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Economics has a lesson for Remainers and lockdown-lovers who refuse to let facts change their minds

Economics has a lesson for Remainers and lockdown-lovers who refuse to let facts change their minds

Christmas is a time to be charitable.

So let’s spare a thought for those who fought against the referendum result.

Unlike the great unwashed, who simply didn’t understand the issues they were voting on, they had all been expensively educated at the right sort of schools and universities.

From the time the vote took place in 2016 right up until the day of Boris Johnson’s decisive victory in the election a year ago, a ruthless campaign was waged to nullify the vote.

How smart do they look now, all those Amber Rudds, Dominic Grieves, Gina Millers and Jo Swinsons?

They could have accepted the result and voted through one of the many versions of a deal proposed by Theresa May. Most of these involved a close and ongoing alignment with the EU.

Instead, they will end up with an arrangement which is the stuff of their nightmares.

Spare a thought, too, at this festive time for the hapless first minister of Wales, Mark Drakeford.

Towards the end of October, he placed Wales in a short “fire-break” lockdown to try to reduce its high infection rate. Sections of supermarkets were cordoned off by government diktat because they sold “non-essential”  items.

The seven-day moving average of daily new cases did indeed fall in Wales from around 300 per 100,000 to well under 200. But within a month of lifting the fire-break, it had risen even higher, to some 350. In the old mining valleys of South Wales, the new case rate is now 600 and rising.

Drakeford did what any self-respecting Corbynite would. He blamed the electorate.

On 10 December, speaking on BBC Breakfast, he remarked: “Not everybody has been willing to abide by the restrictions that are still necessary. We have seen people having house parties, people inviting large numbers of people back to their own houses when that is absolutely not allowed within our rules.”

His words recall the leaflets put out by the old East German Communist government in June 1953, after the workers’ uprising had been brutally suppressed by Soviet tanks. The people, they declared, had forfeited the confidence of the government. It could only be regained by “increased work quotas”.

The Welsh government followed the advice of experts in epidemiology, for whom no lockdown appears to be sufficiently strict.

But these experts did not anticipate that lockdown would make ordinary people less, rather than more, likely to behave in ways the experts deem appropriate.

These two vignettes — lockdown and the anti-Brexit movement — illustrate fundamental principles expounded by Friedrich Hayek and Herbert Simon, both Nobel laureates in economics.

They stressed the need to recognise the highly tentative, uncertain and experimental nature of successful decision-making. It is an evolutionary process, rather than one which can be optimised.

Good policy proceeds by trial and error. Rather than try and find the best possible solution — such as overturning the Brexit result — choose one which seems reasonably satisfactory.

Another key point is that failures need to be abandoned quickly. Lockdowns no longer seem to work, but experts continue to be fixated by them.

The works of Hayek and Simon should fill the stockings of Remainers and epidemiologists alike this Christmas.

As published in City AM Wednesday 16th December 2020
Image: EU flag mask by Ivan Bandura via Wikimedia CC BY 3.0
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Hurrah for a vaccine — but was lockdown actually worth it?

Hurrah for a vaccine — but was lockdown actually worth it?

The development of the vaccines has changed many things.

It has even influenced the opinion of the Prince of Lockdown himself, health secretary Matt Hancock. Life, he pronounced at the weekend, would be back to normal by the spring and the “blasted regulations” abolished.

But one thing has remained constant: the government’s continued refusal to publish a proper cost-benefit analysis of lockdowns.

A perfectly standard methodology exists to do this. It is used not just by our own National Institute for Health Care and Excellence (NICE), but across the western world.

In essence, this involves placing a monetary value on a human life.

Many may see this as a sinister and macabre thing to even ask. But it is, regrettably, something which has to be done.

To illustrate this, imagine a purely hypothetical scenario. Two people suffer from a very rare disease from which they will die within a month. Only one dose of the cure exists, but it is guaranteed to save the life of whichever gets it. One of the patients is 100, and the other is an otherwise healthy 20-year-old.

Who should get the medicine? For most, this choice would be obvious.

This is the quandary in its most basic and understandable form. Of course, people in health systems have to make much more complex decisions on which drugs should be bought and how many people can get a particular treatment all the time.

The key concept is what is known in the jargon as “quality-adjusted life years” (QALYs). Analysts then consider how many of these QALYs would be saved were a given amount of money spent in a particular way.

