 Good afternoon, everyone. First and foremost, I hope you and your loved ones are safe and healthy. Welcome to all of you, wherever you're calling in from. It's been great to see so many people from all over the world joining these webinars. Just by way of an introduction, I'm Raza Rahman, I'm a Master's student in the Economics Department at Zoas, moderating today's webinar. This is the fifth webinar in the Economics of COVID-19 series. It's a series organized by the Department of Economics at Zoas and the Open Economics Forum, a student association part of the Rethinking Economics Network, which aims to introduce plurality in the economic debate. A huge thanks to everyone behind the scenes for organizing these webinars. I, for one, have found them really interesting. We've had some fantastic talks so far discussing the implications of COVID-19 on climate policy, feminist economics, the economic development of Latin America, and new liberalism. If you haven't been able to attend any of the previous webinars, they have been recorded and they're available on the Zoas Economics website. This webinar will also be recorded and uploaded as soon as possible. To keep updated on future events, feel free to follow our social media accounts and keep the conversation going with the hashtag economics of COVID. The details are in the chat box to your right. Today we'll be turning to the macroeconomics of the COVID-19 crisis, specifically the implications of the crisis on the austerity agenda. The discourse on austerity has come back into the limelight, not that it ever really left, as commentators discuss how the decade of austerity has impacted the economy and overall resilience of the crisis hit. Additionally, unprecedented levels of government support as a response to the crisis have led to many questioning what the post-crisis regime will look like as government debt increases substantially. To discuss this topic, we have Dr Joe Michelle, Associate Professor in Economics at the University of the West of England. Joe is currently Secretary of the Post-Keynesian Economics Society and was a founder of reteaching economics. His areas of interest include macroeconomics, money and banking, income distribution, and Brexit. Before handing over to Joe, I'll just lay out the format of the webinar. Joe will be speaking for around 30 minutes followed by an interactive Q&A session, so I strongly encourage you to submit any questions you have within the first 40 minutes of the session in the chat box to the right, or whichever right is your right. We'll then compile these questions and put them to Joe during the Q&A session. I've rambled on for far too long, so Joe, I'll hand over to you for the next 30 or so minutes. Okay, thank you very much for that introduction, thank you very much for joining me. I hope you are all well and as well as can be in these strange and uncertain times. I'm doing okay here, my kids are downstairs, we're just about under control, so I've been given the internet for an hour. I've got a very old fashioned copper connection, but hopefully it'll hold up for just enough for us to get through this session. I'm going to leave Raza to control things like notifications and hands and stuff in the chat box unless you want to jump in and tell me to do something. In fact, I'm just going to turn off the audio notifications because I'm getting beeps in my ear, which are likely to confuse me. Let me just turn that off, okay I think I understand Blackboard well enough to do that. Okay, so I've got about half an hour, I'll try and stick to my time. What I want to do, I'll lay out roughly what I want to talk about and then we'll see how I do getting through it on time. So I'm going to talk about the macro economics of the coronavirus and in particular what are the implications for macroeconomic policy? There's a big debate going on about what is the character of the coronavirus shock? Is it a demand shock? Is it a supply shock? How long will it last? Once we start coming out of lockdown, what are the correct policies to use in particular the correct macroeconomic policies, fiscal policy and monetary policy? And there's a big debate there so I'll try and say something about that. Before I talk about that, what I want to do is go back and say and lay out the macroeconomic backdrop of the last decade, which as Raza said has been the decade of austerity and already there are voices calling for post-corona austerity because it's very clear that we're going to see sharp rises in government spending, we are seeing sharp rises in government spending, falls in tax revenue, that means a budget deficit, it means higher government debt to GDP ratios and already there are people saying that as soon as we're through the most acute phase of the medical emergency then we really need along with easing the lockdown to get economic activity going again, we also need to start thinking about how we get government finances on back what people say are a sustainable footing and I'm going to conclude in half an hour or so or 25 minutes or so to give you the punchline in advance by arguing that we don't need austerity, we are not going to need post-corona austerity. There will be difficult choices, there will be trade-offs to be made, there will be political battles to be had but what we really do need to avoid is what we've seen for the last 10 years, which is those who are least able to take the hit both financially but also medically in terms of health, in terms of security, in terms of overall well-being, we can't allow the people who have been on the sharp end of austerity for the last 10 years to also be on the sharp end of the corona, post-corona shock, we know that those people are currently, you know, suffering disproportionately during the coronavirus lockdown both from the coronavirus itself and from the effects of the economic lockdown, which I'll talk about. So that's sort of what I want to do, we'll see how I get on for time. So let me start with laying out what I mean by austerity and what I think of as austerity because it's a word that's used a lot and it's not always precisely defined and very generally austerity means some kind of externally imposed compression of consumption would be a very general definition and that doesn't have to mean as a result of, you know, weakness in government spending or cuts to government spending. You can think of historical examples, for example, during Soviet Russia or the Great League forward in China, when actually big expansions in government spending on heavy industry and so on resulted in, you know, consumption compression for much of the population and in many cases, terrible hardship and, you know, awful outcomes in terms of huge loss of life. And broadly speaking, you could think of that as a kind of austerity, but that isn't what we've been using the term to mean in the last decade in the UK and it isn't how I'm going to use it for the rest of the seminar. What we mean by austerity is cuts to government spending in an attempt to reduce deficits with the intention of bringing down government debt to GDP ratios. That's what we've lived with for the last 10 years. We've been told, we were told from 2010 onwards when George Osborne became Chancellor, that really the overriding policy goal of government in this country, which trumps all other policy goals really, was to get the public finances under control. And what we were told was that there was an immediate and present danger from the situation that the financial situation, the government public financial situation in 2010, after the immediate effects of the 2008 financial crisis had passed, there was an immediate danger and therefore the requirement was to bring the deficit under control. I'm going to briefly argue that that justification doesn't stand up to scrutiny. And one of the things I think will become