Chris Johns: I think we are on the cusp of an economic boom
We need to grow our way out of our debt mountains rather than tighten purse strings early
Released from lockdowns and other restrictions, we will want to spend. Consumer spending sprees will prime the recovery pump. Photograph: Gareth Chaney/Collins
I think we are on the cusp of an economic boom. That’s not a forecast served up from a flawed economic model; it’s a view based on an existential perspective of economic behaviour. If we don’t have a very robust economic recovery – and a fairly prolonged one at that – it’s likely we will swap a health crisis for an economic one.
Without an economic boom we are going to be in serious trouble. So, on the basis that good forecasting looks to see where the vested interests lie, we will experience something the world hasn’t seen for quite some time: a burst of economic growth along with a dollop of inflation.
Why existential? Lockdown has led to a debate about how we conduct our lives. Some of that has been very public and revealed lots of societal division. Many of us are quietly asking questions about how we want to live and work when this is all over, if not before. There is going to be change, much of which we can only guess at.
But one of my hunches is that a lot of personal decisions will involve a lot more spending, at least for a while. In a small way we can see that already with Christmas: preparations have started earlier than ever. Behaviour today has been altered by the uncertainties of the future. “Let’s do it early, imaginatively and as big as possible” seems to be the theme of Christmas 2020.
Released from lockdowns and other restrictions, we will want to spend. Not just because of a natural bounce-back in consumption, big though that will be. The pandemic for many of us has reminded us of our fragilities, what uncertainty actually means. Saving rates have shot up everywhere: in Ireland, for instance, one euro out of every three that we earned in the second quarter was saved. Our personal savings rate more than doubled.
Despite the pandemic-induced recession incomes have held up remarkably well thanks in no small part to the largesse of the Minister for Finance. Similar stories play out in many other jurisdictions. Part of the post-pandemic boom will be a collapse in those elevated savings rates, quite possibly – and appropriately – going negative as savers spend and become borrowers.
Consumer spending sprees will prime the recovery pump. Governments will also have to play a role, structurally and cyclically. This is one risk for my economic boom thesis: politics and bad economics could easily prompt governments to do the wrong thing. In the US the Trump administration’s scorched earth strategy has now extended to blocking the Federal Reserve’s ongoing efforts to keep the economy afloat. We can only hope that this is as temporary as it is cynical. Could a Republican Senate really think a wrecked economy a price worth paying for a sabotaged Biden presidency?
In the UK the chancellor is muttering about the need to tighten fiscal policy sooner rather than later. That would be a big mistake. An increase in capital gains taxation is but one of the many kites that have been flown. The latest is a public sector wage freeze. If the UK insists on pursuing economic superstition they will merely compound the Brexit catastrophe.
If governments don’t do all they can to encourage a recovery, they will be flying in the face of advice from the world’s leading reformed fiscal vigilantes: even the deficit hawks at the IMF are urging more fiscal stimulus. There is nothing more evangelical than an ex-fiscal scold. Joining this bandwagon are the world’s central banks who keep telling governments that they will print all the money they need to keep the spending party going.
The IMF is also suggesting, loudly, where the spending should be focused. We used to worry that decarbonising our economies could come at a cost of growth and jobs. No longer: the new orthodoxy is that investing in the green economy will, at worst, be neutral in terms of employment and could even boost growth.
The IMF’s shopping list is a familiar one. Carbon taxes have to rise from their current global average of $2 (€ 1.68) per ton to $75. In many countries a rise to $75 wouldn’t restore energy prices to where they were before the recent collapse in the oil price. Solar and wind energy prices are now, in many countries, a match for fossil fuel prices, something analysts thought would either never happen or, at least, not for many years. And alternative energy prices continue to fall.
Spending has to increase on modernising electricity grids, public transport, broadband networks, alternative energy projects, encouraging “climate-smart” investments (think batteries, hydrogen and carbon capture) and all the other usual suspects. The ongoing falls in solar and wind energy prices is a part of this story. All of it adds up to a net positive for economic growth, including boosting employment.
An economic boom will happen because it must: without growth all of that debt we have piled up could come back to haunt us.
It’s a paradox: it’s right to worry about the long-term consequences of too much borrowing, but wrong to stop borrowing now.
Economics can often be counter-intuitive. We need to grow our way out of our debt mountains rather than try to tighten purse strings early. If we go down that route it will be a self-defeating disaster.