No.139 - The World Goes into Intensive Care

Dear James,

The graphs are beginning to go in the right direction. Road transport is down by 95%, deaths are levelling off and new hospital admissions are flattening. Medically speaking, there are signs that the great lockdown is beginning to succeed. However, each day of falling graphs, is one more day when the economy is stalled. Eventually the government will have to face the huge ‘furlough’ bill and medical success will have to be traded off against the economic cost. Experts may have helped in the medical field, but that is a decision that only governments can take. 

Our crisis however, is merely a tiny part of the first stage of a worldwide restructuring. One day quite soon, global lockdowns will be relaxed, people will come off furlough and a new normality will emerge. The question is what will that new normality be? For economics, for politics, for society, for the individual, it is tempting to say that the world will change for ever. But will it? 

Our economy is in an ‘induced coma’. One reckoning is that between a fifth and a seventh of industry has shut down completely. Many will be enjoying their ‘furlough’ for the moment but absence from work while being paid 80% of your salary means that someone, somewhere will have to finance it. That someone is the UK taxpayer. Each day of this crisis adds massively to our national debt. We have however, have been through worse. In wars nations spend ‘whatever it takes’ to achieve their aims, dealing with the results later, ‘at their leisure’. Which is exactly what governments are doing now. Today Britain has a debt to GDP ratio of about of about 85%. After the First World War that ratio was a massive 140%. After that war we adopted an austerity programme in which we ran an annual budget surplus of 7% of GDP. This caused a slump in output which in 1928 remained lower than 1918 contributing to the depression of 1929-33. After World War Two, America had a similar debt to GDP ratio of 135% but this time, instead of austerity, they invested in infrastructure, the economy grew, the debt ratio fell and another depression was avoided. But then the world was a different place. America was supreme. In today’s multi-polar world, national debts are likely to be competitively reorganized and the results are hard to discern. One thing is certain though. There is no economic measure that will not also have huge personal, political and social impacts on all of us. The world has reached a turning point. To succeed It will require international coordination and prudent minds. Which does not describe the world as we presently know it. 

In the USA Donald Trump’s government is in chaos. As Coronavirus lays waste whole areas of his nation, he continues to say that the Federal Government has no part to play in this crisis. Private industry and the various states will solve the problem. Trump has refused to create a central bargaining agent, saying the federal government is “not a shipping clerk”. It is the ultimate expression of unregulated capitalism’s view of itself as the ‘best allocator of resources’. In 1980 President Reagan famously said, ‘Government is not the solution to a problem. Government is the problem’. How right he was! What the US needs now is not minimal government but proper and responsible government. Not the chaos of Donald Trump. 

But the impacts will not just be in the USA. China and Russia have their own shocks to deal with. In our part of the world, the EU has just failed its first test. Yesterday they announced a €500bn Coronavirus fund but failed to agree a Coronavirus Bond, financed by the whole EU. A true union, would be a union of shared debt. The Germans and Dutch do not like that but until they do, Europe will not be a true union. 

But back to our tiny part of the global crisis. The IFS said last week “If we get out of this with a fiscal deficit of much less than £200bn next year, we’ll be lucky.” It also warned of wide-scale job losses, deepening inequalities and more damage to the health of the nation. "The impacts of the coming economic downturn will be felt long after the social distancing measures come to an end". They can say that again!

James, Boris may now be out of the St. Thomas’ ICU, but the world is only just entering its own form of intensive care. Even if it survives, it will probably be a long and difficult recovery. Much good may come out of it but also much bad. In the words of another American, Al Jolson, one thing is for sure, “We ain’t seen nothing yet!”

King regards,

BH - Your Concerned Constituent