This is part of a monthly series, “Economists Exchange”, featuring conversations between top FT commentators and leading economists about the recovery from the economic impact of coronavirus
Over the past quarter of a century, central banks have been set loose to oversee inflation and financial stability free from the strict control of elected politicians. But most chief economists of these institutions have a reputation for sticking strictly within the confines of their mandates, willing to speak about inflation, growth and employment and never veering out of lane.
Not so, Andy Haldane. As chief economist of the Bank of England for the past six years, he more often than not likes to make a splash with grand ideas, borrowing liberally from outside the world of economics. He mixes his time at the central bank with chairing the UK government’s Industrial Strategy Council and is co-founder of Pro Bono Economics, which seeks to match professional economists possessing a social conscience with charities that have knotty problems to solve.
More than a decade ago, Mr Haldane was urging financial risk managers to learn lessons from epidemiology in a bid to quell the global financial crisis. Recently, the fable Chicken Licken was on his mind as he berated the British public for “catastrophising” during the coronavirus crisis, slowing the UK’s economic recovery.
In this late November interview with the FT’s economics editor Chris Giles, he expounds on the duty of public policymakers to tell it straight when it comes to Covid-19, but says he still believes there is an excessively “gloomy and doomy” narrative in the air. With this in mind, he says another important duty of those in public life is to point to a way ahead, “a plan for what might be done to create jobs, to create growth, to build business, to build skills”.
Next month features the FT’s chief economics commentator Martin Wolf in conversation with Kristalina Georgieva, managing director of the IMF
His hope is that efforts to build out of the crisis can be self-fulfilling, encouraging people to start spending and investing to effect change.
“In some ways this is leaning against that old Keynesian paradox of thrift, with our words and with our actions,” he says, calling on policymakers and leaders “to step up and to provide [a] plan”.
But there is a fine line between optimism and becoming an equivalent of the emperor with no clothes, holding out the promise of a better post-pandemic society without the practical plans to make it happen. Mr Haldane nonetheless thinks he might have found the right balance for pointing the UK towards a better, fairer and less regionally unequal future.
Chris Giles: Central banks normally concentrate on the economic cycle, but you’ve also been thinking hard about the structure of society after the coronavirus crisis, how does that change the outlook?
Andy Haldane: The distinction between cyclical and structural is really quite blurry. When you get a shock this big, it’s very likely that even a short-term demand hit can have longer run supply-side consequences.
This is what we mean when we talk about scarring. It can show up in the form of lower investment and innovation. It can show up in the labour market in the form of reduced jobs and skills and experience.
But, there’s a different sense, in which this crisis is also likely to have deep structural consequences and that’s because I think it’s going to deliver some fairly seismic shifts in behaviour. I’m talking about the way we work, the way we spend, where we spend. I’m talking about how businesses operate, and about the role of a state as an insurance device.
CG: In each of these things, you seem to highlight what economists call multiple equilibria. We might have been quite happy in the way we worked before the pandemic, and thought it was efficient, but the crisis will jolt us into a new equilibrium where we’ll never go back to the way we used to work. What does this new economy look like?
AH: To take one example, which is how we work. In some ways, with the glorious benefit of 20/20 hindsight, what was striking is the extent to which we were stuck in a rather unusual working equilibrium pre-Covid. Roughly speaking, only around 5 to 7 per cent of the workforce was spending a significant chunk of their working week working from home. The lion’s share was spent in the office.
If we look at the tasks done, it was clear that anywhere up to a third, perhaps a bit more than a third of those tasks could have been done as productively at home but we were stuck in, what you might call, this low homeworking equilibrium.
If everyone else, or the majority of people, were still going into the office, many others felt the need to go into the office as well. But at a stroke, we suddenly had to switch equilibrium and we found probably around half the workforce, 10 times the pre-Covid level, suddenly being forced to work from home, including you and I, as it turned out.
The debate rages about what that has done to our individual and collective productivities but the one thing we can all agree is that it has reduced the unproductive, unpaid bit of work that’s called commuting because, of course, that’s what commuting is.
I’m not suggesting that a wholesale shift to always working from home is a good thing. I have in mind a mixed model.
CG: If we go into work one or two days a week, I worry that we’ll miss out on the big benefit of office life that is the informal conversations you have from strolling around the newsroom, for example. When there’s only a few people in, those benefits also disappear.
AH: I feel what you’ve just said quite acutely. I was in the bank last week for a day. There was almost no one there and, certainly, very few people I could actually have a serendipitous informal coffee chat with. They provide the wellspring of ideas and make the world of work, work.
The challenge you pose is how can we make it work, respecting the individual desires of people perhaps to spend a bit more time at home when working, while at the same time recognising the collective business benefits and, indeed, some individual benefits, of people being in the same place at the same time.
I think this does call for, I hope this doesn’t sound too grand, a bit of a rethink of the social contract that exists between workers and business, balancing individual desires, in terms of homeworking, with business requirements, in terms of collective working.
You could lob into there the state, as well. It could be that none of us would want, if you live in London, us re-converging on an equilibrium where everyone is travelling on the same public transport at the same time.
I think there’s a lot to play for there, shifting away from what was a pretty odd and probably quite a bad kind of working and business practice equilibrium.
CG: Future society will not only have to deal with the way we work, but hugely different experiences of the crisis. When we come out the other side, how do you see the social contract between different groups in the population changing?
AH: One of the most worrying inequalities before the crisis was the generational inequality between young and old, and the fact that was upending many of the social norms that we’ve become accustomed too for many centuries — not the least that each generation was somewhat often considerably better off than its predecessor.
