Just read this; our thinking is aligned:
Coronavirus may end up reinvigorating the economy, not destroying it
26 March 2020 • 8:00pm
Rishi Sunak, the Chancellor, has announced wide ranging measures to support wages during the crisis, including compensation for the self-employed
The cure is worse than the disease; saving Covid-19 victims comes at too high an economic price and may cost lives elsewhere; policymakers have succumbed to mass hysteria and hugely overreacted, and we would have been better off letting the epidemic run riot.
This is an idea that has gained a lot of traction in recent days. Despite its faintly distasteful connotations – with the old and vulnerable sacrificed so that the young and healthy can thrive – I even flirted with it myself as the inevitability of the current lockdown loomed into sight.
But it is also a flawed way of thinking about the economics of the pandemic. Dig down, and you find plenty of reasons to think that putting the economy into a medically induced coma, provided it doesn’t go on for too long – which it can’t, because public toleration is bound to be time limited – was not just unavoidable, but could ultimately prove powerfully beneficial.
After a decade of economic torpor, in which productivity and wages have gone nowhere, the cleansing impact of today’s cure might indeed be just what the doctor ordered. Here’s why.
Let’s start with the counterfactual. We cannot for now know what the path not taken would have looked like. But we can have a reasonable guess. The economy was already falling off a cliff from well before the lockdown came into force. Looking at the data emerging from Italy, individuals had taken matters into their own hands and radically changed their behaviour by not travelling, going to restaurants and socialising. Companies were cutting back accordingly.
A deep recession, requiring massive monetary and fiscal intervention, had become inevitable regardless of any imposed lockdown. Under the herd immunity approach, this self feeding hiatus could have gone on for a long time, and would undoubtedly have been deepened by images of an overwhelmed healthcare system struggling to cope with the surge of an unchecked epidemic.
That said, there is a perfectly valid discussion to be had over whether measures aimed at saving lives are in practice doing more harm than good.
Sweden, for instance, has adopted a strategy that looks very similar to the more laissez faire approach the UK Government initially pursued before, on seeing the Italian experience, going into lockdown.
It’ll be interesting to see whether this is politically sustainable if Sweden’s death toll rises.
In a paper published this week, Philip Thomas, professor of risk management at Bristol University, argues that “protection schemes should not be put in place if their costs are large enough to cause the nation’s economic output to fall so significantly that it causes more loss of life than if the scheme had never been implemented”.
Thomas calculates this tipping point as being an economic contraction of 6.4 per cent or more, roughly similar to the downturn that occurred during the financial crisis. The Government needs to institute reasonable countermeasures against Covid-19, Thomas argues, but “it should also attempt to restrict the coming recession to not much worse than the 2007-2009 financial crash”.
People taking cover in an underground station from air raids during World War Two. Despite its devastating effects, the war finally managed to banish the depression economics of the Thirties
The flaw in this assessment is that it depends on the assumption that a prolonged recession would cause
more lives to be lost than are saved via the lockdown approach. This is a deeply questionable idea for which there is very little evidence. To the contrary, it may be that recessions improve life expectancy because of the extra welfare they give rise to.
Furthermore, what we are seeing is a deliberately induced recession, rather than one caused by the excesses of the business cycle. Provided that it is time limited, and steps are taken – as they have been almost everywhere – to prevent long term damage to supply, the economy will bounce back sharply once the restrictions are lifted.
In the meantime, we will have seen a massive injection of Government and central bank money into the economy. The costs to the public purse may look staggeringly high, yet they are in truth of no great significance in the long term and for now perfectly manageable – again assuming the lockdown persists for only as long as it takes for
the NHS to achieve the capacity it needs to cope.
Once the economy comes back, some of this new money will unwind quite quickly, but a lot of it will persist, turbo-charging economic activity further out. The deflationary tendencies of the past decade will be washed away in the flood. It arguably took the Second World War finally to banish the depression economics of the 1930s. Ironically, that might be the coronavirus’s lasting effect too. The challenge might rapidly become one of containing the economic expansion, rather than supporting it.
A short, sharp recession might also achieve its natural Darwinian purpose of clearing out zombified deadwood from the economy. One of the financial crisis's most malign legacies – widespread debt forbearance – would finally be removed, thereby freeing up capital for innovation, revived productivity growth and new industries.
In the depths of a crisis, it is hard to see the sunlit uplands that lie beyond. But if we choose well in
our policy response, they ought to be with us soon enough.
