After the Fall

Greg Marsh argues, while the government’s furlough scheme has provided some protection in the short-term, we are still facing an economic cliff edge. Could conscripting the best and brightest from the private sector help to restore public confidence in the state sufficiently that we could contemplate a major programme of fiscal stimulus to rebuild our economy?

Our economy is now in thrall to cartoon physics. As Mark O’Donnell put it in his seminal 1980 treatise, The Laws of Cartoon Motion (courtesy Esquire magazine), “Any body suspended in space will remain suspended in space until made aware of its situation.”

We too, like Wile E. Coyote, are being held aloft only by a shared delusion, a collective naivety about just how inevitable and how catastrophic our imminent fall will be. Although the Covid-19 virus has taken us over the cliff edge, the perverse ingenuity of the furlough scheme has allowed us a surreal hiatus, suspended in mid-air by state largesse. The only vivid disanalogy is that while cartoon legs keep circling furiously even as they sail over the cliff edge, ours are lazily draped over the arm of a sofa.

“The worst recession in 300 years,” according to the Bank of England (FT, May 2020) is a hard enough headline to digest even for those with a strong stomach for economic history. But most do not even get to the business pages; they are too distracted by and too anxious about the urgent public health crisis. For when the fall begins – and it will – many of the nearly 10 million employees furloughed or paused in the UK will not be returning to work. Yet they will all still need to pay for Life: rents must again be collected, food and clothing must be bought, cars and homes must be maintained. The cash people will save by holidaying domestically and the modest buffering of Universal Credit will not begin to compensate for the real loss of total system productivity.

It would be reassuring to assert that this demand is mostly delayed not destroyed; that after the birdies have circled Wile E. Coyote’s bruised head, the screen will wipe, and the chase resume. But for three reasons that will not happen.

Firstly, it takes time for shock to drain from the system. Consumers are scared, and even if only some of that is rational, it is socially reinforced and politically unchallenged. It will persist unpredictably for many quarters. Many small businesses are about to learn the truth of Keynes’ maxim: the market can stay irrational for longer than you can remain solvent.

Secondly, most of Britain’s productive economy depends on international counterparties, many of which are similarly impacted. And even where they are poised to rebound, trade for goods and services is likely to be severely and unpredictably impeded by a wave of physical and regulatory border imposition (it certainly does not help that Brexit is also still in the offing.)

Thirdly, this all assumes that lockdown will ease in a foreseeable way. But ironically while our epidemiological models have never been more sophisticated (nor more scrutinised), the interference effects of governmental and public response to future waves of infection are almost impossible to forecast.

The recurring theme across all three of these factors is their inherent unpredictability. All trade depends on knowing the consequences of your actions, having confidence in recourse, believing you know others’ preference functions so you can circumvent long and costly negotiations. In the absence of that clarity, businesses and consumers will rationally exhibit a surfeit of caution. That means they will save desperately. And that implies an epochal downturn.

It is quite possible that the human costs of this tragedy – unknown in their totality and terrible enough in their own right – will be dwarfed by the profound economic consequences of the depression that is about to engulf us. We will all suffer, but the pain will not be uniformly distributed. While the virus discriminates pitilessly against age, frailty, ethnicity and obesity, this recession will hurt disproportionately those without cushion, without transferrable skills, and without social capital. It will define the contours of a generation.

Mike Moritz, the legendary technology investor, has noted that while some companies’ fortunes have been boosted by this event, for most, Covid-19 has accelerated the inevitable day of reckoning. The challenge is that whereas the obsolescence of the department store in an age of Amazon was progressive and widely anticipated, formerly it was gradual, with enough absorptive capacity in growth sectors of the economy to accommodate much of the displaced labour. But when economic change occurs in punctuated equilibrium, there is no opportunity for reabsorption: the labour market instead becomes flooded by a sudden glut of capacity. When supply increases and demand falls, prices – that is wages – plummet.

This can sound like arcane when phrased in technical language but it is in truth an acute human problem, and one that rapidly becomes societal and political. Redundancy is first debilitating, and then self-fulfilling. When millions of people are structurally unemployed, their skills deplete further and many become unemployable. With tinder like this, it only takes one charismatic demagogue to start a wildfire.

