Published by Spiked – 15 May 2020
The government must grasp the nettle, and lead a national programme of economic transformation.
It is said that crises provide fertile ground for innovation. This is only partly true. The acute pressures, the falling away of pre-crisis norms and the sidestepping of regulations, liberate individuals and teams of people to come up with great ideas about how to do things differently. This fresh thinking can originate better, more effective and efficient ways of conducting existing productive activity, or it can conceive brand new products or services that improve people’s lives.
Certainly in this pandemic and the lockdown crisis, we have already seen lots of inventive deliberation. Sometimes this is in mundane and hopefully fleeting areas, such as how to offer physiotherapy services via Zoom, or how to reopen your gym while meeting the government’s physical-distancing rules. Other areas of original thinking could be more beneficial and long-lasting, such as coming up with ways to produce scant medical equipment, or accelerating the search for coronavirus treatments and vaccines. It extends, too, into coming up with superior ways to organise the labour process, having learnt from the unexpected imposition of shutdowns and mass remote working.
But where the saying falls short is that devising creative ideas is not enough for innovation. Innovation represents the implementation of that creativity for social benefit. While crises can be great times for ingenious thought, novel ideas only become innovations when they are applied and are replicated to bring change, improvement and progress to people’s lives.
This conception of innovation brings out the biggest obstacle to seeing much of it happening in the medium-term future. We are not just in a period of crisis, but a crisis within an existing state of economic depression. Depression is not simply an extension to recession, in the way it is being discussed today. It is a protracted phase of economic sclerosis that has become self-reinforcing.
Even in depressions, individuals and businesses will still have the imagination to see the innovative potential of new ideas and technologies. But it is less likely they will have the motivation and means to pursue the magnitude of capital investment that turns new ideas into new business ventures and industrial sectors. But this is what is necessary to create enough good jobs for people, and to bring about durably higher productivity – which refers to the amount of services or goods people can produce each hour, each week, each year.
This is what our distinctive shutdown recession is beginning to reveal. It is bringing into the open what hitherto was being camouflaged, not least by all the extra liquidity central banks pumped out ever since the late 1980s, and especially since the 2008/2009 financial crash. ‘Liquidity’ means putting cash into the economy so that there is enough spending going on to maintain a sense of functionality. Economic, business and working life wasn’t particularly pretty or inspiring, but it all seemed to tick along. In Britain, for instance, an extra four million jobs were created between 2001 and the start of this year, leading some to herald a strong employment boom.
But it was the snowballing state-backed debt that kept the economy moving. Activity today was being borrowed from tomorrow. Jobs were created, keeping unemployment rates low, though many of the jobs were low-value, low-productivity ones, including the much discussed gig economy. Employers were able to pay people in work, though many wage-earners saw their incomes stagnating, allowing them just about to keep their families’ heads above the water. Nevertheless, enough people were in work, getting paid and able to spend money, which concealed the worst features of the real stagnation within production.
Writers for spiked and many other publications have been anticipating this all falling apart during the next financial-debt implosion. But no one really knew when the denouement would happen. Or whether that would be covered up again by another splurge of state central-bank liquidity. Now, this accidental, unplanned, self-imposed shutdown recession has brought out the insubstantial and artificial character of the post-crisis decade, even with huge central-bank lending.
Today’s recession has drawn the ongoing, debt-disguised depression to the surface. Thus the current challenge is not to prevent a depression from emerging. It is to deal with the one we are already living under. Because of the consequences of this recession and the official monetary and fiscal responses to it, more commentators are identifying the danger of zombie businesses. That’s a helpful step in appreciating the scale of the economic problems. What is still to be widely grasped, though, is that living-dead businesses are less an effect of this recession than its precursor.
Since the lockdown began, many have already seen their jobs and incomes disappear, even with all the monetary easing and government business- and job-support schemes in place. By the middle of May, two-and-a-half million people had already applied for Universal Credit, which is now the main benefit for the newly unemployed. Many casualised gig workers immediately lost their jobs, led by areas like mini-cabbing and hospitality, but extending across much more of the nouveau self-employed. This is a group, not of famed ‘entrepreneurs’, but of people who are working for themselves out of choice or necessity – a group that has risen by over one-and-a-half million since 2000. For many, their incomes simply evaporated with the shutdown.
Meanwhile, it is likely that many of the currently furloughed 7.5million workers, supported by the government jobs scheme, are in a state of suspended unemployment. Almost every day we hear that larger businesses (with over 250 employees) are already seizing the recession opportunity to reset themselves by axing staff to cut costs. These businesses began the recession employing about 11million people, one third of the total workforce. Meanwhile, many smaller and medium-sized businesses are indicating that they might not be able to start up again. And if they do, they may have to cut staff numbers in order to be viable, given the reductions in expected revenues. Shutting down the economy was brutal, but opening it up again looks like being a scene of carnage.
It is good that people on furlough are at least being paid something for the next few months out of the nation’s collective means. But whether this temporary wage subsidy gets extended again this year is much less important to people’s livelihoods than their ability to get alternative and better jobs than the ones they are losing. With many existing businesses – big and small – cutting back, the government needs to recognise today that it has to take responsibility for helping to generate these new jobs.
