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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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Coronavirus fatality rates are way down – why has the government not taken this on board?

Coronavirus fatality rates are way down – why has the government not taken this on board?

King Canute has had a bad press. The monarch sat on the beach on his throne with the deliberate intention of demonstrating to his courtiers that he could not stop the waves from coming in.

But in popular thinking, he is the deranged king who believed he could control the sea.

In this spirit, step forward two modern Queen Canutes, Nicola Sturgeon and Jacinda Ardern of New Zealand. Both appear to think they can eliminate Covid-19.

Our own Matt Hancock is showing dangerous signs of succumbing to this syndrome.

On a more sober note, it is certainly true that new cases are rising not just in the UK but across Europe – except in Sweden.

But there are major differences between this wave of infections and that experienced in March and April.

The key question is not really how many people might get Covid-19. It is how many might die as a result. In the jargon, this is the case fatality rate (CFR), the probability of dying from the disease if you catch it.

As ever, the Oxford Centre for Evidence Based Medicine is a font of wisdom.

A month ago, the Oxford researchers showed that in the UK the CFR had fallen from six per cent in the summer to just 1.5 per cent.

This could of course be due in whole or in part to the fact that the majority of infections are now in the young, who are at essentially no risk at all themselves.

But the Oxford group showed last week that something even more important is going on. They analysed data from Germany, which is more detailed and specific in terms of ages than in the UK. The results are striking.

In the 60 to 79 age group, in the March and April period the CFR was nine per cent. By July and August this had fallen to just two per cent.

In the very vulnerable group of the over 80s, in March and April the CFR was a frightening 29 per cent. By July and August this was down to 11 per cent.

So deaths remain very low not just because it is mainly the young now catching Covid-19 or because the elderly are shielding. Both of these are true.

More fundamentally, fatality rates amongst those who actually have the virus have fallen sharply. Treatment has improved. Social distancing means less strong doses are being caught. Whatever the reason, CFR is down.

Government advisors and health care professionals appear not to have taken this on board. They speak and act as if a second wave will be as lethal as the first.

Some might think they are as mad as the King Canute of popular legend. It is more likely that they are simply suffering from confirmation bias.

This is the tendency to search for, interpret, and recall information in a way that confirms or supports one’s prior beliefs or values.

They have long thought that a second wave would be devastating. The emerging evidence should not be allowed to get in the way of this. Their irrational behaviour is costing us all dearly.

As published in City AM Wednesday 9th September 2020
Image:  Covid Testing by via GiiPe via Wikimedia
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On coronavirus, governments have been the most irrational of us all

On coronavirus, governments have been the most irrational of us all

Decisions, whether by individuals, companies or governments, are often made with imperfect and incomplete information.

This is so obvious as to hardly seem worth stating. But for well over a century economic theory assumed that decisions were made with complete information. Economists knew full well that this was not always the case. The problem was that building a formal model without this assumption was a formidable task.

It was solved in the late 1960s by the American economist George Akerlof. His paper, the enigmatically titled “Market for Lemons”, won him the Nobel Prize. The article is probably the most cited in the entire history of economics.

The coronavirus crisis provides an almost textbook example of how different amounts and quality of information affect the decisions which are made.

In March, initial data from China suggested the death rate was between three and four per cent, a real pandemic. The chaos in the health system in northern Italy was a prominent feature in the media.

Little wonder that, against Boris Johnson’s libertarian instincts, a compulsory lockdown was introduced. Little wonder that people reacted with fear to the virus.

Six months later, whilst there is still much to discover about Covid, far more is now known.

It is well established that almost everyone who has died had some serious pre-existing health condition. Perhaps even more importantly, virtually no-one under the age of 40, or even 50, has died.

Many people have reacted to this information in an entirely rational way.

Those who perceive themselves as being either elderly or having a health problem continue to shield. The young see they are at essentially no risk at all and start to behave as they did before the virus appeared.

In Scotland, for example, it seems that around half the new infections are in mere whippersnappers under the age of 25. More generally across the UK, although the reported number of new cases is rising, hospital admissions remain very low because new infections are concentrated amongst the young.

These behavioural responses have arisen entirely spontaneously as the quality and quantity of information has improved. Many have weighed the costs and benefits in the light of this information and have made rational decisions.

The idea that people would change their behaviour during a pandemic was of course almost entirely absent from the mathematical models used by epidemiologists. It is this which led to absurd predictions both of half a million deaths in the UK in the first place and of fears of a second wave with even more deaths.

Some individuals who are at little risk remain paralysed by fear. They are still relying on outdated information and so behave in non-rational ways.

But it is governments which right now are the least rational of all. Nicola Sturgeon wants to eradicate Covid when even New Zealand, a country which can seal its borders, could not.

And governments persist in incurring the costs of lockdown, when people have shown that they are capable of behaving in sensible and rational ways without government interference.

As published in City AM Wednesday 9th September 2020
Image: Closed Due to Covid-19 Sign by via Pixabay
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Busting the myth of the selfless bureaucrat

Busting the myth of the selfless bureaucrat

There seems to be a fundamental problem with quangos. Hardly a day seems to go by without some new story of incompetence and mismanagement emerging.

