HM Treasury /Flickr

The Government’s Short-Termism Has Trashed the Economy

by James Meadway

@meadwaj
14th June 2020
  • Estimated read time: 5 mins

The British economy shrank by over a fifth in April, the largest such decline in its history. Not the Great Financial Crisis of the late 2000s, not the Great Depression of the 1930s – nothing, in a single month, compares to this.

But we shouldn’t allow the sheer scale of the figures to detract from the absolute necessity of the lockdown. GDP isn’t the same as human welfare: the economy shrank because it was essential to preserve life, something GDP as a measure is largely indifferent to. But to deliberately halt an economic machine that is wired to grind out greater and greater amounts of output (successfully or otherwise) is to also push it into a deep crisis.

The signs suggest the crisis will be worse here than in comparable countries. The Organisation for Economic Cooperation and Development (OECD), the exclusive rich-countries-only members’ club, is forecasting that the UK will suffer the worst economic hit from the pandemic of any advanced economy over this year. Britain has been “hard hit” by the virus, says the OECD, applying lockdown measures “later than in neighbouring countries”. The consequences of that delay are not only economic: in evidence to a House of Commons select committee, Neil Ferguson, the epidemiologist and former government scientific advisor, claimed that locking down a week earlier would have “halved” the number of fatalities in the UK.

The stupidity of trying to play off the economy against health could not be made clearer: by dithering and delaying on the lockdown, at least partly in the belief that the economic costs of the pandemic could be reduced, we have ended up not only with a worse outbreak – one of the worst on the planet – but, as a result, trashed the economy. The suggestion, in one BBC Radio 4 programme, by mathematical biologist Kit Yates that some modellers had more influence than others on the ‘consensus’ advice presented by Sage to the government is no doubt one that an inquiry could follow up, alongside the shocking decision to release 25,000 NHS patients into care homes without testing. There has been a catastrophic failure of government, in multiple parts.

But the issue here is broader than incompetent political leadership, or poor specific decisions – although there should be no doubt Boris Johnson is now painfully far out of his depth, and his cabinet are little better. It is broader, even, than the damage of austerity over the last decade – although there is no doubt that, without years of hollowing out through cuts and privatisation, both our health and – especially – social care systems would have been in a far better position. (The £871m taken from Public Health England, for instance, now looks particularly shortsighted.) There is a deep institutional failure here, centred on the inability of the institutions of government to be able to take on short-term costs in order to achieve long-term gains.

It’s been a long-standing criticism of British capitalism, in particular, that its institutions are bad at thinking about the longer term – and it’s not a critique confined to the political left, by any means: the Bank of England has in the past provided an estimate for the economic costs of a short-term bias in British financial institutions. This short-termism is hardwired into, for instance, how the Treasury thinks about making investment decisions, resulting in a bias towards putting money into places that are already successful, rather than thinking about the necessarily longer-term planning needed for big investments elsewhere. This short-term bias also appears to have damaged the Treasury’s ability to act effectively on climate change.

Short-termism has likewise been built into the response to the pandemic today. At each additional economic intervention by the chancellor, Rishi Sunak, from the Budget in March promising what now seems like the pitiful sum of £20bn for the crisis, through a series of larger and larger announcements, the economic response has lagged events. We eventually got to the point where provision has been made for many workers – about a third of the workforce are now being paid by the government – but 3m are left without protection.

The furlough scheme itself, although operating at a huge scale, effectively preserves the economy in aspic – it is designed to leave everything exactly as it is, in the expectation that the lockdown will be ended and the economy simply ‘switched on’ again at some point soon. Meanwhile, the chancellor and the Treasury have been pushing hard to accelerate the return to work and weaken the social distancing measures that are still in place.

But we know the economy can’t simply be switched back on again, for three reasons.

First, unless a safe, functioning vaccine arrives miraculously quickly (and the chances that a vaccine will never be found are not insignificant), there will be no point at which the all clear can be sounded and everyone marched dutifully back to work. The process of a return to work will have to be gradual, tailored to specific sectors, and conducted at the pace dictated by medical need. In other words, it will have to be a controlled and managed process, with as much co-operation as possible from those expected to work. Failure to persuade teachers, for example, that schools were genuinely safe to return to scuppered the government’s plans to rush the reopening of schools. A return to work would have to be managed, and delivered on a sector-by-sector basis – in other words, it would require the kind of consistent and sustained government intervention that the British state is not at all built to deliver.

Second, there will be sectors of the economy that we can see immediately are not going to survive in their current form in the world we are moving into. Airline travel is the most obvious, but also hospitality like pubs and hotels, offline retail, and education outside of schools – all will have to be redesigned and will likely require sector-specific support to manage the transition, including support for those workers losing their jobs. Even if a vaccine arrives quickly, we live in a world in which epidemics are increasing in frequency and future outbreaks of different diseases have now become a known risk for businesses. New costs will be imposed on them – like the need to monitor the health of their workforce – and ways of working restructured. This is a process that could (in theory) be left to market forces, except (with the collapse in demand and the likely prolonged recession ahead of us) those forces will not be working properly, and in any case markets are slow and often ineffectual means to reshape industries – look, for instance, at the market-led shakeout of British manufacturing in the early 1980s and the huge social costs it precipitated.

Third, the presence of not only further pandemic risks but the rising costs of climate change and other environmental damage are also starting to impose themselves – perhaps most obviously for the UK in finance, but clearly across larger parts of the economy. What we might call an ecological restructuring of capitalism – reducing its environmental footprint but otherwise preserving existing inequalities and hierarchies as far as possible – is increasingly becoming the common sense for recovery programmes after the pandemic, including, quite strikingly, for the Conservative party.

Put all these together – the need to organise a return to work; the need to restructure industries given future epidemic risks; the need to restructure the whole economy given environmental breakdown – and it is clear that what is required is the kind of long-term, more strategic economic thinking that Britain’s institutions are generally bad at providing. To get a grip on the crisis, ideally, we would require new or at least significantly repurposed economic institutions, from the Treasury to finance to how companies are governed and run. It’s not just about changing who is making the decisions; how those decisions are made also needs to change. Instead, this government holds out the prospect of a bungled return to work, further spikes in infections, panicked lockdowns and continued economic stagnation.

James Meadway is an economist and a Novara Media columnist.

Published 14th June 2020

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