Thursday, April 16, 2020

Keir Starmer is Right - We Need to Know When Lockdown Ends

The Dangers of Lockdown and Why it Needs to End… Soon!

Keir Starmer may just be scoring political points but he is actually spot on in asking for a plan to end the lockdown.

For the past few weeks, I have been bending folks ears (those within earshot at least) about the very real threat that lockdown presents to the economy and the danger that a prolonged lockdown presents to the country in the long term. I hear a lot about science deciding when lockdown will be eased but where is the economics, and where is the ear to the business community below the big players?

It is odd to find myself in agreement with Professor Anton Muscatelli University of Glasgow. He and I crossed swords at a debate hosted by Glasgow Chamber of Commerce on the merits and opportunities, in my view, of BREXIT. The Professor disagreed and we debated it for an hour or two before an audience who I hope were entertained.

But on this occasion, the Professor and I are in violent agreement predicting catastrophic declines in the Scottish economy as a result of the actions taken in response to Covid-19. The OBR agree for the wider UK economy, and it is all self inflicted.

The Government has certainly set out some extensive measures aimed at mitigating the short term impact of the lockdown. But there are many ongoing debates about their suitability for smaller firms. 

The fact that there is the ongoing adjustment to accommodate businesses that have so far not been thought of in the provisions is good. But it speaks to the knee jerk nature of the response and as to how poorly understood the richer economic reality is in Government. It is a point reinforced by the lack of uptake. The provisions are not appropriate for many and the mechanisms of delivering them inadequate.

I also hear from my clients and contacts that small firms once ineligible for bank finance suddenly find the bank offering them a product which they miraculously suddenly qualify for. Of course more expensive than any Government-backed option but also immediately rendered ineligible for a great deal of government support

But my real concern is for the smaller businesses, and particularly those in rural or more sparsely populated areas.

Having spent many years dealing with these small firms in their efforts to raise finance I know that even in the good times there is an aversion to debt. So why would they take it on now with such uncertainty?

I think that many will simply, quietly close up. Many are lifestyle businesses, small operations, many are founder owned who have struggled with how they might sell or transfer it. My expectation is that many will simply cut their losses.

Why does this matter so much? It matters because these form an essential part of the ecosystem that supports other businesses. Most economies at a local level are highly integrated and a disruption of the kind we now are wilfully inflicting on ourselves can be catastrophic. I remember vividly years ago when a local steelworks closed the whole town were it was located closed with it. The shops shut, the people moved out and a generation was wasted. Whole estates were boarded up. The council resorted to giving houses away to try to attract folks in.

In Scotland, where I live I fear for the fragile fabric of the economic ecosystem in the more rural areas. It is quite a fine material and a few good rips will ruin it for a generation. 

As a result, the ecosystem to sustain normal business will be gone. Tourism is often a significant contributor to sustaining the communities and supplement other undertakings. Without the little cafes, B&Bs and other parts that oil that sector it will grind to a halt. With it the other rural business subsidized by it as well. Many of the operators of these small businesses use them to supplement otherwise marginal occupations, so the failure of the supplementary income will have evermore profound effects, it won’t be possible to “social distance” these businesses to prevent contagion. The end result will be that the rural patches will recede into economic malaise for a long long time, young people will leave in even greater numbers and the downward spiral will accelerate.

As someone said to me the other day “It’s going to be like the Clearances all over again.”

On the demand side, I also know how much our economy is underpinned by us taking on unsecured debt to buy crap we generally don’t need. But it has kept the wheels on a consumerist model run on insanely thin margins and dependant on volume to survive. The slightest adjustment is curtains for many in retail work. We are already seeing many struggles and go to the wall. Of course like the Covid-19 victims many of these businesses had “underlying health problems”, but this is just three weeks of lockdown.

If we stop taking that debt on because either, we can’t buy anything because the shops are shut, the interest rate goes up (nowhere else it is able to go really) or, most likely, we are out of a job or seeing a 20% reduction on salary as we are furloughed, the whole roundabout fails. So the prospect of a V-shaped bounce driven by conspicuous spending is pretty slim.

So, what is the solution? 

