Where to start when stimulus stops

Community capitalism for a post-Covid recovery

[For those without the time for my customary preamble, please jump to The Covid-19 Recovery Bond section, and please leave your thoughts] 

I’m not deliberately contrarian, it just seems to come naturally. Thus, as the Covid-19 crisis encourages many of my friends to (quite logically) re-engage with such concepts as a universal basic income, I find myself gravitating towards a weirdly Reaganite, even Thatcherite view of what makes societies work. Just as the world gratefully welcomes ‘big government’ back into their lives to beat back the animal spirits of creative destruction, I am arriving at the unexpected conclusion that the cornerstone of sustainable economic growth and social progress is the self-reliance and industry of individual households. Bizarre, I know.

Yet I can’t help but observe how the swift economic deterioration caused by the Covid-19 pandemic highlights the extent to which the household has fallen out of the calculus of modern economic policy, despite overtures to the contrary by any one political party or another. What the contraction and the stimulus both demonstrate is the extent to which the primary human actors in our economy are consumers, employees and employers. Households, it seems, are just places where these people live.

Back in school, when the circular flow of income model was first explained to us, the household played a definitive role in economic theory, not purely as a proxy for ‘consumers’ but as an independent domain that had a particularly annoying and universal habit – saving. I don’t remember getting any explanation for why households saved because I think it was implicit, households were the point where circular flow of income slowed down, where money ‘leaked’ out of the economy to build a reservoir for times of drought - to afford self-reliance. It was via this tension between leakage and injection that economies were supposed to muddle their way to that golden mean that nobody seems to talk about any more: equilibrium.

This crisis has shown that the household is not really a sovereign domain of the economy any more, and it shows just how little saving is expected of those with a capacity to do so. The immediacy with which many governments looked to guarantee wages across much of the economy shows that income no longer slows down at the household level, it speeds up, it speeds up so quickly that people were talking about a housing crisis, followed by a banking crisis, followed by a depression within days of global social isolation measures being put into effect. I’m almost 40 now, and for all the years that I have been economically active I can’t recall a single institution urging me to save. The only value that I can recall being placed on savings is as a means of accruing a house deposit to qualify for a large amount of debt. Beyond that the idea of savings as a hedge against an uncertain future is almost entirely absent from normative economic logic. And while households cannot be reasonably expected to plan for, let alone significantly mitigate the economic effects of something like Covid-19, it becomes increasingly hard to imagine any macroeconomic shock to which households would not be immediately vulnerable. Were someone to invent a circular flow of income model for the modern age they might be forgiven for thinking that households saved in aggregate through the payment of taxes to be amassed by governments to be reinjected back into the economy in times of crisis. Maggie Thatcher would be rolling in her grave.

So when this is all over surely – surely – the intuitive response of households in a position to do so (even if not formally encouraged by governments) will be to save more, regardless of the consequences to aggregate demand. Indeed, given that governments have thrown the entire fiscal sink at this economic contraction, households must expect that they will have to face more of the next crisis – and there will be a next crisis – on their own.

That’s easy to say, but the obvious question is how do we expect them to save in the post-Covid economy when they couldn’t in the pre-Covid one? Indeed. So unless we recognise and address the problems undermining the resilience of households before the crisis we stand no chance of increasing their resilience post-Crisis.

Let them eat debt

In the years building up to the current crisis one of the purported ‘riddles’ of many advanced economies (particularly here in Australia) was wage stagnation, however it was never really a riddle at all. The primary reason for wage stagnation is also readily explained in high school economics textbooks, it is a product of greater competition between labour than for labour. The root cause of this tension is also no riddle, indeed The Economist has been sounding the alarm on this for years. It is the concentration of advanced economies into a smaller number of powerful firms, a phenomenon that was exacerbated by the response to the last global financial crisis and appears about to be super-charged by this one.

To a certain extent the tendency of deregulated economies to form oligopolies is automatic, but our response to recent crises has made a virtue of firms being too big to fail. In the context of Covid-19, while the swift and significant measures, such as wage guarantees, are necessary and laudable, they will only further entrench the position of very large, systemically important firms. Indeed, unaddressed I fear that the long run consequence of the current mix of Covid-19 response packages will be the overt concentration, if not outright bureaucratisation of advanced economies, where new business initiation dwindles and giant firms become pseudo extensions of the State.

Ironically, it was the failure of Thatcher and Reagan to effectively discriminate between the merits of business and big business that set in train this concentration in the early Eighties, and we have not had any meaningful competition reform since that time. That is because every crisis that passes further suppresses the political energy for structural reform, and the public will to compete with incumbents. But we have kicked this can down the road long enough. For all their manifold flaws, Thatcher and Reagan were at least right in their view that the thing that makes liberal democracy + capitalism successful over the long term is its ability to incubate new ideas to compete with the old ones. At least that’s what they used to tell Gorbachev, and in the 80s he may have agreed with them. 

Back then, we didn’t think it was the level of debt-fueled aggregate demand that underwrote the post-War success of Western economies. We thought it was the fact that our ideas grew outwards from the middle, that they were not doled out from the top down in grand five-year plans. Let me say again, the current mode of government interventions to steer economies through the worst of Covid-19 economic contraction are appropriate and crucial. However, if they are not followed by measures to improve economic security and entrepreneurship at the household level, they will do nothing to improve the resilience of our economies ahead of the next great shock.

