The coronavirus crisis may lead to a whole new way of economic thinking
Rishi Sunak says the measures he has announced to support the economy are without precedent in peacetime – and he’s right. Never before has the British state agreed to pay the wages of those at risk of losing their jobs. Never before has the government ordered the pubs to shut.
The chancellor is not the only one to see the struggle against the coronavirus pandemic as like a military operation. Boris Johnson sees this as the summer of 1940, with himself as Churchill.
Harking back to the second world war is inevitable given how strongly influenced Britain is by an event that ended 75 years ago, but there are some key differences.
The main one is that between 1939 and 1945 the economy was running at full tilt. It took the fight against Hitler finally to eradicate the high unemployment of the 1920s and 1930s. Britain had full employment and would have had rising inflation had it not been for rationing and price controls.
Contrast that with today. As yet, there are only estimates of the likely hit to the economy from Covid-19, but they range from very bad to catastrophic. The consultancy Capital Economics has estimated a 15% drop in output in the second quarter of 2020 but said it could be 20%.
Instead of production being scaled up, it is being scaled back. There are a few sectors where activity is rising – food production and healthcare – but those increases will be dwarfed by the lost output elsewhere. Around one-third of workers in the UK have jobs in the sectors most affected by the pandemic: retail, restaurants, bars, clubs, hotels, cinemas, theatres, gyms, sport – and they are all closed for business for months to come. This is not 1940, with factories working round the clock: it is more like a neutron-bomb attack that targets the people but leaves the buildings unscathed.
Another big difference is that unlike in 1940 it is not just a question of holding on until the Americans get involved. The US was never at threat of being invaded and was able to put its enormous economy on a war footing.
But the US is not immune from the coronavirus. On the contrary, it is going to suffer grievously from it: in part because Donald Trump was in denial about the risks; in part because the public healthcare system is so poor; and in part because the social safety net is so weak. America, due to its size and its place at the heart of the global financial system, will still have a vital role to play in any recovery. But the number of people losing their jobs as large parts of the economy go into hibernation is going to be colossal. America is currently where it was in 1930, when the dole queues were lengthening after the Wall Street crash, rather than in its much more robust state a decade later.
Those seeking parallels with the second world war need to broaden their perspective. One way of looking at today’s events is to see the 15 years before the financial crisis of 2007-08 as the equivalent of the years leading up to the first world war. Although this seemed a peaceful, prosperous period – the so-called long Edwardian summer – things were not quite as benign as they seemed. The global balance of power was changing; there was political unrest and there was growing class conflict. The first few years of the 21st century – marked by debt-fueled growth and financial market anarchy were just as delusional.
The mood of complacency was shattered by the financial crisis, just as it had been by the outbreak of war in 1914. In both cases, winning the struggle proved harder than expected and in both cases there was an attempt once victory had been declared to go back to business as usual: balanced budgets and a return to the Gold Standard in the 1920s; balanced budgets, debt-driven growth and financial speculation in the 2010s.
But turning the clock back proved impossible. Political discontent and anger grew as economies struggled. Trust in the democratic process frayed. There was little international co-operation.
Then, around a decade and a half later in both cases, there was a second shock: the collapse of the financial bubble in 1929; the Covid-19 pandemic in 2020. If history is any guide, it is the second shock that makes fundamental change possible.
Four big things happened in the 1930s and 1940s. Firstly, the old economics was abandoned. Countries came off the Gold Standard and states began to pump-prime growth, albeit timidly in most cases. Maynard Keynes’s general theory inspired an entire generation of economists and policymakers.
Secondly, there was an attempt to inject equity into economies through enhanced power for trade unions, more progressive taxation and the expansion of welfare states.
Thirdly, work began early on this progressive agenda. In Britain, the Beveridge report, the Butler education act and the white paper on employment all emerged while the the second world war was still raging.
Finally, there were attempts to build a new international architecture – through the creation of the United Nations, the International Monetary Fund and the World Bank – that would avoid the policy fragmentation of the 1930s.
How close are we to a repeat of all this? Just consider, a model that has failed not once but twice has been ditched. Governments recognise they have to support their citizens through this. New ideas – such as universal basic income – are being championed. And without multilateral cooperation there will be no victory against Covid-19. Sunak is right. This is different, perhaps more fundamentally so than he thinks.