Winner of the New Statesman SPERI Prize in Political Economy 2016


Tuesday, 1 December 2020

Fiscal policy during and after the coronavirus pandemic

 

This post was partly inspired by this recent seminar, but also by this excellent paper from The Resolution Foundation. Apologies for the length, but there is a lot to cover. 


This post is in five parts. The first looks at how our understanding of fiscal policy has evolved over the last decade or so. It is an essential background to how fiscal policy should be employed during the pandemic. The second looks at fiscal policy support during the pandemic. The third looks at what could be quite a short period between when the pandemic is effectively over as a result of mass vaccination, and when the economy has fully recovered. The fourth asks whether, once the economic recovery is complete, we should attempt to gradually reduce the debt to GDP ratio. Finally I look at the Chancellor's recent actions and how they are reported by the media.


Background


Just before the Global Financial Crisis (GFC), I talked of a Consensus Assignment between monetary and fiscal policy. Here is a quote from the introduction.


“The consensus assignment from the title refers to the idea that monetary policy (in a closed economy, or a small open economy with flexible exchange rates)5 should normally focus on business cycle stabilisation and inflation control, while fiscal policy (at the macro level) should focus on the control of government debt or deficits. This conventional assignment leaves open the possibility of using fiscal policy in situations where monetary policy is constrained in some way, either by design (such as a monetary union member subject to asymmetric shocks) or misfortune (where interest rates hit a zero lower bound). It is a consensus only if it applies to situations in which monetary policy is unconstrained in its ability to stabilise the business cycle.”


I did not know it at the time, but that caveat concerning the lower bound for interest rates was going to become the Achilles Heel of the Consensus Assignment.


Having written that paragraph, it was obvious to me that when countries hit the lower bound for interest rates during the GFC, fiscal stimulus would be essential to speed up the recovery from that recession. Unconventional monetary policy, almost by definition (‘unconventional’), was not going to be as reliable as fiscal policy and therefore would be an inferior stabilisation instrument.


In the years following the GFC it became clear to many academic macroeconomists that the GFC was not going to be an exception in driving interest rates to their lower bound. What has been called secular stagnation is the phenomenon that the underlying or equilibrium real interest is now so low that downturns would often trigger rates hitting their lower bound. This in turn means that what I called the consensus assignment has to change.


In my view, and the view of an increasingly large number of academics, we need a new assignment that includes fiscal policy stabilisation at least some of the time. The MMT school suggests switching the old assignment around, and using fiscal policy at all times to stabilise demand. However that seems to ignore our pre-GFC history, where monetary policy was very successful at stopping domestically generated inflation expectations exceeding an inflation target.


The alternative I have recently called the state dependent assignment uses fiscal policy to help stabilise recessions, and monetary policy to help stabilise inflation. When fiscal policy is being used to fight a recession, fiscal policymakers should be completely unconcerned about what is happening to government deficits and debt. The time for fiscal policy makers to focus on deficits and debt is when we have largely recovered from a recession. The obvious way to measure when fiscal policy should switch from stabilising the economy to stabilising debt is when interest rates are no longer at their lower bound. (Lags between fiscal policy decisions and the impact of fiscal policy on demand means that the switch point cannot be that simple in practice, but the key point to remember is that the costs of too much fiscal stimulus are far less than the costs of too little.)


Fiscal policy during this pandemic


The need for fiscal stimulus is acute when economies suffer from large demand shocks. There has been endless debate among macroeconomists about whether the pandemic represents a demand shock or a supply shock. When I began looking over a decade ago with public health experts at the economic effects of flu pandemic (paper here), I started off thinking about the pandemic as a supply shock and ended up realising that a severe pandemic would mainly be a demand shock.


With mild flu pandemics, the main economic effects are supply-side, such as people taking a couple of weeks off work. However with severe pandemics, many people take active steps to try and avoid catching the virus. That means they cut back on, or may even stop completely, forms of social consumption: going to shops, pubs or restaurants, going to public sporting or cultural events and so on. What surprised me when thinking about the extent of the demand fall that produces was that social consumption accounts for around a third of total consumption. A government lockdown may enhance and extend that response.


Does that all imply the need for massive fiscal stimulus? Yes and no. First the yes. What should be clear is that whatever reduces the extent of the virus is good for the economy beyond the short term. The economy just will not recover while the risk of catching the virus is perceived to be significant, because social consumption will remain depressed. The most important way fiscal policy can help in eliminating the virus is by providing support to those workers and firms that suffer from the reduction in social consumption. A possible but imperfect analogy is with the automatic stabilisers that work in a normal recession.