If we hope to find a stable footing for genuine restorative growth once stimulus is exhausted, if we want to stop oscillating between unbounded optimism and existential crisis it will be old-fashioned household economics upon which this will be based. That is where economic growth finds its purpose, in the pursuit of self-sufficiency and industry, not in debt-fuelled consumerism, executive share options and financial engineering.

And thus, in my humble and unsolicited opinion, two key imperatives for the post-Covid recovery become clear:

1.      Increasing household savings; while

2.      Increasing the ability and willingness of households to participate in economic diversification

These two imperatives might seem contradictory, but while savings are a way to de-risk initially, over time they become a means of taking risk, they allow households the ability to exit one from of income in order to build up another. Certainly, these activities will initially reduce aggregate demand with clear consequences for aggregate growth. It will require increasing the labour share of income relative to capital, while encouraging labour to spend less of what they earn, these ideas are anathema to the popular prescriptions of pre-Covid economics. But the challenge before our leaders and economic administrators now will be switching to an economic model that is more interested in the quality of growth than the quantity. This will not be easy, but it is necessary and indeed it may prove a fundamental turning point in the path towards a practical model of Sustainable Development.

Ok, that’s it for the monologue, now let me put to you one idea for how some households can play a more active role in buffering government stimulus while contributing to the overall cause of restoring confidence for small business origination in the post-Covid era. Introducing the Covid Recovery Bond.

The Covid-19 Recovery Bond

While the amount of government support directed to averting a Covid-19 economic crisis here (Australia) and around the world is vast, it still may not be enough. Furthermore, it is necessarily focused on the current form of the economy and more targeted help will be needed to put economies on a more resilient footing into the medium term. This is particularly the case for the small to medium enterprise sector which will need a range of measures to encourage new business origination in light of the risks and consequences made evident by Covid-19. While the funds potentially raised from the Covid Recovery Bond (CRB) would be a drop in the ocean of current stimulus measures, it might still play a meaningful role in mobilising community wealth towards immediate medical needs and in supporting the recovery of the small to medium business sector upon which all healthy economies are built. 

I have dot pointed the below for ease of consumption. Note, this is not intended to be a manual on how the bonds would work, it is just intended to provide enough information to collect challenge and contribution.

How would it work?

• A statutory authority (or similar) would be set up to issue and manage the bonds. Its board will comprise business and community leaders from all disciplines
• CRBs (much like the War Bonds of old), would be purchased by the general public, commensurate with their capacity to do so. The interest coupon and the principal would be underwritten by the Federal (or perhaps State) Government, at, or perhaps slightly above, the current cash rate
• Bond would have a maturity dates of between 1 and 3 years, the staggered maturity will allow the government to stagger the fiscal commitment over that period. Not all bonds will be redeemed at maturity, bond holders will have the option to roll them over for a further term, particularly if they have purchased them as a legacy for their children

The proceeds from the bond purchases would have two purposes:

• Funding critical medical services in the event that they are still needed – genuine war effort stuff; with any surplus funds used to:
• Capitalising a community owned finance institution chartered to:
• Finance small to medium enterprises
• Finance certain social services that the government can no longer finance which have a net benefit to society – think of it a bit like Private Equity, but instead it is ‘Public Equity’, where instead of realising your investment through an IPO, the investment is realised when the government ‘purchases back’ the social service when it has the money to do so
• Direct funding to crucial not-for-profits while community donations dry up

Why the focus on small to medium enterprises?

• Even with government-backed low-interest loans, the disincentives for small and medium businesses to take the risk of business initiation will be immense. However, CRB-based financing is not intended to be another layer of debt. It will work in the same way as the Australian Higher Education Contribution Scheme, in that beneficiaries would only be responsible for returning the principle, and then some interest, if and when a certain benchmark of profitability had been reached. This will substantially de-risk new business initiation and give people more confidence to hire ahead of the curve

Who would qualify for CRB finance?

• Finance would be available to all people who have lost their business or income from the Covid-contraction, to restart their businesses or to establish new businesses, these businesses would be required to hire at least one other unemployed person
• Not-for-profits, and de-funded government initiatives

Aren’t we supposed to be spending any excess money now to stimulate the economy?

• Yes, but a) this is a supply shock as well as a demand shock and people may not have a wealth of options to which to direct their expendable income
• CRBs offer something of an honesty system for those households who do receive direct government transfers (‘helicopter money’) who don’t really need it. E.g. if I am in a relatively secure financial position but still receive $2000 from the government because it is simpler for the government to give everyone money rather than means test it, and this $2000 is not enough to materially change my spending habits, I would return this to the community via a CRB

Why would anyone have comfort that the money is being directed to worthy businesses?

• The CRB Bond would operate with an independent board and be independently audited
• Applicants would be subject to due diligence, and while possibly falling outside the lending criteria of commercial banks they will still need to contain a minimum level of merit from a business plan perspective

Why would anyone part with cash at a time like this?

• Patriotism, civic duty, compassion
• I sense that most people want to play their part in Covid-recovery. Just as the purchase of War Bonds was a great source of civic pride, so might this be
• Some investors are currently crystallising their losses in the stock market and ending up with cash looking for a home, some of this can be directed into CRBs with a guaranteed return
• The interest earnings could be tax free, also five percent of the face value of the bond could be tax deductable

So, why not?

• Precisely. Even if this failed to amass a meaningful corpus for the purposes of capitalising a community finance organisation it will still amass funds that can be shared with the needy. Any success beyond that will go a long way to signalling that capitalism does not need to lurch from unbounded optimism to existential crisis, but rather that it can be marshalled by the people, for the people, in times of great need. That, surely, is a point worth proving at a time like this.