ECONOMIC OUTLOOK, FOR ECONOMISTS

Ask ten economists a question and you get eleven different answers. As a former economist I thought I would bring myself off the bench and make a few comments about the current situation, possibly the most interesting for 100 years. I write this knowing that most economic predictions by economists are completely wrong. So this probably is too.

Economics is about scarcity, and to be honest, for most of us in business in recent years, economics has not been of much interest, as most things were not scarce. But some things are about to get scarce. I will confine this essay to the “short run”, the next one to two years, as we all know what Keynes thought of the long run. I believe historians will look back at 2020 as the start of a new order. Covid-19 will be an initiating footnote (let’s hope), like we remember Archduke Ferdinand in the opening scene of The Great War.

We are living in strange times. The Government publically estimates economic activity is 30%-35% down. My empirical research in Norfolk is that it is nearer 80% down. We have never had a period before with so little economic activity. While this has been good for the planet, some families, and some communities, it is not sustainable. The State is paying 7m people, one quarter of the private sector work force, to stay at home, and bizarrely, not allowing them to work while claiming support. As lockdown is eased and we go back to work, what sort of economy will we go back to?

I am in Schwab’s camp, the UN adviser who suggested that we are going through the fourth industrial revolution. I call it the “Information, Communications and Entertainment Technology” Revolution (ICE Tech). Estimates pre-2020 were that we were 10 years through a 30-year revolution which will completely change our economy, communities and life. My contention is that Covid- 19, or more accurately, governments’ responses to it, will act as the tipping or acceleration point, for many fundamental and systemic changes.

Looking at the big picture we have lived through a neo liberal political time where globalisation has shaped the world economy. Is globalisation about to end? Well yes, and no. Post Covid-19, I can see a world with more globalisation. Amazon will do well, as will the international bankers. I can also see one where there is a return to more local economies, a new localism. I now get my tea ordered on line, grown in India, shipped by an international company, and delivered to my door, from a local merchant. The new economic order will hit all countries, but not all equally. The developing nations will be hit disproportionately, and the Sustainable Development Goals, the 17 SDGs, will be put back decades. The risk is, that the developed nations will abandon the developing nations as the former turn inward.

So what will this new order look like? The opening salvo in UK will include us entering a period of high unemployment, possible the highest ever seen. Talk will soon move from recession to depression. Government might be faced with a choice between a slide into depression or a slide into bankruptcy, as it steps in further, to save industries and jobs. They might mis-read the situation as recessionary unemployment, as opposed to structural unemployment. The reality is, that many businesses will not be viable in the new world and many firms and whole industries will be unsustainable, (ceteris paribus). The best decision will be to let these firms and industries go, but I doubt Governments will be brave enough to do this. The good news will be that we will see unprecedented numbers of new industries and new opportunities given birth in this new economy.

Our success as a nation will depend upon the speed at which we can transition from the old to the new. I suspect that our own well-meaning government will step in but I hope they will not slow us down. We have seen unemployment already double from 1m to 2m since the start of the current crisis. I can say this, as I have been on the front line in the last few weeks; many companies will not be able afford to re-engage the staff they have furloughed. In the coming weeks expect mass redundancies to be declared. The best case is that unemployment will reach 3m, the worst case, it will go to 9m. The latter will be one in three of the private sector work force unemployed, the worst since the great depression of the 1920s. However there is some hidden good news in all this. Unlike the 1920s the workforce is more diversified, better educated, more agile, and with information technology you can set up and grow new businesses faster. So if we do go into a depression our capacity to get out of it fast will be high, assuming Government listens to real businesses and not the banks. It could unleash the greatest enterprise and start-up opportunity ever.