The no relates to whether additional substantial stimulus is required beyond that already supplied by rates at their lower bound. As the previous section made clear, for a normal recession that is essential. But the pandemic is not a normal recession, for two reasons. The first is that the demand shock is sector specific. A standard fiscal stimulus like a tax cut is likely to increase demand in sectors that have not been hit by the virus.


You could get round this with a sector specific stimulus, but then we hit the second problem, which is that to the extent that stimulus is effective it will make the pandemic worse. That was the ultimate fate of the Chancellor’s Eat Out to Help Out scheme. The conclusion has to be that if fiscal support measures are comprehensive, then the case for a large additional fiscal stimulus is weak. (For more formal analysis, see Woodford and references therein.) If support is not comprehensive, or largely absent as in the US, then the case for stimulus to reduce unemployment is much stronger.


When the pandemic is over


The Chancellor has indicated that he is prepared to look at measures to boost the economy once the pandemic is over. This would make sense if consumers are slow to resume social consumption even though it is quite safe to do so. The last proviso is critical, if the Chancellor wants to avoid stimulating the pandemic as well as the economy (in only the short term).


But will consumers in aggregate be over-cautious. In that study I did a decade ago looking at a flu pandemic, I made the assumption that consumers might to a limited extent binge on social consumption once the pandemic was over. After all consumers who have continued working or have benefited from fiscal support will have increased their wealth significantly by not spending on social consumption during the pandemic. In realistic models of consumption consumers will begin to unwind some of that when the pandemic ends.


This suggests that any fiscal stimulus during the recovery phase should focus on the public rather than private sector, and particularly public investment. There is little point in trying to second guess how much permanent scarring the pandemic has left, so as I noted earlier it is always better to assume there is a demand gap, because the costs of being wrong (a short term inflation blip) are much less than the cost of assuming potential output is lower than it actually is.


What is clear is that we have a desperate need for public investment. The government is planning investment worth, in net terms, just under 3% of GDP each year. That is high by recent historical standards, but when you think of all we need to do to reduce the extent of climate change and the risks from climate change, it is probably inadequate. There are many other areas where public investment is needed. 


When the economy has recovered


I have not mentioned government deficits or debt until now, for the very good reason that they are irrelevant in a recession. The mistake of UK policy after 2010 should never be repeated. But when short term interest rates rise significantly because of clear inflationary pressure because the recovery is complete, then this the time to switch to monetary stabilisation and allow fiscal policy to focus on government debt.


In my paper with Jonathan Portes, we argued that in normal times a medium term rolling deficit target should be set with the aim of achieving some long term trajectory for the government debt to GDP ratio. However given the need for substantial government investment already mentioned, a better measure might be government net wealth (net worth) to GDP. After the pandemic net wealth will be well below levels seen before the pandemic, and there is a case for setting a deficit to achieve a very gradual increase in that ratio over time. If that requires fiscal consolidation, there is an overwhelming case that this should be achieved using tax increases rather than spending cuts. Indeed in a number of areas there is a strong case for increasing current government spending, and once the recession is over and interest rates are well above their lower bound because domestically generated inflation is likely to permanently exceed its target, these need to be matched by higher taxes.


However even when the economy has recovered from the recession caused by the pandemic, we will not be in normal times. The threat of man made climate change is now both very real and imminent. As I have already argued, public investment aimed to achieve our carbon emission targets, like all public investment, should not be restrained by any fiscal rule. The argument that the polluter pays still holds, which means taxes to discourage carbon production and use are essential.


All of this is perfectly compatible with a gradual increase in the government’s net wealth ratio, and indeed carbon taxes should help here. The political problem that may arise, and anticipated in the Green New Deal in 2008, is that it may be politically impossible to enact the necessary taxes without compensating fiscal rebates of various kinds. We live in an imperfect information world, or more accurately a misinformation world, and as a result it is tempting for some political parties to pretend measures to prevent climate change can be achieved with no costs, or worse still that deny the problem is imminent.


If that turns out to be true, the least important goal is an increase in the net wealth ratio or a reduction in the government’s debt to GDP ratio. If we fail to tackle climate change, and in 50 years time our children or grandchildren are suffering the consequences of significant global warming, they will not forgive us failing to do what needed to be done because we were ‘responsible’ with the public finances.


Austerity redux?


As I have tried to stress, looking after our public finances is a second order problem compared to the first order problems of supporting people during the pandemic, getting a complete economic recovery and tackling climate change. I think most academic macroeconomists would agree with that, and the IMF also agrees with that.


