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How are the Dominoes going to fall?

March 21st, 2020

What if the policy response to Covid-19 doesn’t protect society but shatters it?

Rishi Sunak’s radical and immense pledges to try to secure a viable post-Covid-19 economy by directly subsidising the great majority of the cost of temporarily redundant staff with the aim of keeping them from unemployment and keeping the businesses from bankruptcy was extraordinary.

For one thing, probably the biggest single spending pledge by any British government since the 1940s was made not to parliament but in a press conference. That was possible in part because there is no meaningful current Labour leadership, in part because Covid-19 has itself rendered the normal operation of parliament difficult, but in the main because extensive discussions have clearly already taken place. The UK may barely be a parliamentary democracy today but it already has a National Government for practical purposes – perhaps it will have a real one once Labour’s has a leader with which to work.

Yet that wasn’t even the most remarkable facet of the announcement. Nor, taken more broadly, was the preceding statement from the PM, shutting down more of Britain’s social life than at any point for 80 years. Nor even was the implicit pseudo-nationalisation of vast swathes of the private sector (probably benignly but should is so choose, the government can attach whatever conditions it wants to the grants and drive business policy that way) – and by a Conservative government. No, the mind-blowing thing was the sheer scale of it: a commitment of many hundreds of billions of pounds; enough to leave a debt legacy to last decades. If it comes off. What if it doesn’t?

For that matter, we needn’t restrict ourselves to Britain here. This crisis is global and all the major Western economies are similarly affected (some in the Far East aren’t, though whether they can avoid a second wave as they exit lock-downs remains to be seen).

So the first domino to fall was the Health Crisis: the Covid-19 pandemic. That toppled into a second one: an Economic Crisis. There things might stay if handled well, albeit that there’ll be a painful and lasting legacy of the protection measures. But what if it doesn’t?

There are two main risks, one on each side of an unstable equilibrium.

The first is that the support package and the administration to implement it is inadequate to the task; that the money doesn’t get where it needs to go. If that’s the outcome then many, many businesses will fail. Goldman Sachs predicted that in the US, weekly jobless claims could surge eightfold to hit 2.25m this week – more than three times the previous record set in 1982 – together with a slump in quarterly GDP next Quarter of an annualised 24%. If those figures are right, it will be extremely hard to avoid massive business failures, and, off the back of that, banking failures as bad debts and unpaid bills and salaries infect firm after firm and sector after sector. That brings us rapidly back to a 2008-style credit crunch, or a 1929-style one, if you prefer. Put simply, the risk is of an economic implosion as more and more people and firms get dragged into the vortex. It is not only the US at risk of this, of course (although the nature of its administration and politics means the risk’s higher there than in many other OECD countries).

The opposite scenario is that in order to avoid the kind of collapse just outlined, money is sprayed in all directions to ensure that people have enough to pay and to protect businesses that were perfectly viable prior to the enforced closures. But money has little value of itself; it is primarily a means of exchange between people or organisations; what matters is what it can buy. And if the economy is producing far less because people are forced to be at home, then shoving money into it will only force up prices as more money chases fewer goods and services. If that happens sufficiently quickly, living standards drop unsustainably and the demand comes for more money to be produced. That is the route to hyperinflation and all that implies: an outcome we certainly should not dismiss out of hand.

That there will be a recession is inevitable; that there will be an economic crisis of either extreme just mentioned is not. If it does happen though, the Economic Crisis is unlikely to be the last domino in the line. The rise of the political populist is a narrative that’s received a good airing these last ten years but to the extent that populists have succeeded, they’ve always done so within the system and been content to operate within it. They may not continue to do so if that system fails so many people. Indeed, the people may well demand that they don’t. From a severe Economic Crisis, we could easily fall into a severe Political Crisis where democracies already weakened by those who’ve played a bit free and easy with the unspoken rules are swept away by those who demand vengeance against whoever their pet target group is and aren’t bothered by the niceties of constitutional democratic liberalism; indeed, they openly despise it.

Which potentially leads to the final domino: a Social Crisis as the tensions and antagonisms of such political revolutions violently play out not just between state and individual but among individuals, groups and communities across – and maybe even between – the countries affected.

To go there is to look down a very dark path. Yet human history gives us enough examples of similar sets of tumbling dominoes that we should recognise the possibility this time and do what we can to avoid going there again. And avoiding it is certainly possible but certainly not guaranteed.

Attempting to prevent the deaths of millions across the globe from Covid-19 is an absolutely understandable aim. Any humane society would try to do so. Yet we must also understand what we place in the balance as we try to do so.

David Herdson