Does Rishi Sunak know how to conjure our animal spirits?
(Photo by TOLGA AKMEN/AFP via Getty Images)
Today is the day of reckoning. As tens of thousands of shops reopen across Britain, both the Government and the business community are keeping their fingers crossed that we will go out and shop until we drop.
In a rare appearance outside the Downing Street bunker, the Prime Minister showed himself at a Westfield shopping centre to deliver his message: “We hope that people will come back to the shops.” While he professed himself “very optimistic about the opening up that is going to happen”, however, Boris Johnson also expressed the ambiguity still inherent in our predicament by hoping that “sensible numbers” would return to the high street. The kind of bargain-hunting frenzy that was considered normal in post-Christmas sales less than six months ago is now impossible under social distancing. The cold hand of the Covid-19 pandemic still has the British economy by the throat. In April alone it shrank by a fifth and even the most optimistic estimates for the year as a whole have GDP down by at least 11 per cent.
How, then, do we get out of this deadly embrace? Are ministers merely whistling in the dark? Or is there some rational basis for hope that the economy may have a softer landing than is generally feared?
As usual, it was Rishi Sunak, the cheerful Chancellor, who uttered the key words: “animal spirits”. On the Andrew Marr show, he explained that the issue for the public was not cash, but confidence. It was the Chancellor rather than the interviewer who asked the trillion pound question: “Are the animal spirits [there] for us to get back to our high streets in the way that we used to?”
Many viewers may have been startled by this choice of words. What on earth does Rishi Sunak mean by “animal spirits”? No, the Treasury hasn’t switched from spin doctors to witch doctors. In fact, the concept of “animal spirits” has a respectable literary pedigree. Novelists from Daniel Defoe to Jane Austen used it in a general sense to mean ebullience and, In Disraeli’s words, “a keen sense of enjoyment”.
In economics, however, the phrase is always associated with Keynes. In his General Theory of Employment, Interest and Money, the most influential economist of the 20th century wrote: “Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as a result of a weighted average of quantitative benefits multiplied by quantitative probabilities.”
This famous passage comes in the chapter of the General Theory devoted to “the state of long-term expectation”. Keynes was writing in 1936, at the height of the Great Depression, when unemployment was the greatest curse and lack of investment its immediate cause. Keynes — himself a successful though occasionally reckless speculator — was interested in what made entrepreneurs reluctant to take risks. He was convinced that if fear was the contagion, he had the antidote: “Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; — though fears of loss may have a basis no more reasonable than hopes of profit had before.”
The problem that Keynes identified is a perennial and, indeed, highly topical one: how does an economy recover from a loss of confidence, whether the cause be the Wall Street Crash or the coronavirus pandemic? Only individuals can make the decision to invest. “But individual initiative will only be adequate when reasonable calculation is supplemented by animal spirits… it is our innate urge to activity which makes the wheels go round.”
In his General Theory, Keynes focused not only on “the average business man” — for whose “nerves and hysteria and even the digestions and reactions to the weather” he had an amused contempt — but also on the consumer. The “propensity to consume” was, for him, the driving force of the economy, without which the latter would grind to a halt. He dedicated much of his work to understanding what were the factors, objective and subjective, that inhibited consumption.
Today, too, we are faced with a public that has chosen spontaneously to save rather than spend for several months. To a greater extent than many of its neighbours, the British economy depends on the stimulus of consumer spending. Whereas the German economy has a notoriously high ratio of saving to spending, but remains prosperous by a relentless focus on manufacturing exports, in Britain prosperity has tended to float on a sea of consumer debt, financed by a thriving service sector. In time of coronavirus, however, domestic demand has slumped, as families have postponed expenditure and paid off their debts. The habit of instant gratification has been lost — whether temporarily or permanently remains to be seen. We can all congratulate ourselves for the healthier state of our bank balances. But if unemployment surges to more than four million next year, it will have an incalculable impact not only on the economy, but on politics too.
What, then, should Rishi Sunak do? Keynes thought he knew the answer, though in the form of a reductio ad absurdum: “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal-mines which are then filled up with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.”
Before he resorts to such expedients, the Chancellor has a more popular trick up his sleeve: tax cuts — and in particular, VAT cuts. The Germans have already slashed their VAT rates in order to boost consumer demand. We can expect something similar here when the emergency Budget finally takes place sometime this autumn.
Will it be enough? Not unless the tax cuts are bold enough to bowl us over. The doctrine of animal spirits implies that the revival of confidence depends on psychological as much as mathematical factors. The “Rishi Boom”, if it ever materialises, will be stimulated by eye-catching measures that grip the public imagination. We know the furlough scheme and other temporary subsidies are coming to an end, so families are holding back until they know whether their jobs and incomes are secure. So the task for “Dishy Rishi” is to seduce us all into letting our animal spirits lead us, rather than the fear of insolvency and ruin. The Chancellor should not stand on ceremony. Why wait till the autumn? If he is to conjure our animal spirits, he should act now.