Like many policy-oriented metrics developed by economists (GDP, for example), the concept of QALYs is not without its critics. But, again like GDP, it is a useful and practical tool. We need a way to determine whether it is worth spending the money available on a particular course of action, and the only way to do that is with a metric to measure benefits against costs.

Armed with the concept of QALYs, it is easy to see why estimates of the benefits of lockdown do not yield huge numbers.

Many of those who have died from Covid-19 are very old — the average age of a coronavirus victim in the UK is over 80. Around 95 per cent of people who have died of Covid have had some serious underlying health condition, so the quality of their remaining life was not high.

In contrast, the costs of lockdown are massive, and impact everyone in the country. Just for starters, Rishi Sunak presented a plausible estimate of a loss of output in 2020 of over £200bn — nearly £3,000 per man, woman and child in the UK.

That is to say nothing of the economic impact of missed education, long-term unemployment, and negative mental health effects caused by lockdown policies.

The government refuses to crunch the numbers. But economists and medics have done it for them using the same approach that the NHS already relies on.

In June, David Miles of Imperial College, a former member of the Monetary Policy Committee, concluded that “the costs of continuing severe restrictions in the UK are so great relative to likely benefits that a substantial easing in restrictions is now warranted”.  In October, Barry McCormick, a former chief economist at the Department of Health, also showed that the benefits of lockdowns are greatly exceeded by the costs they create.

Hopefully the health secretary is correct and the problem will soon vanish as the vaccine is rolled out. But the government must be kept under pressure at every stage of the reviews of both Tiers themselves and the restriction system as a whole.

A well-established methodology, already used in our health service, shows the costs of lockdown far outweigh the benefits.

As published in City AM Wednesday 9th December 2020
Image: Nightingale Hospital  CC BY-SA 2.0 via Wikimedia 
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Economics lessons from history: Don’t expect a post-Covid boom

Economics lessons from history: Don’t expect a post-Covid boom

Just over 200 years ago, the finances of the British government looked even more parlous than they do today.

Since the mid-1790s, the country had been engaged in a titanic struggle with Napoleon’s France.

To pay for the conflict, the government had borrowed on a massive scale. The cumulative financial deficit — the difference between income from taxes and what the government spends — in the 20 years from 1795 amounted to over 2 trillion pounds in the prices of 2020.

Between 1812 and 1814 alone the state ran up a deficit of almost £500bn at today’s prices.

The current projection by the Office of Budget Responsibility for the year of the pandemic, 2020, is some £370bn, after years of much lower deficits. So we find ourselves in a similar position.

David Ricardo, at the time a multi-millionaire MP and a titan of economic thought, tried to answer the question: how should the war be paid for?

Obviously, one way to pay off the cumulative deficits would have been to raise taxes, exactly as Rishi Sunak is contemplating today. The other was to borrow by issuing government bonds, again what is happening now.

Ricardo argued that whichever of the two were used, in whatever combination, the impact on the economy would be the same.

When the government runs a deficit, spending power is injected into the economy. But an increase in taxes cancels this out.

But what if the government simply finances the debt by issuing bonds?

Ricardo believed the private sector would act rationally. People would anticipate that in the future, taxes would have to go up anyway to pay off the debt. As a result, they would save more and spend less now to be able to pay these taxes in the future.

This is a key idea in modern macroeconomics, known as “Ricardian equivalence”. The two methods of financing a deficit — taxes and issuing bonds — are equivalent in their impact on total spending in an economy. They cancel out the effect of any government spending in excess of its receipts from taxation.

It sounds a bizarre concept. But the experience of the financial crisis of the late 2000s provides support for the idea.

In America, net private saving in the years prior to the crisis was some $700–800bn. In 2009, following a massive increase in the federal deficit, it rose to over $1,200bn, and has been even higher ever since.

The esoteric concept of Ricardian equivalence is of great practical importance in the current pandemic-induced economic recession.

This year has seen what is effectively forced savings. People have not been able to get out and spend in the usual way. Once the vaccines are in place, we might expect a spending splurge.

But if Ricardo’s idea holds true, people will simply keep their savings squirrelled away to meet the anticipated increase in taxes. The economy will not boom.

The next couple of years will prove to be an interesting natural experiment to test Ricardo’s proposition. Much more tangibly and practically, if it holds, rises in unemployment will prove difficult to reverse.