clear or is becoming clear as a result of the coronavirus expansion in government spending and the coming big rises in the deficit, we're going to see another big chunk added on to the government debt. And my hunch is we're going to see none of the problems which we were told we were facing 10 years ago in terms of investors in government debt, people who buy and hold government bonds, those are the debt instruments that issued by government to cover the difference between taxation income and spending, cash spending by governments. We were told that those investors wouldn't want to hold government debt if the GDP ratio has exceeded 80, 90, 100%. And therefore interest rates on government debt would rise. And this would put us in an unsustainable situation, which would ultimately mean sharp tax rises and real falls in consumption for average people. What I think we're going to see is that that isn't true and we're going to see that interest rates are likely to remain very subdued on government debt. And I think it was pretty clear even 10 years ago that that justification didn't hold water. There was very little evidence in the financial markets of bond holders, bond investors not wanting to hold the instruments of rich country, big rich country treasuries like the UK and the US and Japan, for example, we already had the historical experience of Japan, which had debt to GDP ratios that were very high, much higher than we were looking at, above 200% of GDP and very low rates of interest on their debt. And if you really push people on this, because the last 10 years have been very difficult for the people who made that argument, because we've seen government debt to GDP has remained quite high, because austerity is actually not a very good way of reducing government debt to GDP. So those ratios have stayed quite high. And at the same time, interest rates have gone lower and lower. And much of developed, I shouldn't say you don't like the word developed, on rich world government debt instruments, they're negative, real interest rates are now negative, meaning that bond investors will actually pay for the privilege of having an asset that they regard as safe. People are so, people who want to hold financial instruments are so keen to have something which they know will retain at least some of its value and a predictable amount of its value, that they will actually accept a negative return on instruments. So when you push the Austerians and you say, well, look, what was your justification? One justification was, of course, the famous Reinhart and Rogoff paper, which was shown by Thomas Herndon, a brilliant PhD student, to have relied on a coding error in an Excel spreadsheet, literally a fat finger error in an Excel spreadsheet. This was Osborne's usual justification when pressed. He would say, this is the most important academic contribution. And this is the overriding intellectual fashion of our government's policy. It was a fat finger error in Excel. So now that one is off the table. If pushed, they will say, well, look, there was a bond auction. There was one bond auction when investors didn't show up and they didn't want to buy government bonds. And that shows that they were scared. But this was right in the heat of the financial mess of 2008 when bank balance sheets were under severe distress, when financial institutions were extremely focused on the immediate problems of the crisis. It's not surprising that bond auctions were a little bit disorderly at that point. And there was only one. And there is literally no other evidence that I can really think of beyond that one kind of blip 10 years ago that showed this danger existed. So that's my kind of starting point is that we've had a decade of policy premised on the assertion that there is a lack of demand for UK government debt. And I think that assertion has been shown to be false. And I think it was quite, it was very hard to say there was a clear case that it was not false, even at the point we were 10 years ago. Now, one of the results of that 10 years of government cuts being, and I should just briefly note that there were also tax cuts during the period. And if they were really serious about bringing the deficit down, you wouldn't cut taxes at the same time as cutting government spending. And I think this does show that there was more going on than what we were told as the headline justification. You know, if you're taking money away with one hand, you know, by cutting disability benefits, income to people who are disabled while giving tax cuts to those at the upper end of the income distribution, it's a lot harder to say, well, we're bringing down the deficit and we're all in it together. That's a fairly clear redistribution from, you know, a very vulnerable low income group to, you know, a very privileged and less vulnerable group. But the results of austerity, I think, are now very clear. We've got lots of good academic work that shows severe health effects, you know, we've seen rises in all kinds of health conditions. The macroeconomic effects are fairly clear. We've had a very weak recovery. Income per head has grown at one of the slowest rates post-crisis on record. Productivity is almost completely flat in this country. We've seen almost no productivity growth. Wage growth was negative for a sustained period. For several years, we had falling wages after the start of austerity. And depending how you measure it, wages have just got back to where they were before the crisis 10 years ago. And we've got government cuts, particularly local cuts, in places like many of the most deprived places in the countries. And the northeast is currently seeing one of the worst coronavirus outbreaks. It's actually overtaken, I think, London as the current center of the coronavirus outbreak. Government cuts in the northeast were absolutely brutal over the last decade. And so it's a kind of perfect storm. The population has really suffered. They've suffered from deindustrialization, the loss of steady jobs over the longer run. There are many underlying health conditions there from coal mining and from the kind of jobs that were there. Then you had austerity, which really compounded many of those infrastructural issues, social organization issues, health issues, and now the coronavirus shock coming off the top of it. So I think the evidence is pretty clear that austerity was a very bad way to prepare for the kind of pandemic which we're now facing. And then we can add to that the more immediate serious questions about the way the government has handled the crisis, particularly things like how long they took to start lockdown and so on. So that's kind of the backdrop. Let me now say something about the debate about what's happening now and how policy should respond to the corona shock. And economists are fond of using the word shock because, to be honest, because there are a lot of things which are not in the models which have been used. And so you say something which isn't in the model is a shock. And quite often those things shouldn't really be shocked. So the financial crisis of 2008 was a shock because the models at the time didn't really have a well-developed financial sector and they didn't have the possibility that finance could be very unstable and could generate this kind of dynamics. But I do think it's reasonable to call coronavirus a shock. I think it's reasonable that macroeconomic models don't have some kind of pandemic modeling parameter. And the debate has been shaped around very crudely a sort of dichotomy as these debates almost always are, between a group who say, well, this is a supply shock and a group who say this is a demand shock and the policy response is very different depending on which of those two things is true. So let me briefly lay out what I mean by a supply shock and a demand shock and then tell you where