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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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It is science, not lockdowns, that will save the world

It is science, not lockdowns, that will save the world

The various new vaccines announced over the past two weeks give real hope of a return to normal life.

Of course, many practical questions remain. How will these vaccines be delivered? Do they stop the transmission or simply the symptoms of the virus? Exactly how effective will they be outside a controlled trial environment?

But despite these legitimate queries, the scientific community has made massive progress in a very short space of time, and should be celebrated.

The good news makes a very welcome change to the dreary and damaging pessimism offered by the epidemiologists.

Still, scarcely a day goes by without SAGE boffins popping up in the media pronouncing that the lockdown is not strict enough, it should have been brought in earlier, more will be needed when this one has ended. Even in the wake of the news of the Moderna vaccine, Public Health England’s Dr Susan Hopkins was warning that, when the official four-week lockdown ends on 2 December, the previous “Tier” system should be strengthened. That makes the prospect of households being able to mix indoors and businesses being permitted to reopen look far from likely.

As I have written before, if the only tool you have is a hammer, everything looks like a nail.  And the only tool the epidemiologists seem to have is lockdown.

Many of them do not seem to grasp that epidemics can ultimately be contained only by either behavioural change or by scientific innovation — and preferably a combination of the two.

Two admittedly somewhat extreme examples illustrate the importance of each. We used to throw the contents of our bedpans into the street from the bedroom windows, spreading all manner of disease. The change in our behaviour did indeed save lives.

But we also need scientific advancement to progress. David Ricardo, the greatest British economist of the nineteenth century and an immensely wealthy man, died at the age of 51 from an ear infection which would now be routinely cured in a few days.

The sharp contrast between restrictions which the epidemiologists want us to endure and the bright life which scientific innovation brings extends far beyond the current crisis.

It is at the heart of the debates over climate change, for example — or, more precisely, over what our response should be.

Climate change could indeed be stalled by reducing living standards to those of, say, Ricardo’s time, some 200 years ago. The Industrial Revolution was then half a century or so old. By then, people had just enough to eat in order to keep them alive and do some work. The famines which characterised all previous human history had been vanquished in western Europe. But life was pretty grim.

It was science and innovation that improved life beyond measure and that now enables us to enjoy modern living standards. That same innovation can also be harnessed to combat climate change.

Innovation need not be on the grand breakthrough scale of the Covid vaccines. A series of modest scientific advances can have a lot of impact.

For example, until recently Australia, despite its wonderful sunny climate, had very few solar panels. The reason was that energy from coal and gas was much cheaper. Now that the panels have gradually become much more efficient, the reverse is true. As a result, there is a massive boom in installation by households. Companies are building gigantic farms of panels in the deserts.

Hair shirts imposed by blinkered academics and those with a central planning mentality will not work. Ingenuity and innovation permit permanent solutions to many of the problems we face.

As published in City AM Wednesday 18th November 2020
Image: Vaccine by Bicanski on Pixnio
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Lockdown 2.0: A creative destruction revolution, or the death knell of innovation?

Lockdown 2.0: A creative destruction revolution, or the death knell of innovation?

So Boris Johnson has failed to follow his own government’s guidelines on cost-benefit appraisal.

Study after study by economists show that the costs of lockdown far exceed the benefits.

The NHS — the “envy of the world” — has conspicuously failed to develop sufficient capacity to deal with a second wave, despite having had months in which to prepare.

The Prime Minister’s cronies have failed to deliver on his claims of various “world-beating” devices. We are reminded of Glendower’s boast in Henry IV Part 1: “I can call the spirits from the vasty deep”, and Hotspur’s withering reply: “Why, so can I, or so can any man. But will they come, when you do?”

From this litany of failure, one certainty emerges. The economic recession will now be even longer and deeper than it need otherwise have been.

Perhaps there is a silver lining. In the 1930s, the Harvard economist Joseph Schumpeter coined the memorable phrase “gales of creative destruction”.

He developed an original insight of Karl Marx, who argued that under capitalism firms are under constant pressure to innovate. Failure to innovate increases the chances of going under.

Schumpeter emphasised the “cleansing effect” of recessions. In an economic downturn, trading conditions are hard. The less efficient companies are at greater risk of closing down. This creates an opportunity for new, more dynamic firms to enter the market.

The very deep recession generated by the policy response to Covid-19 might therefore simply sweep out the dead wood. The performance of the economy will be even stronger when the upturn comes.

There is, however, an alternative view to this positive outlook, also developed by a major American economist in the 1930s, which is far less well known outside of economics.

Irving Fisher of Yale set out his theory of debt-deflation while the Great Depression was raging in the west and unemployment rates rose above 20 per cent in many countries.

In the light of the financial crisis of the late 2000s, his perspective is strikingly modern. Fisher regarded major recessions as being created by the balance sheets of companies, and in particular by debt.

In his view, innovation was not stimulated by economic downturns, as Schumpeter thought. On the contrary, it was when the economy was growing rapidly that balance sheets were strong enough to finance innovation, especially of the trail-blazing kind whose outcome is of necessity very uncertain.

In the current circumstances, a lot depends upon who was correct, Schumpeter or Fisher. Is the Covid recession stimulating or reducing innovation?

A timely paper on this has been published in the latest issue of the American Economic Association’s economic policy journal.

Jorge Guzman and Scott Stern, of Columbia and MIT respectively, make excellent use of big data to estimate the quality and the quantity of entrepreneurship and innovation over a 25-year period in the US.

The analysis is complex, and the authors make very proper qualifications to their results. But on balance, their results support Fisher’s view.

Innovation flourishes when the economy is doing well. Yet another reason to exit from lockdown as quickly as possible.

As published in City AM Wednesday 4th November 2020
Image: Pxhere
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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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