As published in City AM Wednesday 2nd December 2020
Image: Coins sign via pxfuel
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Forget the polls endorsing lockdowns and look at how people actually behave

Forget the polls endorsing lockdowns and look at how people actually behave

Economics is at long last storming the bastions of the Scientific Advisory Group for Emergencies (SAGE).

This citadel of epidemiologists and health professionals has for many months resisted the lessons which the so-called gloomy science can bring.

In the context of Covid-19, economics is in fact a beacon of hope.

This week, news broke of a report commissioned by SAGE from Barry McCormick, a former chief economist at the Department of Health. It shows that the benefits of lockdowns are greatly exceeded by the costs they create. On the government’s own standard cost-benefit criteria for judging policy, they should not be imposed.

But If the only tool you have is a hammer, everything looks like a nail.  And the scientists of SAGE only seem to have lockdowns in their kitbags.

Economists have warned of the unfavourable cost-benefit impact of lockdowns for months.

At the end of June, David Miles, a former member of the Monetary Policy Committee, produced a very detailed report showing that even if the first lockdown had saved 500,000 lives — the estimate of professor Neil Ferguson at Imperial, and a figure Miles regarded as absurd — the costs of it were even greater than the value of the lives saved.

Indeed, back in early April, Gerard Lyons and I (while supporting the initial lockdown) laid out our plans to chart a way out of it. We urged the government to do so quickly, precisely because of the costs to the economy and society which lockdown created.

And the government appeared to agree. Rishi Sunak designed his job support schemes on the assumption that the country would soon be opening up for business again, winding down furlough and focusing on how to get the economy moving again.

Then as summer ended, the government was essentially railroaded back into a lockdown strategy by the panic-inducing charts produced by the scientists. The massive inaccuracies of the graphs flourished by Chris Whitty and Patrick Vallance on 21 September simply cannot be emphasised enough. On their projection, there would now be nearly 200,000 cases a day  in the UK. There are actually only around 20,000.

But once the graphs had been released, the government was backed into a corner by public opinion. Opinion poll after opinion poll apparently showed strong support not only for whatever lockdown measures were in place, but for them to be strengthened.

What is the government to do in the face of such a pro-lockdown public?

Here, as it did over the summer, economics can again come to the rescue.

A fundamental concept of economic theory is that of revealed preference. People’s preference can be most reliably inferred not from the answers given to questions in surveys, but from the actual decisions which they make and the actions which they carry out.

Even the scientists on Sage are beginning to grasp that, in practice, the strictures of lockdowns are widely ignored, despite the answers people give to surveys.

For example, while huge majorities will earnestly say they support long isolation periods for Covid sufferers and their contacts, the data shows that barely 10 per cent of people in these categories are actually following the rules. As a result, the quarantine period may soon be reduced to just seven days, in the hope that people will be more likely to stick to the rules if they are less harsh.

Overall, the preference revealed by the British public is that they have had enough of lockdowns. That is not to say that they do not care about reducing transmission — they understand the need to change behaviour.  Many of the over 70s are shielding effectively, while young people are beginning to grasp the implications of unrestrained mingling and are modifying their actions. But when the rules are clearly overly strict, counter-productive, or downright bizarre, people pay less attention.

The government should rely on economists and not epidemiologists to get us out of the crisis.

As published in City AM Wednesday 28th October 2020
Image: Stay Safe sign via Flickr  CC BY-NC-SA 2.0
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The government must take back control of the Covid narrative

The government must take back control of the Covid narrative

The word “narrative” is usually seen as being a posh way of saying “story”.

But the idea of narratives is one which is gaining traction in economics.

Last year, for example, Nobel laureate Robert Shiller of Yale published a book entitled “Narrative Economics”.  He argued that it is the perception of events and the stories around them which are the key drivers of the economy.

There is a lot to be said for this view. A good example was provided during one of the many crises of the euro in the 2010s.

In 2012, the then president of the European Central Bank, Mario Dhragi, pronounced that he would “do whatever it takes” to defend the euro. He then did precisely nothing. The euro promptly strengthened. His statement alone was enough to create a positive narrative which was believed by the markets.

We have not had an old-fashioned sterling crisis for many years. But during the Labour government of Harold Wilson in the 1960s, Treasury officials were forbidden from using the word “devaluation”, even in top secret memos. The fear was that a leak would immediately precipitate the collapse of sterling. The pound was indeed devalued eventually, but in circumstances a bit more under the government’s control.

