Living through economic hard times, a practical suggestion

One of the big fears at the moment is that we are about to hit a recession.  A recession is a period of time, technically a minimum of two quarters (6 months), when the economy shrinks.  A shrinking economy is likely to lead to significant job losses as businesses cut costs to survive. Meanwhile, some businesses won’t make it at all and they’ll end up going bankrupt causing further unemployment. Alongside that, financial hardship will mean that many will not be able to pay off their mortgages leading to repossessions and homelessness.

Now, my personal view is that if there is an economic cycle, then we cannot avoid the downturns. We cannot assume that we are going to see permanent economic growth accompanied by full employment and low inflation. These things tend to balance themselves out.  I’ve argued before that the Bible seems to get that and that ancient Israel were encouraged to go with the grain of real life by building in Sabbaths and Jubilees. This meant that the nation prepared for the hard times during the good times. Indeed, that approach comes to the fore in international politics when Joseph encourages Egypt to use the seven good years to store up grain ready for the seven lean years.  George Osborne wasn’t the first to come up with the idea of “fixing the roof whilst the sun is shining.”

So, the question is this. Can we work in such a way as to prepare and provide for the economic down turns? Shouldn’t we in effect be building up a surplus during the years of growth in order to see us through recessions?  I think we already have small individual examples of this in place. It’s possible to overpay your mortgage for a period of time when you have spare finance and then underpay when things are tight making use of the surplus you’ve built up. Alternatively some insurance companies offer income protection plans.  Meanwhile, the government kind of insures us against loss of work and income. We pay into National Insurance and then if you lose your job you can claim benefits.

However, our benefits system comes with stigma, there are loopholes so that even though you paid into an insurance scheme it doesn’t feel like you are claiming back what you are entitled to. Furthermore, if you lose your job, especially as you get older, it is very hard to get back into work and pretty much impossible to get back to where you left off.

Now, as it happens, the Government road-tested something incredible during the pandemic. There were points in time when the economy shrank heavily as lockdowns made it impossible to get to work and closed the shops.  So we introduced a furlough scheme where employees were able to take time out of work whilst receiving a substantial proportion of their income.  The problem with that of course is that we relied on the largess of Government finances and as politicians are fond of telling us, there isn’t a magic money tree.

So, here’s my suggestion. Why don’t we build the furlough principle into the economic cycle.  We could extend it to enable companies not only to furlough their staff but in effect protect all their assets as well in order to protect against bankruptcy during a crisis.  If we planned for it, then we wouldn’t need to massively increase borrowing or taxes in response to a crisis. Instead, each business and every working individual would be paying in to their “Furlough Insurance” during the good years, ready to take out in the hard years.  It would probably involve an increase in National Insurance once the economy begins to recover and then we would have 7 or 8 years to build up the funds. Of course, the scheme would only be able to support people for so long and as far as there’s finances in it to cover them.  This isn’t about a permanent get out of jail card and irresponsible and ineffective businesses would still be hit with a reality check.

This idea is of course too late for the current crisis. However, we should be learning from things now so as to be better prepared for the future.