We shall surmount the Corona Slump, whatever ordeals the oracles may ordain
Just as in war we have armchair generals to second-guess the real ones, so in this pandemic the instant epidemiologists have been strutting their stuff on social media, extrapolating from the models and data provided by the genuine experts. Now it is the turn of the economists, professional and amateur. The figure of a 35 per cent fall in GDP during the second quarter of 2020, as set out by the Office of Budget Responsibility, is already being treated as a forecast. The OBR was careful to say that it was too soon to predict how much economic damage the lockdown would inflict for the obvious reason that we do not know yet how long it will last.
This has not stopped other economists from castigating the OBR for being “very optimistic” (Paul Johnson of the Institute for Fiscal Studies) or warning that “policymakers should not treat this as a worst-case scenario” (Torsten Bell of the Resolution Foundation).
As for the self-appointed gurus of the media: they have excelled themselves by wallowing in doom and gloom. The headline on the column by the FT’s Martin Wolf, for instance, reads: “The world economy is now collapsing.” The same people who outbid one another in pessimism over Brexit are now doing the same thing on the Corona Slump. Only this time their catastrophism is of a different order of magnitude. The end of the world, if they are to be believed, is indeed nigh.
The truth is: we do not know. Most economists expect a V-shaped curve, as the global economy dips sharply and then recovers rapidly. The main debate revolves around “scarring”, by which they mean the permanent damage that the interruption in economic activity will cause. The most obvious residual harm will take forms familiar from the 2008 recession: bankruptcies, unemployment and debt. But there may also be deeper structural damage, as markets mutate or even vanish, never to return, or habits change. Prosperity has long been fuelled by consumer spending. Tourism, for instance, has been a major boon for Britain, led by London, the world’s favourite destination. Millions of jobs depend on the billions of pounds that visitors spend here. But what if the tourists don’t come back?
Before we sink into a slough of despond — the “worst recession for 300 years”, to mention only one extrapolation from the OBR scenario by the Resolution Foundation — we should preserve a sense of proportion.
That great economist of the last century, Joseph Schumpeter, spoke of “creative destruction” to indicate the opportunities that every crisis of capitalism offers. The Depression of the 1930s caused great suffering, but also saw the creation of new markets and technologies that ultimately replaced the declining industries of the previous era. Even the catastrophe of the Second World War, which wrought unprecedented destruction for six years, forced humanity to innovate and adapt. The countries whose cities and factories had been most thoroughly obliterated, Germany and Japan, were among the first to lead the postwar recovery. In the last decade, from 2010-2020, more wealth has been created than ever before. It will take more than a few months of lockdown to upend the history of human progress.
Some sectors of the economy will even emerge from the present crisis stronger than before. The obvious example is the digital economy, but there may well be others. The forced saving that has taken place during the global shutdown, perhaps running into the trillions, will help to reboot the system, as confidence returns. Yes, there will be thousands of businesses that close for good, but in many cases they are the infirm firms that would have failed eventually in any case. This crisis, like others before it, may prove to have accelerated subterranean processes that were already at work. Global dependence on China, for example, was already being questioned. Now it will almost certainly go into reverse.
Martin Luther King famously said: “The arc of the moral universe is long, but it bends towards justice.” The same is true of the arc of the economic universe: it is long, but it bends towards prosperity. We shall survive and surmount the Corona Slump, whatever ordeals the oracles may ordain.
