Published:

159 comments

Sir John Redwood is MP for Wokingham, and is a former Secretary of State for Wales.

Donald Trump and Angela Merkel, Emmanuel Macron and Boris Johnson have all used war metaphors to describe what they are currently doing. Their battles against the virus have taken them into new territory in western democracies, closing down large sectors of their economies and placing big new demands on the suppliers of medical equipment, care and retail food.

As soon as a Government intervenes heavily in an important part of a complex western free enterprise economy, it discovers it has to intervene in many more things that are put out of joint by the first decision. Requiring all tourism, non-essential travel, leisure, and hospitality industries to close down creates a huge hole in the activity of the country and threatens to leave millions jobless or without proper incomes.

Round two interventions have to offer state cash as a substitute for the money they would otherwise have  earned, to enable them to buy their food and pay their mortgage, to avoid further business collapse and a big crater in demand.

There are so many consequentials. Many people normally eat five or more meals out of their homes each week at work or school and during leisure time in restaurants, pubs and clubs. Now these have been stopped they need to buy maybe 25 per cent more food to eat at home to replace the lost meals, placing a huge burden on supermarkets to up their volumes to cope.

The food industry has to start to divert food previously supplied in large catering packs to restaurants and hotels to retail packs to shops. The catering supplier needs to transfer his milk contract to the supermarket, but wants reassurance working in co-operation between the two will not lead to competition law objections.

The workers no longer go to the office in large numbers on the train. Train services are cut back and revenues plunge. The Government steps in to take the pain of the revenue loss, using the franchisee as the manager, no longer as the risk taker. The railways are effectively nationalised and made to run at a big loss. Airlines experience a collapse in demand, and various bans on flights in differing countries around the world. They look to the taxpayer to bail them out, pointing to the need to keep their capacity for future recovery.

Closing schools means many parents can no longer work but have to stay home to look after the children. Governments then allocate places in childminding centres set up for the offspring of key workers .

Meanwhile at the supermarkets, the surge in demand for home food is driven higher by people hoarding, including some who clear the country of new freezers to fill them just when the supermarkets are struggling with volumes. This leads for calls for rationing. The shops impose a sensible rough and ready ration, which helps. Some want full ration books and police to enforce. The Government urges business to convert its output to more ventilators, hand gel, protective clothing, medical supplies, and has the money to buy up whatever business can turn out.

This should not need to be on the scale of the Second World War, when the state had to manage the whole economy on war lines. A huge effort had to go into weapons and military machinery manufacture which we mercifully do not need today. The food supply had to  be boosted at home because no imports were possible from the continent of Europe and imports from further afield were subject to remorseless German attacks on the supply boats. Men had to be conscripted to serve in the military and women took up many of the industrial and service jobs they left behind. There was government direction of labour, rationing of supplies and Whitehall control of much production.

The direction of travel today, however,  is the same as in 1939, toward more government methods – rationing, price control, large state expenditures, emergency laws and suspension of the usual rules of business and commerce and tough laws against profiteers and ration busters.

Shortages of some supplies like gel and toilet rolls is already leading to racketeers trying to make excessive profits out of the situation, as government and people wrestle with fairness and how to ensure that everyone gets what they need rather than what they want. Much of industry faces poor demand at best, so there is potential to gear up the production of items much needed by the medical emergency.

People will ask: how can we pay for all this? State debt is going to rise rapidly as the state becomes buyer and employer of last resort in many areas. The Government has said it will spend whatever it takes to provide health capacity, and will subsidise employment to prevent mass redundancies. It also needs to offer a financial package to the self-employed.

The Bank of England is helping by announcing it will buy up another £200 billion of government debt. This will both keep rates low and mean that another £200 billion is no longer a proper state debt, as we will owe it to ourselves as owners of the Bank of England.

So how will we get away with that? It used to be called Zimbabwean economics, after a country that printed money to spend and ended up with sky high inflation and an economic mess. The reason we will get away with it again, as we did in the banking crash, is that there is so much deflation around, inflation is not a problem.

Yes, things in strong demand like food and medicines may go up, but political and moral pressures will stop exploitation.  Everything else is going to be low or falling. Watch out for the falling oil and gas prices, cheaper petrol, deeply discounted discretionary purchase of all kinds, and cheaper clothes. The collapse of demand and the collapse of traditional shopping means there is no overall inflation problem.

That’s why I am less worried about the extraordinary money policy than I am about the big hit to our economy, jobs and incomes. The government must cushion it as much as possible, and end the pain as soon as possible.

159 comments for: John Redwood: Why I, as a strong supporter of the market economy, back the Government’s emergency economic measures

Leave a Reply

You must be logged in to post a comment.