CV19 and the economy

[Machiavelli]

The lockdown measures look as though they'll lead to the sharpest decline in economic activity since WW2. Below is the OBR's projection which involves assumptions about the length of the lockdown. My key question is who is going to pay for the debt in the longer term (ie when the government has to start paying it back)?

Coronavirus lockdown could shrink GDP by 35% and see unemployment rise by 2m, says OBR

Here is an excerpt from the report published by the Office for Budget Responsibility today looking at what impact the coronavirus lockdown could have on the economy. It says GDP could fall by 35% in the second quarter of the year.

Here is an extract.

In addition to its impact on public health, the coronavirus outbreak will substantially raise public sector net borrowing and debt, primarily reflecting economic disruption. The government’s policy response will also have substantial direct budgetary costs, but the measures should help limit the long-term damage to the economy and public finances – the costs of inaction would certainly have been higher ...

We do not attempt to predict how long the economic lockdown will last – that is a matter for the government, informed by medical advice. But, to illustrate some of the potential fiscal effects, we assume a three-month lockdown due to public health restrictions followed by another three-month period when they are partially lifted. For now, we assume no lasting economic hit.

Real GDP falls 35 per cent in the second quarter, but bounces back quickly. Unemployment rises by more than 2 million to 10 per cent in the second quarter, but then declines more slowly than GDP recovers. Policy measures support households and companies’ finances through the shock.

Public sector net borrowing increases by £218 billion in 2020-21 relative to our March budget forecast (to reach £273 billion or 14 per cent of GDP), before falling back close to forecast in the medium term. That would be the largest single-year deficit since the Second World War.

 

[LamieRobertson]

Create more debt to pay back the extra debt ...

 

[Herr Tubthumper]

And I presume there’s still the dent in the economy from Brexit to add to that? The U.K. is in a very sorry state.

 

[beorhthelm]

And I presume there’s still the dent in the economy from Brexit to add to that? The U.K. is in a very sorry state.

that dent wont be discernible from the rest of the damage.

 

[Herr Tubthumper]

They brexit lot will be rubbing their hands with glee that the impact of brexit can now be hidden/blamed on covid.

True. Maybe it’s a good opportunity for both sides to go their way with a no deal?

 

[Herr Tubthumper]

As an aside, there’s been talk of bringing the removal of the solidarity tax removal forward a year to help the economy, in effect a 5.5% tax cut. I know the very basics when it comes to economics but how does a 5.5% tax cut help? Also worth noting that Germans like to save so it’s no necessarily going to get put into the economy.

 

[Machiavelli]

that dent wont be discernible from the rest of the damage.

Yup, pretty much agree with this, and I loathe Brexit.

 

[Machiavelli]

As an aside, there’s been talk of bringing the removal of the solidarity tax removal forward a year to help the economy, in effect a 5.5% tax cut. I know the very basics when it comes to economics but how does a 5.5% tax cut help? Also worth noting that Germans like to save so it’s no necessarily going to get put into the economy.

Tax cuts mean there's more money ploughed into the economy, and it will need it (I'm sceptical of a V-shaped recovery, as I suspect the upside will be far more protracted than the rapid plummet), but it just means that the Treasury will bring in less money, racking up debt and, if the recent past is anything to go by, calls for 'tightening of belts'.

 

[Swansman]

How about FOR ONCE exercise some political power over the banks and tell them "we're not borrowing money, we're taking them".

 

[Deleted member 22389]

They brexit lot will be rubbing their hands with glee that the impact of brexit can now be hidden/blamed on covid.

Give it a rest.

 

[Perfidious Albion]

“My key question is who is going to pay for the debt in the longer term (ie when the government has to start paying it back)?”

One way or another, I have a hunch that it will be you and I that pay up, through taxes, spending cuts or loan interest. That is tough but given the current pandemic I don’t see any alternative to the measures the Govt. is taking which are similar to other governments of this world.

 

[Wrong-Direction]

Why do people keep asking these stupid questions!? It will be US that pay for it! The people that actually work for a living. Christ has history really taught people nothing .
Do you really think they'll suddenly stop screwing over those beneath them.
C***s dont just change over night.

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[Herr Ing Gull]

Why do people keep asking these stupid questions!? It will be US that pay for it! The people that actually work for a living. Christ has history really taught people nothing

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I don't think Trump will agree to that; he wouldn't even pay for his own wall!


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[Machiavelli]

Confirmation of what many of us feared and expected. This is part of a broader trend across the world. That said, my hunch is that the only western country to get out of this in better shape than others is Germany, whereas Asia -- and particularly eastern Asia -- will experience the least economic difficulties across the world for all sorts of reasons. To go even further (but to be far less secure in this), this might be the historical point in which future historians speak about the east alongside the west, rather than as subservient to it.

https://www.reuters.com/article/us-...onomy-to-its-knees-in-april-pmi-idUSKCN22512Q

 

[Machiavelli]

Adam Tooze is one of the world's leading scholars in International Political Economy. This is well worth reading for what comes once we're inching out the other side:

https://www.theguardian.com/commentisfree/2020/apr/27/economy-recover-coronavirus-debt-austerity


Should we be scared of the coronavirus debt mountain?
Adam Tooze

The pandemic has necessitated huge borrowing – but post-crisis austerity would be the very worst way to deal with it


We do not know how this pandemic will end. We do know that we will be poorer when it’s over: GDP is plunging around the world.