However, you wouldn’t know that from the discourse of the Chancellor and from much of the media. The notion that the government’s finances are like that of a household should have been well and truly buried after the disaster of 2010 austerity, yet they live on among many of the political journalists you will see on the broadcast media. (There are, unlike 2010, a few notable exceptions.)


When we talk about a possible repeat of austerity, we have to be careful what we mean. The original spending cuts from the 2010-18 period have only been partially unwound. What people therefore mean by a second round of austerity is yet further cut backs in spending or tax increases. The first period of austerity was a disaster for two reasons. The first was that the supply of public spending was cut without any attempt to reduce the demand for public services, so problems with services for health, welfare, prisons, police, the justice system and much more were inevitable. The idea that there were substantial efficiency gains in all this provision proved largely mythical.


The second reason it was a disaster is macroeconomic. In a recession due to demand deficiency, taking more demand out of the economy is bound to make things worse if interest rates are stuck at their lower bound. (If demand was not deficient interest rates would be well above the lower bound, and could therefore fall to boost demand and compensate for the demand impact of fiscal consolidation.) If you continue austerity during a period of deficient demand for a number of years there is a significant danger that output will be permanently lower as a result.


Given all this, why does the Chancellor encourage talk of austerity while we are still coping with the pandemic? The obvious answer is that it provides cover for essentially political decisions, like cutting the aid budget or the real wages of public sector employees, while increasing spending on defence. It provides cover because the media (what I call mediamacro) is still largely using the household analogy when it comes to government debt. 


An equally serious problem is that the political cycle in the UK is likely to lead to decisions being taken at the wrong time. If taxes do need to rise, they must only rise after the recovery is complete. That might be in 2023 and 2024. Only then will be know the recovery is complete, because interest rates are significantly higher in an attempt to prevent a rise in inflation becoming permanent. The Chancellor and government might think this timing will jeopardize their re-election chances. This leaves a danger that tax rises (or worse still public spending cuts) happen earlier, which might damage the recovery. The alternative that tax rises are delayed until after the election carries much smaller economic costs.











Monday, 23 November 2020

Politicians and experts: austerity, Brexit and the pandemic

 

I’ll be talking about fiscal policy during and after the pandemic at a Resolution Foundation/MMF event in a week’s time: https://www.mmf.ac.uk/resolution-foundation/


I have written quite a few posts on the relationship between policy and expertise, and between expertise and the media. The better ones are in my book, but they were all written before the COVID pandemic. How does the relationship between experts on the one hand and politicians and the media on the other that we saw with economists over austerity and Brexit play out with medics and the pandemic?


All three cases are different from each other. Although the evidence set out in my book suggests that the majority of academic economists opposed austerity (a majority that got larger as time went on), this plurality had no impact on either the media or the politicians pushing austerity. A few well known academics who supported austerity got a lot of publicity, but this was because they supported a policy pushed by politicians and the media, and not because they were influential in driving the policy. An obvious example in the UK was Ken Rogoff, who supported protecting public investment from any cuts while the government did much economic harm by cutting public investment.


The most notable feature of austerity was the almost total disregard by the media of the views of the majority of academics. As Alan Winters in his analysis of experts and Brexit points out, it was David Henderson who said in his Reith Lectures of 1985 “There is no doubt that the policies of governments … are influenced by economic ideas. But … these have not necessarily been the ideas of economists”. This applies with equal force to the media. The media appeared to apply the logic of the household to governments, so that the necessity of paying back debt as soon as possible became common sense, even though saying this would be a fail for any first year economics undergraduate. For that reason I called it mediamacro.


The power of media narratives should never be underestimated, as the Labour party has experienced many times to its cost. Austerity was just another example. It was a particularly devastating example, because in this case the media’s common sense did terrible harm to the economy, and the media was ignoring what it should have regarded as a key source of knowledge, academic macroeconomics. Needless to say, media organisations have never examined their own mistakes in this regard.


Brexit was different in two respects. First, what was a plurality over austerity was an almost total consensus on Brexit. Making trade more difficult, which almost any form of Brexit did, would cause considerable harm to the economy. The second difference compared to austerity was that the broadcast media had less of any common sense to appeal to, and so they played the ‘two sides’ game. On the one hand was the overwhelming consensus of academics, together with all the major economics institutions, and on the other was a handful of pro-Brexit economists the most noticeable of whom was Patrick Minford. (A few media outlets, and particularly the Financial Times, did follow the academic consensus.)