I come down on this debate. And then I'll move on to sort of the future outlook. So a supply shock means, I mean, the sort of the easy mental version of this is something like an asteroid strike or a natural disaster. You have an immediate destruction of economic productive active of capacity. You know, you lose power stations, roads, the physical infrastructure you need to produce things. And if the population continue trying to spend the same amount of money buying goods and services with degraded supply capacity within say 10 or 15% less ability to actually produce goods and services, you know, in a simple economic model you get inflation because people then raise prices to ration the now short supply goods. And there's a view that what we're seeing now is a supply shock. And the argument is, well, large numbers of people are forced to stay at home. That's a huge negative labor supply shock. There's a huge amount of labor which isn't coming into the productive process. That means goods and services are not being produced. And therefore what we're facing effectively is a supply side shock. Now that's a perfectly reasonable argument. And I'll come back to this one in a minute. The danger that comes from a supply side shock as I sort of laid out in my example is an inflationary problem. You get inflationary pressure because prices start to rise. And you therefore need policy to try and constrain that inflationary pressure. And usually that policy is broadly speaking unpleasant. It means some form of austerity or it means tied to monetary policy in the form of higher interest rates. It means kind of trying to constrain people's spending. The alternate very crudely side of the debate would say, well, look, no, it's not really a supply shock. Or yes, maybe it is a supply shock. But what really matters here is demand shock. Number one, people aren't spending. People have been prevented from leaving their houses. That means they can't go to the shops and buy the things they would normally buy. They can't go to the pub. They can't go to restaurants. They can't go to cinemas. They don't travel. They're not buying airline tickets. They're not buying train tickets. So we're seeing a huge reduction in expenditure. And that's a demand shock. So there are people who are saying, look, this demand shock outweighs the supply shock. And I think everybody actually accepts that both things are happening. So the question is, it's magnitude. Which of these two effects is dominating? And those who are pointing to the demand shock are saying, well, look, what we need is a demand stimulus. We need a response to try and bring back the demand which is missing because people are not spending. And with interest rates at or very close to zero or in some cases negative, large amounts of quantitative easing already outstanding. Sure, the central bank is already looking at new and alternative policy tools and we could maybe discuss some of those later on. But the short version is the demand side argument says we need fiscal policy. We need government spending to step in and take up the reduction in spending that we're seeing from the household side and also from the firm side, not buying intermediate goods and so on. My starting point on this is that for the point that we are right now, during lockdown, this isn't really the right framework to use. I can understand why that framework has been used because it's a standard macroeconomics framework. But I don't think we should think about the current period as really a normal economic period in which we're looking at the balance between a supply and a demand shock. What we're really trying to do, this is externally imposed by government to basically try and freeze the economy. We just want us to stop economic activity. We want to try and put the economy on ice, freeze frame it, keep the essentials running, food delivery, basic infrastructure, power, internet communication for things which have to keep going, shut down the things which don't need to keep going, haircuts, nightclubs, etc. In that situation, yes, you expect a supply response because that's what you're aiming to do. You're aiming to stop, okay, but we come back to that one. There's a range of policy options there from number four to full on hippies, but let's come back to that. What we want to do is we want to shut down the economy. We want supply to fall, we also want demand to fall, and we want to try and preserve the economy in the structure it is in with as little damage as possible so that when we start to come out of the lockdown, and I think we have to think about how that is sequenced and the phasing and so on because it's not going to be one day, you know, you flick a switch and we all go to the pub and talk about, well, that was a strange time, wasn't it? It's going to be very long and drawn out and possibly even in waves, you know, test it and see, realize a mistake was made, reimpose restrictions and so on. I think until then we shouldn't be thinking in terms of this supply demand framework, but the way I've been thinking of it is as an analogue with central banking behavior, and central bank activity very crudely is divided into monetary policy, which is about managing, at least on paper, it's about managing spending and demand. You raise interest rates to stop people spending, you lower interest rates to make people spend more. It's a very crude, not very realistic version, I think, that we teach in standard macroeconomics, but I think the more important function, actually the more sort of historically embedded function of central banks is lender of last resort. They are the institution which can create credit, which can postpone payments until next month, next year. Banks can do it. A bank can make a loan and say, I'll lend you a million pounds at 0% interest rate, and that effectively allows me to postpone all my other payments. If the bank will give me a million pounds and say, you don't have to give it back for 50 years, fine, I can pay off my mortgage, I can, you know, all the other debts which are coming due, stop being a problem. But the banks aren't going to step up in a situation like this. The banks aren't going to go out looking for customers, so the only institution really which can provide the credit, the forbearance, the kicking the can down the road of, sure, you need to pay your mortgage, but the person who you're paying your mortgage to or your rent, who you're paying your rent to needs that rent as an income in order to pay their mortgage and the banks need the mortgage income in order to prevent their balance sheets deteriorating. So you've got these chains of payment and either you freeze them and you say nobody has to make payment, you know, for three months or six months or whatever, or you allow those payments to continue, but somebody ultimately picks up the tab and says, basically, all of you owe me, and at the end of it will kind of tally it all up and work it out. And that's what I think that's how I think the government actions up till now are kind of functioning. They're a way of trying to keep the economy and freeze frame mostly in the second option. You know, they're doing it by saying, you know, we'll cover wage payments, we'll allow or guarantee banks to make loans to keep credit flowing so that people can continue to make payments. There is another school which has actually a better option would just be to suspend those payments. I see that Neff, the New Economics Foundation have a report today saying we should just suspend rent and mortgage payments rather than increasing credit from public institutions to allow them to continue, we should suspend them. And I think there's a discussion to be had about which of those is better. But that's kind of how I think about what the policy reaction is trying to do. It's trying to kind of put the economy on ice, prevent