We also know that there will be a towering pile of IOUs left from the bills run up during the crisis. When it is over we will have to figure out how to repay them – or whether to repay them at all. That question will decide the complexion of our politics, and the quality of our public infrastructure and services for years to come. Unless we tackle this issue, coronavirus debts will be the battering ram for a new campaign of austerity.

The scale of the challenge is huge. Hard cases like Italy grab the headlines. Its debt currently stands at 135% of GDP. As a result of the crisis it will likely rise to 155%. But it is no longer an extreme outlier. According to the IMF, the debt ratio of the average advanced economy will exceed 120% next year. In the US, the debt to GDP ratio may soon surpass that at the end of the second world war.

These numbers are impressive, daunting even. They offer an open door to conservative scaremongering. The first move in that tradition of debt politics is to invoke the tenuous analogy to a household. In this picture, debts are a burden on the profligate; a moral obligation that must be honoured on pain of national bankruptcy and ruin.

There are some circumstances in which this analogy is apt, specifically when you are an impoverished and desperate country dependent on foreign creditors who will lend to you only in the currency of another country, most commonly that of the US. Many poorer countries are in this position. Few rich countries are. Indeed, one of the definitions of being an advanced economy is that you are not.

Advanced economies borrow in their own currency and overwhelmingly from their own citizens. For them, the household analogy is profoundly misleading. In fact, those seeking to rebut the misconceptions of the household analogy sometimes say we merely owe government debts to ourselves.

That is a liberating thought. It makes clear that we are not in the position of a subordinate debtor nation. But it has a dizzying circularity to it. If we are our own creditors, are we not also our own debtors – master and slave at the same time? Ultimately, it is a bon mot that relies on treating the economic nation as a unit. That may look like liberation, but it is an illusion achieved by removing the real politics of debt – which are about class, not nationality.

Historically, government debts were assets owned by the middle and upper classes, the famous rentiers. And taxes were overwhelmingly indirect and thus fell disproportionately on lower incomes.

Today, the richest still own a disproportionate share of government debt. But the liabilities of the government are now widely distributed. They are staple investments for pension funds and insurers. Government debt is not simply a burden; it is a highly useful financial asset, offering modest interest rates in exchange for safety. It is all the more useful for the fact that the government lives for ever and will generate revenue for ever through taxation. So it enables very long-term planning.

The tax base today is much broader than it was a century ago. But who pays taxes – and who does not – remains one of the most urgent questions of the moment. A world in which coronavirus debts are repaid by a wealth tax or a global crackdown on corporate tax havens would look very different from one in which benefits are slashed and VAT is raised. And it is very possible that debt service will be taken out of other spending, whether that be schools, pensions or national defence.

As the great Austrian economist Joseph Schumpeter remarked in the aftermath of the first world war, “the budget is the skeleton of the state stripped of all misleading ideologies”, the truest reflection of the distribution of power and influence.

It is a distributional issue. But not only that. Debts may also affect the size of the cake itself. As we know only too well, a regime of austerity that keeps taxes high and government spending low is not conducive to rapid economic growth. And yet for debt to be sustainable, what we need is growth in GDP – to be precise, growth in nominal GDP, which includes real economic growth and inflation. Inflation matters because it acts as a tax on debts that are owed in money that is progressively losing its value. Price stability, the objective of monetary policy since the 1970s, no doubt has benefits for everyone, but most of all the creditor class.

This is the awesome dilemma we will face in the aftermath of Covid-19. This is the battle for which we must brace. Not right now, but once the immediate crisis has passed. After the financial crisis of 2007-08, it was in 2010 that the push for belt-tightening began. Like revenge, austerity is a dish best served cold.

Progressive politics cannot, of course, shrink from a battle about budgetary priorities. But it should resist fighting on the terms set by austerian debt-fear. In the circumstances of the UK or the US, alarmism about debt is false. And how false is being demonstrated by the crisis itself.

There is one mechanism through which we can ensure we truly owe the debts to ourselves. That mechanism is the central bank. Its principal job is to manage public debt – and at a moment of crisis central banks do what they must. They buy government debts or, in what amounts to the same thing, they open overdraft accounts for the government.

That has two effects that, acting together, have the potential to negate debt as a political issue. Central bank intervention lowers the interest rate. If interest rates are held down, debt service need not be an onerous burden. At the same time, the central bank purchases remove government IOUs from private portfolios and put them on the balance sheet of the central bank. There, they are literally claims by the public upon itself.


When the central bank buys the debt it does so by creating money. Under ordinary circumstances one might worry about that causing inflation. But given the recession we face that is a risk worth running. Indeed modest inflation would help us by taking a bite out of the real value of the debt.

