In a speech to the House last week, Rishi Sunak explained his thinking on how to protect businesses, jobs and the economy as a whole:

“Our economy is now likely to undergo a more permanent adjustment. [Because of COVID] The sources of our economic growth and the kinds of jobs we create, will adapt and evolve to the new normal. And our plan needs to adapt and evolve in response. Above all, we need to face up to the trade-offs and hard choices Coronavirus presents.”

He went on to say,

“But as the economy reopens it is fundamentally wrong to hold people in jobs that only exist inside the furlough. … I cannot save every business. I cannot save every job. No Chancellor could.”

All of this is consistent with the logic of market fundamentalism, according to which the best thing any Chancellor can do for the economy is to let market forces decide what succeeds and what fails.

But does it make sense to think like this in the middle of a pandemic?

No. Sunak’s approach relies on magical thinking when the country needs hard-headed realism:

  • It treats markets as omnipotent;
  • It treats policy as impotent; and
  • It will fail the British people and the British economy.

It Treats Markets as Omnipotent

Market fundamentalists believe in the magic of markets. According to market fundamentalism, market transactions are the only sound basis for determining what is needed in society and what is not. By extension, they are the only way of determining which businesses are viable and which are not.

But, of course, policy decisions affect the behaviour of markets. In particular, policy decisions in respect of COVID-19 have had a profound effect. As Sarah O’Connor wrote in the Financial Times,

             “But in truth, it’s impossible to determine which jobs will be viable after the crisis ends while we are still in the middle of it. Economic activity remains warped by government restrictions, from a ban on nightclubs to a 10pm curfew for bars and restaurants. The job of theatre producer is unviable, as defined by the chancellor. But won’t we ever want to go to the theatre again?”

And, of course, she is right. There are many jobs which are not viable during lockdown – indeed whole industries have become temporarily unviable. Airlines, hotels, restaurants – all of these are industries which are profitable only when they run with a high degree of utilisation (percentage of seats filled, rooms booked and tables occupied). And of course with strict restrictions on social distancing, their utilisation rates have plummeted.

Do we want to see these industries fail because they are ‘unviable’ during lockdown?

After January, with – almost certainly – a hard Brexit, do we want to see the automotive industry, the chemicals industry, the aerospace industry and the city all fail because they are ‘unviable’?

The world has seen this kind of thinking before, and the results were not pleasant.

Andrew Mellon was the Secretary of the Treasury of the United States from 1921 to 1932. During the Great Depression, with the US unemployment rate at almost 20%, Mellon became one of the most unpopular leaders in the United States after President Hoover. In the midst of economic catastrophe, Mellon urged Hoover not to protect unviable businesses but instead to:

“liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. … enterprising people will pick up the wrecks from less competent people.”

Fortunately, Franklin D Roosevelt became President in 1933 and introduced his New Deal – the opposite of Mellon’s recommendations.

Sunak is in danger of becoming the 21st century’s Andrew Mellon. His rhetoric (in public) sounds far friendlier than Mellon’s (which was in a private note to President Hoover), but the meaning is the same.

 

It Treats Policy as Impotent

The coronavirus has also shown us both how greatly government policies around the world can differ, and the impact of those differences. Some countries were quick to lockdown, while others were slow; some made masks mandatory, some resisted; some explicitly targeted elimination of the virus, others prefer the idea of herd immunity.

And this extends to the difference in the approach taken in protecting jobs and businesses. As Sarah O’Connor wrote: “While countries including Germany, France and Spain have extended their furlough schemes, in the UK only ‘viable’ jobs (defined as those that can be done part-time) will receive state subsidies.”

Sunak’s view of the UK’s decision-making during this period is that:

“The government has done much to mitigate the effects of the awful trade-offs between health, education and employment.”

The statistics suggest otherwise: it is neither true that there is a trade-off between health, education and employment, nor that our government has done well in comparison with others.

In fact, both economically, according to the OECD and in health terms, according to Statista, the UK is among the worst performers.