balance sheets from deteriorating, prevent people from going bankrupt, from losing their houses, prevent jobs from going under, prevent firms from going bankrupt, and so on. And I think of this in terms of a kind of Minsky process. Minsky, for those of you who don't know him in detail or haven't come across his work, always talked about the economy as a structure of balance sheets, you know, where you have obligations from previous commitments, I've agreed to pay my mortgage, I've agreed to pay my phone bill, et cetera, et cetera, and income. And if your cash income falls and your expected cash income or illegally required cash outflow is still there, then you're in trouble, you're bankrupt. So I think we're kind of preventing a Minsky-type dominoes falling effect is what the aim of government policy should be. And my hunch is that my view is that while much of the government policy is very welcome, particularly the job retention scheme, the ability to furlough workers and the government to cover up to 80% of wages, is very welcome as our other schemes. I don't think they're sufficient. I think there's been too much reliance on loans, on credit, and not enough on either direct cash transfers, grant-type transfers, or payment suspensions of certain types of payments. And so I think that the damage that's occurring to the economy in terms of job losses, in terms of firms, bankruptcies, and rising credit problems, balance sheets deteriorating, I think are severe. And I think the longer it goes on, and we don't know how long it will go on, the worse these problems will get. And I think these have quite important implications for once we do start trying to remove the lockdown and get activity going again, there will be lasting damage. But the terminology which is emerging here is scarring. Economists are talking about scarring effects. In the economics literature, this has been referred to as hysteresis effects, i.e. sort of long-run either GDP level or even GDP growth rate effects from recessions. And we saw it quite clearly, I think, after 2008. The growth rate didn't return to its previous growth rate. The productivity growth rate collapsed from about 2% to close to zero. So almost all GDP growth in the last 10 years came from population expansion, effectively, rather than higher output per head. So I think it's very likely we'll see this kind of effect again, and possibly more extreme. So that's where I think we are now in terms of policy. Once we come out of the lockdown, whenever that may be, and as I said, I think it's going to be a prolonged and difficult and phased process, at that point we're going to have to start thinking in terms of the supply side versus the demand side. Where are the bottlenecks in the economy? Where are the shortages of things, potentially food, for example, leading to price rises? And there are a number of elements in the argument that we're going to see supply side bottlenecks. One is that global trade is going to break down. And those fairly fragile cross-border global supply chains, which relied on just-in-time production, goods moving very rapidly through different economies and so on, will break down and won't reconstitute themselves quickly. We're also in the context of anti-globalization sentiment from all over the place, from Trump to people on the left. So I think the likelihood that we're going to get back to those global supply chains quickly or possibly even ever is unlikely. Other reasons why we might see inflationary pressure are demographics. An aging population is often invoked. It's not clear to me that that link is clear. I think you could also argue that aging populations lead to deflationary pressure, but it's sometimes there. And there are other elements to that story. On the demand side, why might we see severe demand shortfalls as we exit from the lockdown? Well, people are going to be, at the moment, during lockdown, people are not spending because they can't. Now, once we start to come out of lockdown, people may not spend because they won't or because they can't for different reasons. Now, they won't possibly because they're scared. People may not want to go back into crowded nightclubs and into cinemas and into crowded public transport and so on. So I think there's good evidence coming out of polling that people are not immediately just going to start rushing out and going out and being in crowded areas. Even once the government says, sure, go to Cheltenham Festival or go to Liverpool versus Athletica or whatever, it's safe. People may look at the government and say, I don't really trust you. I don't think it's safe. I'm going to stay home. So I think there's good evidence that people are not going to be spending. I think there's evidence that balance sheets will have deteriorated, as I said, during the crisis. So some people will have racked up debts just to keep keeping their houses or whatever and it will not be able to do anything other than pay down those debts. I think there's probably a fairly severe income distribution process going on, which I think is a really pernicious effect of the lockdown in that relatively well-off middle-class people like myself so far haven't seen job losses. I haven't yet been told that I'm redundant until my salary is going to be cut or a salary are cut, they're not cut by large amounts, effectively stop spending. Unless they actually make an effort, like I try and make an effort to try and actually keep spending by giving money to people I used to give money to even though they're not helping me in the way they used to, people like me will accumulate cash balances, not driving Ubers, not going to restaurants, not going to bars and so on. Whereas the people who rely on those things, driving Ubers, serving in bars, making coffees, etc., don't have an income. Many of them are on precarious contracts, they're effectively unemployed now. So there's been I think a wholesale shift in wealth, you know, income distribution from those least able to take the hit to those most able to take the hit. I do think it's incumbent on those who have seen their, who've done wealth financially out of this crisis and as a sort of personal point, I think it's incumbent on those people to find ways to get rid of that money. You know, if you've made too grand out of being in lockdown, I think you should give the money to charity or you should, you know, pay all the services that you didn't pay in the meantime or something to try and even it out a bit. But otherwise, the government should come and look at balance sheets at some point and tax. So I think there is alongside that that where these two interact, we've got the damage to the supply side, the hysteresis effects and the longer there's a demand side recession, you know, kind of depression as we come out of lockdown, you know, if there isn't government, strong government stimulus at that point, I think there's a very plausible scenario where you get sustained recession, almost into depression, that worsens the hysteresis effects, you get, you know, more layoffs, skill losses, lack of investments and so on. And that can be very dangerous potentially because it means that when we do finally start to try and come out into a growth path, it's going to be constrained. So let me, I'm aware that I'm up to half an hour, so I need to start drawing to a conclusion. There's still lots more I could say, but maybe we can, I can say some of it in the Q&A. With Rob Calvert-Jump, my co-author, I've been doing some work on projections and forecasts of the government's finances. And we were stimulated to do this by the Office for Budget Responsibility scenario, what they called the Coronavirus Reference Scenario, which came out a few weeks back. And what the OBR showed was they predicted, or they'll be careful not to say they were predicting it, but their scenario showed