LONDON – Amid all the talk of when and how to end or reverse quantitative easing (QE), one question is almost never discussed: Why have central banks’ massive doses of bond purchases in Europe and the United States since 2009 had so little effect on the general price level?0

Between 2009 and 2019, the Bank of England injected £425 billion ($588 billion) – about 22.5% of the United Kingdom’s 2012 GDP – into the UK economy. This was aimed at pushing up inflation to the BOE’s mandated medium-term target of 2%, from a low of just 1.1% in 2009. But after ten years of QE, inflation was below its 2009 level, despite the fact that house and stock-market prices were booming, and GDP growth had not recovered to its pre-crisis trend rate.

Since the start of the COVID-19 pandemic in March 2020, the BOE has bought an additional £450 billion worth of UK government bonds, bringing the total to £875 billion, or 40% of current GDP. The effects on inflation and output of this second round of QE are yet to be felt, but asset prices have again increased markedly.

A plausible generalization is that increasing the quantity of money through QE gives a big temporary boost to the prices of housing and financial securities, thus greatly benefiting the holders of these assets. A small proportion of this increased wealth trickles through to the real economy, but most of it simply circulates within the financial system.

The standard Keynesian argument, derived from John Maynard Keynes’s General Theory, is that any economic collapse, whatever its cause, leads to a large increase in cash hoarding. Money flows into reserves, and saving goes up, while spending goes down. This is why Keynes argued that economic stimulus following a collapse should be carried out by fiscal rather than monetary policy. Government has to be the “spender of last resort” to ensure that new money is used on production instead of being hoarded.

But in his Treatise on Money, Keynes provided a more realistic account based on the “speculative demand for money.” During a sharp economic downturn, he argued, money is not necessarily hoarded, but flows from “industrial” to “financial” circulation. Money in industrial circulation supports the normal processes of producing output, but in financial circulation it is used for “the business of holding and exchanging existing titles to wealth, including stock exchange and money market transactions.” A depression is marked by a transfer of money from industrial to financial circulation – from investment to speculation.

So, the reason why QE has had hardly any effect on the general price level may be that a large part of the new money has fueled asset speculation, thus creating financial bubbles, while prices and output as a whole remained stable.

One implication of this is that QE generates its own boom-and-bust cycles. Unlike orthodox Keynesians, who believed that crises were brought on by some external shock, the economist Hyman Minsky thought that the economic system could generate shocks through its own internal dynamics. Bank lending, Minsky argued, goes through three degenerative stages, which he dubbed hedge, speculation, and Ponzi. At first, the borrower’s income needs to be sufficient to repay both the principal and interest on a loan. Then, it needs to be high enough to meet only the interest payments. And in the final stage, finance simply becomes a gamble that asset prices will rise enough to cover the lending. When the inevitable reversal of asset prices produces a crash, the increase in paper wealth vanishes, dragging down the real economy in its wake.

Minsky would thus view QE as an example of state-created financial instability. Today, there are already clear signs of mortgage-market excesses. UK house prices increased by 10.2% in the year to March 2021, the highest rate of growth since August 2007, while indices of overvaluation in the US housing market are “flashing bright red.” And an econometric study (so far unpublished) by Sandhya Krishnan of the Desai Academy of Economics in Mumbai shows no relationship between asset prices and goods prices in the UK and the US between 2000 and 2016.

So, it is hardly surprising that, in its February 2021 forecast, the BOE’s Monetary Policy Committee estimated that there was a one-third chance of UK inflation falling below 0% or rising above 4% in the next few years. This relatively wide range partly reflects uncertainty about the future course of the pandemic, but also a more basic uncertainty about the effects of QE itself.

In Margaret Atwood’s futuristic 2003 novel Oryx and Crake, HelthWyzer, a drug development center that manufactures premium-brand vitamin pills, inserts a virus randomly into its pills, hoping to profit from the sale of both the pills and the antidote it has developed for the virus. The best type of diseases “from a business point of view,” explains Crake, a mad scientist, “would be those that cause lingering illness […] the patient would either get well or die just before all of his or her money runs out. It’s a fine calculation.”

