Article written by Professor Kent Matthews – Cardiff University:

Professor Bob Lucas, Nobel laureate and father of the New Classical Macroeconomics school, famously quipped, ‘we are all Keynesians in the foxhole’. This is the only way to understand the policy response to the virus. The shutting down of the economy to flatten the curve and save the NHS from being overwhelmed represents a strong negative shock. This has yet to come through the official figures, but the signs are there for all to see. Unemployment is barely affected but the figures are disguised by the massive support from the UK furlough scheme which has seen nearly one-third of the labour force in paid idleness. The most affected sectors in Wales being Retail & Wholesale (42% of total employment), Accommodation and Food (78%), manufacturing (42%), Arts & Entertainment (77%), and Construction (62%). The sectors that have survived are predictably, government, health, and education.

In the first half of 2020 Welsh businesses received over £3.1bn in relief and grants and in addition nearly £1bn has been made available through the Welsh government Economic Resilience Fund (ERF). Welsh government fiscal spending has £5.6bn available for its Covid-19 response. Of this, £4bn has already been allocated to Health & Social Services, and Economy & Transport. A decade of QE and financial repression by the Bank of England has enabled the government to increase its debt at low cost – so Keynesian fiscal policy is the order of the day. But it is not all old-fashioned Keynesianism. The Furlough scheme is pure Friedmanite helicopter money. This puts money in the hands of people who are not working and therefore not creating output.

Think about the economic implications. There will be microeconomic and macroeconomic consequences. On the macro front, the strongly negative supply shock is cushioned by Keynesian fiscal policy and Friedman helicopter money. There will be an inflation price to pay. This price will first arise in the form of a relative price increase where the price of some goods will rise, while others stay the same or fall because of changes to consumption patterns. The official price measures will understate the inflation response because of the mismeasurement of the consumption basket. The ultimate inflationary effect will come through when the growth in Broad money (M4) – currently growing at 13%, gets moved out of the Keynesian precautionary motive, into asset and goods expenditure. Once the inflation cat is out of the bag, we know from bitter experience from the decade of the 1980s that getting it back into the bag is a lengthy and painful experience.  

On the micro front, the economic scarring of unemployment, will have medium to long-term effects. Research has shown that economies never recover from major recessions even in the long term (Cerra and Saxena, 2008). Studies of the effects of former pandemics show that affected economies face a GDP drop of 3%. While the bounce back is rapid, output is still below pre-pandemic levels even five years later. Unemployment is higher and more persistent for low-skilled workers and women (Ma et al, 2020). This pandemic is distinguished by the almost universal use of lockdown by all economies globally, which means that the economic scarring will be longer. As a schoolboy I recall the Hong Kong flu pandemic of 1968-9 and 1970-71 which killed 80,000 people. Anti-establishment and anti-Vietnam war demonstrations were the main social gatherings of the year. There was no social distancing and no lockdown. If inequality is a consideration the medium-term effects of the Covid-19 policy is to increase the gap between the ‘haves’ and the ‘have nots’ with the political consequences that can arise.

Iatrogenic is a medical term used to describe a treatment that makes the patient worse than the treated disease. Is the government cure for Covid-19 worse than the cure? We may not know definitively until years later but what is disappointing is that the question is not even asked. What we do know is that mortality is right-hand skewed in the age distribution, while infections are left skewed. Economics is labelled the dismal science because economists have the courage to place a monetary value on life. There is a clear trade-off between the lives of the old and the livelihoods of the young. It is intellectually dishonest to not even consider this question.


Cerra V & Saxena S C (2008), ‘Growth Dynamics: The Myth of Economic Recovery’, American Economic Review, 98, 1, 439-457

Ma C, Rogers J, & Zhou S (2020), ‘Modern Pandemics: Recession and Recovery’, Board f Governors of the Federal Reserve System, International Finance DP 1295