In defence of the broadcast media, this ‘two sided debate’ format is their default on most issues, and it doesn’t normally matter what the expert consensus is (which is typically not mentioned). However as we saw with austerity, there are exceptions. Whereas the exceptions should be based on the expert consensus, they instead seem to be based on common sense narratives. As with austerity, the media has never examined its own mistakes in relation to Brexit. As the referendum was very tight, the actions of the broadcast media in treating the overwhelming consensus of academic economists as just one opinion could well have influenced the result.


This trivialising of expert opinion is not inevitable. Strong pressure from academic bodies can yield results. The obvious example is climate change. When broadcasters began to increasingly ‘two-side’ the climate change issue, academics and others protested, and the BBC trust acknowledged that on this issue the expert consensus had to be followed. Not all BBC programmes have subsequently respected the Trust’s findings, but nevertheless you will generally see broadcasters treating the need to reduce man made climate change as a fact, and not as a controversial opinion.


The obvious difference between austerity or Brexit and climate change is that the former involves economists and the latter involves scientists. Actually the difference in methodology between climate change scientists and economists is not that great: both attempt to predict in a highly stochastic environment, and neither can easily conduct experiments. There are differences in public perception, of course. Besides the insight of Henderson noted above, there are various myths about economics that are part of the public debate. But the most relevant difference in my view is the absence of institutional pressure on the media from economists that matched the pressure over climate change.


Another academic discipline that has similarities to economics is medicine, and more specifically public health and epidemiology. The story of COVID-19 initially appeared to be more optimistic than austerity and Brexit. In many European countries, including the UK, governments took scientific advice, although in the UK with a short delay that probably cost tens of thousands of lives. But as Alan Winters notes, that optimism has been short lived. In most countries in Europe, including the UK, the second wave has been far worse because politicians ignored the expert advice.


The rationale they have given for ignoring the medical experts has been to balance health with the economy. The irony is that once again most economists I have seen who have studied this issue have agreed with me that there is no meaningful trade-off between the economy and health beyond the very short term. Once again academic economists are ignored, this time where lives are directly at stake.


The media have faithfully echoed the excuses for ignoring the expert advice, seemingly ignorant of the fact that they have little basis. From what I have seen they have given air time to experts and particularly politicians pushing the ‘lockdowns do not work’ nonsense, as if this is just another opinion. I suspect once again this is because it is ‘common sense’ that there is a health/economy trade-off, because most people do not think in dynamic terms. I have not seen government politicians questioned in interviews for not following expert advice in a similar manner to the way Labour politicians were questioned for doubting Osborne’s austerity.


Why did politicians initially say they were following the science of how to deal with the pandemic, while the same politicians ignored economists on Brexit? It is not because medicine is a science and economics is not. As I have argued elsewhere, the two disciplines have many structural similarities. Henderson’s point about prior beliefs is undoubtedly one reason: not many non-medics thought about pandemics before there was one. For politicians another reason is ideology. With austerity and Brexit it was ideologically convenient, and perhaps even necessary, for its proponents to discount expertise. Initially there appeared to be little ideology involved with controlling a pandemic, beyond libertarian instincts.


One reason attitudes to medical experts changed among government politicians between the first and second wave was the emergence of ideology dressed up as science: the Barrington Declaration and all that, and the influence that has had on many Conservative MPs. Once again, it became in the interests of those politicians to ignore expertise, just as they did with Brexit. The correlation with pro-Brexit and anti-lockdown views is no accident. The lesson is simply not to elect politicians who can so easily cast aside expertise.


Unfortunately that is less likely to happen as long as the media fails to tell viewers what the consensus among experts is. I have made this point before, but I think the lesson of climate change is instructive. The media are not going to change what they do, particularly when some feel their existence may depend on keeping certain politicians happy. What changed the media’s approach to climate change, at least in principle, was pressure from science itself. The reason academic economics gets ignored is that academic economists don’t organise to apply pressure.


I have seen so many accounts of why economics was ignored over Brexit that blame themselves: things should have been presented more clearly, economists should have been more open about uncertainties, and so on. All have some truth, but none will make any difference as long as the media treats the consensus among academic economists as just another opinion. For the media to do otherwise requires the strongest pressure from groups who represent academic economists. At the very least, we need institutions representing economists telling the media what the consensus view (if any) is on particular economic issues. [1]


I suspect that some medics will be beginning to ask similar questions about the pandemic: why did politicians ignore consensus advice, why did anti-lockdown politicians get so much airtime and so on. The answers I suspect are similar to those I have just given for economics. Medics have one big advantage over economists: the bodies that represent them are used to applying public pressure. They should apply that pressure on the media if they want to avoid expert views about the safety of COVID-19 vaccines to be treated as just one opinion to set beside the opinion of anti-vaxxers.