Source: OECD, Statista; 99% analysis

This is not some Act of God; it is the result of poor policy-making in the UK.

It is not that we have the highest density of population: Korea is denser and has performed far better. It is not that the UK population is inherently less law-abiding than those of other countries – in fact we used to pride ourselves on the contrary. It is that our laws and government guidance have been ill-considered and inconsistent, lurching from lockdown to ‘eat out to help out’ and it being a ‘patriotic duty’ to go back to the pub.

The UK has some of the world’s finest scientists and some of the world’s top economists. We should be among the best performers in the world; we find ourselves among the worst.

 

It Will Fail the British People and the British Economy

As the chart shows, we have already seen the results of this kind of policy-making in the first wave of the virus; if we combine a second wave with the economic damage of a hard or even no-deal Brexit, we may need to be prepared to liquidate huge sections of the British Economy.

The Parliamentary Committee on the Future Relationship with the European Union heard evidence this week from representatives of several major UK industries; the message was uniformly hard-hitting.

The Association of the British Pharmaceutical Industry (ABPI) described the impact of a hard Brexit on the supply of medicines as follows,

“Some medicines may not reach Northern Ireland – if, as feared, extra tests will be needed. Those facilities [for testing] don’t exist, so it’s not clear how it will happen.”

Neil Hollis, speaking for the UK arm of the chemicals company BASF, said

“There’s no positive spin on [£1bn of new registration costs, a loss of innovation and some chemicals no longer being available].”

The ADS Group, the aerospace trade organisation, pointed out that in addition to short-term disruption, there will be a huge disincentive for future investment:

“Whatever happens now, we will be involved in a day-to-day struggle to ensure the goods that we need to see flowing across our borders. It will happen at whatever cost it has to bear – but that obviously shapes and impacts on people’s future investment plans. It’s not a happy place for us to be.”

The Automotive Industry has long been warning of the dangers of hard Brexit. In the UK, the sector employs approximately 800,000 people. And it could be devastated. Honda, PSA, Ford, Nissan and Jaguar Land Rover have all indicated that major plants may need to close. And once they are closed, they are unlikely ever to re-open. The industry is in peril. And for every job which is lost in a car plant, a further seven are at risk in the automotive supply chain. Many other manufacturing sectors will face similar problems.

Farmers are also worried. Minette Batters, president of the NFU explained:

“We are at a pivotal time for the future of farming and the food on our plates. Nothing will determine this more than how the Government shapes trade deals with countries around the world.

There is no doubt that the countries we are currently negotiating with are demanding access to our prized market for their agriculture products and, right now, a trade agreement could be signed with little parliamentary scrutiny. This could result in a massive increase in the amount of food being imported that is produced in ways that would be illegal in this country.”

And even the City of London is not immune according to research by the think tank New Financial:

“We have identified 332 firms in the UK that have moved or are moving some of their business, staff, assets or legal entities from the UK to the EU to prepare for Brexit, which we think makes it the most comprehensive analysis yet of the impact of Brexit on the banking and finance industry.

Around 310 firms have chosen specific post-Brexit hubs for their EU business, and we have identified an additional 63 firms that are moving something somewhere since we published our initial report on the impact of Brexit on the City in March 2019 (an increase of 23%).”

And, as we have seen during the virus, the bulk of the pain will be borne by the people with the least ability to bear it – the poorest in society will become far poorer, even if some hedge fund managers do extremely well out of the chaos.

What should Sunak be doing?

What is the alternative? Joined-up, fact-based policy which integrates the COVID-19 response with the economic support package.

In March we wrote this article setting out a simple Three-Point Plan for Economic Recovery. Had the government followed that advice, the virus would have been contained by now and many (though not all) areas of the economy would have been fully opened.

We need more – updated, clearly – thinking along these lines, not a plan to sit back and let ‘unviable’ businesses go to the wall.

What is really unviable in the face of a real-world crisis is this desperate clinging to a childlike belief in the ‘magic of markets.’

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