The economic response to the coronavirus answers only immediate questions

History does not provide a template for the management of a crisis like this. When the banking crisis struck in 2007–09, there emerged a highly readable historical literature to guide us through the likely course of the financial firestorm, from 'Tulipmania' in the 17^th century to the Wall Street Crash of 1929. This Time Is Different by Carmen Reinhart and Kenneth Rogoff (subtitle: “Eight Centuries of Financial Folly”) sold well for a book with a deliberately ironic title; financial crises always have echoes of an earlier one from which we can learn – though we seldom do.

Pandemics are not new, but one of this swiftness and near-total coverage really is. Even more novel are the dramatic state interventions intended to put a firebreak around its spread. The analogies with war are very misleading. Wartime economies are brutally productive, high-temperature machines, whereas the coronavirus economy is the very opposite: a colossal state effort aimed at putting much of the economy into hibernation. 

We are witnessing for the first time the concept of anti-stimulus fiscal policy: money spent supporting businesses in not operating, people in not going to work. Only in particular parts of the economy, in particular health, is the temperature running hot.

The appalling novelty of the crisis is an important framing device, because it makes clear how impressive some of the government’s reaction has been. The Treasury in particular deserves praise for its ability to adopt an utterly un-Treasury mindset in a very short period of time. It is just three weeks since the new chancellor, Rishi Sunak, adopted the famous phrase of Mario Draghi to frame everything he was doing. “Whatever it takes” meant more than just a bursting of fiscal limits but also willingness to abandon the Treasury’s typical squeamishness towards intervention – and in so doing, rightly set aside the constraints that we felt should apply to bailing out business for Brexit.

The coronavirus crisis has forced the chancellor to rip up the rules

What emerged in the following fortnight went beyond just setting aside rules: the chancellor turned them on their head, and again quite rightly. For a start, fiscal support is normally designed to encourage activity, not to stop it. For this reason, it will be impossible to use the normal mechanisms of evaluation to determine value for money for schemes like the Job Retention Scheme.  

A second rule is the accepted view that the greater the private sector participation in a scheme, the better. This reflects several sound principles: to protect the taxpayer, ensure fairness and try to align state support with the private sector’s incentives. While this is not wholly suspended, at a macro level the whole point of the Treasury support is to shift the financial burden of this hibernation towards the state. The government does not want the private sector to emerge from this crisis only through recourse to such a high level of borrowing that it cannot support itself when the hibernation is over. Hence the rule is no longer guiding policy to the degree it might have.

And another is that an economic crisis is usually also meant to do some kind of useful work in terms of restructuring activity. Most crises show that some of the prior patterns of behaviour were unsustainable (speculating on tulips, investing in too many railroads, bidding up subprime debt). While the transition is brutal, the avenging angel of a sharp economic contraction is meant to speed the process of creative destruction. But in this case the government’s intention is clear: to preserve the same economy as went into this crisis. Restructuring is a topic for the long term.

There will be further phases to the coronavirus response – and the Treasury will need to adjust

For the first critical phase, this approach makes sense. There was the real risk of a dangerous collapse in economic confidence. But as the Treasury and other parts of government are besieged by businesses shouting about their own particularly affected corner of financial distress, they should keep in mind the other phases of the coronavirus crisis to come.

Later in the year, if all goes well, the government’s mind will turn towards how it restarts demand in a private sector that has had its confidence shattered and – in parts – its financial resources depleted. It will be deeply concerned with the damage the crisis will have wreaked on the supply side of the economy – the labour withdrawn from the market, the investment that has been curtailed, the broken supply chains and the lost organisational capital of failed companies.

There will be growing interest in the question of how our economy and society need to be reformed in the wake of this trauma: more spending on health, certainly, but also the possibility of a real change in how we work, travel and interact. Finally, there is going to be the most enormous fiscal reckoning. Now is too soon to estimate the rise in debt and annual borrowing that future chancellors will need to address, but it may well require more pressing answers then those demanded by the financial crisis a decade earlier.

To think about all these now, with the crisis still far from over, may seem vain. But companies are naturally forward-thinking, and the government must be the same. During the hibernation phase its first question will be to ask whether what is doing will ensure a business can survive. But if the support is going to impede the important later phases of boosting demand, rebuilding supply, and long-term reconstruction, the questions will certainly change, and the usual constraints upon policy return. History may not provide a template for Rishi Sunak to follow, but the chancellor will know gravity cannot be suspended indefinitely.