With QE, we have invented a wonder drug that cures the macroeconomic diseases it causes. That is why questions about the timing of its withdrawal are such “fine calculations.”

But the antidote is staring us in the face. First, governments must abandon the fiction that central banks create money independently from government. Second, they must themselves spend the money created at their behest. For example, governments should not hoard the furlough funds that are set to be withdrawn as economic activity picks up, but instead use them to create public-sector jobs.

Doing this will bring about a recovery without creating financial instability. It is the only way to wean ourselves off our decade-long addiction to QE.

Robert Skidelsky

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Since January 2021, the Biden administration has spent or committed to spend $1.9 trillion for immediate COVID-19 relief, $2.7 trillion for investment and business support, and $1.8 trillion for welfare and education. This amounts to $6.4 trillion, or nearly 30% of US GDP. The $1.9 trillion already delivered through coronavirus spending will tail off, leaving $4.5 trillion, or about 20% of GDP, to be spent over the next ten years.

The spending will be financed largely by US Federal Reserve bond purchases, with tax hikes coming later. But will it represent the biggest mobilization of US public investment since WWII, or rather an inflationary splurge?

We don’t know yet, because we have no accurate way of measuring the output gap – the difference between actual and potential output, or, roughly, the amount of slack in the economy that can be absorbed before prices start to rise. The International Monetary Fund predicts that the US economy will be growing above potential by the end of this year, and that European economies will be close to their potential. This signals inflation ahead and the need to reverse deficit finance.

Against this static view is the belief – or hope – that government investment programs will increase the US economy’s potential output, and thus enable faster non-inflationary growth. Much of Bidenomics is about improving the workforce’s productivity through education and training. But this is a long-term program. In the short run, so-called supply-side “bottlenecks” could drive inflation. There is thus a palpable danger that an overambitious agenda gives way to abrupt policy reversals, renewed recession, and disillusion.

There is a steadier course available, but the Biden administration has ignored two radical suggestions that might make its life a lot easier. The first is a federal job guarantee. Put simply, the government should guarantee a job to anyone who cannot find work in the private sector, at a fixed hourly rate not lower than the national minimum wage.

Such a scheme has many advantages, but two are key. First, a federal job guarantee would eliminate the need to calculate output gaps, because it would target not future demand for output but present demand for labor. This in turn underwrites an unambiguous definition of full employment: it exists where all who are ready, willing, and able to work are gainfully employed at a given base wage. On this basis, there is substantial underemployment in the United States today, including among people who have withdrawn from the labor market or are working less than they want.

Second, the job guarantee acts as a labor-market buffer that expands and contracts automatically with the business cycle. The 1978 Humphrey-Hawkins Act in the US – which was never implemented – “authorized” the federal government to create “reservoirs of public employment” to balance fluctuations in private spending.

These reservoirs would automatically deplete and fill up as the private economy waxed and waned, creating a much more powerful automatic stabilizer than unemployment insurance. As Pavlina R. Tcherneva of Bard College says, a job guarantee “continues to stabilize economic growth and prices, using a pool of employed individuals for the purpose rather than a reserve army of the unemployed.” No “management” of the business cycle, with its well-known political risks, is involved.

The second radical idea is the economist Vladimir Masch’s compensated free-trade plan. America has lost millions of manufacturing jobs so far this millennium, largely owing to offshoring of production to cheaper labor markets in Asia. The counterpart of this has been a structural US current-account deficit averaging about 5% of GDP.

One of the Biden administration’s main objectives is to rebuild US manufacturing capacity. While the COVID-19 has fostered a conventional wisdom among all deindustrializing countries that they should reserve “essential” procurement for domestic manufacturers, Biden’s “Made in America” efforts echo former US President Donald Trump’s “America First” approach. But Biden’s plan to rebalance US trade by means of tax subsidies for domestic producers, trade deals, and international agreements, rather than tariffs and insults, is vague and unconvincing.

In a world of second-best options, the Masch plan offers the quickest and most elegant way for Biden to secure the balanced trade that he wants. The basic principle is simple: any government in a position to do so should unilaterally set a ceiling on its overall trade deficit, and cap the value of permitted imports from each trading partner accordingly.

