COVID-19 and the economy

28 April 2020

Interview with 

Christopher Rauh, University of Cambridge, Lord David Willetts, Resolution Foundation

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Our lives have been turned upside down in the last few weeks, and the economy is no exception. Many people have been furloughed or have lost their jobs. What kind of impact is this having short and long term? Christopher Rauh is an economist from the University of Cambridge, and he spoke to Adam Murphy about this impact. Then Lord David Willetts, former Minister of State for Universities and Science, and President of the Resolution Foundation shares his thoughts with Chris Smith...

Christopher - So most of the government data is released with a lag. And at the moment there was nothing available. So we thought, let's go out and collect our own data.

Adam - And what have you found? What is the impact going to be in terms of job losses?

Christopher - So I can only second what David said. So we actually were interested in the inequality of the impact and before we go into the inequality, just the aggregate impact was huge. So already 15% of workers have lost their job, of those that were working four weeks ago. And this number is even more shocking if you think about that usually in the recession, mass layoffs are not what are driving increases in the unemployment rate. Usually they're coming from people having problems finding jobs. So that makes these numbers ever more shocking.

Adam - So who is it that's most affected? Who stands to be hit hardest?

Christopher - First are those in precarious work arrangements, they were the ones that lost their jobs first. So zero hour contracts, temporary contracts, variable hours. We see that all those people were the first to lose their jobs. Then those that work from home, they are are protected quite well because they can continue to do their job and these jobs tend to be held by those that are more educated and also have higher incomes. What is really different though, from other recessions, is that this time women have been more likely to also lose their jobs. So usually it's men that are more likely to lose their jobs in recessions. Now, one could think that this is because women are more likely to work in services or in face to face jobs, but we find that it's above and beyond that. So even if you control for their work arrangements, individual characteristics and occupation, women have been more likely to lose their jobs.

Adam - Do you know what's driving that difference then?

Christopher - We don't. So we have some time-use data and this is really only suggestive. We have no causal evidence for this, but we find that those women that are still working from home, they spent more time on homeschooling and taking care of their children than men that are working from home and have children. So one could think about maybe this plays a role in the decision employers make.

Adam - As you mentioned, this is a very different kind of recession. Does that mean the way out is going to be different? Will it be short term? Once we've got a vaccine or are we in this for the long haul?

Christopher - So I think we're in this for the long haul, but how long will depend on some of the government schemes. So I think the furloughing scheme is going to be key here. If firms have to go back and hire lots of workers, number one they wouldn't want to do this because of the uncertainty involved. Number two, the whole process is costly. You have to screen people, meet them, make decisions and make good matches. And then the other problem is that if you work for someone over time you're accumulating something that is like an employer-employee specific human capital. You know how that firm is run. The firm knows how you work. So you are more efficient together. Now if all these people are being separated from their firms, you lose all of this. So through furloughing a lot of this can be preserved.

Adam - And as we've said, this is different from previous recessions, but is there anything we can learn from those recessions and take forward into this one that might help us?

Christopher - You know, if we had had a furloughing scheme in place already here, that would have helped a lot. You have the self employed that wouldn't be receiving payments until June. That creates a lot of uncertainty. People can not cover their bills. So we find that more than one third of the people are already having problems covering their bills and these things create domino effects. So looking back, we should have learned from the past recessions, that we should have policies to adapt to these short term or medium term drops in demand and production.

David - Well, I would say that the initial reaction from the chancellor and the prime minister was pretty bold. And also we were able to coordinate that, sort of the fiscal response, the public spending announcements, and the monetary response, the bank of England's announcements, in a way that was harder in Europe because of the structure of the Eurozone. So I would say the initial response was bold and effective, but there's still a lot more to do as we've just been hearing. There's a real danger of viable companies going under and the scarring effects bringing down our long-term economic performance and lowering our productivity.

Chris - What is the level of debt that we're accruing? I mean, as a country, so when the government is doing the various initiatives that we just heard about, how much is this costing per week? What will the level of debt burden be by the time we, you know, best case scenario, get out of this lockdown and get the economy rebooted?

David - Well, we started with our national debt standing at about 80% of our national income. Now, who knows where it'll be at the end of it, but it's going to be, I think very probably over a hundred percent, could be significantly higher than that. So it will be a big increase in the national debt. But at the end of the second world war, the national debt was over 200% of GDP. So that puts it into perspective, but nevertheless, we will be operating with higher levels of national debt. However, on the other hand, interest rates are very low. That means that at the moment, the cost to the government of paying the interest on its borrowings is surprisingly modest. It's a peculiar combination, very large amounts of debt, relatively low cost of actually paying the interest on it.

Chris - And you made a sort of reference to the second world war, which we only just stopped paying off in relatively recent years. I suppose the differences comparing then to now is that with things like the furlough scheme and keeping businesses intact albeit not producing anything for the short term is that we're sort of hot loaded and ready to go as soon as things can reboot. Which after a war of course that wouldn't have been the case. There would have been more of a lag.

David - Yeah, that is true and the logic from the Treasury's point of view, looking at it from the economic perspective, is absolutely that they want companies to be back and viable and functioning. They're trying to keep them going - a sort of short term blip. I think the interesting parallel with the second world war is of course there hasn't been the physical destruction. On the other hand, if railway carriages and tube trains all have to have every other seat blocked off so that we're not too close to other people, if you have to redesign the way that your workplace functions so that people are always two meters apart, then actually that is a very big hit. That means that your capital stock can't work as well as it used to. That's a massive investment challenge to reboot and reorganise the way we do things.

Chris - And just briefly, David, people are talking about what globalization might look like in future. We've been hooked on a supply of very cheap mass manufactured goods from the far East for a long time now, for example. People are saying that's all going to have to change. What's your view? How is it going to change and will it?

David - I think there will be changes, partly in the way we lead our lives. I suspect there'll be less air travel for a very long time, and there will be national attempts to create the new industries that you need to tackle the problem. However, the one optimistic sign on globalization in this terrible crisis is that this is a common enemy. It isn't something that should divide nations. This is an enemy that we can all see and where there can also be very high levels of international collaboration. And what I hope comes from this is a greater sense that we're all in this together. Just as with the challenge of climate change.

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