The labour market policy instruments we have evolved over the last couple of decades in the context of near full (albeit in some cases tenuous and precarious) employment, and a relatively benign global trading environment have yielded us mechanisms like the minimum wage and security of employment. Those components – already inadequate – were at least appropriate for their era, and helped to blunt the sharpest edges of market capitalism. But in a period of entrenched structural unemployment, those safety features may throw things into reverse: by further discouraging terrified employers from investing in growth, they may accelerate among anxious businesses the adoption of technologies which lower labour intensity, thereby exacerbating the crisis.

So what can be done? There are really only a few viable candidates. The libertarian prescription would be to embrace the gig economy wholesale and deregulate employment. Partial, casual employment is surely better than none at all. While we are at it, we can privatise social protection, too, and help mitigate the explosion of national debt. But while dynamic and responsive, this path will only compound income and wealth inequality. It is hard to see how that strategy could survive a full political cycle. Furthermore, having grown up with the promise of equality of opportunity, few of us want to live in a still more unjust society.

Another is a massive programme of fiscal stimulus. A New Deal for the New Normal. That worked in the 30s, but is less obvious today. We are already profoundly sceptical of our politicians in this country; we no longer defer to them reflexively, nor do we trust them to commission railways, airport runways or hospitals. Most of the economy?

France at least has a statist inheritance; Germany’s technocracy has inspired increased confidence in its leadership through the crisis; Sweden’s social cohesion and Janteloven has allowed its government to tread the strait path to herd immunity in its response strategy, while retaining public faith. But in the UK, by comparison, the hollowness of our public discourse has been laid bare. Having run up a trust deficit over the Iraq war and more recently Brexit, even our best politicians – already thin on the ground – now enjoy such low public confidence, and face such a reflexively shrill and critical media, that they have been defensive and untransparent from the outset. At precisely the moment when a strong, bold state is most needed, it is most visible by its absence.

In one sense this should be no surprise. Having London at the centre of our economy has proved a double-edged sword. It has been a tremendous international magnet for talent, and a font of wealth. But by promising – and delivering – riches, it has crowded out the public sector by syphoning off the best and brightest from our education system. Whereas a hundred years ago, plum jobs with the civil service were fiercely fought for, in recent decades graduates have instead craved employment with consulting firms, banks, and tech companies. Likewise, politics has lost its vestigial public regard; its appeal as a career choice has waned, leaving us, some might contend, with our present sorry state: a lurid mediocrity of chancers, narcissists and relics. This mattered little when the dominant strategy of government was to stay out of the way of the economy. Who after all cared to devote their career to administering a small island? But in this time of crisis, it is a critical deficiency.

So while a plethora of policy gizmos will now do the rounds promising to square circles, every good student of Wile E. Coyote already knows the key lesson: given sufficient operator incompetence, even the most ingenious Acme Corporation weapon will inevitably backfire.

A Ministry of All the Talents

My recommendation is therefore a modest one: conscription. Invite, with maximum prejudice, the best and brightest minds to give over the private sector for a time so as to do their duty in service of the state. The bankers, the consultants, the engineers who have staffed our modern service economy, who have profited hugely from its international clientele, are now urgently required on the home front.

The NHS – and in particular NHSX (which is driving forward the digital transformation of health and social care) – is a case study for this. Its executive ranks, over the last few years, have swelled with highly qualified escapees from the City, who have arrived with a sophisticated modern management toolkit. Far from perfect, it nevertheless helps explain why despite the system’s manifest structural bloat and chronic underfunding it has survived the last few months. It is one of the reasons that 90% of GP surgeries are now doing online video calling, why remote monitoring is undergoing field trials, and why there is some glimmer of hope about a new contact tracing technology platform – especially if we can eschew British exceptionalism for long enough to adopt the technically robust decentralised approach sponsored by Google and Apple. (Odd, no, that it should be the tech behemoths championing our civil liberties?)

Escapees from the private sector shall not be on the frontline intubating patients. Nor should they dig trenches or build bridges: rather, they are to help to run things without profiting by it. They must do strategy, product management, planning – just the competencies they were previously selling at eye-watering day rates. Having long ago capitulated in the battle for talent with the private sector, the public sector now urgently needs this acumen. We must immediately repurpose private sector training, skills and intellect across all parts of government to help rebuild our economy from the top down in this, our darkest hour.

With all such talents at its disposal, the state might yet secure a renewed lease on public confidence—and a Keynesian programme might actually stand a fighting chance.

The founder of pioneering home sharing platform onefinestay, Greg Marsh is an entrepreneur and investor. He has also taught at Harvard and Imperial College. He was a co-author of the 2017 Taylor review of modern working practices, commissioned by the British Prime Minister.