Three principles for responding to the Covid-19 economic fallout

Covid-19’s economic fallout is intensifying. In response, the Bank of England and the Treasury must coordinate to implement targeted measures in line with the following three principles: (i) protecting the most vulnerable; (ii) supporting the green transition; (iii) restructuring rather than reproducing failed economic systems.

As the number of Covid-19 cases continues to rise, the economic fallout of the virus is intensifying. The global economy faces simultaneous shocks to the supply and demand of goods and services, as schools shut down, factories suspend production, big events are canceled, workers stay at home and travel is restricted. All eyes are on the world’s governments and how they will seek to mitigate both the immediate health effects of the virus, as well as any further impacts resulting from the twin shocks to supply and demand. The ultimate severity of the economic consequences are unclear, though a recession is a distinct possibility.

The response so far has involved, for the most part, relatively broad and blunt stimulus measures. Only governments of most severely affected areas, such as China, South Korea, and Italy, have announced significant fiscal stimulus measures (though the UK may do so today). Monetary policy action has been more common, as central banks across the globe have cut base interest rates. The Bank of England followed suit with an emergency 0.5% rate cut this morning. They also announced further measures to stimulate bank lending to the real economy, small and medium sized businesses in particular.

While such monetary policy measures are unlikely to have any significant immediate effect, especially in the face of a global health crisis during which nobody will be looking to borrow, the Bank’s apparent cooperation with HM Treasury should be welcomed. These two institutions must coordinate to ensure the implementation of targeted (primarily) fiscal measures that will have an immediate and pointed impact in response to the outbreak, and longer-term benefits during and after the recovery. Specifically, the response should be guided by the following three principles, listed in order of more immediate to more long-term impacts:

1. Protect the most vulnerable

2. Support the green transition

3. Restructure not reproduce

First, the economic response should not be focused on any broad goal of stimulating the economy, but rather protecting the most vulnerable in this time of crisis. This involves ensuring that health services have all the necessary resources to support patients to the best of their ability, self-employed and precarious workers are guaranteed the financial compensation that will allow them to self-isolate when necessary, measures to tackle homelessness are ramped up, and most at risk and physically immobile individuals are supported with in-kind provisioning of essential goods.

Second, any significant monetary and fiscal interventions must, wherever possible, support the green transition. Given that brown companies such as fossil fuels and airlines are important drivers of economic growth, governments will inevitably be tempted to come to their rescue if the need arises. Unless they want to drive us even deeper into climate and ecological breakdown – which presents a far bigger threat than Covid-19 – they should not support these companies. Rather, they must invest in the green infrastructure that is so desperately needed. A green jobs programme (including retraining) should be provided to smooth the transition and absorb lay-offs from potentially failing brown industries. 

This second principle of supporting the green transition is an example of the third principle: restructure not reproduce. Before Covid-19 came along, our economy was already driving crises of poverty, inequality, environment, and democracy. Occurrences like the financial crisis of 2007-08, and possibly this current health crisis, represent critical junctures. Big responses are necessary, and we can choose to reproduce old structures that drive social and environmental ills, or we can choose to fundamentally restructure our economic system to foster prosperity within planetary boundaries.

In response to the financial crisis, we chose the former. Today, we must choose the latter. This will involve long-term measures, among others, to support local economic activity over globalised supply chains, democratise finance rather than subsidise big commercial banks, and escape our dependency on continued destructive economic growth.

As specific policies are announced in the coming days and weeks, they should be evaluated against these three principles. If we can protect the most vulnerable, support a green transition, and restructure our economy in line with social and environmental goals, we might even come out of this crisis better than we entered it.