For example, China, which accounts for about $300 billion of the current US trade deficit – half of the total – might be limited to $200 billion worth of annual exports to the US. If China exported more, it could either pay a fine equal to the excess over its quota or face a ban on excess exports.

Compensated free trade, Masch argues, “would stimulate a return to the US of the off-shored enterprises and jobs.” It would also automatically prevent trade wars, because “any attempt by the surplus country to decrease the value of its imports from the US would automatically decrease the value of its allowed export.”

Policymakers seeking to stimulate the economy must pay more attention than past Keynesians did to avoiding inflation and ensuring that job creation at home is not offset by a drain of production capacity abroad. The Biden administration will have no choice but to learn these lessons. If it’s wise, it will shun austerity and unfettered trade in favor of full employment and the manufacturing capacity needed to achieve it.

Robert Skidelsky

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Jan Toporowski

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Robert Skidelsky

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Robert castigates the Universal Benefit system and makes the case for a job guarantee by the state

“the problem is aggregate under-demand for labor, not a surplus supply of the wrong kind of labor.The only escape from such a system is to replace fantasy with reality. If the UK’s private sector cannot in normal times provide decently paid jobs for all those willing and able to work, the state should step in with a public-sector job guarantee

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To start with the first. The economy has shrunk  by 10% since last March. In that time the government has spent over  £300bn ‘supporting jobs,incomes,and businesses’. The OBR expects  the economy to  have recovered all this lost output  by mid 2022,  4%  this year, 7% next year. As  a consequence, government borrowing  to ‘support the econmy’ will  tail off from £355bn today to £234bn next year and decline  thereafter,  the cancellation of the furlough in September being the biggest saving.  The national debt will peak at 97% of GDP in 2023-4 and then start falling.

The  thought processes underlying this rosy prospectus seem somewhat as follows.  The lockdown stops this summer.  ‘Non-essential’ businesses reopen, helped by tax breaks and subsidies. Customers flock back, free at last to spend their ‘forced’ savings.   Employment picks up. The economy starts booming.   Inflation –the dog which failed to bark  for ten years –is set to take off at last.

It may go like this –no one knows for certain. But I am highly sceptical about this story of ‘pent-up demand’. A shrinkage  in national  income by  10% implies a fall, not rise, in national saving. Saving out of income may go up, but income itself is lower.  That’s why it’s not like in a war, when you have full employment and rising wages, but  less to spend money on. Today, the  wealthier sections of the population,  whose incomes haven’t fallen,  will now be free to spend more on restaurants, entertainment, holidays, and so on; but what about all those  whose incomes have fallen? Where is their ‘pent up demand’ supposed  to come from?

So it is dangerous to assume that the reopening of the economy will be automatically followed by a strong recovery. To give the economy a cushion of extra spending power  the Chancellor  has wisely kept furlough going till September. I would have preferred that this money, some £60bn, be given to local authorities to create public jobs in their areas, especially for young people.   Now it is too late, because no one in the Treasury was thinking along these lines. Only someone with a bit of history can tell   30-year old Treasury officials  that there used to be something called ‘public works’.

Since the 2008-9 financial crisis, macro economic  policy has been in a mess, like a ship without a navigation system, responding to storms as they blow  up. A start has been made  on the necessary job of developing a proper policy  framework.  Mr. Sunak means three things by ‘sustainable’ public finances: first, in ‘normal’ times the state should balance its day- to- day (or current spending) budget; second,national debt should not be rising over the medium term, and  ‘we need to pay attention to its affordability’; third, it makes sense when interest rates are so low ‘to invest in capital projects that can drive our future growth’. (The Chancellor put his money where his mouth was by     announcing    a UK Infrastructure Bank to invest ‘in public and private projects to finance the green industrial revolution’ .)

 Further, in a significant  passage Mr. Sunak said  that  the Bank of England’s  2%  inflation target  should reflect ‘the importance of environmental stability and transition to net zero’ –the first hint we have had of a formal modification of the Bank’s mandate.  

 These principles give  the start of a   sensible policy of fiscal and monetary coordination which we have lacked for ten years.

