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19 October 2020

The Covid-19 crisis has given the Conservatives a chance to play divide and rule

Rishi Sunak’s ominous talk of “viable” versus “unviable” jobs lets the free market determine who should and shouldn’t work. 

By James Meadway

The International Monetary Fund’s 2020 World Economic Outlook, published last week, added to the growing chorus of economists warning that the impact of Covid-19 is likely to endure far beyond the initial shock. The IMF suggests the immediate future looks particularly bleak for less developed economies, while across the globe the process of adjusting to Covid-19, including scaling back badly hit industries (such as travel), and shifting resources into those expanding (such as e-commerce), will be long and painful. In contrast to the IMF’s approach following the 2008 financial crisis, the fund is now arguing against austere spending cuts, at least in the immediate future, instead urging governments to maintain a high level of support. 

The reason Covid-19 has been so destabilising is still not widely appreciated. Unlike most recessions, the current economic crisis is not, in the first instance, a problem of weak demand. We are quite used to recessions where falling demand from consumers results in fewer sales by firms, leading them to lay off workers, who then lose income, reinforcing the fall in demand. Any undergraduate macro-economic textbook will tell you that, in these circumstances, it makes sense for the state to intervene and prop up falling demand by running a budget deficit – spending more than it collects in taxes. This is basic Keynesian economic management.

In 2008, the financial crisis presented something more complex: a catastrophic failure of the key institutions of global capitalism – the major banks – which then turned into a dramatic recession. Governments across the world initially responded as the Keynesian textbooks advise: allowing deficits to widen and increasing their own spending. But from 2010 onwards, with the UK leading the way, they embraced austerity – imposing spending cuts in an attempt to reduce deficits. 

[See also: Why Covid-19 means there will never be a return to economic normality]

The justification offered at the time by politicians such as George Osborne, and supported by economists such as Alberto Alesina, was that spending cuts could actually boost economic activity, while government debt was a permanent drag on growth. We know what happened in reality: in the worst-affected countries, such as Greece and Spain, the recession was intensified, comparable in some states to the Great Depression of the 1930s in terms of its size and devastating consequences.

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This obvious failure is why no serious macro-economist will now make the case for austerity in response to the Covid-19 shock. But the crisis goes far beyond a simple demand-led recession, or even the structural failures witnessed in 2008-9. It strikes directly at the most fundamental institution in capitalism, which is the labour market. 

The pandemic means social activities, critically including much of the work we do, become unsafe. In the age of social distancing, some kinds of work become impossible, or at least can only be conducted with many additional costs – fewer people in pubs, more cleaning of surfaces, additional provision of PPE – and controls on how that labour can be used. It is, in conventional economics terms, a monumental (and quite likely permanent) supply-side shock. And it is because of this disruption to the foundational institution of capitalism that Covid-19 is, and will remain, more disruptive than any economic crisis in modern history.

There was never a realistic prospect of a “V-shaped recovery”, in which a rapid decline as the virus hit and lockdowns were enforced would be followed by an equally rapid recovery. To believe that prospect earlier this year, you also had to believe a destructive and contagious virus that directly chewed away at the basic fabric of social life would swiftly evaporate, along with the behaviour-changing fear it caused. In an optimist’s scenario, the savings accrued by the more fortunate sections of society during the lockdown would then be spent rapidly, as fear evaporated, driving rising demand and a speedy return to normal growth.

Something like this belief clearly animated the summer’s Eat Out to Help Out programme: a daft scheme that future historians of the crisis will surely look on with incredulity, and one of a growing number of unforced errors that our overhyped Chancellor has committed. Should Rishi Sunak attempt to fulfil his promise of “balancing the books” (which he described as a “sacred responsibility”), he would add a further disastrous error to this list. It would take a special kind of talent, indeed, to observe the gross failure of austerity over the last decade and conclude that another decade or more of it would be a good idea.

[See also: Why the cult of Rishi Sunak should end

But the labour market shock of Covid-19 has played out in specific ways. Across the globe, the crisis has, as the IMF notes, disproportionately affected women, those in informal employment and those with lower levels of formal educational. The dramatic creation of a two-tier workforce was strikingly clear during lockdown in Britain: for those furloughed, or able to work from home, it was possible to maintain a fairly comfortable (if constrained) existence. But for those, often in the lowest-paid and most insecure jobs, who are forced to continue working, the situation could be disastrous, as the outbreaks of Covid-19 in Leicester textile factories, or the high mortality rates among London bus drivers, starkly illustrated. And for those unable to claim furlough or other support – around three million people – the threadbare provision of the current welfare state has been grimly obvious.

Indeed, the political logic of the UK government’s economic interventions has been to reinforce this labour market caste system: the 9.6 million furloughed workers at the scheme’s height undoubtedly had the arm of government (to quote Boris Johnson) thrown around them, receiving a level of welfare support unprecedented in British history. But this is only around one-third of the workforce, concentrated on those otherwise in regular employment. 

The replacement for the furlough scheme, the Job Support Scheme, which purports to aid short-time work in conditions of weakened demand, is inadequate in a number of ways, as the Resolution Foundation and others have highlighted. The peculiarity of the scheme’s design is that it is most likely to concentrate support on higher-paid workers with more substantial on-the-job or formal training: protecting, in other words, the status of the already relatively privileged. There is an ugly insider-outsider pattern to the government’s interventions that the labour movement would do well to be more critical of: it was a mistake for the TUC’s general-secretary Frances OGrady to take part in a photo opportunity with Sunak welcoming the Job Support Scheme.

[See also: What would Keynes do?]

This may be where we are heading. Sunak’s ominous talk of “viable” versus “unviable” jobs is about letting the free market determine who should and should not work. But where work must be supported, current government programmes attempt to build in an insider-outsider logic of a kind that can be made to work very well politically: it is no secret that the protection given to pension payments by Conservative-led governments over the last decade is directly linked to the party’s overwhelming electoral support among pensioners (64 per cent of over-65s voted for the Tories in 2019). Divide and rule is an old political strategy and one the Conservatives have applied successfully in the past. If Covid-19 means extended periods of state support, why would they not use it again? 

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