Time for our economic policy response to wake up to fact that it's uncertainty that is the enemy not just coronavirus. Here's why this matters so much...
In any crisis it's absolute crucial to address the root cause of the shock. The goal is to remove uncertainty about the situation continuing/getting worse - that is the only basis for a recovery. That's why in a financial crisis faith must be restored in the banks
Economic shock plus big uncertainty about whether/how long the problem will continue = recipe for firms/families hugely cutting back = deeper recession. That is where we are today.
Why? Because in moving to the new health response the government is embarking (for good reasons) on a strategy with no clear endgame - they (understandably) can't tell people or firms how long this will go on. In contrast under the old strategy the answer was a few months
So now the economic strategy has to recognise the world has changed. Most importantly if we can't reduce the actual uncertainty of the health response's economic impact we need to make that uncertainty matter A LOT less for firms/families
For firms that means being realistic about the limits of relying on loans however cheap. A loan is ideal for a firm planning on a short disruption, but firms aren't going to take on loans to cover revenue losses for a whole year that they can't pay back
Firms hit instead need confidence that big chunks of their costs will be taken off their books for however long this lasts. In particular (if we don't want very high unemployment) their wage bill.
In the face of this uncertainty we should also think hard about forms of loans that go beyond reducing the cost, to reducing the RISK to firms that the loan will kill their business anyway ie income contingent loans (think student loans for firms)
For families we need to swiftly offer reassurance that their incomes are not going to fall far and stay low. If that is a big risk not only will those actually hit stop spending but everyone else will too. That is what a demand shock is all about
The answer to reducing struggling firms wage costs AND offering families reassurance on long lasting income hits is a new retention scheme where people who don't have work to do, stay formally employed by their firm but with a significant amount of their pay covered by the state
In every area of the policy response we need to be asking not just can we reduce the immediate harm, but what more can we do to reduce the uncertainty facing firms and families. In an economic crisis uncertainty kills - and at present we have it in bucket-loads