But the Treasury still finds it hard  to get rid of old habits of thinking.  For example, ‘it will take years to pay back the  debt’. Pay it back to whom? Most of the debt incurred since last March to support the economy has been borrowed from the Bank of England. Paying back the Bank is simply transferring money from one government  department to another.

Then,  what did Mr. Sunak mean which he  talked about the need to ‘fix’ the public finances,  as though they were  broken? In fact they are not broken, they are doing exactly what public finances should be doing,  which is to balance the economy, supporting it when it is collapsing and withdrawing support when it is booming. This is not just policy for emergencies: it is part of the state’s normal  stabilization function. It reflects  the fact that economies do not  automatically self-balance at full employment. The state budget is the balancing factor.  Therefore,  provided we have in place a policy which supports recovery,  we should not worry about the deficit: it will reduce automatically.

My worry is rather the reverse; that the measures to support the economy during the pandemic will be withdrawn,  without  being replaced by measures to stimulate the recovery.   If that turns out to be true, we will be in for a very severe recession and the Chancellor will have to come back in six months time to announce further  recovery measures. It’s important to start thinking now about what they should be.
Robert Skidelsky

This article was first published in the Catholic Herald

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Nevertheless, in a remarkable outbreak of forward-thinking, the committee decided that its inquiry would cover not just job protection but job creation over the coming two years. This was three months before a second lockdown brought clear evidence that the recovery was unlikely to be swift or vigorous.

This was a retrospective vindication of the committee’s decision to focus on job creation. Our report today clearly states that when the Job Retention Scheme ends in 2021 “the government will need to shift public spending away from untargeted wage subsidies and towards policies focused on creating job opportunities”.

Further, while acknowledging the “unprecedented” level of public spending incurred to support the economy, the report warns the government must “not repeat past mistakes by withdrawing economic support too soon. Over the next 12-18 months it will need to continue to spend to generate a sustainable recovery and address rising poverty and unemployment”.

While the report criticises gaps in the coverage of the furlough scheme and the deficiencies of universal credit, its real bite is its focus on a plan for the recovery. Here it is explicitly acknowledged that the deep freeze of the emergency will have to give way to creating job opportunities if the recovery is to be strengthened and sustained. The most important recommendation is a proposal for a job, skills and training guarantee “to every young person not in full-time education or employment for one year.”

To put it another way: rather than gamble on a strong, private sector-led, recovery once social distancing requirements can be lifted, the report calls for a plan for creating job opportunities not just to replace activity cancelled by Covid-19 but to prepare the workforce for the inevitable transition to a different kind of economy.

Investment should be directed towards jobs that are: suitable for those at most risk of unemployment; needed across the whole country; and most likely to have long-term benefits to the UK. We set these principles out in line with evidence we received that called for a recovery plan that places investment in the UK’s social infrastructure and meeting the government’s climate change objectives at its heart.

Therefore, the committee has once again called for the government to increase funding in the social care sector and significantly expand the number of care workers. Importantly, it calls for wages and improved training and conditions in the sector.

The report ends on a green note, concluding that the government should “prioritise green projects that can be delivered at scale, quickly, and take place across the country.”

Much of the evidence we heard calls for the government to prioritise investment in retrofitting buildings and switching gas boilers to low-carbon alternatives, both of which could create jobs quickly and at scale across the country.

Lord Skidelsky is a crossbench peer, historian and member of the Lords economic affairs committee

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1.      The focus of economic policy should be on maintaining a high, sustainable level of employment. This is correct theoretically, practically, and socially. It counterbalances the capitalist market system’s tendency not to create a high level of employment; it largely pays for itself in generating revenue: it is socially right because it avoids the waste of human resources entailed by involuntary unemployment, crowding in activity that would otherwise be crowded out.  

Sustainability is a key requirement for any policy of high employment today. The workforce must be employable in work for which there is both demand, and which, by respecting nature, also secures the future of the planet.

These are general propositions for policy valid for most advanced economies, but they have a special application to our country at this particular moment in time.

