Universal basic income sounds appealing—but it's the wrong response to coronavirus

One of my favourite books about the way normal life can unravel is Norman Lewis’s masterpiece, Naples ’44. Based on his observations as an intelligence officer at the end of World War Two, I have always treated the medieval-sounding events, health hazards and a collapse in civilised norms, as a form of fiction that I would never see in my lifetime.

But when health systems are at breaking point and the global economy is faced with a sudden stop, as it is now from the Covid-19 coronavirus strain, what are the policies we need to ensure a return to normality rather than further economic degradation? Ideas such as the adoption of universal basic income and “helicopter money” are being touted as way of preventing the ultimate fall. I am not so sure.

The first question for an economist is always: what is the shock that we face to the structure of our economy? Having taken a view on this, we can decide the best response. The Covid-19 virus has shrunk to almost zero the normal interactions that dominate our socio-economic relationships. Those who can work from home will do so, probably about 30 per cent of the workforce on a sustained basis, and we will switch our expenditure patterns away from recreational activities to necessities.

Much production will be halted. And we will also worry about the unknowns over how long this disruption will persist and ultimately whether our long-established trading and mobile patterns will return to anything like their pre-crisis norms. Many firms will be facing a severe loss of revenue, as will many workers, particularly those in self-employed and precariat industries.

The shock to the economy therefore has a number of elements. It involves the introduction of a large amount of uncertainty—what former Bank of England Governor Mervyn King has, with economist John Kay, called “radical uncertainty—into the economy that will stymie planning and activity for a prolonged and unknown period. The good news though is that the initial shock is likely to be temporary, and so part of the policy response must be to limit the duration of its impact.

A further aspect is that this crisis was not caused by fiscal, monetary or regulatory laxity; it is essentially an “Act of God.” Therefore there should be no direct concern about policy interventions rewarding badly-run businesses and promoting more risky behaviour in the future, what economists call moral hazard. Policy has to provide comprehensive insurance and risk pooling to the private sector for the duration of this crisis, and given that expenditure will stall, as people increase precautionary savings, a considerable monetary and fiscal stimulus is required.

Fortunately the crisis has precipitated a co-ordinated response. In terms of demand management, so far there has been a proportionate reaction and much has been done to foster confidence, even though that remains fragile as the primary concern is that of our health. On Budget Day, the Bank of England stole the lead by making a 50 basis point emergency cut in the base rate, announcing a new SME funding scheme and a relaxation of the counter-cyclical buffer. A few hours later Chancellor Riski Sunak announced £30bn of support to business. The following week Sunak moved even further away from his arbitrary fiscal rules and unveiled an overall £330bn package of loan guarantees worth some 15 per cent of GDP and nearly 70 per cent of outstanding business loans. Just days later, the Bank of England further responded with an emergency announcement of a cut in Bank Rate to its 0.1 per cent floor and a substantial extension of the asset purchase facility, or quantitative easing. The chancellor too went further to support firms’ ability to retain workers who would otherwise be laid off.

The immediate problem the economy will face over the next few months is very much one of cash flow, as the normal circulation of cash through exchange and trade will be shattered. And the key policy questions are not so much the typical monetary and fiscal questions of the price of credit and the scope for tax cuts, but rather, how can the state get cash into the hands of firms and households without undermining long-run monetary and financial stability? The problem we face in the UK with our large sequence of current account deficits is that overseas investors will judge us harshly and make the borrowing we need more expensive if there is any hint of a decisive move away from long-run sound money. Any temporary measures therefore need the support of a clear, long-run and credible Bank of England framework.

The extreme answers to the cash flow problems are a “helicopter drop” of money, which involves the state borrowing money from capital markets and then asking the Bank of England to issue money backed by those borrowings. A money drop of some £1,000 per person would cost around £70bn, or 3 per cent of GDP and may be just as likely to be saved as spent

A similar idea would be to adopt a universal basic income strictly for the duration of the crisis, which if set at £500 per person per month would cost somewhat over 1 per cent of GDP per month. If matched to the duration of the crisis these measures may make some sense as an insurance policy for the whole population, as we are all going to be affected.

But universal policies are not necessarily well targeted at the people who cannot work effectively from home, who are often in primary and secondary industries where salaries and qualifications tend to be lower. We should be thinking of how to shift resources from sectors where labour is now abundant to where it is required and how we might provide rapid retraining. There is also the need to provide targeted support for the self-employed who cannot typically insure themselves against job or income loss. Many of these people work in professional occupations.

Then there are those working in key distribution, supply and transport industries. We should be thinking about using the time afforded by any universal support to set up a national insurance scheme for people in the new economy. We also need to think carefully about in which other areas of risk the state might support the private sector: from hedging exchange rate risk to the costs of temporary overdraft facilities. There are just so many examples of incomplete coverage. Maybe we can start building a more secure future now.