Exiting the economic shock Top of the Charts 10 April 2020 Torsten Bell Morning all, It’s been another week of massive news bringing with it important realisations – the Queen reminding us all she’s a legend, our worries about our Prime Minister reiterating that this virus is NOT the flu, and the Labour Party realising that being a serious opposition during a national crisis might be the way to go. But the main realisation spreading across the country is that this lockdown, and the economic and social costs it brings, are here to stay. So, this week’s reads focus on the big economic policy questions we face – from how to think about the nature of this shock, to how to exit it, and how to pay for it. We’ll be publishing our own take on what this all means for economic policy next Thursday, and hosting an event (web-based, of course) to explore these issues further. Hope you enjoy the weirdest Easter weekend since the very first one… Torsten Chief Executive Resolution Foundation PS. Thanks for all the votes last week. It turns out you (well 29.9 percent of you) thought the chart revealing that benefit cuts had reduced the incomes of the poorest fifth by over 10 per cent was the most important. Fair enough. Set our youth free. Now we’re not just including this first one because it’d cover a large chunk of the RF team… but a new article makes a concrete proposal for how we start winding down the current lockdown: ‘release’ the 4.2m people aged 20 to 30 who do not live with their parents. The authors’ argument is three-fold – they are less at risk from the virus, less likely to spread it to those who are more so, and most economically damaged from the current shutdown. I’ll leave the epidemiologists to debate the health side of things, but it’s certainly true that the young are losing their jobs fastest and are most at risk of large wage cuts. Lifting lockdown. Obviously easing the lockdown is only one part of the exit strategy from this mess. More broadly we need our economic and health strategies to be integrated. For a broader discussion read the Tony Blair Institute’s thinking about the options we face. They aren’t very keen on two much-discussed options – rolling shutdowns until a vaccine solves this for us will be ruinous economically, while operating a form of freedom pass for those that have had the virus risks huge controversy if it privileges a few during a period of high unemployment. The paper says combining app-based contact tracing and testing is the most plausible option. This is broadly what Singapore is trying (albeit with a recently stepped-up lockdown of their own). Shocking shock. Much of the policy debate focuses on the fact that we’re seeing a big supply shock (we’re shutting down chunks of our economy), with some concluding as a result that there’s nothing to be done as supporting demand will just create inflation. In reality there are supply and demand falls happening (spending power is falling too as firms shut). A great new paper adds two important elements to this debate, both driven by the important insight that sectors are affected very differently by this crisis. First, the demand shock may actually be bigger than the supply shock – for example people even in sectors not affected by the shutdown saving more as economic fear rises. Second, the standard broad-based fiscal policy is less useful in this recession – the normal feedback loops of giving people extra cash are constrained if they can’t be spent in the sectors that most need supporting. This doesn’t mean fiscal policy shouldn’t be active – it just needs to targeted at those people and sectors being hit hard. This is the exact logic behind our arguments for the Job Retention Scheme. Paying for Covid-19. As well as devising policies to combat the crisis, policy makers also need to work out how to pay for them. In most of the world the answer is significantly higher government debt – as Olivier Blanchard discussed in this webinar. If central banks need to facilitate that by offering cash flow support or directly buying government debt because private sector appetite is insufficient, so be it (temporarily). The Treasury and Bank of England took a step in that direction earlier today. But within the Eurozone things are less straightforward. Without their own central banks standing behind them, questions of what governments like Italy can or cannot afford are becoming much more problematic. Basically, if a Eurozone member can’t afford to borrow to pay for crisis spending that everyone agrees is needed, then the Eurozone has to decide whether it wants shared debt, shared spending or a political crisis. This great piece argues that we need all of the above (apart from the political crisis bit), and last night European finance ministers looked to have followed that advice. A whole new world. Where are we going when this is all over? There’s lots of grand futurology predicting huge changes out there but the counterargument, set out by Dani Rodrik here, is that the handling of this crisis is actually reinforcing existing pre-crisis trends, from authoritarianism in Hungary to damaging presidential leadership in the US. He goes on to argue that the lasting crisis impact will be to reinforce our (already polarised) worldviews with lefties more convinced of the need for a big state and the right’s China hostility ramped up. He goes on to argue that the crisis will reinforce our worldviews as we go forward too. That would show a remarkable lack of imagination on all our parts. If that’s not enough future gazing for you, RF Economist Hannah Slaughter and I set out a more labour market-focused version earlier this week. Chart of the Week This week’s chart, is a tale of two policies – one good, one bad – rubbing up against each other to cause serious problems for those most in need during this crisis. The good guy in this tale is the Government’s recent £7 billion boost to benefits. This safety net is what will support millions of families during this crisis, and in particular private renters who are most exposed to not being able to pay their housing costs if their income falls. The bad guy is the benefit cap – which limits the amount of support an out-of-work family can receive. This cap was previously only really biting in a minority of the highest rent areas. But the recent increases in generosity mean it’s now having a much bigger impact: couples with two children renting a typical three-bedroom home will now fall foul of the cap in 107 out of 152 local areas. The result is that those falling out of work will not be able to get the help they need, as we set out in our latest Housing Outlook today. Even if you thought this policy was a good idea in normal times, it certainly isn’t during this crisis.