Sorry for the lack of activity. I haven’t succumbed to Covid-19. I have just been exceptionally busy, not least with a house-move. And not just that: my Treasurer duties have been quite intense, and still are: I’m in the middle of an audit. I will recount my tale when things settle down a bit. Meanwhile it is my pleasure to publish this piece from John Medway.
A recent article in the Daily Mail raised the question of whether it might be better to accept a high death toll among the elderly from the coronavirus than to impose a huge financial burden on the younger generations by allowing major short-term disruption of the economy. Stephen Glover wrote (25 March 2020 ): “We have to ask ourselves a rather shocking question. Is it right that, in order to save the lives of mostly elderly people … the future lives of millions should be devastated?”
I must declare an interest here – I am elderly. To be fair to Glover, he doesn’t come down in favour of letting the elderly die off. He accepts an imperative to “throw the kitchen sink at the problem”. In any case, I’m going to leave aside the moral issue of balancing human lives against economic well-being. My view is that his prediction of long-lasting economic devastation from the coronavirus is simply bad economics. I don’t accept that we necessarily face years of austerity because of a generous approach to the temporary economic victims of the coronavirus.
The coronavirus episode will have some significant short- and medium-term economic effects. One is that resources are going to waste because workers are being made idle. This means that for a time, the economy will be smaller than normal and that on average we will be poorer for a short while. If the episode is prolonged and government support for businesses inadequate, there could be some lasting damage to the economy through premature retirements from the workforce, loss of skills and delays in training. These are real, medium-term effects but should be manageable. They should not mean that “the future lives of millions” will be “devastated”.
Glover’s main concern is not with short-term effects on the real economy – its ability to produce the goods and services we need or desire. It is rather with the sudden and huge surge in government expenditure, the loss of government revenue and rapid growth of government debt. “Let’s be in no doubt”, he writes, “that our country faces years of austerity that will almost certainly make the past decade look like a minor irritant.”
That would be true if an unreconstructed George Osborne were to return as Chancellor but I hope this is most unlikely. Thatcherites liked to portray the state and the country as a household whose expenditure was limited by its level of income or by its ability to borrow. This gave some cover for their aim of reducing the size of the state and passing as much of the public sector as possible to markets – an aim no doubt with a strong appeal to the sort of people who donate five- six- and seven-figure sums to the Conservative Party.
But a government does not always need to finance its deficit by borrowing. If, like the UK, it does not belong to a currency union, it can also do it, in co-operation with its central bank, by “printing” money – also known as “quantitative easing” or QE. The limit on the prudent printing of money is set (if not by ideology) by the perceived needs of the economy. If, once the coronavirus is beaten, the economy is held back by the inability of many firms and households to repay or finance their debts, an injection of liquidity through QE could solve the problem. This could be done through a generous welfare system and by offering cheap credit to basically sound firms in temporary financial difficulty.
It is, of course, tempting to think that governments can go on indefinitely financing their deficits through printing money. Some countries have done this, with disastrous results. The volume and speed at which money circulates needs to match the productive capacity of the economy or inflation results. As the economy recovers and nears its short-term limit, there may be a need to reduce rather than increase the money in circulation. This can be done by increasing interest rates, increasing taxes, reducing public expenditure or any combination of these. The important point here is that when printing money is an option, taxes are needed, not to pay for government expenditure, but to help keep the supply of money in the economy in line with productive capacity. In normal times, the notion that taxes are needed to “pay for” public expenditure is a useful approximation to the truth. But these are not normal times.
To a person who thinks in terms of public expenditure invariably needing to be paid for through taxation or other revenue, a sudden and enormous surge in government spending is deeply alarming. Glover’s alarm is perhaps because his perception of the nature of money, spending, borrowing and taxation is fundamentally different from mine.
There are big things to worry about in the British economy. One is the age imbalance in the population and the problem of caring for a growing elderly population – ironically, a problem that might be alleviated by a cull of the elderly population by the coronavirus if it gets truly out of control. The age imbalance is a problem in the real economy – the resources devoted to the care of elderly people. The problem is exacerbated by unfunded public-sector pension commitments, to which printing money will not be the answer.
More serious is the climate emergency. It is an emergency because global warming seems likely to prove catastrophic unless action is taken urgently to reduce carbon emissions. Governments generally show no sense of urgency and some (such as the US government) are in actual denial of the problem. The medium-term economic and social effects of dealing effectively with the climate emergency are likely to be far-reaching – for good or ill, depending on the attitude and skill with which governments and societies approach the problem. The price of failure could be one or more future generations of people for whom life is nasty, brutish and short.
Young people have plenty of things to worry about in the economy, society and environment that we oldies are bequeathing them. The long-term effect of the coronavirus should not be one of them.