In this exceptional crisis – akin to a war – the state has no choice but to become an insurer of last resort
The war against the coronavirus is primarily medical, but also increasingly economic. The UK is now in the midst of its worst recession in living memory: the collapse in output has been sharper than during the credit crunch, the ERM crisis, the recession of 1982 or the turmoil of the Seventies.
GDP could fall by a tenth and perhaps by 15 per cent, if only temporarily. Millions are about to lose their jobs, and tens of thousands will have been laid off by the end of the week. Entire sectors of the economy are imploding, with their revenues collapsing by up to 100 per cent.
Rishi Sunak, the Chancellor, should be congratulated for having produced such a comprehensive package of measures so quickly, but we need even more and we need it fast. Every day matters. This is not your usual recession: it was not caused by malinvestment, over-lending, an oil shock or a sudden weakening of demand. It cannot be cured by a Keynesian or monetarist or Austrian recipe: bolstering demand now would achieve nothing in a state of lockdown, and the last thing we need is mass liquidations of healthy firms.
This recession is due to a unique supply-side and liquidity shock caused by the Government’s – entirely right and proper – decision to shut down much of the economy to reduce social contact and save tens or hundreds of thousands of lives. The parallel with a defensive, total war is stark: if the recession is allowed to run its course, huge swathes of Britain’s physical, financial and human capital could be destroyed, for almost random reasons.
Ordinary economic cycles can have a rejuvenating effect: they trigger creative destruction which shuts down bad investments, liquidates inefficient firms and reallocates resources to growth industries. Lehman Brothers deserved to go bust. But not this time: there is nothing cleansing about this recession. There is nothing creative about the nihilistic destruction it is wreaking.
The state must therefore become an insurer of last resort: it needs to cushion the blow and compensate for the shutdown. Sunak needs to put the economy in deep freeze, mothballing as much of it as possible, before freeing it up as soon as it is safe for people to start working again. He needs to think carefully how he does this, despite the lack of time: the aim needs to be to preserve the bulk of our economic and social model, not to permanently nationalise it in a way that cripples our economic performance and our competitiveness for decades to come. Grants are better than nationalisation, and subsidising wages and one-off universal cash payments are better than creating entire new benefits.
So what should he do next? He must forfeit more taxes: he has already cancelled one year’s worth of business rates for many companies, but now needs to do a lot more. There should be, for starters, a three-month moratorium on paying a range of taxes, including employers’ National Insurance Contributions and VAT payments collected by firms.
Next, he should freeze all or almost all debt repayments: some action has already been taken on mortgages but all loans should be extended by three months, and the Government should reimburse the lenders. Anybody who rents and is in trouble should be paid a subsidy for the next three months. Some sectors, such as airlines, should be rescued directly, but bondholders and shareholders should share the pain. The Bank of England’s lending scheme will only be open to investment grade firms: another scheme must be found for the rest.
The greatest subsidy should be reserved for wages: any company that wants to should be given a cash grant worth 75-80 per cent of its wage bill, as long as it agrees to no net job losses during that time and some other restrictions. This could be achieved by using HMRC data and perhaps by paying negative National Insurance Contributions. The self-employed should also be given cash subsidies based on their previous year’s income.
This will cost a fortune, but the whole point of practicing fiscal conservatism during good times is to be able to splash out when a real crisis hits. The budget deficit reached 13.6 per cent of GDP in 1939-40 and then surged to 26.5 per cent by 1940-41, despite crippling taxes and massive state-backed production. It stayed at over 20 per cent for the duration of the war, and sent the national debt sky-rocketing to unsustainable levels.
I expect the measures I am advocating may take the deficit to a similar level, but for one year only, sending the national debt to around 100-105 per cent of GDP. The Bank of England will need to stand behind the Government and potentially purchase gilts as they are issued: in other words, in extremis, to print money.
This usually suicidal policy cannot be kept going for long without ruining a nation – and hopefully the markets will buy the gilts – but it is the least bad option. Traders know something like this is on the cards, which is why the value of the pound has crashed.
So how, as a libertarian who believes that the state should be much smaller, can I justify any of this? None of my views have changed: I still think that as much of society as possible should be organised around markets, sound money, families and voluntary action.
But the Government has a role, not least in enforcing law and order, even in normal times, and it must take the lead during genuine emergencies, such as wars, natural disasters and pandemics. Classical liberals such as Friedrich Hayek or Milton Friedman were fully signed up to the idea of the state’s emergency role.
There is a risk that some of the measures shift the country permanently to the Left, as the Second World War did. But this is far from guaranteed if the right policies are adopted, and the alternative – not doing enough – would be callous, immoral and lead to an even greater political calamity. Walter Scheidel, an American economist, explains in The Great Leveller that only four types of events throughout history end up dislocating and impoverishing society to an extreme degree: total war, violent revolutions, the collapse of states, and last, but not least, epidemics.
Our society is at war on two fronts: medical and economic. The Government needs to give all that it has to stave off Armageddon.