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.

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