Large parts of the western world are this weekend in lockdown. The state of California — a bigger economy than the UK — on Friday became the latest to enforce sweeping social distancing measures aimed at reducing the spread of coronavirus. It joins cities such as New York, and much of Europe, where movement and business is now restricted in the name of public health.
Alongside the virus suppression measures that spread with extraordinary speed this week, the global economic policymaking apparatus has shuddered into overdrive. The effort began on Sunday when the Federal Reserve cut interest rates to zero, relaunched quantitative easing and extended swap lines to foreign central banks.
The European Central Bank and the Bank of England followed on Thursday, with hundreds of billions in asset purchases. The Fed also extended swap lines to even more US allies, helping to ease a funding squeeze as investors dumped even safe-haven investments such as government bonds and gold in a scramble to get hold of dollars.
The co-ordinated action is showing signs of having ameliorated the purely financial aspects of the crisis. Global stocks and the price of oil rose on Friday, while the US dollar’s rapid climb went into reverse — though Wall Street struggled to hold on to its early gains. A lot has been achieved this week, but more is still needed — especially in terms of support to the real economy.
After the falls in markets, the damage to livelihoods is just beginning. Jobless claims for the US rose last week by the fourth biggest percentage on record. Goldman Sachs estimates this week’s figures will rise by 2.25m: the highest ever.
Policymakers must now turn attention to making the recession as shallow as possible and the eventual recovery robust. This does not mean boosting current spending; consumption will inevitably fall with populations in lockdown. Stimulus should instead encourage productive capacity to remain, so that when social distancing comes to an end businesses can resume work and employees return to their jobs.
European governments have already launched programmes including tax holidays and loan guarantees to keep companies in business. On Monday, France said it would guarantee loans to businesses worth about 12 per cent of national income. The UK made guarantees worth 15 per cent. The US Senate introduced legislation on Friday that would unlock more than $1tn in total, including $208bn of loan guarantees.
Cheap credit can help some businesses survive but others will not be viable with the additional debt at any cost. Governments now need to provide help so companies can keep their workers on the books ready for when the virus passes. France and Germany have relaunched the kind of subsidised short-term working arrangements that helped during the financial crisis. In one of the most substantial packages so far, the UK government on Friday pledged to pay 80 per cent of the wages of workers who are furloughed rather than fired, up to a certain limit.
Direct payments, funded by government borrowing or in extremis central banks, are now called for — and in size. Other countries can learn from the US, where Congress is debating just how much to send to low- and middle-income workers. Methods need to be found to offer payments in other developed countries. In Europe, value added tax systems can help companies, while benefits and self-assessment tax systems will need to be adjusted to deliver a universal basic income.
As with antivirus efforts, time is of the essence. The faster governments put in place measures to combat recession, the better. Welfare states were created to provide insurance for temporary sickness and unemployment. Now it is time to show what they can do.
Source: Economy - ft.com
