The economic effects of lockdown- Interview with Philip Booth

After two months of lockdown, and with a massive furlough scheme, the prospects of the British economy appear to be uncertain. How can we manage the present crisis while promoting free market ideas and keeping protectionism at bay? I asked Philip Booth, Dean of the Faculty of Education, Humanities and Social Sciences at St Mary's University, Twickenham and Senior Academic Fellow at the Institute of Economic Affairs.

The Government said they are extending the furlough scheme to October- what do you think will be the short-term impact on the economy?

The short-term impact will be to make it easier and allow employers to keep their staff on without them being fully employed. Currently, the furlough scheme is quite rigid, in that it doesn’t really facilitate part-time work, people are either on furlough or off furlough and it’s difficult as well for companies to change their business model, which they might want to do as a result of the current crisis. The furlough scheme as originally envisaged is fine if you stop the economy for three weeks and then everybody can start again three weeks later. But if you do that for six weeks or twelve weeks then it becomes much more difficult, businesses cannot just pick up where they left off, businesses are more likely to become bankrupt, they are likely to make redundancies and so on and furlough can actually slow down that process and make it more difficult for people to go into the labour market and to get jobs when things return to normal.

It’s a very difficult balance, but the underlying problem is not so much the furlough scheme, where you really are talking about choosing between very imperfect alternatives. It is the fact that the lockdown is going on for so long in what was a relatively dynamic economy.

What could be the long-term effects of Covid-19 on the British economy?

There were a lot of people at the beginning who hoped you could get what is often called the v shaped recession, a very distinct fall of national income followed by a very rapid recovery. I am now very skeptical of that. This suspension of economic activity and the change in the way organisations operate will cause huge difficulties. Higher education is one example of this and transport and tourism another: it is not clear that businesses will simply be able to go back to doing what they were doing before.

There will be a significant increase in unemployment and the longer people stay unemployed the more their skills will deteriorate, the more difficult it is for them to get jobs. So I think will have a pretty long period of high unemployment. If we get significant business bankruptcy, they cannot just start again out of thin air. So we are going for a slower recovery than people hope for, and the slower the recovery the more permanent will be the loss in output.

How about Brexit happening at the same time?

I am not sure how important Brexit is. Higher education is a good and possibly typical example here. They were somewhat concerned about Brexit pre-covid. Now it is a relatively minor problem on a long list!

Now really nobody talks much about Brexit at all, the problems of Covid-19 transcend any of the problems about Brexit, the disruption of business models is going to be such that you might as well deal with Brexit whilst dealing with anything else, so I don’t think that there is a good case for extending the Brexit transition because of Covid. It really is important that we promote the cause of globalisation more generally, because there are threats to globalisation and I think it’s important that the UK does now take a lead along with other countries that are favourable to globalisation in trying to ensure that the political opinion in the world is in favour of free trade, and not putting up more barriers than necessary simply to deal with the Covid crisis.

So you are afraid of people reverting to more protectionist views?

People have expressed views in the UK that we should be more protectionist. For example they blame the fact we don’t have enough PPE on our lack of domestic manufacturing capacity. However, you can’t design your whole economy around the possibility that you might need huge amounts of PPE or, indeed, around any possible crisis. And actually the global supply chain has been pretty robust. There have been very few shortages in supermarkets. In fact the major shortage we can observe at the moment is in flour, which is largely domestically produced, so in many ways global supply chains they might be a little more fragile but they also diversify risk.

Contrast that with the 1970s. If there was a strike in (for example) the coal industry, the whole economy would collapse. Coal was produced domestically but it was part of a supply chain which appeared more robust but which, in fact, was more prone to risk because there were few alternatives. Now if there’s a problem in terms of the supply of particular goods or services in some parts of the world, you just switch to somewhere else or to substitute products. So I don’t think, overall, that the development of global supply chains has made the world economy more fragile when you have this kind of events.

Looking at the present crisis, what should be a Catholic’s major concern?

I suppose there are three issues that come up. One is how you deal with a situation where you have to make really difficult choices about how you use resources and protect people’s lives. As it happens I think this has been much less controversial than it might have been, partly because of the huge efforts that the government has made to protect NHS capacity.

The next issue is how you deal with people pastorally in these circumstances, I do feel that bishops in England and Wales, Scotland as well (and parts of Europe) have been rather bureaucratic and risk averse . Instead of encouraging priests with appropriate prudence and caution to minister to the people, they seem to have been doing the opposite; instead of encouraging the government to keep churches open for private prayer again they have been doing the opposite. Contrast that perhaps with somebody like St Charles Borromeo, who visited plague victims in their houses at great personal risk.

 Another lesson, I think, is that in the narrow sense the NHS has coped, but it has coped because the rest of the economy has been restricted in order to limit the effect on the health service. But if you look at those things which are done in the best tradition of the British National Health Service in a centralised way, such as the rolling out of testing, it does really look like the Soviet Union in the 1980s. Every time a target is not met, a higher target is introduced which will remove attention from the fact that the previous one wasn’t met. So, we don’t meet 100,000 tests and we then target 200,000; and we also discover that 100,000 involved including tests that weren’t actually used. I think the lesson there is that decentralised systems, certainly Germany, have been much more effective. It’s pretty clear it’s because of the centralisation that we had the problems. Catholics in Britain have been pretty much wedded to the NHS but it is difficult to square with Catholic social teaching.

Then the final issue, most of the Catholic comments on the question of Covid- 19 have been on inequality, social care, and what the government should be doing about these things. These are important but it is not just the government’s job. And Catholics should be talking about the importance of work and ensuring the economy is able to adjust, post lockdown, to rapidly generate jobs once again.