Hoping for a V-shaped bounce back is not showing political leadership. Especially when so many are predicting a growth pattern more like a squashed square-root sign – a sharp decline, then a gradual but limited increase in national output as two-thirds or so of the workforce return to work and commence spending, followed by a protracted flat line.
With such subdued post-pandemic economic conditions, few businesses are going to risk engaging in the scale of capital investment required to bring new (and old) creative ideas to market. Overly indebted companies have even less incentive or ability to invest. A brief post-pandemic bounce is not going to prompt private-sector expansion when so many people and businesses are already burdened with debt and falling incomes. We come back to the crucial question of how innovation could happen in order to generate the additional jobs required.
Nations never ‘bounce back’ from depressions because the productive process is atrophied. The only way out is a countrywide shake out of its dysfunctional capital assets. With private businesses so cautious, the government will need to step up in order to help turn ideas into genuine innovation, generating the new sectors, new businesses and new employment. These were all necessary before the pandemic for the jobless and underemployed. After the shutdown, they will be vital too for the millions more recently unemployed.
Government leadership of economic and employment renewal could take many forms. There is no one single proven route to bring about productive restructuring, not least given the extent to which sclerosis has spread over the past four decades. But the discussions about what to do to reset the economy should begin now, not least to give the unemployed, as well as the many insecure furloughed workers, a way forward.
What sort of public initiatives do we need? Talk of long-term infrastructure projects coming to fruition in the 2030s and beyond, such as HS2, is not enough. A return to conventional fiscal-stimulus packages would not work either, as the problem is production atrophy, not a temporary shortage of demand. Nor are offers of retraining the unemployed going to be effective, because decent jobs will not emerge spontaneously for the now ‘up-skilled’ worker.
Instead, the public goal is the simple one of investment in business change and job creation. I’m sure a good copywriter can turn that into a three-word slogan so favoured by the prime minister. To illustrate the slogan’s content, here are three indicative components of a transformation programme geared to resetting a jobs-rich economy through innovation and technological renaissance.
First, it could include a state-sponsored research-projects agency, to work on new forms of energy, transport and communication, and on new production processes and materials. Many already suggest this could be modelled on the US Defence Advanced Research Projects Agency (DARPA). This was set up in the Cold War moment of the late 1950s, bringing together university research units with business development activities.
Out of this state-business-university nexus eventually came the internet, semi-conductors and many other building blocks of today’s information and communications technologies. David King, one of the former UK government chief scientific advisers, thought it was a ‘simple fact’ that ‘there would have been no Silicon Valley in the United States without DARPA funding’. It also created millions of extra well-paid jobs for American workers. Over time, a British ARPA could similarly generate new business sectors and many decent high-productivity jobs.
A second, more immediate avenue, is a state-led long-term investment fund along the lines of the Industrial and Commercial Finance Corporation, set up by the government and the Bank of England in 1945 (which later evolved into the private equity 3i Group). In the aftermath of the war, this fund helped smaller and medium-sized businesses to restructure and invest in the new technologies that had already been developed through preparing for and fighting the war. Something similar could help now with funding tied specifically to investment in innovation and new technology projects. This includes a particular need for risk-taking, venture-capital-type funding, to help newer businesses already on the innovation road to scale up.
Third, there is the need to tackle the problems of larger businesses, of which there are about 8,000 in Britain. They generally have easier access to the equity or bond markets, so do not need state-sponsored funds in the same way. However, after decades of loosening monetary policies there are too many over-indebted large businesses that are only coping because of easy credit facilities and low interest rates. For these, and their smaller zombie cousins, a more courageous approach is needed from government to get out of the debt-deflationary spiral.
First, the government should formalise what has so far been an informal practice, and officially retake political control of the Bank of England. It should then set it a different mandate for the post-shutdown future. The goal is to wean zombie businesses, of all sizes, off cheap debt by gradually – say, over two or three years – reversing the existing quantitative easing, and raising official interest rates from about zero now to, say, three per cent. Any business planning to transform itself to raise productivity should be able to afford a return of four or five per cent on any commercial funds it needs to borrow. If necessary, lending could be state-supported to maintain commercial interest rates at these modest levels, until the economy has escaped depression.
In parallel, the government could take advantage of its Coronavirus Large Business Interruption Loan Scheme, under which the state has guaranteed 80 per cent of new commercial loans to bigger businesses for up to three years. The state would enter into discussions with each of these government-backed firms, and any other large firms that wanted to take part, to assess their long-term commercial viability. Call it a Corporate Transformation Scheme.
For those businesses deemed to be viable, the government would offer to extend the guaranteed loans when they expire, not for operational running expenses, as now, but exclusively for implementing an innovation investment plan. For those other businesses assessed as unviable and which agree to winding up, the government would provide financial support to their workers during a phased restructuring or closure.
This corporate wage subsidy would be part of a wider state household-support programme for everyone not working, or at risk of being unemployed, as they transition into the new jobs the government is helping existing and start-up businesses to create. The guiding government principle would be to support the person (and dependants) until they can get into better employment, not to try to preserve existing jobs.
No doubt each of these three suggestions for a national economic transformation programme could be improved upon, or substituted with alternative mechanisms. What is more important than the specifics is that the government launches a public conversation now about the programme at both local and national levels. People throughout the nation need to be involved in assessing the scale of the economic challenges, and in hammering out how to bring about the higher-productivity businesses and well-paid jobs upon which our future prosperity hangs.