2.       The consensus of forecasts is that the British economy will be more than 10% smaller this year than in 2019, with only a moderate recovery in 2021.  Unemployment is set to rise to at least 8 per cent (2.5m), with underemployment almost double this. The 16-25 age group is projected to take a disproportionate hit, shouldering up two fifths of the rise of unemployment to a million despite representing only a fifth of the workforce.

The roll out of the new vaccines and extension of the furlough scheme to March may postpone the worst effects of the predicted downturn but they offer no basis for sustained economic recovery: little or  nothing is in place to stop the gradual haemorrhaging of  businesses and their supply chains.  This means that job retention, which aims to preserve many jobs which two lockdowns have made obsolete, must urgently give way to job creation.

In conclusion the economy has to afford more employment opportunities, especially for the young. British capitalism – currently biased to short term value creation and rent extraction (rentier capitalism) – has to be repurposed to long-term, environmentally sustainable value creation. The international trade and financial framework must be as accommodative to these aims as possible. If these are the medium and long term aims, then the foundations must  be incorporated in any short term programme.  

B.            SHORT-RUN RECOVERY

1. There are two urgent things the government should do now.

It must establish a tripartite Economic Recovery Board, incorporating a Taskforce on work. The Board’s task would be to identify those economic sectors, nationally and regionally, which could be a major source of future employment.  These are likely to be, indeed should be:

the green economy

the rural economy

the digital economy

the caring economy

the mentoring economy

The Task Force on work should be charged with identifying work and educational opportunities now available and linking them to these potentially expanding sectors. This would give short-term work and training schemes the focus and purpose which is largely lacking from emergency programmes – a bridge between the Job Retention phase of Covid-19 and the Job Creation phase which has to follow it. 

Initiatives deserving urgent consideration are:

1. The government should build on its own Kickstart programme, the experience of the Future Jobs Fund and the model of  Roosevelt’s Civilian Conservation Corps  by ensuring  all  unemployed  18-25 year olds  are offered work and training  in urban conservation, rural regeneration and  digital skills. Kickstart is supposedly to generate 300,000 placements for the young people, largely from the private sector. No one now expects hard-pressed businesses to offer employment on anything like this scale in the coming months.  So the public sector will need to become “employer of last resort”. There should be a youth guarantee of work and/or training. The Roosevelt scheme provided  millions of jobs for young people in

“the prevention of forest fires…plant, pest and disease control, the construction, maintenance and repair of paths, trails and fire-lanes in the national parks and national forests and such other work…as the President may determine to be desirable”. 

A youth led National Youth Corps (NYC) should be created in the same Rooseveltian spirit ( one contemporary model is the Austrian Zivildienst) as the umbrella organisation in which volunteers, paid the minimum wage for a year and combining at least 3 months training, are able to work in a range of exciting and socially valuable projects across the country – giving them a vital role  and stake in stimulating recovery. The NYC should go beyond Kickstart to stimulate  local and central government, the private and third sectors to develop and create work-rich projects (see below), connecting volunteers to opportunities via a dedicated App, offering mentoring and crucially the chance of working away from home. With sufficient urgency such programmes could be up and running within the next six months.

• All regional and local authorities should be asked to bring forward plans for work which needs to be done in their areas  for strengthening local economic resilience and  improving local amenities and  which now languish for lack of money. Examples would be the widening of the Manchester Ship Canal and retrofitting local properties to create thousands of new jobs as well as scaling up local training programmes.

The government should allocate a quantum of money to regional and local authorities for at least one year leaving it the authorities themselves, together with private businesses, to decide what jobs and training schemes they want to create.

• These initiatives should be supported by measures to sustain demand, given a savings ratio approaching 30 per cent, the imposition of a second lockdown and the likelihood of a thin Brexit deal (or No Deal).  There should be an acceleration and expansion of its national infrastructure programmes, along with a 12 month temporary cut in VAT for all goods and services which in 2008 proved a very effective stimulus in response to the financial crisis.