Public Health England (PHE) is at least going to be put out of its misery by health secretary Matt Hancock, and replaced with a new agency specifically focused on pandemics.

An anonymous government minister is attributed as saying early in the crisis “we didn’t really know what PHE actually did, except from time to time they would put their head over the parapet and try and ban something like Coco Pops”.

PHE is by no means the first government body to have a slightly dubious record of effectiveness. The Highways Agency, set up by John Major’s government, was of such legendary uselessness that David Cameron renationalised it just before the 2015 election. It rose again as a “government owned company”, Highways England. As such, it has been responsible for the funereally slow works which install so-called smart motorways.

Network Rail, meanwhile, seems to have the Midas touch — for its contractors and consultants, that is, as it fails to complete Crossrail and the costs of HS2 soar out of control.

And the shambles at Ofqual over A-levels is beyond parody.

The simplest way from the outset would have been to accept, as a unique one-off event, the predicted grades of teachers. That is all that the quango need have done. The problem of who to admit would have been devolved to the universities, which are the bodies with the ultimate financial interest in these matters.

Now, the situation is even more complicated — places have already been assigned based on algorithm-assigned grades before the U-turn, and universities have mere days to work out how they will teach thousands of additional students, rather than months to work out a reasonable system.

In the case of each individual quango, there will be reasons as to why those specific problems occurred. But there are so many examples that there must be some more general principles at work.

As usual, economics can help. There is a long history of work around the concept of what has come to be known as “public choice” theory.  The American economist James Buchanan did more than anyone to establish it as a standard and wide-ranging tool of economics, and he was awarded the Nobel Prize for this as long ago as 1986.

Too often in public discourse, a contrast is made between self-interested companies and government bureaucrats working in a seemingly selfless way for the public interest.  Indeed, some of the bodies pilloried above were set up with the explicit aim of taking politics out of decision making in the relevant areas.

In essence, Buchanan believed that bureaucrats and politicians behave in the same self-interested way as everyone else. This does not mean that other motives are absent, but that rational self-interest is an important driver of behaviour.

We can see this clearly in the way the teaching unions have reacted to the Covid crisis.  Many teachers are dedicated and committed to their pupils. Equally, however, there is a significant minority who do not act in any way as selfless professionals. Their revealed preferences have been to draw full pay and do little to no work, regardless of the consequence for children.

Detaching public policy decisions from direct political control has been very fashionable for the past few decades. The performance of the UK’s quangos shows that it is high time for a change of mind.

Paul Ormerod
As published in City AM Wednesday 19th August 2020
Image: NHS Heroes by Bill Nicholls via Geograph  CC BY-SA 2.0
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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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Priti Patel vs. Philip Rutnam: It’s in Britain’s interest that bureaucracy does not win

Priti Patel vs. Philip Rutnam: It’s in Britain’s interest that bureaucracy does not win

The reverberations around the resignation of Sir Philip Rutnam, the top civil servant at the Home Office, continue.

Priti Patel, the home secretary, is receiving a barrage of abuse.

Labour’s John McDonnell has pronounced that he cannot see how Patel could carry on. He raised the possibility that she might be in some way “suspended”.

It seems to have slipped the shadow chancellor’s mind that he himself was keen to carry out a purge of economists in the Treasury and Bank of England if Labour had won the election. The officials which remained would have required “re-educating”.

But right now it doesn’t really matter what Labour thinks. The salient point about the criticism of Patel is that it is coming from the serried ranks of the metropolitan liberal elite. The Guardian newspaper has been in a total lather. The BBC’s coverage has hardly been impartial.

This group see Rutnam as one of their own: a professional expert, conscientiously going about his business. Naturally, they regard his actions as sound, carried out in the interests of the nation as a whole.

An important part of economic theory takes a completely different view of the motivations of bureaucrats. James Buchanan was awarded the Nobel Prize in 1986 for his work in developing what is called “public choice theory”.

Public choice economics rejects the idea that bureaucrats act in a disinterested, objective way. They are no less selfish than the rest of us. Their primary motivation is not to serve the public, it is to further the interests both of themselves as individuals and of the bureaucracy as a whole.

The Home Office itself provides many examples which support this view. When tasked by ministers with deporting those without correct documentation, the bureaucrats did not try to track down, say, Albanian drug dealers. Instead, they minimised effort to themselves, identifying people who had lived here for decades but whose paperwork was not quite in order. The result was the Windrush scandal.

Some 20 years ago, I was involved in a project on crime for Charles Clarke when he was home secretary under Tony Blair. I discovered an influential group in the Home Office who believed that the number of criminal offences actually carried out was more or less constant from year to year.

It may have appeared from the data that there had been a huge increase in crime since the Second World War. On the contrary (according to these officials), this merely reflected changes in the propensity to report crimes. The actual level of crime, they purported, was the same in 2000 as it had been in 1950.

I was impressed by the brilliance of this hypothesis. It meant that no bureaucrat could ever be criticised for failing to control crime.

Of course, the view that people always act purely in their own self-interest is rarely completely true. There will be a mix of motivations at play. But in clashes between politicians and the bureaucracy, it is essential for democracy that the former win.

As published in City AM Wednesday 4th March 2020
Image: Home Office by  Steph Gray via Wikimedia is icensed for use CC BY-SA 2.0
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