Government continues to measure unemployment as “those who are not employed”, ie those without a “full time” job. This measure will become meaningless. More people will be part-time, have zero hours contracts, portfolio working, caring, gigging, choosing not to work, multiple income streams, job sharing, and have more than one part-time job. Some through choice, others due to necessity. In the new world, over half the population will not have a job, but this will be OK. The headline figures hide the effect of the sharing economy, the green economy, the gig economy, and the black-market economy, all of which Britain leads the world in. While there will be more opportunity than ever before there will be stress for millions, as people lose their job, and find it hard to transition into the new work. Just like the great depression and the world wars, it will bring a lot a pain to us all, but those that make it through, will be better off on the other side. The NHS was born from World War 2 and universal suffrage, ‘votes for all’, came from World War One. But this transition will present Government with a massive problem, a reducing tax take.

So where does that leave fiscal policy? Huge borrowings will be racked up as a gap will open as G (Government Spending) mainly supporting people and businesses, plus stimulus measures, outstrips T (Taxation). The first thing that Government in 21/22 will do is to hit G and T hard. I.e. we can expect to see massive cut backs in Government spending and massive tax hikes, along with some increases in spending in targeted areas. But this will not be enough to close the gap. Some of these will be the old chestnuts of Income Tax, VAT, Corporation Tax, National Insurance, etc. Some of this tax increase will be visible and some will be done by stealth. Taxes alone will not be enough.

They will then consider structural changes such as radical attacks on G. For example (and I’m not advocating it) reduction in the number of state funded universities from 100 to 20, or ending free state education at 18, or 16? Maybe benefits will need to be scrapped and a universal basic income introduced? Even if they do this, this will not be enough, so they will turn to bringing in new taxes. My favourite would be the re-introduction of the beard tax from Elizabethan times, or the modern equivalent, a tattoo tax. Or better still, the windows tax, in effect a tax on wealth, as they try to claim back capital from those who have it. They might even have to consider taxing billionaires, footballers, foreign companies and those living in tax havens offshore! But even this might not be enough, so they will have to sell some of the nation’s assets. We don’t have any gold left, thanks to Gordon Brown, so we might sell land, or access. Maybe Scotland could be sold, to the SNP? More likely, is the charging for public services that had previously been free. For example you might get a free call centre phone call with your virtual doctor in India, but if you want a Zoom meeting with your own Doctor based in the UK, you will need to pay for it. Maybe state funding of the BBC will end, which probably overall would be a good thing. But then we would lose Match of the Day, Radio 4 and the world service, which would be a bad thing. I am not describing utopia here, but a scene with winners and losers. Maybe the better off will join the super-rich and buy their services in the global marketplace, e.g. Cars from Germany, Banking from Switzerland, Theatre from the UK, TV from Netflix/USA? Overall services will be maintained or improved for the wealthiest but they will be asked to make a bigger contribution to the national coffers.

So what about Monetary Policy? I am not sure that anyone has ever understood monetary policy, other than Milton Friedman, certainly no one has since the invention of QE (Quantitative Easing). QE might be a saviour since the crisis is affecting all countries, we might be able to write off debt while printing money, and as long as all nations do this, at agreed rates, we might be OK. We certainly won’t be able to use exchange rates and interest rates like in the good old days of Bretton Woods. If we have actually lent the money to ourselves, we might be able to write it off. That’s assumes we know who we are borrowing the money from? We had better ask the Bank of England, and when I was at school we were told, was a “public good”. Today it might be a private bank, in which case maybe we should sell it?

Governments might rely on international private business to help us. I suspect USA will choose this route. This will be the most efficient response, but will generate huge inequality. Other countries will choose state intervention, which will be very inefficient, and generate more inequality, but not as much inequality as with the earlier option. The best answer, and the opportunity we have, is that we might be able to find a new form of capitalism. A sort of “mixed economy” which balances private and public. In fact like the one we had before globalisation! My choice would be to stimulate local free enterprise, supported by local and national public services, and a bit of international global business. It would rebalance our economy to the centre, making it more mixed and less global-market-driven.

 We will get over Covid-19, but the real challenges will be economic. All countries are in this together, but not equally. Jobs will go, maybe most of them, but there will be more work than we have ever seen before. There will be huge pain, danger and challenge for us all, but massive benefits if we are nimble enough, and brave enough to grasp them. New leaders will emerge. This might be a tipping point to create a better world?

Nigel Cushion

Former Economist, in the 20th Century.

May 2020