There is nothing I’ve seen during the course of the past 10 months that doesn’t make me think that situation is likely to be made somewhat worse by the Covid crisis.
Recessions always hit the youngest hardest and the crisis has disproportionately hit those with low skills, those on low income, and those that are young. Much will depend on how quickly we can get unemployment back down to a reasonable base.
My hope would be, and it is no more than hope at this stage, that this event might serve as a clarion call and catalyst for us doing a somewhat better job at improving the lot, skills-wise, of those who pre-Covid would have been our low income path but, at present, are on a no-jobs path.
CG: It strikes me that the reason we have such a generational problem is that productivity growth has fallen through the floor since the financial crisis a decade ago. We have structural issues, such as the very low interest rates, which raised asset prices, pushing them out of the reach of younger people. No one wanted these results, but what can we do about it?
AH: To go to the heart of it, the low levels of productivity and the low equilibrium global real interest rate are, of course, intimately interconnected, one in some ways has helped generate the other.
The list of things that might be done speak to the skills deficits that we know exist across many economies; it speaks to us doing a materially better job in infrastructure; it absolutely speaks to us looking to ensure that many more of the fruits of innovation are harvested by many more businesses.
We had, in many countries around the world, this conflation of factors pre-Covid whereby we were talking about being on the cusp of a fourth industrial revolution, yet none of that was really showing up in the productivity numbers.
So, something was going wrong between the innovation engine at one end and the body of the corporate sector that didn’t appear to be benefiting fully from the effects of that innovation, in terms of their own productivity.
CG: We’ve been talking about this delayed productivity boost for ages. As you know from Bank of England forecasts, everyone always assumes the productivity crisis will end next year. And then it doesn’t.
AH: Exactly. If you look at the lag between invention and adoption, that has tended to fall over time. The puzzle this time is what’s taking so long. I don’t think there’s any one answer to that, but I do think, right now, in lot of countries people are making the case for increased R&D [research & development] spending which we know will eventually show up in heightened productivity.
What I wouldn’t want to lose sight of, though, is the diffusion part of this, which is ensuring that this innovation reaches down to many more businesses. Something has gone wrong in the diffusion engine in many economies and that, at least in part, explains the productivity problem.
CG: What is your understanding of what has gone wrong?
AH: To go back to your multi-equilibrium metaphor from earlier on, I do think we increasingly saw the coexistence of two sets of companies. There were those that were at the bleeding edge of technology that were high-productivity, high-performance companies. They tended to attract highly skilled workers and tended to situate themselves in the better performing cities around the world.
But, on the other end of the spectrum we had a different equilibrium, which was a set of companies that were locked in a low-performance, low-profitability, low-productivity equilibrium, who tended to hire lower-skilled workers and to locate themselves in some of the less well-performing parts of the country.
I said that because I see the company productivity, workers skills and spatial dimensions of this as being closely interconnected. So, the productivity problem, the skills problem, the spatial problem, the regional problem, are part and parcel of the selfsame problem.
One of the tasks of policy will be to think about how we can jolt or incentivise companies to shift the equilibrium in which they are operating towards a higher-productivity, higher-skilled equilibrium — and take workers with them.
Covid, of necessity, has provided a bit of a downpayment on that transition because it has required more companies to get themselves match fit. The UK numbers on that are quite striking. In the first few months of this crisis, companies were investing four times more in digital than they had in the whole of 2019.
So, there has been a bit of jolt there already. The question is how do we keep up the momentum once Covid is behind us.
CG: If you were advising someone who is in one of the very good northern English city universities, would you say that they should stay there, try and make a career there or come to London where house prices are very high but it’s still the most dynamic part of the UK? Where do you see their future?
AH: Far be it for me to be offering financial locational advice.
CG: You came down from Sheffield to London, yourself, didn’t you?
AH: I did. I grew up in Yorkshire, slightly north of Sheffield. I went to the University of Sheffield. Yes, I did and that’s partly because there was no Bank of England in Yorkshire. Maybe in the fullness of time that will change. Who knows?
I do think the forces of agglomeration are incredibly powerful. The rise of super cities, the centripetal forces of skills and business and culture and people were overwhelmingly positive, and that is why cities are such a motor for growth. The flipside of that is why we have had regional disparities which in the UK are back to the highest levels since late Victorian times.
Covid is set to be a game-changer on this. As urban density was a huge asset pre-Covid, it’s become something of a liability. To be clear, I don’t think we’re going to see the complete reversal of those agglomeration benefits, having something that is a cultural capital, a business capital and a financial capital. But if we are moving to a world of working and to a way of doing business that can be more decentralised, then I think it’s likely that activity, itself, will become more decentralised and evenly spread as well.
CG: We’ve talked quite a lot about both how equilibriums might change because of Covid and where public policy might become involved to force or to encourage change in future. Can you give a sense of whether Covid, in some sense, makes the world a better place?
AH: Well, I wouldn’t want to underemphasise the damage that the virus has delivered and the scars it’s inflicted, which have affected pretty much everyone on the planet with no exception — some very much more than others.
Covid has ushered in an era of anxiety and has made worse some of the insecurities about jobs and incomes that pre-existed the crisis. Equally, as we all know, all crises open up opportunities, as well, to think afresh and do a whole range of things. We could use some of the behavioural change that we’ve discussed as a force for good, to move to a different way of working that is somewhat more efficient and productive.
I don’t want to come across as Panglossian because no one, with no exception, would have wished this crisis on the world, given the damage it has inflicted. Equally, there are ways we can, I think, build back in a different way that we ought to be optimistic about.
This is the edited transcript of an interview between economist Andy Haldane and the FT’s economics editor Chris Giles
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