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Incentives are a better way to tackle Covid-19 than blanket lockdowns

Incentives are a better way to tackle Covid-19 than blanket lockdowns

A great deal of government policy during the Covid crisis has involved regulation. Given a choice, economists usually prefer to use incentives. Altering the relative costs and benefits of an action is a well-established way to alter behaviour.

Perhaps the government has been listening. A big stick will now be waved at people who fail to self-isolate when they ought to: breaking this regulation can be punished by a fine of up to £10,000.

The size of the penalty seems large enough to deter people from going out and about when they should be staying at home. The case in favour of the policy seems open and shut.

However, the fine alters another incentive in the test and trace regime. The bigger the fine for breaking the rules, the less likely it is that people will supply the correct contact information in the first place.

Which of these two incentives will predominate is a purely empirical matter and one which is hard to predict in advance. Both undoubtedly exist, and the impact on the test and trace system remains to be seen. But it may just blow the scheme out of the water.

We do not know the source of the proposal within the machinery of government.  SAGE, the scientific group which has been advising the government during the pandemic, has no economists as members. But there are well over 1,000 economists working directly for the Government Economic Service. Have none of them made this obvious point to ministers about the different incentives?

On a more positive note, vulnerable groups have responded well to incentives created by the information which has emerged about the virus. No less than 89 per cent of all Covid deaths occur in the over 65 age groups. Even more pertinently, those with pre-existing medical conditions account for 95 per cent of all Covid mortalities.

There is a strong overlap between these two groups. Many of these individuals have altered their behaviour dramatically. They are shielding.  As a result, total deaths remain low given the number of infections.

German has experienced less than a quarter of the number of deaths as the UK. Its case fatality rate – the percentage who die once they catch the disease – among the elderly is the same as in the UK. The Germans have simply been much more effective at preventing the elderly from catching it in the first place.

An absolutely crucial part of any strategy is to try and keep the virus out of care homes. It is not possible for the very elderly in care homes to change their behaviour. Their environment is decided for them.

Care homes already have the incentive of reputational risk to avoid the virus spreading. But it must be worth reinforcing this with a public policy of substantial monetary incentives for those homes which are able to remain virus-free.

Whatever the incentive structure might be, a more subtle and targeted approach is needed than that of blanket lockdowns.  These simply generate huge social and economic costs, with little in the way of overall health benefits.

As published in City AM Wednesday 23rd September 2020
Image:  Self Isolating sign by Tim Dennell via Flickr   CC BY-NC 2.0
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The national productivity recovery depends on getting people back to the office

The national productivity recovery depends on getting people back to the office

Office workers continue to display reluctance to return to their workplaces, despite encouragement from the government for them to head back.

The immediate consequences for the service jobs in cities which depend on people commuting into the office are apparent, hence the government drive. But is office work a good thing for the workers themselves?

An important concept in economics is that of revealed preference. Economists believe that preferences are revealed not in surveys, but by the decisions which people actually make.

So could it be that the Covid crisis has given office workers the chance to reveal their true preferences in terms of work-life balance?

This is almost certainly true for the senior staff who make the decisions. They will typically live in large houses in agreeable surroundings, with space to dedicate a room as an office.

It is much less obviously the case for many younger staff. Working with your laptop on your knees in a bedsit, unable to socialise with colleagues, may lead you to prefer the commute instead. But there are constraints on being able to reveal this preference, such as potentially annoying your boss who enjoys working from home.

Furloughed workers, meanwhile, have merely revealed a preference to be paid a large part of their regular pay and not work at all. This is particularly true of public sector workers, who receive their full salary regardless. They have no incentive to change their work patterns.

An obvious incentive for companies is that, if working from home persists, they can save on office costs. They may even be able to adjust salaries downwards, especially for staff who commuted long distance from cheaper locations.

In the very short term, there will be little, if any, loss of productivity to offset this. Most office jobs consist of performing routine, well understood tasks. Within the discipline of an established framework, some people may even be able to do their jobs more efficiently at home, encountering fewer distractions.

