By Professor Ronald MacDonald, Adam Smith Business School, University of Glasgow
It is now clear that the initial UK lockdown has not contained the COVID-19 virus, the recovery is now unlikely to be V-shaped and the associated measures that have been put in place to protect jobs now seem unlikely to be able to prevent mass unemployment.
This paper is follow-up to The Post Pandemic New Normal, also published by Policy Scotland in which I argued that, for a number of reasons, the COVID-19 pandemic represented a watershed moment for the world economy and offers a real opportunity in a number of directions for policymakers to deal with some of the most pressing issues facing the global economy. In this new paper I pick up on two of its key themes which and that underscore the need to reboot the social contract.
The first issue is that of unemployment and what the policy response should be to the expected steep rise in unemployment in the transition to the new normal and what should employment look like in the new normal to be consistent with a new social contract.
The second is the role of the banking sector in the UK economy and how the pandemic has highlighted crucial flaws in the functioning of the banking system and how this has stymied the growth of the economy. If we are to have a flourishing economy in the new normal and one that provides value creating jobs in both the public and private sectors, then reform of the banking sector will be a necessary part of the reform mix.
So far, we have already seen a considerable increase in unemployment in high street retail and in all parts of the aviation industry. Furthermore, there are sectors of the economy such as the culture and events sector that are still not able to open and will undoubtedly pay a heavy price in terms of bankruptcy and unemployment. With the original furlough scheme coming to an end, combined with the resurgence of the virus, this clearly opens up the prosect of a return to the kind of mass unemployment that we saw in the 1980s.
One of the important consequences of the pandemic is that it has accelerated the application of digital technology in a number of areas and this has greatly mitigated the effects on the economy by stabilising employment in certain sectors and creating many new digi-tech jobs along with associated professional service jobs to support them. But there is also the significant skills mismatch since those who are being made unemployed in sectors such as gig economy, hospitality and high street retail sectors are unlikely to match skills in the sectors that are likely to grow. And although these technological changes are currently producing opportunities this is contrary to the wider, underlying digitisation trend which could, in the longer term, lead to further job losses.
To address where these jobs might be in the New Normal and to deal with mass unemployment that now seems the inevitable consequence of COVID-19 and the Government’s response, it is useful to return to some initiatives that have been taken in the past during past world crises such as the Great Depression and the Second World War.
These include the 1942 Beveridge Report in the UK, which sought to address the five giant scourges of the time and that were expected to haunt the post-war era, namely Want, Disease, Ignorance, Squalor and Idleness; President Franklin D Roosevelt’s New Deal in the USA, including initiatives with a strong resonance with today’s pressing concerns to support jobs in the caring, health and creative sectors, and projects to improve infrastructure and to protect and enhance the environment.
The first Policy Scotland paper argued that the current crisis should also be a wake-up call for many governments to finally address the economic model of shareholder and financial capitalism that has been the prevailing model in the UK and US for at least the last forty years. This model, with rent seeking rather than value/wealth creation at its heart and its focus on short-termism, has undoubtedly created huge inequalities in societies and certainly in the UK it is clear that this model is now at a dead end.
In this paper I discuss how other countries have created structures that support and encourage banks’ transformation function; that is their ability to transform short term loans into longer term lending for businesses that cannot access capital through equity or bond issuances. This is the key way in which banks can add value in the modern economy rather than the value extraction or rent seeking that has been so prevalent in the UK and US financial and corporate systems.
Again, historic responses to similar crises offer solutions to overcome this short-termism. I argue for a rebooting of the banking sector in this country and one based on a stakeholder model which provides the long-term relationship that business needs to sustain value-creating jobs going forward. This model was actually first brought to life in the UK in 1945 and has been successfully copied in other countries but was a casualty of the privatisation revolution in this country.
A new social contract
The paper argues for a return to the Beveridge Report – which underpinned the social contract developed after the Second World War – because the five Giants that Beveridge described (Want, Disease, Ignorance, Squalor and Idleness) in the 1940s are as relevant today as they were then. Their recasting in today’s equivalents should provide a programme that will spare the economy from mass unemployment and guide it on a path to a New Normal.
An important element of the new social contract should be a move away from the shareholder capitalism model that has ruled the roost since the 1970s, and the associated short termism and value extraction associated with that model, to a stakeholder model based on value creation. As in the post-war era, the optimal path for addressing debt and deficits going forward will be by growing the economy in terms of a mix of real and nominal growth.
To cite this article: MacDonald, Ronald, This time it has to be different: The policy response to the New Normal economy revisited, Policy Scotland, 10 October 2020, https://policyscotland.gla.ac.uk/this-time-it-has-to-be-different
Image credit: Daisy-Daisy | iStockphoto
See coverage of this paper in The Herald: The Big Read: Professor’s revolutionary new plan aims to save Scottish economy from Covid tsunami