a very severe contraction in GDP of around 35%. So currently they think that the economy is operating at about 65% in terms of the cash value of transactions that's taking place relative to the pre-crisis situation. But what they show in their scenario is that that reverses completely to the point that the GDP path returns to its long-run trend from pre-crisis, you can draw a line straight through on their charts, I hope you can see my hand here, and you kind of get a V shape, which just joins up the beginning and the end, and then it carries on. So their pre-crisis projections are identical to their post-crisis projections, with the exception of this V shape. And the good news about that is it means that government debt to GDP does spike up, the deficit spikes up, but it immediately closes, and we see an increase in government debt to GDP peaks at about 110% and comes back down, I think, to about 90%. For context, for 2008, UK government debt to GDP was about 40%. It went up to about 80%, 90% during that crisis, and it hasn't really come down much since. The deficit has closed, but the debt to GDP ratio hasn't actually changed a great deal. So what Rob and I have done, and these hopefully should be published next week, if you're interested, is done some alternative projections where we assume a weaker bounce back and these kind of hysteresis effects, and what we show is that we think applauseable, we're actually going to show fan charts of the range of possible outcomes, and they're pretty wide because the uncertainty is so high, but our central projections for a kind of shortish lockdown, which ends reasonably soon, sort of three-month-ish lockdown followed by reasonably rapid return to long-run-ish growth trends, government debt to GDP goes to about 120% and stays there. Worse than the assumptions, i.e., let's say, a six-month lockdown with hysteresis effects, and then you're looking at more like 140-150% of GDP. And as you increase the length of the lockdown and worsen your assumptions about what could come after, this number rises. And what we've done is we've made a little kind of interactive tools so people can even play with this themselves and generate their own forecasts. So that should be out next week or so, hopefully. But the policy conclusion to all this, and why are we doing this? Why are we giving these neoliberals ammunition? Why are we showing these debt to GDP ratios and so on? I think forewarned is forearmed. I think it's quite dangerous that the OBR are putting out these scenarios saying, you know, we're going to be roughly in the same place in terms of government finances we were. In two years' time, we're going to be about where we are now. I don't think we are. I think on paper, the numbers are going to be bigger, and that means the headlines. That means the newspaper headlines saying, you know, highest debt to GDP since 1973 or whatever the relevant number is. And it means the usual talking heads on the radio or on the television saying, you know, this is all very sad. We're all going to be in it together, but we've got to do what we did again in 2008. And I think we need to be ready this time. I think we need to be ready with that. It's coming. These are the kind of numbers we're looking at. And in my view, it's kind of numbers, 120%, even 130%, 140%. With sensible policies on the sequencing of bond issuance, with sensible use of the Bank of England as a stabilization mechanism to ensure that debt can be issued smoothly. Potentially some of it can be monetized through quantitative easing. The Bank of England have already basically said they're going to do that. I don't see any real reason why we have to go for any kind of austerity strategy in the sense of government spending cuts and so on. And what we need to be thinking about is some kind of fiscal stimulus strategy in the possibility that we do get a kind of a depression type scenario emerging. We need to be ready with a serious fiscal stimulus package and we think about what are the areas of focus? Should it be infrastructure? Should it be social care? Obviously it should be green and so on. And we need to think about the arguments on this can be financed. It could be done sustainably. So it's not going to be the same arguments as 2010. We're not going to lose the argument in the way we did in 2010. Okay, I've overrun by five minutes so I'm going to wrap up there. That's my conclusion. I'm going to hand back to Raza and hopefully Raza is going to know what I need to do. I've seen lots of questions coming in but I've been carefully not reading them. I get distracted. There have been plenty of questions. Thanks for that. Let's get started and actually turn focus maybe towards the European and other countries first and then come back to the UK. So we had a question. Well actually I know you spoke about the UK's relationship with austerity but the European dynamics are different with calls for shared debt burden but those were called down and the European stability mechanism has a clause which imposes austerity if you reach into it. Also Toby has a question. The Bank of England has the option of doing monetary financing but the ECB has explicitly prohibited by the Maastricht treaties. So any new public debt will mean higher debt service in the future. If the ECB is not allowed to absorb this additional burden through monetary financing, isn't a reduction of public debt the unavoidable response? Okay these are good questions. So the political economy in Europe is more complicated of course than in the UK because of the complexities of the eurozone and I think it's very widely accepted now. It was pointed out by a fairly small number of critics at the time but I think it's widely accepted that that's a deeply flawed institutional arrangement, a monetary union without corresponding fiscal government union. And that means that the macro dynamics there are very much driven by intergovernmental politics or inter-country politics in a way that you know in the UK it's determined by internal fights between those who want more austerity and those who don't. In the eurozone it's determined by countries that you know have a kind of austere mindset that think you know budgets should be balanced. The Germans have this black zero thing that it's just completely mad. It's so far from any kind of sensible macroeconomics that it's just so hard to comprehend you know for someone like me. In a situation like this the statements that still come out from northern European countries about fiscal rectitude and the balancing the budgets and you know not doing unconventional monetary policies could endanger monetary stability and so on. It's exactly the wrong way around and there has to be some kind of burden sharing. There has to be you know the only solution that I can see for the European system is some kind of joint debt issuance and guarantees for the weaker nations, the weaker financially weaker nations, monetary, sovereignties if you like by the richer nations. I'm not optimistic that we're going to see it and we could talk about the details of the various programs but really it's the politics which matters here. We have some I mean the ECB has been sensible and the ECB has done I think quite a lot and is still announcing more measures but ECB if you read between the lines basically says that there's only so much we can do you know the governments have to step up. We have seen finally some slightly more sensible messages in more recent weeks from northern states including Germany saying actually we're going to suspend the usual restrictions about fiscal balances and so on but I mean the kind of the mechanics the macro mechanics isn't that different to the UK it's just bigger and it's across a more heterogeneous not even heterogeneous I mean the UK is incredibly heterogeneous look at income and productivity levels from London