Paying for It: Part 1 - The Sinking Fund

We don't know the cost of Covid-19 in terms of human life, lost production, jettisoned employment, bankrupties and credit impairments eroding financial systems etc. But all of them imply an assault on fiscal cashflows and national balance sheets far greater than anyone expected, and probably unseen outside wartime.

So there are choices to be made about how to pay for it. Decisions made within the next year about how to meet the coronavirus bill will help frame the economic and financial environment for at least a generation. Consequently, how the world chooses how to pay for this 'act of God' will comprise the most important set of economic and financial decisions we will live to see. This is no exaggeration.

To date, there has been little public or political discussion of this looming enormity. So let's make a start.

The first thing to acknowledge is the uniquely an-economic source of this crisis. The fiscal positions of countless nations (and companies, and individuals) are getting trashed not as a painful consequence of previous economic or financial folly or miscalculation, but because a new deadly virus got out and jumped every rabbit-proof fence we tried to put in its path. By itself, this has precisely nothing to say about economic and financial conditions and policies prior to the virus. It has nothing new to tell us about the frailties of globalization, the wonders of socialism, or even the necessity of state power. And by extension, there's no need to assume that the coming destruction will have anything 'creative' about it.

Nor should decisions about 'how to pay for it' entertain value-judgements about who 'should' pay for it. (And that includes the US attorney launching a $20tr lawsuit against China.)

Rather, I would suggest that the starting point for discussions should be a crystal-clear recognition that the destruction is a blind and anomalous disaster akin to 'an act of God', the consequences of which we need to minimise even as we recognize they will be with us for decades.

In turn, this raises the idea of ring-fencing corona-virus-related public debt into a separately managed consolidated sinking fund.

Japan, which is more habituated than most both to natural disasters and potentially disabling levels of public debt, already deploys such a mechanism. In Japan, when 'unexpected' public debt is incurred (the definition is both broad and publicly sketchy), it is added to the debts overseen by the Government Debt Consolition Fund (GDCF). Public rules about how that debt is going to be repaid are then set in motion. The key stipulation is that the debts in the GDCF are to be repaid over a 60yr period. So, for example, if the debts in the GDCF amount to Y600bn, then after 10yrs, Y100bn will have been paid down out of government revenues (ie, taxes or asset sales), whilst the remaining Y500bn will be refinanced. Each year, then, nibbles away at the total, and within 60yrs the GDCF will, notionally, be out of business.

Adopting a similar structure to hold coronavirus-related debt has two attractive properties. First, it acknowledges that the debts created are simply the result of an anomalous accident (unlike, for example, the debts incurred in rescuing Western financial systems in 2008/09), and that in the aftermath there are greater urgencies tha re-establishing pre-virus fiscal conditions. Moreover, by laying out an unambiguous but long-term plan to pay down that debt, it is acknowledged that fiscal responsibility has not been abandonned, but that immediate fiscal austerity post-virus is not envisaged as the way responsibility will be asserted. Second, it acknowledges the fact that the economic and financial shadow to be cast by the virus will be both broad and long, and escaping it will be, and should be, a multi-generational task.

Together, these two principles might clear the ground sufficiently to allow constructive (rather than constrictive) post-virus economic and financial policies.

I am well aware that a sinking fund is not a panacea, and that it does not address the second immediate level of questions to be asked - notably about the relationship between the central bank balance sheet and public sector debt.

It turns out that Japan has plenty to teach us about that too - at least about what mistakes have to be avoided. And those lessons were learned, and learned the hard way, in the aftermath of the Great Kanto Earthquake of 1 September 1923. Of which I shall write in Part 2.