This is true even for jobs which require analytical skills. The business model of a number of large consultancies, for example, can be thought of as follows.

The company hires bright young graduates, who come equipped with a stock of the latest ideas — what economists call human capital.  The short-term pressures in the big consultancies to make money are so intense that they have little chance to refresh this during their careers. Essentially, they run down their human capital. By the time they make partner or director in their forties, they are operating on half-remembered ideas from graduate courses.

This is why the company requires a steady flow of new recruits, to refresh the business. The challenge with remote working over time will of course be to not only integrate new young staff into the organisation, but to ensure that their ideas percolate.

Productivity will grow more slowly over time if extensive homeworking persists. In part, this will be due to factors internal to the firm. The tacit knowledge and creativity sparked by informal exchanges will be lost.

The real loss, though, is through factors external to any individual company. A huge amount of evidence shows that the higher the density of employment in an area, the higher its productivity.

The drive to get people back into their offices, therefore, is about far more than saving city cafes and restaurants. The government should incentivise firms to get staff back to work, in order to avoid lost productivity — for the entire economy.

As published in City AM Wednesday 2nd September 2020
Image: London Underground by via Pikist
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Why you should read the small print on alarmist Covid-19 death projections

Why you should read the small print on alarmist Covid-19 death projections

Another day, another lurid, headline-grabbing number of deaths to expect from Covid-19.

This time, it was a study from the Academy of Medical Sciences. A second wave, we were warned, could kill 120,000 this winter in hospitals alone.

To be fair, this study was a projection rather than a forecast. A forecast is what is thought to be the most likely outcome.  A projection looks at what could happen under a particular set of conditions.

The Academy essentially assumed that behaviour would revert to the same as it was before the crisis, with people acting as though the virus had never appeared.

The researchers made their assumptions clear. But entirely predictably, the media seized on the 120,000 figure for deaths. The qualifications made around that number faded into the background.

The plain fact is that the assumptions of the report were wholly implausible. Even if lockdown were lifted completely, behaviour is not going to immediately revert to exactly what it was before the Covid crisis. Will people shake hands? Of course not. The concept of  a typical way of life has irrevocably changed.

The entire history of the world can be cited in evidence of this proposition. In the face of an epidemic, people alter their behaviour. They do not need to be told to do so by governments.

Of course, how much behaviours will change is ultimately a matter of judgement. But it is one where the social sciences, including economics, can make a valuable contribution. Epidemiology is currently too important a subject to be left in the hands of the epidemiologists.

It is something of a mystery why the numbers churned out by various epidemiologists retain any credibility. Their models in general take no account of behavioural change when a pandemic occurs.

In March, we all remember the Imperial College study claiming that without lockdown there would be 500,000 deaths in the UK. This was ludicrous — and economists such as Gerard Lyons and I quickly attacked it.

In April, a very similar model was run on Swedish data. It claimed that there would be 40,000 deaths by the beginning of July. In fact, even with no lockdown, there were only some 5,000, the majority of which took place in care homes.

Forecasts such as these make economic forecasts seem like Platonic ideals of precision.

This is far from a mere spat between scientific disciplines. Poor models and their resulting projections can lead to poor policy decisions. They generate a wholly unwarranted climate of fear among the population. This reduces economic activity, meaning less money available to fund health services, and greater poverty with its associated illnesses such as depression.

The number of deaths in England and Wales peaked on 8 April. The average time from infection to death tells us that the number of cases peaked in the week 18–25 March.  Lockdown was only introduced on the evening of 23 March. This shows that behaviour had already altered dramatically.

No more credence should be given to epidemiological projections which do not assume behavioural change.

As published in City AM Wednesday 22nd July 2020
Image: UK Government Coronavirus by Gustave iii via Wikimedia CC BY-SA 4.0
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Office clusters are as crucial to productivity as they ever were

Office clusters are as crucial to productivity as they ever were

The Prime Minister is now demanding that offices reopen to revive economic activity in the centres of towns and cities.

But there is not much sign of a return to work.