Well, quite simply, end the lockdown. A three week holiday might be just about survivable. Similarly, explain the process of ending it. Trust people, give them the opportunity to plan. I don’t buy the idea that by sharing such a message we loosen peoples behaviours re social distancing. Quite apart from the fact that the evidence is far from conclusive that it is working, or that the cost is worth it, I just have much greater faith in people’s wisdom generally.

If the lockdown continues, here are one or two suggestions, instead of propping up business, get them into suspended animation, firepower to wake them up again. Target funds directly at the population not through the business, temporary UBI. For the small companies get on to Companies House and HMRC to track any micro-businesses winding up and mothball them. Bring in a debt jubilee to free folks up to spend. Use the capacity of crowdfunding through targeted interventions to give us all the stake in the recovery.

The idea that we are knowingly creating an economic catastrophe worse than the Second World War speaks of monumental miscalculation and horrendous overreaction. It can be stopped, and it should be stopped, by quickly announcing the mechanism and timetable to end the lockdown.

Monday, April 13, 2020

What Will Really Change as a Result of Covid-19?

Let’s Hope it is a Reassessment of China.

There have been a great many pronouncements that the world “will never be the same again” after the end of this period of derangement. “Everything will change” I hear.

I doubt it.

In 2008 I heard the same sage predictions as banking collapsed onto life support and the cashpoints came within an ace of closing. For myself, I would have liked to see some close but that is a debate for another day. 

The end of capitalism was widely predicted - radical change was afoot. 

But apart from the misery of austerity, the drudge and scourge of joblessness and poverty what did really change? Structurally practically nothing. Behaviorally practically nothing. Longer-term some political developments might have traced their routes to the shock of the banking crisis - but that is how politics work. B

But as to the general manner in which we do business very very little change.

At the time I blamed a failure of vision, leadership and imagination from the Left - I still do. The opportunity had finally arrived and they flunked it.

So what behaviourally and structurally will change this time round? 

Very little I expect. There are the eco acolytes who think it will, but it won’t. Quite apart from the fact that their enduring electoral failures demonstrate that they are nowhere near as popular as they might think, except amongst the chattering classes. More importantly, the period of lockdown, constrained travel and soviet-style government intervention in the day to day minutia of your life will, I am certain, convince most folks that the medieval vision of the more radical eco crusties is not something we aspire to. No, we will return to foreign holidays and a bit of excessive drinking and conspicuous consumption to celebrate emerging from the lockdown and before you know it we will be back where we were, behaviourally that is.

But, if there is one change I hope just might come about then it is this one. I hope that more folks question the role of China in the world.

I have never been under any illusion about the malign and corrosive role of China and have told those who were prepared to listen. It is a ghastly repressive regime that habitually steals IP, manipulates it currently and abuses human rights. It should NEVER have been admitted to the WTO. But it has been the crack cocaine of manufacturing CEOs and University Chancellors for far too long. Eternally happy to bend the knee, turn a blind eye and with weasel words, half-truths deny their addiction to the lure of easy supply and assert it is a victimless crime.

It reminds me of the miners’ strike in the UK when arguments were made that we could “buy coal cheaper from South America” Well sure if you are content it is mined by 14-year-olds with poor or no safety equipment. Cheaper in monetary terms much more costly in every other way.

So my view hasn't changed. It is why I despise companies like Apple who have happily offshored manufacture to China. Charge top dollar, rake in huge margins and do it off the back of lying down with dogs. Steve Jobs always had fleas in my book. Their response in 2008 when they had $Billions sitting in the bank was risible and I can’t help but smirk at how Apple loving “progressives” reaped their own whirlwind in 2016.

But now we cannot deny the danger of chasing cheap manufacture to ever more remote countries with dubious regimes.

For me, I hope this means that we can rejuvenate our manufacturing, return it home but to do so through the widespread adoption of automation and AI. Of course, it will take investment but now we know the cost of not doing it now. 

It was always going to be the future but we have tended to take the easier route, the cheaper route. Now perhaps, finally we might be encouraged to make the change. Maybe this will be the important intervention from Government to reshape things for the betterment of mankind that should have come before.

Ultimately competition will not be determined largely by price, as the opportunity to find significant incremental advantage through mass manufacture will be so widely available that the market will differentiate itself in other ways

Idealism? Maybe. Perhaps, as I say, nothing structural or behaviourally will change, just more drudgery, austerity and recession. 

But, if there is one change, let it be that one.