The government advanced a £8bn infrastructure spending earlier this summer. It should be expanded. The 3 year Comprehensive Spending Review should not be deferred, but instead brought forward to be announced in March 2021 at the latest. In particular the £40bn five year infrastructure plan should be front-loaded into the next two years, with priority given to big environmental projects, social housing and NHS/social care.  In doing so it would simply be following the advice of respected organisations like the International Monetary Fund. It writes

“Empirical estimates based on a cross-country data set and a sample of 400,000 firms    show that public investment can have a powerful impact on GDP growth and employment during periods of high uncertainty—which is a defining feature of the current crisis. For advanced and emerging market economies, the fiscal multiplier peaks at over 2 in two years. Increasing public investment by 1 percent of GDP in these economies would create 7 million jobs directly, and between 20 million and 33 million jobs overall when considering the indirect macroeconomic effects.

FOLLOW THROUGH – REFORM TO UNDERPIN RECOVERY

• Launch the investment covenant. A newly created bank ( either an arm of the National Investment Bank or  specially created “ bad” or refinancing bank) will buy corporate debt of distressed companies, partially underwrite the first tranche with a credit guarantee and package up the loans into single tradeable “ reconstruction” or “build-back-better” bonds. Banks and Insurance Companies will be required to hold these bonds as up to 10 per cent of their balance sheet assets. Companies accepting this debt relief will be contractually required to bring forward a proportional increase in investment spending – and accept reciprocal obligations (see below).

• Roll over and extend all existing loan schemes but with reciprocal obligations (executive pay, commitment to train, participation in Kickstart and NYC, union recognition, adherence to Social Value Act, sign up to Corporate Governance Code, Sustainable development goals). These obligations should also be incurred by all companies being relieved of debt.

• Transform the British Business Bank into a National Investment Bank, properly capitalised and with power to lend.

• Banks to publish term structure of lending as part of drive for more long termism. A comply or explain regime to be created to explain why lending remains short term.

• Corporate Governance Code to be toughened and adherence made mandatory

• Pilot a perpetual bond

        INTERNATIONAL

• Follow through any EU trade deal with negotiations on service sector access, improved access for goods and mutual recognition. Either leading to  eventual full membership of single market and customs union or a unique European Economic Area plus 

C.    THE MEDIUM AND LONG TERM

British capitalism and financial system must be restructured around the pursuit of social purpose. Only thus can it take full advantage of digitalisation and protect natural resources and habitats in such a way as satisfies the demand for social fairness and equity between human demands and the logic of nature. Without such an economic and social settlement, the risk is ongoing degeneracy ultimately provoking civil unrest.

1. Macro Policy

• Establish a new Macroeconomic Policy Framework which integrates Fiscal and Monetary Policy in pursuit of the single objective of a non-inflationary level of high employment. This recognises that monetary policy on its own cannot shield the economy against shocks to supply or demand or restore full activity level following a shock. The Bank of should be given a dual employment/inflation mandate  like the Fed. It should aim to keep down borrowing costs for the government; with forward guidance in the form of a promise not to raise Bank Rate till unemployment has fallen below a certain percentage. We cannot afford a macro-policy just based on an inflation target and a passive fiscal policy except in emergencies.
• Fiscal policy framework. Borrow for capital spending but balance current revenues and spending. Accept debt service limit (10 % of tax revenues?)
• Increases in capital gains, corporation, inheritance taxes. Introduce environmental taxes.
• Set in train the reorganisation of tax system around the Mirrlees report (proper taxation of capital and wealth, environmental taxes, reform of council tax, try to avoid high marginal rates for low earners)
• Build in green targets for all public capital projects (Green New deal)
• Up to 600,000 public sector jobs could be created, with more than half in the NHS and adult social care, as part of rebuilding of public capacity and reversing hollowed out civil service.

• Stakeholder Capitalism

• The objective is to create a capitalism that is driven by purpose, long term value creation and sustainability – balancing the needs of all stakeholders and in partnership with an agile, capable, well-resourced public sector.