up to the northeast or something it's actually kind of comparable to the Eurozone so it's really a question of size and political will and I just think we have to keep trying to keep up the pressure but I don't feel optimistic I mean I do have the sense that northern European elites would almost rather stick to the sort of the stupid path to the point that it causes disintegration and it causes Italy just to say I can't take any more. At some point you know I've always been you know somebody who wanted to keep the European project together and who's defended it despite all its manifest flaws and that's a very big debate but you know you do see at that point countries like Italy just do have to say you know this is this is ridiculous you know we can't put up with this anymore but I hope we don't I really hope we don't get to that did I answer the question was there something about monetary financing yeah I mean in terms of monetary financing the ECB can kind of do it through the back door I mean there are ways I mean there's a big debate about whether QE is monetary financing I mean what happens with quantitative easing is the Treasury so in the UK the Treasury sells guilts government bonds to say a pension fund and at the same time the Bank of England is buying those guilts or actually different guilts from pension funds so as long as there's a private sector agent steps in and then you get price formation and then you're not worried because you can pretend that really the interest rates have been determined by the game between the pension funds and the Treasury it's not the Bank of England which is setting the rates of interest nobody buys it it's not true but the Bank of England comes and buys those guilts from the pension fund and we can all sort of pretend that there isn't monetary financing going on that the ECB can and is doing similar kinds of creative tricks but it would be kind of useful if we had a bit less of the sort of breathing down the neck and the restrictions saying you know you really mustn't do this it's not sound finance it is it's perfectly reasonable great thank you we've had had some questions about context outside of the European Union and the UK so some developing countries has austerity been implemented in those countries and are the macro economic effects particularly acute for them of this corona crisis okay that's a really good question and it's a really big debate and actually I think you're going to have a seminar on this topic you know Keston Perrier is online for that so I'll leave quite a lot for him one thing I've been watching I mean it's it's very country and case specific but I think there's a there's a an overriding point here which is that rich countries like the UK like the Eurozone or whether they don't want to use it like the US have enormous capacity effectively because people want to hold instruments denominated in in those currencies in pounds in in dollars and so on whether they are government debt instruments government bonds whether they're just cash you know bank deposits of various types or stocks and shares and other kinds of financial instruments and that gives governments in those countries a lot of leeway to spend and to use the central bank as a mechanism to smooth that spending by you know expanding the money supply very crudely speaking because ultimately people will will to have not to an unlimited degree I actually don't think there's there's no limit to this but I think to a fairly wide degree people will accept those instruments will accept pounds and dollars that isn't the case for many countries who are lower down what I would call a global currency hierarchy who are reliant on the use particularly of dollars for international trading to finance trade deficits to finance the need for capital goods to finance the need for hydrocarbons you know for oil imports if they're oil importing nations and what we've seen during the austerity period alongside the austerity in rich countries was very loose monetary policy to counteract I think actually the macro effects of the fiscal austerity you try and keep growth on the road by cutting interest rates very low pumping liquidity into the system and one result of that has been a flight not a flight but a movement from rich country financial instruments into so-called emerging market or emerging economy instruments so I think monetary loosening and very loose credit conditions in rich countries has led rich country investors to just take positions against instruments in poorer countries that pay higher rates of interest and what we've seen since the crisis struck is a rapid reversal of that you know kind of sudden stop where money has flown out of poor countries into the dollar everybody's trying to hold dollars we have seen federal reserve action to expand access to what are called swap facilities which allow other countries banks that can't issue dollars to keep their banking systems afloat or fund their businesses or whatever to access dollars but I don't think it's been nearly strong enough I would like to see much stronger IMF action to make loans using what are called special drawing rights it's a kind of monetary instrument that the IMF issues without conditionality one of the problems with the IMF is they usually impose fiscal austerity as a side effect of you know you want this loan you have to impose structural adjustment on your economy that would be catastrophic so I think there's a real problem and actually I was a kind of coordinator of a letter to the FT quite early on I can't remember how long ago now time is a blur six weeks or so maybe really urging rich countries to think about this issue the fact that they have the monetary you know what the MMT is called monetary sovereignty I think it's a useful term to a much greater extent than those poorer countries and to take that into account and to not allow these international financial dynamics to constrain those governments in their responses their responses to the health crisis and the macro crisis because we do need all countries pretty much to be able to run big government responses that means deficits and that does mean an international sort of solidarity in terms of money and finance again I'm not optimistic but you know we have to say this is what this is what's needed I agree um so there are some policy related questions people are asking you for your opinion on some policies so you mentioned payments so some suspending payments or the government is actually acting as the ultimate backstop do you think debt forgiveness is a viable policy um there's other policy related questions does the need for fiscal stimulus to present the perfect opportunity for a green new deal and what do you think about the strategy of trying to inflate away at least partially government debt yep you know all excellent questions good um debt forgiveness it depends on which debts and it's a complicated one in general I lean towards I mean it's not the blanket answer but I lean towards using creative lending accounting rather than technical debt write-offs because debt write-offs cause kind of domino reactions you know they cause credit events they cause technical defaults and these things can cause kind of domino reactions which can make a mess what you can do is you can refinance debts and pretend that they're going to be paid off when they're not you can refinance them basically zero rates of interest hide them on balance sheets leave them there for 20 30 years and then by the time it's 20 30 years you know who cares this is kind of what the government does with student loans they know that a big chunk of student loans are never going to be paid off um so I would be of you know as a very first cut and not in all cases there are clearly some debts which just should not have been made and are you know what's the word unethical or there's