Of course, ensuring that the central banks continue their crisis-fighting methods into the recovery period will itself require a political battle. Fearmongering about inflation is the close cousin of fearmongering about debt. We should resist both blackmails. We have the institutions and techniques to neutralise the coronavirus debt problem. We owe it to ourselves to use them.

• Adam Tooze directs the European Institute at Columbia University and is the author of Crashed

 

[RossyG]

 

[Thunder Bolt]

View attachment 122878

Have you seen the body bags being lowered into a mass grave in New York?

https://www.bbc.co.uk/news/world-us-canada-52241221

 

[RossyG]

Have you seen the body bags being lowered into a mass grave in New York?

https://www.bbc.co.uk/news/world-us-canada-52241221

Yes. It’s been in use for 150 years.

 

[Machiavelli]

https://www.theguardian.com/commentisfree/2020/apr/30/captain-toms-birthday-100-years-nhs-crisis


It's Captain Tom's birthday. The past 100 years should teach us a powerful lesson
Danny Dorling

Over the NHS fundraiser’s lifetime, inequality has dropped but shot back up again. After this crisis we must keep it down


Tom Moore entered the world on 30 April 1920 as Britain was emerging from the worst pandemic since mortality records began: the influenza of 1918-19. Total mortality in the UK rose by 24% in a year in 1918. Tom was just nine years old when the bitterly cold winter of 1929 increased mortality by 15%, and a newly married husband aged 48 when the influenza pandemic of 1968 led to a mortality increase of 6%.

We do not yet know how Covid-19, the pandemic that inspired Captain Tom to begin his record-breaking walk at the age of 99, will rank in this deadly league table; yet it will almost certainly be less deadly than the events of 1918, 1929 or 1968.

In 1937, when Tom was 17 years old, there was no National Health Service. It was a time of mass unemployment and mass poverty. One shilling in every six earned in Britain went to the best-off 1% of the population. The vast majority of Britons were poor. If they fell ill, they had to pay to see a doctor, or hope for charity.

When 20-year-old Tom was conscripted to the war effort in 1940, Britain began to change faster than it ever had before; the next 17 years would be some of the most remarkable in UK history. In 1957, when Tom was 37, the best-off 1% in the UK took only 9% of all national income. A great transformation had taken place and people were told they had never had it so good. But it would get better.

Though Boris Johnson likes to talk of 'levelling up', the coronavirus pandemic has instead resulted in a levelling down

The influenza of 1968 returned in 1970 and again in 1972. One million people died worldwide. Yet it was a time when the global population was younger because of lower life expectancy than today; and it was a time of growing optimism and equality. By the time Tom was 57 years old in 1977, the best-off took less than 6% of all income in Britain; three times less than when he was aged 12. It was the smallest share they have ever taken; housing was affordable and there was full employment.

Tom could have expected the situation to get better still. But a very different UK emerged instead. Margaret Thatcher’s election in 1979 heralded 18 years of radical Conservative economic policy. In 1997, when he was 77, the take of Britain’s 1% had doubled to 12% of all national income. When Tom turned 87, after a decade of “New” Labour, the share of the best-off 1% had risen to over 15%, which meant that inequality had returned to the levels they were when Tom was a very young man. Today the very best-off 1% in Britain receive around 14%, or a seventh of all income.

At the start of this century our leading politicians believed that the rich should be rewarded and the poor should be bullied. Though not very long from now, we may look back and see that it took the Covid-19 pandemic to bring to a halt the rise in economic inequality.

Though prime minister Boris Johnson likes to talk of “levelling up”, the coronavirus pandemic has instead resulted in a levelling down. Many Britons with no wealth will fall further into debt this year. Yet it’s estimated that a third of FTSE-100 companies have cut their chief executive’s pay as a result of the economic shutdown; anyone whose wealth is held in stocks and shares has seen it collapse in recent months; and house prices are falling, and are likely to fall the most where they were highest.

Captain Tom’s fundraising achievement, for which he has been promoted to colonel, is a tribute to Britain’s belief that our NHS is worth preserving. But charity efforts even of this magnitude can raise only a tiny fraction of the billion a week needed if the UK it is to fund its health services to the levels of Germany. Of all large European countries, it is Germany that has dealt with the pandemic the best.

At first, the economic impact of Covid-19 looks devastating. But think back to the first half-century of Tom’s life. Think of how his situation changed from one in which living in poverty was very likely, through to a time when his children could expect to have well-paid jobs, enjoy full employment and start a family in their 20s if they wished.

The last time economic inequality began to fall in the UK was around the time Tom was born, at some point between 1913 and just after the end of the first world war. The war debts could only be repaid by taxing the rich; no one else had enough money. The same is likely to happen again today, with the debts of lockdown and global recession.

Coincidentally, a century after Captain Tom was born, the prime minister announced the birth of his own son. But there is no need for Boris Johnson and Carrie Symonds’ baby to live through such a rollercoaster century. We should learn from the past 100 years: pull inequality down, but this time keep it down.

• Danny Dorling is the Halford Mackinder professor of geography at the University of Oxford and author of Slowdown: The End of the Great Acceleration