Adrian R Bell and Chris Brooks write that the economic recovery from COVID-19 will require a reshaping of priorities and an expectation that we must be willing to pay a little more and wait a little longer to get a little less than we have become accustomed to.
Prior to the Black Death (1348-50), overpopulation had led to a need to farm ‘marginal land’. This would have been back-breaking work, for little return. Following this pandemic, which killed around 50% of the population of the UK, farmers retreated from this marginal land, and were able to work more fertile and productive soil for growing crops and raising farm animals. This dramatically increased farming efficiency and yields, as the marginal lands were no longer needed and were abandoned.
Indeed, research has shown that this also drove market demand for productive real estate and in particular for high value properties such as manors. This may have been as a direct result of owners or heirs dying due to the virus, or an increase in the cost of labour needed to farm extensive holdings. It has also been shown that social mobility drove purchases, as non-aristocratic investors with spare cash sought to gain other privileges that were associated with landholding.
How does this help us consider our current situation as we look to exit the lockdown to a severe economic downturn that has already been termed ‘A Greater Depression’?
Prior to the Covid-19 pandemic, it could be argued that many firms were operating at the margin of utility and profitability. We can illustrate this proposition in two ways. Firstly, many start-ups burned through investors’ cash in order to establish their brands. Such firms may not survive in the long-term, as working patterns change and what was recently cutting-edge rapidly becomes old hat. Secondly, more established firms, especially well-known retail brands, were already operating on very small margins – indeed, the death of the high street has been widely predicted for many years.
In the UK, the Coronavirus Job Retention Scheme, colloquially known as the ‘furlough’, has enabled all companies to apply for 80% of their employees’ salaries for four months. We presume this was designed with the good intention that such employers can save cash in order to reopen once the lockdown is eased. On the day of its launch, approximately 185,000 companies applied for this bailout, making the estimated £56 billion over four months a real cost to the taxpayer.
It has now been revealed that even though some firms will apply for furlough payments, they will not reopen following the end of the bailout as the government would have initially hoped. This includes restaurants such as Chiquito closing many venues, and clothing stores Oasis and Warehouse falling into administration. Now Debenhams, Cath Kidston, and the Arcadia group have also reported that they are planning to close stores permanently during the lockdown period. Will there be room on the high street for high cost (in terms of rentals and, once normal fiscal rules resume, business rates) department stores for instance – or is this the end for shopping in real life?
These companies have taken the ‘no strings attached’ cash to pay salaries and may now plan to use this money to pay notice as well. We will soon find out if the furlough turns into state-sponsored redundancy, resulting in many workers now exiting a lockdown scenario into unemployment during what is likely to be the deepest economic recession in history. The former Chancellor of the Exchequer, Phillip Hammond, has termed the furlough an anaesthetic, but once this wears off, millions of workers will come around in financial pain.
This is a tragic situation but how is it that our contemporary society and economy have so little resilience? Every day we hear of another company moving into some form of insolvency, which, as well as retailing has now seen some airlines entering voluntary administration. It is possible that these and other companies would have failed anyway as they pushed growth strategies and carried large deficits, as it is clear that they were living hand-to-mouth. This is replicated in other sectors of the economy with oil prices now in negative territory as demand has collapsed.
In terms of impacts on the wider society, elements of our life such as sport and education also seem to be at risk. Football is negotiating wage cuts with its players in order to survive whilst closer to home, UUK has requested a bailout from the government for the whole Higher Education system; and yet it is clear that the Chancellor’s magic money tree may be running out of funds, as he said himself, he cannot save every job. The sheer number of global corporate and third sector failures so soon after the lockdown and despite unprecedented government bailouts has exposed the frailty of many organisations’ business models and cash positions. Continuing drives for enhanced productivity and to ‘do more with less’ have pressed organisations both operationally and financially to the limit.
What links these two scenarios, historical and contemporary, is that in both cases humanity was pushing into the margins of what was possible and wringing every last drop out of the available resource. In medieval times, this was in order to try to feed the population; more recently, to satisfy an insatiable hunger for consumerism – everything available immediately at ultra-low cost, and with increasing choice. Perhaps a retreat from the marginal is not too bad an outcome as we will be asking ourselves: did we ever need another drive-through chain coffee shop on a roundabout?
Building robustness into the commercial and public sectors going forwards will require a reshaping of priorities and an expectation that we must be willing to pay a little more and wait a little longer to get a little less than we have become accustomed to. We will also have less choice, both in terms of what is on the shelves and which company’s shelves remain to browse. But the reward is that we will be better placed to weather future storms.
Adrian R Bell is Research Dean for Prosperity and Resilience, and Chair in the History of Finance in the Henley Business School at the University of Reading. He is also Principal Investigator on the AHRC funded project, The People of 1381.
Chris Brooks is Professor in Finance in the Henley Business School at the University of Reading.
All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science. Featured image credit: by Peter Bond on Unsplash.