There are reasons for optimism as the UK economy and much of the rest of the world plunges into recession. That might seem like a bizarre statement when the recession is forecast to be the deepest in several centuries.
Yet there are several arguments for remaining hopeful. Looking back, it is clear that previous pandemics have reduced inequality. And this one could, at least in the short term, be no exception. As the Nobel prize-winning economist Sir Angus Deaton has written: “It is an equal opportunity infection that does not pass over world leaders, senior politicians and celebrities.”
Writing in the Financial Times, the Harvard economist Amartya Sen, another Nobel prize winner, says there is room for optimism as collective action is appreciated (rather than being denigrated as the first steps towards communism). “The need to act together can certainly generate an appreciation of the constructive role of public action.”
The Bank of England’s chief economist, Andy Haldane, is another who is hopeful that collective action will be appreciated long after a vaccine is found for Covid-19. His emphasis is on voluntary groups and the spontaneous urge of the community-minded to come together, appreciating the need to take on issues such as climate change, or to care for those less well equipped to deal with modern life.
Of course, any action to improve living standards and general wellbeing once the lockdown is lifted will need money, and the potential for governments to access plentiful funds is another reason for optimism. After the 2008 financial crash, the largely conservative governments that ran the developed world were emotionally averse to persistently high levels of debt, even when their purpose was to spur a recovery and ultimately reduce the debt as a proportion of national income (GDP).
The intellectual veneer put on this was an argument about debt markets and interest rates. The central thesis was that a debt-to-GDP ratio above 80-90% ran the risk of triggering a panic sale of government bonds. The result would be rocketing interest rates and a return to deep recession. As chancellor, George Osborne addressed the bond markets as if he were a modern-day Uriah Heep, ’umbly begging their pardon while he dutifully visited a long-lasting and painful austerity upon the poorest sections of society.
A pandemic means all countries must raise funds on the debt markets to bail out vital industries and prevent mass unemployment. The bond investor has nowhere to go other than to lend to highly indebted governments. Another factor determining the impotence of these investors is the crazy risk of switching their funds into equities when so little is known about which companies will survive and prosper in the post-pandemic age, Amazon notwithstanding.
The UK may enter 2021 with a debt-to-GDP level above 100% and few will think it a cause for concern. The sheer volume of funds in the bond markets looking for investment opportunities will mean interest rates stay low, allowing nations to pay their interest bill with room to spare. The UK will have the scope to support campaigns to write off developing-world debt while also repairing the country’s tattered social fabric and investing in new infrastructure, healthcare provision and educational facilities.
There is a cost to this, which is the investment returns usually enjoyed by pension funds in the developed world, including those in the UK. They are the major bond investors, along with Middle East sovereign wealth funds, that must accept lower returns for lending governments their savings.
For a long time now, pension funds have wrestled with how to match steadily declining returns with unreasonable demands from savers for sky-high retirement incomes. The post-pandemic world is going to make that circle even harder to square.
And this problem is not a side issue. Unless governments can work out a way to persuade older voters that their best interests lie, not in protecting their house prices and pension entitlements, but in rejecting austerity to favour a world where their savings are put to use – in part, to enhance health and social care – for them and their families, spending cuts and higher taxes will be the result.
Deaton and Sen are ultimately gloomy about overcoming the long-term drift to inequality. For the British, who must soldier on with Boris Johnson as prime minister, that concern must be writ large.
Let’s hope the old, who traditionally vote Conservative in droves, see that the collective response to the pandemic should be maintained, not least for their own good.
