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My Lords, I welcomed the broad spirit and nature of the Chancellor’s Budget, much of which was, of course, designed before the realities of Covid-19. It was focused on a policy to significantly boost investment spending, so-called levelling up and giving proper attention to the northern powerhouse, all of which I hugely welcome. However, there have been events. The rest of my speech will be a brief, adapted form of an article I posted on Monday on the website of Chatham House, which I currently chair.
Linked to the call that Robin Niblett and Creon Butler of Chatham House and I made the day before—Sunday—for a global response to the Covid-19 pandemic, the case for a specific dramatic economic policy gesture from many policymakers across the world is prescient. This should involve most, if not all, G20 nations and should certainly have the same force as that led by Gordon Brown in 2008. We need some sort of income support for all our citizens, whether employees or employers, for the next two months. Perhaps one might call it, as I have done, truly a people’s QE— quantitative easing.
Both so-called modern monetary theory, MMT, and universal basic income, UBI, essentially owe their roots to the judgment that conventional economic policies have not been working, especially since 2008, in the way we are all trained to believe. At the core of these views is the notion of giving money to people, especially those on lower incomes, directly paid for by our central banks printing money. Until recently, I found myself having many doubts about, or not much sympathy with, these views, but, as a result of Covid-19, I have changed my mind.
This crisis is extraordinary in so far as it is both a colossal demand shock and perhaps an even bigger colossal supply shock. The crisis epicentre has apparently shifted from China, and perhaps much of the rest of Asia, to Europe and the United States. We cannot expect policies, however unconventional by pre-2008 standards, including the dramatic monetary steps announced by the Federal Reserve Board and other central banks, to put a floor under this crisis. We are consciously asking our people to stop going out, stop travelling and not go to their offices—in essence, curtailing most forms of normal economic life. The only ones not impacted are those who spend their entirety in cyberspace but even they have to buy some form of consumer goods, such as food, and, even if they order online, someone has to deliver it.
To give a flavour of the kind of challenge that we are now in, data published at the weekend shows that on most measures the Chinese economy probably fell by about 20% year on year in February alone. That equates to taking off something close to $3 trillion worth of GDP in a month. We in the UK, and much of the rest of the Western world, are adopting or have adopted some version of that same policy in March. It would be not at all surprising if we did not do something bolder, and the economic consequences will not be so far different from those in China.
As a result, markets are correctly worrying about a complete collapse of economic activity and with it a collapse of companies, not just their earnings. In my view, an expansion of central banks’ balance sheets in the way that has been done since 2008 is not going to do anything to help to arrest this, especially unless we go beyond just trying to underline the security of our banks, although that is still important. What is needed in the current circumstances are steps to make us believe with high confidence that if we take the advice of our medical experts, especially if we self-isolate and deliberately restrict our incomes or have them deliberately restricted for us, then this will be made good by our Governments. As I have said, in essence we need smart, persuasive people’s QE and quickly.
Having discussed this idea with a couple of economic experts I know, I realise that there are of course some challenges in the implementation of such an idea. For example, I gather that in the US it is probably currently illegal for the Federal Reserve Board to directly transfer cash to individuals or companies, and that could be true here and elsewhere. In my view, though, that is easily surmounted by our fiscal authorities by issuing a special bond, the proceeds of which could be transferred in the manner that I have suggested to both individuals and business owners, and our central banks could easily finance such bonds. It is also the case that such a step may encourage both the perception and the actuality of central bank independence, but I now find myself among those who argue that central banks can operate such independence only if done wisely and when needed.
Others may argue, in the spirit of the equality debate, that any income support should be targeted primarily if not entirely at those on very low incomes, while higher earners or large businesses should be given none or very little. I can sympathise with such spirits, but in my view that ignores the centrality and scale of this particular economic shock. All our cafes, pubs, restaurants, airlines—where do you stop?—indeed, all our businesses are currently at accelerating genuine risk of not being able to survive, and of course all these organisations are enormous employers of people on any kind of income.
As I have tried to say, it is also the case that time is of the essence. We need our policymakers to act on something like this as soon as possible—ideally in the next 24 hours—otherwise many of the transmission mechanisms that we have become accustomed to for the whole of our lives are going to be challenged. We need some kind of smart people’s QE now.