The preferences of the workforce are an important factor in the very slow pace of return. Fears expressed about the safety of public transport may or may not be genuine, but it is certainly true that many prefer to avoid the time spent commuting and enjoy the extra leisure time this brings.

But why do offices cluster together in urban centres anyway?

It is easy to see that in the old days industries such as steel and coal clustered geographically. One was a key supplier of the other. Being near at hand minimised transport costs.

Today’s offices span a wide range of diverse industries, from consulting to law to oil companies. The reasons why they locate in close proximity are more subtle.

The views of economists on this are still shaped by the writings of Alfred Marshall. He established the faculty of economics at Cambridge in 1903 and was then probably the world’s leading economist.

Marshall described the tendency of businesses to cluster near each other as “agglomeration”. He gave three key reasons why this colocation is observed.

In addition to the savings on the costs of transporting the materials needed in industrial processes, Marshall developed a theory of labour market pooling, in which firms located near one another can share labour.

Further, he believed that “intellectual spillovers” were important. Firms locate near each other in order to learn and speed up the process of innovation. Think of Silicon Valley, formed nearly a century after Marshall wrote.

A large number of detailed studies in recent decades confirm that these are not just mere theories. They have strong empirical support. The Harvard economist Ed Glaeser, for example calculated that in the US in the 2000s each of Marshall’s three reasons were of roughly equal importance.

There have been very distinct benefits to agglomeration. Throughout the developed world, the greater the density of employment in an area, the higher is its productivity. Head offices contain more highly skilled staff and so will be more productive than the average. But in city centres, their productivity is even higher than their skill levels suggest they should be.

Has Covid-19 changed all this? Or more specifically, has the crisis enabled people to see that new technology could overturn two centuries of experience in urban centres in industrialised countries?

Certainly, tech platforms such as LinkedIn offer the potential for efficient hiring of relevant skills and for employees to discover opportunities through their networks. But new recruits need to be integrated. And younger people probably still need a combination of social and remote interaction to develop their own professional networks.

It is less clear that remote working can encourage innovation in the same way. Much of the informal contacts needed for this cannot be captured by video conferences.

Yes, there will be an increase in working from home. But Marshall’s insights into the benefits of agglomeration still hold true.

As published in City AM Wednesday 15th July 2020
Image: The City of London via Wikimedia CC BY-SA
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History shows us that slavery is an economic catastrophe as well as a moral one

History shows us that slavery is an economic catastrophe as well as a moral one

Slavery has certainly been in the headlines in the past couple of weeks.

Given this sudden interest in this area of history, it is worth considering the economic lessons it can teach us, as well as the moral ones.

Slavery was abolished in England itself in the twelfth century. Then in 1772, Lord Mansfield gave his famous judgment that as soon as any slave set foot on British soil, he or she was automatically freed.

Clearly, some people became rich by trading or owning slaves abroad. There is nothing new or unusual about this. Taking a broad sweep of human history, the societies in which slavery does not feature form a very distinct minority.

It was Karl Marx who coined the phrase the “ancient mode of production” to describe the economies of both Ancient Greece and Rome. Greece, of course, gave us the concept of democracy itself. Yet, ironically, its economy was built on slavery.

Rome developed the concept even further. With a plentiful supply of labour from its military conquests, the aristocracy owned vast tracts of land, maintained by slaves.

Yet although individuals became rich through slavery, Rome as a society did not.

When the Empire was at its maximum extent in the second century AD, the living standard of the average Roman citizen was the highest the world had yet seen. Indeed, it was probably not surpassed until the early modern era.

Yet the Roman economy, prosperous though it was, remained at the living standard of purely agrarian societies. It never got “lift off”, as Europe did in the eighteenth and nineteenth centuries.

The fundamental problem was that an economy based on slavery has little incentive to adopt new, more efficient ways of working. Indeed, for the individual slave there is virtually no incentive at all. If a particular task can be done better and more quickly, there is always another one which he or she will be given. Innovations, when they did happen, spread only very slowly.