a technical term I can't think of immediately and those should be struck off but there's a big gray area where it's kind of a mess and for that I think extend and pretend you know refinance them for 30 years at close to zero bury them somewhere and then you've basically written them off without the mess of um the credit defaults and so on but there's a there's a big debate there and you'd actually have to go through it I mean there's a difference between mortgage debts and student loans and credit cards and pay their lenders and and so on and so forth and the answer is different I think in each case does this provide us with the opportunity for a green new deal yes I mean the short answer is from my perspective from the way I think about the world everything provides us an opportunity for a green new deal because that's what I want to see again I'm not optimistic I think we're going to see fairly strong action to get things back to as close to normal a pre-crisis pre-corona normal as possible I've actually got something I've been working on with Yang so I think it's on the call and Daniela thinking about you know what are the kind of prospects for um you know green policy versus kind of greenwashing you know to what extent are we going to see lots of branding of financial instruments as green investments but don't actually have a great deal of effect in terms of actual carbon reductions to prevent present new opportunities for financial investors and so on um so I think things are going to change I don't think we're going to go back to to normal that's already a cliche to say you know the world has changed we're never going back but I think there's going to be a push to get back to the kinds of in many ways the more pernicious elements of normal I sort of slightly a finance dominated type of capitalism with charity I think surveillance is a very interesting question because we're talking about increased use of surveillance and technology as a way of getting out for contact tracing so on and I'm very much a favor of that but we're there's already discussion about surveillance capitalism and surveillance workers through digital technology and I think that that's going to be an element so yes I think there are kind of two parts ahead of us there's there's the green new deal you know big investments you know social solidarity redistribution confronting the power of finance that's very much the the I would like us to go down but there's also the you know back to as close to business as usual as possible in the new normal and you know if I had to bet I'm afraid I would bet on the latter but you know those of us who agree with me get ready to to fight for the former I think about that right way you get the point what about the prospects for inflation as a way of getting us out of of debt to GDP ratios there are two stories about how you get out of high debt to GDP ratios that I'm increasingly wary of and if you look at the post-war experience what you saw was a reasonably high nominal inflation until mid 60s when it becomes you know more more severe and then becomes the major policy issue alongside rapid growth and at the combination of those things you know rapid real and nominal growth plus you know fairly healthy sustained inflation brought down debt to GDP ratios from post-war highs of about 200 to 150 percent you know fairly rapidly down to to sort of where we saw them in the in the 80s and 90s I am dubious about either of those processes I don't think we're going to see a return to long-run high growth and I'm not I'm increasingly convinced by the green arguments that actually we don't want to be I mean perhaps creative accounting we can count thing more things in GDP so we call GDP higher for example but actually I do think we need to start thinking about redistributing activity redistributing working hours and this is a really big debate but even if we did want to go for you know to help with the carbon emissions let's just drive the economy as hard as we can and get five percent post-war type growth rates I'm just dubious I think that's kind of historical phase which is quite unusual and I think it probably has come to an end I also think inflation with very wide era bands I would say here I'm not completely discounting a post-corona supply side inflationary scenario I think it's it's I think it's unlikely but I think it's plausible and actually one thing we should be talking about is what are the correct policy responses there because it's quite a different policy environment to be arguing but I think it's low likelihood I think actually deflationary pressure persisting deflationary you know so-called secular stagnation although I'm not convinced by the theoretical underpinnings of the story is more likely and therefore I just can't see the inflationary pressure and very crudely I think a big driver of inflation is workers being able to put the demand wage rises that I think is a really key element of an sustained inflationary process so not just a one-off increase in prices food bottlenecks you know for a short period might lead to sharply higher food prices for a while but unless they keep rising it's not inflation it's just you know a change in the price of a particular category of goods I think for sustained inflation you do need wage pressure you need workers to be able to say I want to pay rise and for firms to react to that to try and protect their profit margins by raising prices and the stories I'm hearing and this is anecdotal at this point is that people aren't agitating for pay rises in the current situation and I don't think it's likely they're going to be I'm actually hearing of it forced pay cuts and people who are keeping their jobs being told your salary is 80 percent or 70 percent and if you don't like it you know off you go so my hunch is that that's a little long answer I don't completely discount an inflationary scenario but I would definitely have it sort of under five percent in my range of outcomes so I think the most likely is ongoing weak or even negative inflation in that case you're not going to get nominal debt nominal you're not going to get debt to GDP down through through inflation so I think we need to start making arguments about the sustainability of government finances with big balance sheets you know we can live with 100 120 130 percent we don't need growth to erode it we don't need inflation to erode it we just have to accept that that's you know people want to hold those safe assets of that kind of size and they're showing us they want to hold those safe assets by interest rates so I think those are the kind of arguments I would I would push rather than you know growth will take care of the deficit which was true in the 60s and 70s but it's 50s and 60s but it's I think less convincing now great I'm just conscious of time so I'll yes I've been about the future so how long do you think government support will need to be in place um there are some questions around furlough so considering at at the moment the furlough scheme is protecting many household jobs how long do you believe the government can afford to carry on these payments before we see huge jobs losses similar to the US which may exacerbate the recession and depression related to that is there any good reason to be concerned about too much debt to GDP increases and are there any are any government showing signs that they would act differently in terms of austerity following this crisis compared to financial crisis okay those are all good questions how long can the furlough go on how much will it cost do we even care about debt to GDP um and I've lost the third one tell me the third one again um the third one was are there any signs that governments are acting differently yes or act differently post COVID compared to the financial crisis yeah okay that's a really good question all