Sabotaging the recovery

Sabotaging the recovery
By Mainly Macro
mainlymacro.blogspot.com
Tuesday, 7 July 2020
5 min
View Original

I wrote last week about how a premature easing of lockdown in the UK would cost many more lives. This post will be about how it is also likely to create a weak recovery where some businesses will go to the wall and many jobs will be lost.

A good starting point in thinking about the kind of recovery we could have is to think about synchronized holidays, like Christmas or the summer holiday in much of France. Most of the economy closes down for a few weeks, but starts up again without any long term harm done. You get a V shaped recovery, which we never notice because it gets seasonally adjusted out of the data.

A few months is not fundamentally different from a few weeks, if the government provides sufficient support to firms, the self employed and individuals? The absence of such support gives us the first reason why a recovery might not be V shaped. Yet the UK government’s support over the last few months has been reasonably good, albeit with some notable exceptions.

After a holiday involving a few weeks, consumers’ preferences will be unchanged. Is the same true of a pandemic? If the virus has disappeared for good, or immunity against the virus is complete (with a vaccine, say), there seems no compelling reason to believe otherwise, although overseas travel will require the virus to have disappeared in other countries as well. Perhaps some consumers might initially not believe the virus has disappeared, but this might be offset by other consumers spending more time on social consumption than normal in celebration that the pandemic has ended. In some sectors this second effect could even lead to a larger recovery than the initial recession.

The main reason a V shaped recovery is not going to happen in the UK is because the virus has not disappeared. Compared to other European countries the number of new infections remains high, and as a result many consumers will be understandably reluctant to resume their normal patterns of social consumption. If the government also withdraws support from social consumption sectors, this inevitably means firm closure and firm downsizing, leading to a large increase in unemployment. Restoring confidence in countries where the virus has largely disappeared will not be easy, but that task is much harder when the risks of catching the virus are non-negligible.

There is a further hurdle in the face of a recovery that this government has created. Whatever the new number of infections are, will consumers trust the government when they are told they should resume social consumption? Almost everything the government has done to combat the virus has been a failure. The latest is withholding until recently Pillar 2 data from local authorities and the public. When people are told it’s their civic duty to resume social consumption, rather than simply being told what the risks of doing so are, they are bound to be suspicious of the government’s motives, and who can blame them.

The continuing high level of infections and lack of trust mean that many consumers will not resume social consumption. This poll shows that people’s perception of the risk from the virus has recently increased. This is the inevitable result of prioritising the economy rather than getting new infection numbers right down.

So what can be done? The government is not going to drive new infections down much lower by opening up pubs! It is not going to get trust back anytime soon. Can the Chancellor encourage reluctant consumers to resume social consumption by some means? A general fiscal stimulus, in the form of a tax cut, is unlikely to do much in this respect, because most of it will be saved. Furthermore what is spent is likely to go into sectors that can make a reasonable recovery, like clothing and consumer durables. Other forms of standard fiscal stimulus, including a VAT cut, are unlikely to avoid large scale redundancies from social consumption sectors.

The Resolution Foundation has a more interesting proposal, which is to give vouchers that are time limited that can be spent in vulnerable social consumption sectors (and which are switched off if a second wave appears and we have to go back into lockdown). This is the kind of sector specific stimulus we need. Another possibility would be a temporary cut in VAT on social consumption goods.

Even with such schemes, we are unlikely to see a full rebound in social consumption for some months to come. In a few specific areas social distancing means venues will inevitably be operating at a loss. Subsidies of various kinds to keep firms going and to avoid as far as possible large scale redundancies will be necessary.

While a general fiscal stimulus will not solve sector specific problems, if interest rates remain at their lower bound there is strong a case for economy wide fiscal support. Aggregate demand may remain low as investment is depressed by Brexit and uncertainty about a second wave. If the Chancellor is looking at ideas for what this stimulus could be, or more generally in how to meet our climate change goals, here is a report from NEF.

However unemployment will inevitably remain too high. As Paul Gregg notes, this prolonged recession will be much more unemployment intensive than the recession after the Global Financial Crisis. But just as fiscal stimulus can be regarded as an opportunity, so job losses can be seen as a chance to reskill the UK workforce, along the lines suggested by Jonathan Portes and Tony Wilson. However some of those working in areas where social consumption is low because of the pandemic may wish to remain in those sectors once demand picks up because new infections decline significantly or a vaccine is developed. It is worth noting that a Job Guarantee, if such a scheme existed, would provide an excellent chance for these people to do something useful in this enforced break in their careers.

These are all policies that will have much more work to do because this government made yet another error in their handling of this pandemic, which was to ease the lockdown while the number of new infections was still quite high. Most experts, and indeed most academic economists, understood it would be an error before it happened. It is an error that could sabotage what might have been something close to a V shaped recovery.