The inherent inefficiency of slavery as a method of production is clear from the experience of Stalin’s Soviet Union and Mao Tse Tung’s Communist China — the two great slave societies of the twentieth century.

The labour camps, filled with the so-called enemies of socialism, represented a huge drain on their economies. Output was low, and large amounts of resources were needed to run and maintain the system.

Slavery is of course morally repugnant, a stain on the histories of civilised societies. But it is also economically detrimental to the societies it ostensibly appears to benefit. The fact is that no society based on slavery has ever come anywhere near to delivering decent living standards for the average person.

The only system which has is capitalism. Britain and other areas of north west Europe started to become rich through a system based on the rule of law, the ability of individuals to profit from innovation and not be expropriated, and the freedom of labour to negotiate contracts.

Morality undoubtedly played a part in Britain’s leading role in abolishing slavery. But by the early nineteenth century, it had become an anachronism. Resources employed in slavery could be put to much more productive use under capitalism.

Perhaps, then, we should remove not just statues of British slave owners, but erase the whole corpus of Greek and Roman art, financed as it was by Marx’s slave-based ancient mode of production.

As published in City AM Wednesday 17th June 2020
Image: Antique Statues via Wallpaper Flare
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What can we learn from the Black Death? Be prepared, trust entrepreneurs, and have faith

What can we learn from the Black Death? Be prepared, trust entrepreneurs, and have faith

Can we learn from history?

An excellent book by Ben Gummer on the Black Death in fourteenth century Britain, The Scourging Angel, shows that we can.

Published 10 years ago, the book offers many intriguing parallels with the Covid-19 crisis.

Of course, the Black Death was almost incomprehensibly more lethal.  Around 50 per cent of the total UK population died in 1348–49. That is 33m deaths in current terms.

Modern scholarship has overturned the long-held idea that the plague was spread exclusively by fleas on rats. Contemporaries knew that it was spread from person to person by breath. The new coronavirus  is transmitted by droplets from the nose and mouth. Both diseases lingered on clothing and objects.

People back then worked out very quickly how plague might be avoided. Those who could fled from infected areas. If possible, they locked themselves away in castles or monasteries.

The peasantry — the vast bulk of the population — had far fewer options. But they did try to cut off contact with the world outside their own immediate village as much as possible.

Then, as now, there were inequalities in health outcomes. Because of their greater ability to practise social distancing, the nobles and church leaders had much lower death rates. Even so, these were still some 20 per cent.

There were arguments over the Medieval equivalent of PPE. In London, the demand for gloves rose dramatically. Master glove makers enticed away their rivals’ employees.  Unlicensed glove production, often of dubious quality, soared. The city fathers had to step in and enforce the regulations more effectively.

On a lighter if macabre note, a “William of Liverpool” was convicted of a different scam. A neighbouring village had no burial ground. For a substantial fee, he agreed to take the bodies and bury them on what he claimed were his extensive fields. Essentially, he then fly-tipped the corpses on his way home.

Then there is the economy. The current chancellor has had to be very innovative with his schemes to preserve jobs. The Black Death created the opposite problem: a massive shortage of labour.

But an equally innovative and imaginative solution was found. Maximum wage rates were fixed by legislation. The local nobility and gentry were given an incentive to enforce it: any fines collected from workers paid more than was legal could be offset against the overall amount of tax due from the county.

Two positive themes emerge towards the end of the book.

First, the authorities then took steps to try to mitigate the impact of any second wave of the plague almost as soon as the first had passed. The streets of London, for example, unimaginably filthy to modern eyes, were kept cleaner.

Here is a key lesson for Covid-19. If a new wave arrives in the winter, there is no excuse if the government is not prepared. The time to start is now.

The second point is that economic activity recovered remarkably quickly. London in particular was soon buzzing again. It was not state action which delivered this — it was confidence on the part of both entrepreneurs and consumers.

Now, as then, confidence is the key to recovery.

As published in City AM Wednesday 3rd June 2020
Image: Coronavirus street art by Evelyn Simak via Geograph CC BY-SA 2.0
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