The coronavirus cash crunch

The UK Treasury’s number one priority, with support from the Bank of England, must be to get unlimited money swiftly to businesses and individuals who are losing income because of the government’s coronavirus containment measures. This applies both to providing firms with cash to avoid bankruptcy as well as to ensuring that all their staff – employed, self-employed and gig workers – continue to be paid when they go into unpaid quarantine or are laid off either temporarily or permanently.

But however successful the government is in this vital support task, the British economy is already in recession. And the more extensive the lockdowns are, the deeper the immediate falls in economic activity will be. Long before the Covid-19 outbreak many economists had been correctly anticipating another downturn. Britain, like most other advanced industrial countries, has been in a state of precarious sclerosis ever since the stabilisation which followed the financial crisis. Western economies have been producing too little new wealth for decades. They were only functioning as well as they have been by borrowing from the future. Now this precarious, debt-dependent economic life has suffered a sharp and unexpected disruption. The collapse is largely due to a cash crunch.

Read the full article here.

Break free of the fiscal rules

In pre-coronavirus days, immediately following the Tories’ huge election victory in December, this Budget was trailed as the thing that would tell us what the ‘levelling up’ mantra really meant. Things haven’t quite worked out that way. Maybe because of the necessary focus on the coronavirus impact, we learnt little new about what ‘levelling up’ means. Or possibly that was because the government is also still not quite sure what the phrase stands for. Sunak was clearly getting a little carried away by his rhetoric when he claimed that this Budget had already delivered – got done – the election promise to ‘level up’.

The government this week flunked one budgetary issue that could have pointed in the desired political direction. No doubt drawing on his hedge-fund experience, Sunak hedged a decision on what to do about the fiscal rules, after much speculation that he would address them in the Budget.

Read the full article here.

Beyond the zombie economy

The UK’s productivity problem not only long precedes the Brexit discussions. It also long precedes the 2008 financial crisis. Longer-term studies actually reveal that the decline in productivity growth, not just in Britain but across mature industrialised countries, has been pretty relentless since the 1970s. That its slowdown began so long ago means the problem is deep-seated and therefore justifies a substantial strategic response. This is usually presented as an activist industrial policy.

But the big paradox about industrial policies is the contrast between the extensive cross-party consensus on this issue and the lack of headway in reviving investment and productivity. Read the full article here.

 

The myth of Corbyn’s radicalism

Given the fears generated by the prospect of a Corbyn-led government, just how radical is it likely to be? Should we really expect Britain’s first anti-capitalist government? Certainly not on the basis of what Corbyn and McDonnell and their cheerleaders have been writing and saying about their future Labour government. Read the full essay here.

When the next crisis comes, don’t blame the central bankers

President Trump’s tweets criticising the Federal Reserve bank, and the European Central Bank, draw attention to how prominent central banking has become over recent years. Central banking’s high profile today marks a significant shift from earlier times. Central banking used to be regarded as a necessary activity that most people knew existed, but few could get that excited about.

Increasingly over the past three decades the central banks have attained a much more prominent role, not only in the US but across the mature industrial countries. This has had nothing to do with changes to the calibre of central bankers, or to the development of new banking techniques. Instead, it was primarily a response to the exhaustion of Western politics that became more evident from the second half of the 1980s.

There are three important features of central banking in modern mature economies. First, the misleading fallacy of central bank ‘independence’. Second, the associated sheltering of politicians from responsibility for the economy. And third, the waning efficacy of central banking.

Read the full article here.