciding instead that Covid-19 is a risk they are prepared to accept.

This is not a bad philosophy because until a vaccine is found there is a choice. Either countries such as Britain use effective track and trace systems to deal with local hotspots and let the rest of the country operate as near to normal as possible, or they shut everything down again. If they haven’t already done so, governments will conclude that the economic, social, health and educational costs of full lockdowns are too high and that somehow we have to learn to live with Covid-19.

Left and right are in parallel up to a point.  The Observer’s Will Hutton argues for  direct state intervention to subsidise wages and invest in companies.

Around 1.6 million retail workers are furloughed; 1.4 million hotel, restaurant and pub workers. Expect their employers in these ultra-distressed sectors to make at least of half their payroll redundant when furloughing ends. On top, another 5.7 million are furloughed – expect a third of them to be made redundant. Unemployment is thus nearly certain to exceed 6 million by early 2021. Avoiding this is the most profound challenge British economic policymakers have confronted in my lifetime.

Obviously, the government cannot pay the wages of 9 million people indefinitely. But equally it cannot risk 6 million unemployed. What it must do is introduce a wage subsidy as it phases out the job retention scheme so that employers do not sack their workers as furlough ends, but instead keep them on as active workers. The subsidy can be reduced gradually during 2021 but in those sectors in extreme distress it should continue into 2023. I would add a subsidy to hire and train all unemployed 16- to 25-year-olds, underwriting a National Youth Corps.

Furthermore, the government must aggressively stand behind banks and investors supporting distressed companies with subsidised loans and by taking partial direct stakes, forgoing tax if necessary to keep firms alive as long as other stakeholders take a similar hit. The whole approach might seem expensive. But the fiscal and human cost of allowing firms constituting a sixth of GDP to go bust, with unemployment rocketing, is many times greater.

If averting immediate mass unemployment is one objective, another is to lay the basis of a more sustainable economy by backing the next wave of innovative and green enterprises. Sunak has launched a £500m future fund to support innovative and high-growth companies. That’s good, but it is minuscule. Germany’s designated funds for economic reinvention, part of its recently announced economic recovery plan, are many times larger. It will Istick in the craw of the Brexit right but Britain would do well to follow Germany’s lead. Its overall economic stimulus is worth 4% of GDP. We should follow suit.

How is all this to be financed? Here again, the old rules need torching. Issue perpetual bonds that don’t have to be repaid, and, if necessary, supplement the bond proceeds by printing money; with output taking such an enormous hit, the inflationary risk is non-existent. Britain is facing a looming first-order economic disaster. The risk is not thinking big enough in response.

In the Daily Telegraph Gerard Lyons, economic adviser to  investment banks including the Bank of China  follows Hutton part of the way but  goes for tax cuts – the traditional Tory way– and a shorter debt repayment schedule.

While unlocking may unleash some pent-up demand, many people will be reluctant to shop, have little to spend or will want to add to their savings as they face an uncertain future. So VAT should be cut to help boost demand and stamp duty reduced to help kick-start the housing market.

One is credible fiscal activism. There is no magic money tree. Instead, low inflation, interest rates and yields allow the government to borrow, and to then reduce debt to GDP gradually over time. This would avoid both tax increases and austerity.

Second is monetary and financial stability, including a new remit for the Bank of England based on money GDP. This would help guard against inflation in an upturn and weaker demand in a downturn. Also, while the City needs to be globally competitive it must help finance British companies better. Last year, the funding gap faced by the UK’s small and medium sized firms was a hefty £22 billion.

The third economic arrow is a supply-side agenda aimed at incentivising the private sector and helping it grow. The focus should be on lowering inequality, getting incentives right and boosting innovation, investment and infrastructure.

This crisis could herald a sea-change in how welive, work and travel. This merits delivering widespread broadband at a faster pace. It warrants a rethink of transport plans; after all the rail system has effectively been nationalised. Also, during the lockdown, almost unnoticed, Gatwick was given permission to turn its unused emergency runway into a second runway. Why?

A credible economic vision has yet to be outlined by this government. The good news is that the health and economic crisis provides a clear basis for doing so.

But delayed until the autumn..

British finance minister Rishi Sunak has decided to delay a major stimulus package until the autumn to see how the economy fares in the coronavirus fallout, the Financial Times reported on Friday.

Sunak will still announce some limited measures next month, but this would not be a “Budget or mini-Budget”, an ally of Sunak told the FT.

“We will be taking stock of the economic situation, and looking at if and where further support makes sense ahead of the more significant moments in the autumn,” the finance ministry said in response to the FT report.

Prime Minister Boris Johnson on May 27 promised that a post-coronavirus recovery package would be put before parliament. Sunak has also talked about the need to focus resources on national recovery.