Finding the right corona stimulus won’t be easy

All governments are going to have to come up with vast stimulus packages over the next few weeks or face mass bankruptcies and job losses as the economy is paralysed by measures to combat the coronavirus. But was it really wise for President Macron to announce on Monday evening that no business will go bankrupt as a result of the coronavirus crisis? True, there are a great number of businesses all across the world that risk going to pot through no fault of their own. You might run the best pizza parlour in the world but still you face going under if your government orders you to close down for weeks and months, depriving you of income with which to pay your continuing overheads.

But what governments are going to have to beware of is coming up with indiscriminate rescue packages that bail out everyone, bad businesses included. As in the 2008/09 banking crisis, we are in danger of propping up zombie firms that would better be allowed to be put out of their misery. As then, governments face the issue of moral hazard – by offering to bail out businesses willy-nilly they are in danger of creating the expectation that they will always be bailed out in times of economic crisis. That will merely encourage reckless behaviour, with businesses over-borrowing and over-expanding, calculating that if it all goes horribly wrong the government will come along and pick up the pieces.

But some way is going to have to be found to compensate firms whose business has been undermined by government decrees that people should avoid their services. It is tantamount to those businesses being forcibly closed down – but without their business interruption insurance cover being triggered. 

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We are going to hear a lot about ‘helicopter money’ over the next few days and weeks: the concept, devised by Milton Friedman in 1969, of printing money and dropping it directly into communities in order to stimulate the economy. Trouble is you can’t stimulate an economy in this way if businesses are forcibly closed and people ordered to remain indoors. The alternative is to drop money not into consumers’ pockets but into the bank accounts of businesses that are affected by the closures to keep them afloat until customers return. But that brings us back to how you decide which businesses get the money?

Either way, we are heading for a very deep depression. Recession is too mild a word and governments seem blind to the consequences of their actions. Announcing a €45 billion (£41 billion) rescue package this morning, French finance minister Bruno Le Mair, suggested that the French economy might shrink this year by one per cent rather than grow by one per cent. Come off it. Just one per cent shrinkage with almost every restaurant and non-food shops closed?

More realistically, Capital Economics estimated this morning that the UK economy could shrink by 15 per cent this quarter – that is compared with a six per cent drop from the peak to the trough of the 2008/09 crisis. And the government has entered this recession with a significant deficit of nearly £40 billion that, even without extra stimulus measures, is going to balloon over the next few months. We might regret that the now-defunct policy of austerity (i.e. government living within its means) had not been pursued more vigorously in order to build up a war chest for the lean years. The only way out now is going to be to resort to a very large experiment with printing money in some way – with risky outcomes even harder to predict than the course of the coronavirus itself.