Narratives are important right now. If companies believe, for example, that a successful Covid vaccine will be introduced by the new year, they will feel much more confident about carrying out new investments now and keeping people employed than if they are sceptical.

In terms of boosting confidence, both for individuals and firms, the government has lost control of the Covid narrative.

In March, it made perfect sense for the government to emphasise the data on both hospital admissions and deaths. A new disease had appeared from China which appeared to kill between three and four per cent of those who caught it.

The frightening charts on deaths and hospitalisations served two key purposes. They legitimised the enforced lockdown, and they encouraged people to change their behaviour.

We now know much more about Covid-19. The infection fatality rate, for example, is far lower than originally feared. Vulnerable groups have learned to shield effectively.

We also know that lockdowns themselves generate massive costs. Cancer patients go untreated. Hip operations get postponed. Mental health deteriorates. Jobs are lost and poverty rises.

Today, cases, hospital admissions and deaths are indeed rising again, but at a much slower rate than in March and early April. Yet the government persists in allowing scientists who focus exclusively on Covid to dominate the narrative.

According to the Project Fear charts put up by Chris Whitty and Patrick Valance on 21 September, there should now be nearly 100,000 new cases a day on the official data. There are less than 20,000.

The Prime Minister must change the narrative. Charts on the costs of lockdown should take centre stage, and the benefits of future lockdown restrictions should be presented alongside metrics showing the risk they pose to the economy and society.

A period of silence by SAGE members would also be welcome. At this point in the crisis, we cannot afford to cede control of the narrative to a group of taxpayer funded scientists who are fixated by a single disease.

As published in City AM Wednesday 21st October 2020
Image: Covid  Daily Briefing via Flickr  CC BY-NC-ND 2.0 
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And this week’s winner for the Stupid Scientist award is…

And this week’s winner for the Stupid Scientist award is…

Scepticism about the advice given by government scientists about Covid-19 is rising sharply.

In areas like Bolton infections are high. Interviews with the locals reveal that so, too, is disbelief in the veracity of the statements made by members of SAGE, the government science advisory group.

The scientists, rational beings themselves, may ascribe this to the inability of the general population to process information.

Yet it is their own pronouncements which have fostered scepticism. Scepticism in turn brings reluctance to follow advice, even when it is good.

Which brings us to the winner of this week’s Stupid Scientist award. It is a close-run thing, but step forward Nicola Steedman, Scotland’s deputy chief medical officer.

Students at universities in the Glasgow region are effectively being held under house arrest in their halls of residence. According to this particular Nicola, it is for their own good.  The students are apparently at serious risk of dying from coronavirus.

If we turn to the data to see how many people under 30 have died from Covid in Scotland since the pandemic began, the number is in fact zero.

Given this, why should any credence be given to anything which Ms Steedman now says?  There have been zero deaths amongst student-age groups, yet she appears to believe that they are at serious risk of death.

Runners up for the award are the well-known duo of Chris Whitty, chief UK medical officer, and Patrick Vallance, chief scientist. They pronounced there could be 50,000 cases of Covid a day by mid-October. If cases doubled every week, they would reach this level.

This projection has attracted widespread criticism. New cases have indeed risen in countries like France, Italy and even Germany, but at a rate which is much slower than doubling every week.

The real issue is the dog that did not bark. Not so much what they actually say, but what they do not say.

In France and Spain, for example, during September the number of new daily cases exceeded the previous peak levels reached in April. In France, the daily total reached 16,000 last Friday, double the highest level of April.

Surely the cemeteries and crematoria should be full to bursting?

But they are not.

In France, new cases have exceeded the April maximum since the beginning of September.  At the end of the month, deaths are only one tenth of their April peak level.

In Spain, deaths reached a quarter of the April peak for a couple of days and are now falling sharply.

In Italy, daily deaths remain in very low single figures.

In the UK, too, deaths have risen but are very low compared to the total number of new cases.

The whole thrust of the messaging from pro-lockdown public sector scientists and bureaucrats is negative. Some may think this is because of the incentives they face. The bigger the threat the virus apparently presents, the more their importance and influence grows.

In my view, this is unduly cynical. But it is a cynicism which seems to be prevailing amongst the people of Bolton and other afflicted areas.

As published in City AM Wednesday 30th September 2020
Image:  Chris Witty and Patrick Vallance by Number 10 via Flickr  CC BY-NC 2.0
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