Printing money, a new national youth corps… time to think the unthinkable
Source: The Guardian
Date: 14 Jun 2020
Printing money, a new national youth corps… time to think the unthinkable
The high street is open again. But an explosive rise in unemployment is still on the cards
Shops can open tomorrow, but until social distancing rules can be dispensed with completely, expect business to be slow. Even in a world with an effective vaccine and a robust testing, tracking and tracing system that would give shoppers confidence, British retailing, with online spending having doubled in three months, would have to reinvent itself.
The British high street is being destroyed before our eyes. Last year, retailing supported 2.9 million jobs. If it supports half that number in five years’ time, we will be lucky.
Nor is it alone. Output statistics for April, released on Friday, spell out a story of mayhem. Aviation suffered a 92.8% fall; car output was down 90.3%; food and beverage services 88.5%; hotels down 86.9%. None of these will recover to what they were last year quickly and some, such as airlines and pubs, face structural issues as difficult as those that confront retailing.
Overall, output in April fell by some 20%, having fallen 10% in the first three months of the year. Yes, there will be some recovery in the months ahead as lockdown is eased but, taken as a whole, British output is projected to fall by 14% over 2020, according to the Bank of England. These are bewildering numbers.
In response, the Treasury has made valiant efforts with its job retention scheme, currently furloughing some 9 million people, as has the Bank with its rapid provision of hundreds of billions of emergency credit. Yet last week the World Bank forecast that advanced economies’ output would decline on average by 7% in 2020. Britain’s decline will be twice that. We are the recessionary world-beaters.
Part of the explanation is the disastrous handling of the crisis. Many Britons are frightened, wary of common spaces and distrustful of an errant, ineffective government. The return to work is more cautious than in countries whose public health record is better.
And another part of the explanation is the structure of the UK economy. It’s not that retailing, leisure, hospitality, business services are not economically valid activities. But in Britain they have become vastly outsized, built on unsustainable consumer spending flowing from the rise in property prices. There needs to be a rebalancing and a new generation of firms whose foundations are less intertwined with the fortunes of house price-dependent consumption.
The result is that over the next 12 months Britain risks an explosive rise in unemployment and social distress. Even as matters stand, unemployment among non-furloughed workers looks set to rise to some 3 million by the autumn. As the furloughing and emergency loan schemes are wound down, with nothing so far planned to take their place, the combined impact will be devastating.
Around 1.6 million retail workers are furloughed; 1.4 million hotel, restaurant and pub workers. Expect their employers in these ultra-distressed sectors to make at least of half their payroll redundant when furloughing ends. On top, another 5.7 million are furloughed – expect a third of them to be made redundant. Unemployment is thus nearly certain to exceed 6 million by early 2021. Avoiding this is the most profound challenge British economic policymakers have confronted in my lifetime.
The government is privately aware that the twin combination of unemployment and the death rate could be politically fatal. Witness the call for local authorities and local enterprise partnerships to suggest “shovel-ready” construction projects in the very near future.
There was widespread surprise at the scale and generosity of chancellor Rishi Sunak’s job retention scheme when he launched it and then at his readiness to only gradually wind it down, ending it in October. But his willingness to break all conventional rules is only just beginning to be tested.
Obviously, the government cannot pay the wages of 9 million people indefinitely. But equally it cannot risk 6 million unemployed. What it must do is introduce a wage subsidy as it phases out the job retention scheme so that employers do not sack their workers as furlough ends, but instead keep them on as active workers. The subsidy can be reduced gradually during 2021 but in those sectors in extreme distress it should continue into 2023. I would add a subsidy to hire and train all unemployed 16- to 25-year-olds, underwriting a National Youth Corps.
Furthermore, the government must aggressively stand behind banks and investors supporting distressed companies with subsidised loans and by taking partial direct stakes, forgoing tax if necessary to keep firms alive as long as other stakeholders take a similar hit. The whole approach might seem expensive. But the fiscal and human cost of allowing firms constituting a sixth of GDP to go bust, with unemployment rocketing, is many times greater.
If averting immediate mass unemployment is one objective, another is to lay the basis of a more sustainable economy by backing the next wave of innovative and green enterprises. Sunak has launched a £500m future fund to support innovative and high-growth companies. That’s good, but it is minuscule. Germany’s designated funds for economic reinvention, part of its recently announced economic recovery plan, are many times larger. It will stick in the craw of the Brexit right but Britain would do well to follow Germany’s lead. Its overall economic stimulus is worth 4% of GDP. We should follow suit.
How is all this to be financed? Here again, the old rules need torching. Issue perpetual bonds that don’t have to be repaid, and, if necessary, supplement the bond proceeds by printing money; with output taking such an enormous hit, the inflationary risk is non-existent. Britain is facing a looming first-order economic disaster. The risk is not thinking big enough in response.
Will Hutton is an Observer columnist