22.03.2020 | Boris must embrace socialism immediately to save the liberal free market
by Ambrose Evans-Pritchard - The Telegraph

The British state can well afford to spend whatever it takes to cover lost wages, keep companies afloat, and hold the economy together through the Covid-19 crisis. There is no debt constraint. Nor is there any coherent alternative. Rishi Sunak has taken exactly the right steps in covering 80pc of wages - up to £2,500 a month - for staff kept on by companies but unable to work, and to offer the self-employed access to Universal Credit at rates equal to statutory sick pay. It prevents wholesale destruction of our economic base. It greatly raíses the chances of averting a protracted slump, or worse yet, a deflationary depression. It is executive action befitting the war-time threat that we face. Some cavil at the cost. They are wrong. To deny funding on the basis of primitive accounting shibboleths would be to repeat the errors of post-Lehman austerity strategy but on a greater scale, and with more calamitous effects. In that episode, public investment was cut to the bone – even though we could borrow at negative real rates – and this pulled down the rate of future economic growth for a decade. It was based on the false theory of “expansionary fiscal contractions”, debunked by the International Monetary Fund, and the nearest thing to witchcraft in modern economic debate. The result was a higher public debt ratio and smaller GDP than would otherwise have been the case. It achieved nothing of value. It was self-defeating even on its own crude terms. The stakes are higher this time because "sudden stop" threatens to push thousands of valuable and viable companies over the edge and fundamentally damage our free market system, eating into the supply-side foundations of our economy. We would have emerged dazed and blinking from the coming siege – months hence – to discover that you cannot just let the natural process clear "dead wood" (how I hate that term) and then enjoy a V-shaped recovery. Hysteresis would have set it. Other countries that preserved their industrial and economic base with more provident policies would instead have been the ones roaring back to life. While we languished in depression, they would have snatched our export markets and eaten our lunch. “This is not just a 'supply shock' that goes away in the third quarter,” says Robert Woods from Bank of America. Firms are going smack into a brick wall. Income has stopped overnight. Companies cannot ‘hoard labour’’ and muddle through. To take the route of passive liquidation – on the basis of Schumpeterian gobbledygook or sovereign debt phobia – is self-evidently untenable. The Government would end up having to nationalise large parts of the economy. We would have slid into socialism, one disaster after another, week after week, until we reached Corbynism by default and by defaults. To avert socialism, we must briefly become socialists. We must spend whatever it takes to save free market liberalism. The Government has already committed one grave error by giving up too early on the successful Korea/Taiwan/Singapore strategy on Covid-19 – “test, trace, isolate” – as it dallied with far-fetched theories and told us that it could "time" the trajectory of the epidemic with calibrated responses. Yet it could not even get the timing remotely right. It built a strategy on claims that we were four weeks behind Italy when anybody following the events in Lombardy could see the lag was only 13 days (exactly as professor Anthony Costello kept warning). It is now beyond doubt that we have let an Italian pattern take hold. Still we dither. The Government seemed to imagine that it could let British residents die at a much faster rate than in other comparable democracies in the first wave without provoking a ferocious popular and political reaction, and without untold damage to our international reputation. It seemed to think that testing the NHS to destruction was "doable". We’ll find some ventilators somewhere. The strategy reminds me of the Norway campaign in early 1940. It exposed staggering ineptitude. What finished off the Chamberlain government and brought about the national coalition that saved this country was the parade of Tory MPs in full military uniform – the voice of the front line – speaking in the Commons to vent their fury. Doctors this time? Downing Street must not now make an error of comparable gravity on the economic front by listening to bad counsel. It makes little substantive difference whether the public debt ratio stays at 85pc of GDP or jumps temporarily to 100pc or even 110pc so long as the money is spent preserving the productive system. Ratios of this kind – in these particular circumstances – are smoke and mirrors. Bernard Connolly, the high priest of British Wicksellian economists, argues that the Government's subsidies to keep the nation whole will lead to a big rise in pent-up demand (since nobody is spending much now beyond survival). This in turn will cause GDP to accelerate in a super V-shaped recovery once it comes. The Treasury can then run a tighter fiscal policy for a while – it would have to do so to avoid overheating – and that would gradually bend the debt trajectory back down. What matters is the trend over time. The snapshot debt ratio is irrelevant. This week’s talk of a Gilts strike, or flight from UK debt, lasted 48 hours and was nothing more than market noise. As soon as the Bank of England stepped in with £200bn of fresh QE – enough to cover a budget deficit of a tenth of GDP for a year – borrowing costs plunged, 10-year bonds yields halved, and sterling surged (to the consternation of the debt alarmists). Futures contracts on Gilts scarcely moved on the Chancellor's package tonight. What that tells you is that investors will reward rather than punish a proactive regime. Furthermore joined-up monetary and fiscal policy – call it helicopter money, call it whatever you want – is the new orthodoxy as we go into a global recession without normal central bank buffers. We will all have to print our way out of this. Old rules do not apply in a world of excess capital, zero rates and chronic deflation. The UK borrows in its own currency and has sovereign policy instruments. There is no credit risk. Nor do we face a rollover crunch on Gilts over any meaningful time-horizon. The existing stock of debt is on the longest maturity of any major country at more than 14 years. Those warning that we cannot afford more debt even in an emergency – and therefore implicitly that we should stick to economic business as usual and let the pandemic run wild – are more or less the same people who argued after the Lehman crisis that debt ratios were about to spiral out of control and that QE would lead to hyperinflation. They did not understand the fundamentals then. They are arguing from the same false premises today. The Chancellor’s £330bn loan package a week ago was right at the time but it was crafted on pandemic assumptions that no longer hold. This new package is of an entirely different character. It is marvelously audacious. Can I conclude that he has seen off the perennial obstructionists at the Treasury, with their pre-modern, 20th Century doctrines of debt sustainability? It brings us into alignment with Denmark, Norway, or Austria. It is a step ahead of Germany, which already has a longstanding Kurzarbeit system that allows companies to retain their workers on standby at state cost during downturns. The UK’s safety net of £73.10 a week for jobseekers was not the proper tool to deal with a violent unemployment shock beyond anybody’s control. Macroeconomic imperatives outweigh normal concerns about moral hazard. Household savings are too low to tide many people through the crisis. The state had to step in to prevent a cascade of defaults, adding a financial crisis to an economic crisis. Had this Government committed a second great mistake it would have surrendered our political system to a proto-revolutionary assault by others waiting to take advantage. The young Chancellor has won his spurs. Source:


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