of them really good how long can the furlough scheme go on um it's a really good question back of an envelope we have budgeted something like 15 billion per month of lockdown give or take so the deficit we're sort of projecting something in the order of 350 billion for this year which is huge it's unprecedented it's kind of 12 13% of GDP it's bigger than the deficit we saw 2008 much bigger in nominal terms kind of twice as big but also bigger in percentage terms each additional quarter of lockdown you know with the full job furlough guarantee job guarantee job furlough scheme should mix my terminology and so on we'll add large numbers to that so we could see up up to sort of 500 billion um which is a very large figure you're talking 20 25 percent of GDP how much can be afforded this kind of connects to the second question of you know how much does debt to GDP matter and the honest answer is we don't know where the limit is we don't know at which point people start selling the pound people start saying I don't want to hold um you know guilds sure the bank of England can buy guilds it can intervene to stabilize the interest rate by by purchasing guilds at the limit then people just say they don't want to hold these kind of instruments by just selling the pound wholesale and sure we can take 10 15 20 percent depreciation of the pound wouldn't hurt that much but sustained selling and and you know real depreciation of the pound would hurt and ultimately one way or another it will hurt um but I think those technical questions about where is the limit are probably more less pressing than political considerations I just can't see the conservative government sitting for nine months paying large I mean increasing proportion of the workforce wages and watching that kind of deficit rack up the OBR will producing different will be producing different kind of charts the right wing press will be screaming you know about all kinds of things you know the debt GDP ratio is going to kill our grandchildren and so on so I really think probably the political considerations will kick in before the actual again you in macro financial considerations my best guess is that beyond about six months the kind of numbers you're looking at will just be not the kind of numbers that a conservative chancellor will will be able to stomach I mean already we've seen I saw a very nice summary of this um during austerity they wouldn't spend any money to change things you know for the better what we're seeing now is they're spending huge amounts of money to try and keep things as they were you know to try and stop things getting getting better they're not spending money in the way that would really lead to change social change and improvement um but the kinds of money they're spending even just to keep things as they were you know through loan guarantees and job furloughs and so on I think are going to become politically very difficult so I my hunch is that beyond about six months of this kind of full lockdown you know they're sort of get the economy going let the mortality rate go up side of the debate we'll start winning and I really hope we don't get there and I hope that we can get the lockdown strong enough for the next few months get some kind of tracking and tracing in place that we actually can start coming out you know in a kind of South Korea type scenario without the mortality rates going up without our rising and therefore we don't have to have these horrible fiscal arguments because that's a real mess I think um and this is a really good one actually to end on to what extent were we already post-austerity because if you remember Rishi Sunak's first budget before coronavirus before we fully comprehended the scale of it was the end of austerity big increases what looked like headline huge increases in government spending deficit rises to hell with the deficit and the debt and you know many people myself included said look this shows they never really believed it they knew that there was never a financial constraint they just they wanted to do it and now they they've realized that actually it's politically inconvenient and they do need to spend money on leveling up and and so on um I think there's definitely going to be um a camp still within the you know the conservatives and within the kind of republican camp in the U.S. which is going to stick with that much looser fiscal kind of um sense but I think there's also going to be a camp pushing for austerity in the sense of government cuts even if we do get the kind of big budget tourism and big budget republicanism and historically of course in the U.S. it's always the republicans that run the big budgets they always talk up a game about you know you can't run budget deficits because they want the democrats to cut social security sets and spending but when they get in they always hand out money to their friendly tax cuts and run big big deficits so they don't they don't buy it um so I do think there was a shift there was a really noticeable shift from that sort of camp but I still think there are there are there are fights within that camp between the kind of the true austerians and the kind of to hell with it big deficit tax cuts for the rich kind of camp even if the latter camp win it's going to be ugly you know it's not going to be Green New Deal um so there's a fight there and and we really mustn't mistake the ends for the means a big deficit isn't the thing we're aiming for it's the thing which allows us if we need it to get to the place we're going which is better jobs better security environmental protections and so on um so let's not you know mix the two up and we don't just want big deficits for the sake of it okay I think we're getting close to time limit here um so as we're nearing the end Joe I'll come back to you for maybe just a very brief conclusion and your main takeaway is okay um I think you can probably all guess pretty much my my views on this from from what I've said um we are in a you know completely I'm gonna try not to use the word unprecedented because as I said people keep saying there's an unprecedented use of the term but it's very hard to to know how to think about the current situation normal macro models don't apply so my my my argument was that the standard supply demand analysis isn't currently useful we're in kind of freeze frame on ice lender of last resort type situation as we come out those traditional macro arguments are going to come back um I think there's a huge range of possible outcomes they depend on policy they depend on medical um developments and so on but my current sort of central scenario is weak demand the need for fiscal stimulus and the need to you know push against austerity arguments with high debt to GDP ratios and push for you know socially useful government spending green new deal type um spending but we'll see for the next few months how things unfold and see whether that story is still where we are in you know two three months time that's what we have time for today thank you so much Joe for your insight into what the COVID-19 crisis means for the future of the austerity agenda and the macro implications I think we've had a really interesting conversation and some great questions sorry that we haven't been able to get to all your questions but you can keep the conversation going on social media um you can follow along um I'll put down the links in the chat box um the next webinar will be this Wednesday 6th of May at the same time 3 to 4pm UK time it will be on COVID-19 and debt crises the speaker will be Christina Lascaris and the moderator as far been as usually both from SOAS in the meantime as I mentioned at the start you can stay updated um on the series and the wider conversation on social media um now all I have to say is I hope you all stay safe and well and I hope to see you on Wednesday goodbye