Chris Johns: Economies may enjoy ‘roaring twenties’

Pandemic has prompted a fundamental rethink of the fiscal rules

The collective noun for a group of ladybirds is a “loveliness”. That stands in stark contrast to descriptions for a collection of economists. My own favourite is a “surplus” but that verges on an insider joke. Carlyle coined the “miserable science” so perhaps a “misery” will do.

Last week I suggested our economic future might be very bright. Far from being miserable, a number of economists have joined with that optimism, one or two even suggesting that the next decade – the 2020s – could be like the last decade of that name. After the ’flu pandemic of 1918-19, the world witnessed the “roaring twenties”.

There are reasons to think we might see something similar a century on. The parties we all want to throw could start quite soon – provided economic policy plays its part.

Cliff Taylor's recent interviews with Ajai Chopra, late of the IMF, and Patrick Honohan, former boss of the Central Bank of Ireland, make for fascinating reading. Although couched in the language of officialdom, the ways in which monetary and fiscal rules have fundamentally changed are laid bare.


Under those old rules, the fiscal consequences of coronavirus would have been similar to those of the banking crisis. We would have ended up in a bailout.

This time around, the markets couldn’t have responded more differently. The word “bailout” has been banished and we now face an extraordinary opportunity: the world’s investors clamour to pay for the privilege of lending to us.

Think about that: our borrowing needs today are in the same ball-park as those that led to a bailout a mere decade ago. A bailout that came with strict conditions that added up to austerity. Today, starting from much higher debt levels, we can add to the national debt while the costs of serving those borrowings are falling.

Will we, and other countries, take the right lessons from all of this? In the UK, the signs are not good. The chancellor of the exchequer, Rishi Sunak, this week unveiled his fiscal plans for the next year, abandoning his promise to set them out for the next three years. That much was sensible.

The Office for Budget Responsibility (OBR), the independent watchdog, was forced, unprecedentedly, to produce three economic "scenarios", an acknowledgement of just how uncertain the future is right now. The next sentence contains four words I never expected to write: Boris Johnson was right when he suggested the OBR is too pessimistic.

Sunak’s message, based on the OBR projections, was that the economic emergency has only just begun. The optimists, like me, think that the emergency could be a few months away from being over. Key to understanding this is to realise that the emergency, the pandemic, has prompted a fundamental rethink of the fiscal rules.

Chris Giles of the Financial Times is one economist who has spotted the ways in which the old thinking no longer applies. Fiscal policy, for the foreseeable future, must be the stabilising force for the economic cycle until monetary policy, the setting of interest rates, "can regain its potency". For as long as interest rates are zero or negative, central bank firepower is not exhausted but does have limitations.

Giles quotes Jason Furman, ex-chairman of Barack Obama's council of economic advisers, in saying that while the old rules are no longer valid, economics has yet to provide much definitive guidance about what the new ones should be.

Furman suggests, plausibly, two rules of thumb. First, debt interest should be kept below 1 per cent of national income and the overall debt level be held below 150 per cent.

For the UK, as Giles argues, that means there is no fiscal emergency. Ireland’s debt ratio is also not a problem but it will have to watch the 1 per cent rule carefully – economic growth and persistently low interest rates over the next few years should take care of it.

Sunak is wrong to be so fiscally gloomy. Suggestions of tax rises and spending cuts are a mistake. Sunak has banished the word austerity but it is there, buried in his plans.

Inspired by the dead hand of Treasury orthodoxy, we hear of the possibility of capital gains tax rises, cutting pension tax breaks, council tax rises and various expenditure cutbacks. There are mutterings that the manifesto pledge of no income tax or national insurance hikes will have to be junked by Johnson.

If the UK goes down this path the emergency will be unnecessarily extended. My guess is that all this talk will remain precisely that, although the greatest risk to my optimism is an economic policy error.

Old thinking dies hard. In finance ministries and the media, we continue to see government finances described in terms of household budgeting. The BBC this week talked about the UK “having maxed out its credit card”. This is pure flat-earth economics and couldn’t be more wrong.

According to the Office for National Statistics, almost half of Britons have no idea what gross national product (GNP) is. The BBC, the wider media and the economics profession need to think very hard about public education. And their own.

Finance ministers should pay heed to the new thinking. They are being told by the IMF – previous guardians of austerity orthodoxy – to continue spending and not to tighten too early. Indeed, further stimulus should be prepared, for the day the World Health Organisation declares the pandemic to be over. That way, the 2020s will indeed see an economic roar.