Over nine months after the start of the outbreak, we are starting to get an idea of the huge damage that the corona pandemic has done to the Dutch economy. A simple calculation suggests that the total cost will be over 175 billion euros. The next question is inevitably: who is going to pay for that? The current mantra is that we must not immediately start retrenching and that the cost can be repaid over a longer period of time. I don’t get this. What use is it to future generations that we have now spent so much money on ourselves?
It is of course still too early to know the full cost. But the latest calculation byCPB, the Dutch Bureau for Economic Policy Analysis, does allow us to draw a few cautious conclusions.
First, economic activity has been permanently dented: economic activity in 2025 will be 4.5% lower than calculated earlier. In other words, the Netherlands will be 40 billion euros poorer than anticipated. But that is not all. Government debt in 2025 will be considerably higher due to the coronavirus, at over 138 billion euros. So all in all it looks like in the longer term this crisis will cost us at least 175 billion euros.And then there is the health damage caused by the virus. This is a considerable cost item, as well as the damage to mental health caused by the restrictions and economic uncertainty.The costs are offset by benefits: the health damage could have been worse and without government support the long-term impact on the economy would also be much greater.
We can never calculate exactly whether the benefits outweigh the costs. Because we cannot know exactly what would have happened if those restrictions had not been implemented. What we do know now is that short and strict lockdowns (followed by track and trace) work better than half-baked measures. Apart from the health aspect, the macro data already show that we are faced with a crisis of at least the same proportions as the Great Financial Crisis of 2008/2009.
It seems logical to present the bill to those who benefit the most from the current expenditure. And that is us! All the costs that have been incurred are either direct health costs (i.e. aimed at making us less ill), or costs to prevent economic activity from collapsing. We have been doing this so zealously, that even now the number of bankruptcies is still lower than last year.
An argument that you could use is that at least we will be passing on a solid and functioning economy to future generations. If those 175 billion euros had been used for enhancing sustainability and for productive investments, that would have been an excellent argument. But as it is, it is actually a terrible argument, because we are really not doing future generations a favour with the most fossil-based economy in Europe.
So, does that mean we should retrench? After the Great Financial Crisis that was indeed the panic reaction that immediately took hold in the public sector: tighten our belts! It is now over ten years later and the reaction could not be more different. Not a soul now mentions retrenching. I believe this has nothing to do with nonsensical arguments such as a pandemic ‘is a sudden shock’ or ‘this is also good for future generations’. No, it comes down to a very different issue. After the financial crisis, politicians found out that retrenchments invariably mean political suicide. And this time there is also no chance of passing the buck to the bankers. So why would you want to do that?
And not retrenching is also an option now. Central banks - concerned as they are about a repeat of what happened twelve years ago - have numbed the markets with a monetary overdose. And that is why we can continue to live as if nothing is the matter. While the real discussion should of course be about how we can ever repair the damage and create an economy that is of use to future generations.
Does this mean that I advocate tough retrenchments, like those that followed the financial crisis? No. What I do advocate is expenditure that will also benefit future generations. And that means not just spending money in order to save our fossil-based economy. And yes, we will have to find money somewhere in the years ahead. But perhaps that money should come first and foremost from those who are now benefiting the most: companies and the wealthy members of our society.
Read Hans previous column: Exponential short-sightedness