• Legislate for the multi- stakeholder company. A new Companies Act incorporating hardened up Corporate Governance and  Stewardship Codes.
• Encouragement of varying ownership forms – co-operatives, mutuals, public benefit companies, new forms of collective ownership.
• Towards the digital trade union. Trade unions to use IT to ballot members etc as part of digital enablement of participatory trade unionism and 21^st century collective bargaining.
• Consolidate National investment bank with scaled up regional branches
• Organise a regional industrial strategy. Key components to include a “scale-up” ecosystem around Catapult network, creating regional growth hubs focused on key sectors – space, robotics, new pharma. AI applications etc
• Overhaul CMA
• Support with roll out of British style Fachhochschule ( universities of applied science)
• Overhaul educational curriculum with wider range of skills – emotional intelligence, digital, ethics etc

• The social settlement

• The guiding principles must be universality of provision and fairness.

• All forms of work – whether part time, flexible or full time – to carry the same employment rights, creating a British system of flexi-security.
• Fully fledged National Youth Corps as part of a Work Corps for all with training arm
• Universal basic income for children up to 18 – child benefit etc
• Universal basic services
• Restructure care sector into NHS as part of drive for public health resilience.
• Properly funded universal national tutoring service 
• Pursue Devolution Agenda ,  including  tax raising powers (eg local income tax) for regional authorities.   

• International

• The system needs to be more resilient and sustainable
• Procurement policy for essential services, particularly health and food not to be dependent on global supply chains.
• Movement of capital and labour should also be aligned with national purposes
• Work with EU and Biden’s US to reinvigorate WTO
• Joint action on tax havens and tax abuse by High Tech
• Intense commitment to UN Sustainable Development and climate change goals
• Have a referendum on re-joining the EU in 10 years time

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For one thing, as Labour’s Anneliese Dodds pointed out, COVID-19 has had worse health effects – and inflicted more damage – on the UK economy than in any of our comparators. The depletion of state capacity to respond effectively to the health crisis has left a legacy of mistrust and fear which will make it exceptionally challenging to “kick start” the economy quickly.

Let me concentrate on the most important aspect. Ending the furlough scheme in October means that the government will no longer pay the wages of nine million workers.  That means that either the firms on whose books they remain will have to start paying them, or they will be made redundant. Rishi Sunak has offered a “son of furlough” incentive to employers, so as to avoid mass redundancies. Until January, companies that pay the wages of furloughed workers will receive a £1000 bonus for each one.

However, whether it will be worth it for employers to resume paying their workforce (even with the £1000 bonus) will depend on the demand for their goods and services, that is, on what happens to consumption over the next few months.

And this depends on two things: how quickly the supply-side of the economy can be reopened and how soon people are ready to resume their old shopping and recreational habits. The two are of course connected: the easier it is for people to shop, go to pubs, cinemas, and theatres, stay in hotels and eat in restaurants, the more they will be ready to do so. But it also depends on their psychological willingness to risk infection.

The government’s ineptness in handling the health crisis will thus impact both the supply and the demand sides of the economy. The precautionary regulations affecting distancing, masks, crowd numbers and travel will still remain in place as long as the threat of new waves of infection remain: indeed the failure to develop a viable “test, track, and isolate” system means that the threat will stay longer than necessary. There will also be less appetite for some kinds of spending under these conditions. This means that even with the best will in the world, consumption will remain awkward and constricted in many sectors of the economy.

But the fear of contact, created by the propaganda which justified mass lockdowns, will also be a powerful limiting factor. A quarter of parents have said they will not send their children back to school in September. This fear of contact is bound to limit the business of all those companies whose industry depends on contact, especially hospitality, travel and recreation. Even £10 off the restaurant bill in August, as promised by the Chancellor today, is unlikely to induce a mass resumption of eating out in our large towns and cities.

The Chancellor’s measures, which include VAT reductions, and financial incentives for training, apprenticeships, house buying, and energy-saving are welcome. But they are a holding operation. I do not see how they can prevent a haemorrhage of jobs after October. The real choices will come with the Autumn Budget.

The choice will essentially be whether to continue with the financial orthodoxy of recent years which denied a state “mission” in investment or job creation or whether to use the immense fiscal power of the state, which, when circumstances demand, is perfectly capable of keeping households provisioned through a months-long standstill of private enterprise, to transform the subsidy culture into a new lasting partnership between the state and the people.

This piece is cross-posted from: Catholic Herald

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