[1] When I make this point I often get comments along the lines that I’m trying to impose conformity, and the public should be told about mavericks opinions because (very occasionally) they turn out to be right. I’m doing neither of those things. What is missing from the media is any sense of what the expert consensus is, and for politicians who depart from the consensus being interrogated on why they think they know better than the expert consensus.




Monday, 16 November 2020

How the electoral system in the US, and to a lesser extent the UK, is biased towards social conservatism.

 

The UK is often torn between following the US or following Europe. We share a language with the US, and a lot of popular culture. But we also share a voting system that ensures the political right has a heavy built in advantage. The United States may be too far down that road to change, but in the UK there is still hope if only the current opposition leadership see sense.


Once we get over the relief that Donald Trump is no longer President, comes the realisation of just how bad the US election results really were for Democrats. Trump was a Republican, and the Republican party backed him almost without exception. Even in the current ludicrous situation where Trump is refusing to concede, many senior Republican politicians continue to back him.


It should come as no surprise that Republicans have an ambiguous relationship to democracy. Republicans see nothing wrong in distorting district borders to give themselves better election results in terms of seats than their polling numbers deserve. Gerrymandering is endemic, and it gives the Republicans an inbuilt advantage in one half of Congress, the House of Representatives. They also habitually make it hard for democrat voters (particularly black voters) to vote: the long lines we see during US elections are there for a reason.


Recently Republican senator Mike Lee said “Democracy isn’t the objective; liberty, peace, and prospefity [sic] are. We want the human condition to flourish. Rank democracy can thwart that.” This view is not unusual among Republican politicians, it is just that most are not so foolish as to say it out loud.


But Trump’s attempt to cling to power is not the problem. The problem is that the Republican party won seats in the House, and is likely to retain its majority in the Senate. Why the Democrats did so badly in both of these contests is something that will be analysed by others at length later. But I suspect what few outside the US understand is just how difficult it is for the Democrats to win big in the Senate.


As Shaun Lawson explains in an excellent piece, the Senate is constructed such that each state has two senators, whatever its population. To take the most extreme example, Wyoming with a population of 563,626 gets the same representation in the Senate as California with a population of 37,253,956. Now if political support was evenly distributed among big and small states alike this would not be an issue . However it is not: Wyoming has two Republican senators and California has two Democratic senators. The Senate structure influences the Electoral College used to choose a President.


The basic problem with the Senate is that it gives rural and small town states much more political clout than their population warrants. With political polarisation increasingly between liberals and social conservatives (the culture war), and with liberals concentrated in the big dynamic cities and conservatives in the rest of the country, anything that gives the latter an advantage relative to their number is a political problem.


The example of the US senate is far more extreme than anything in the UK, but that does not mean that the problem does not exist here. We saw that very clearly with Brexit, which is essentially a culture war issue. The referendum of course involved the whole population, and we all know the result of that. But if a general election had been held on just that issue, it is estimated that Leave would have won a landslide: 406 Leave | 242 Remain.


We can do a similar calculation for the 2019 election. If you add up the vote totals of parties supporting a second referendum, it was just more than 50%, but of course the Conservatives won a landslide and Brexit went ahead. That partly reflects the fact that the second referendum vote was more divided among different parties than the Brexit vote, but it also reflects the way the social liberal/conservative divide is split among parliamentary seats.


Socially liberal votes are concentrated in the cities. Seats outside the cities have many social liberals as well, but they are typically outnumbered by social conservatives. However you will find very few social conservatives in big city seats. That means that even if social liberals are in a small majority in the population as a whole, they are outnumbered in terms of seats. When it comes to culture war issues, the First Past The Post (FPTP) UK constituency system for general elections represents accidental gerrymandering favouring social conservatives.


An illustration of this is to compare the 2017 and 2019 elections. In 2017 both main parties backed Brexit and the Remain movement hardly existed, so Labour could focus on a relatively popular economic programme and do relatively well. In contrast, the 2019 election was mainly about Brexit, and the seat totals (once you allow for other parties) was not very different from those implied by the 2016 referendum result. 2019 also reflects the difficulty Labour had in focusing on economic issues given a slanted media.


If you think this is just about Brexit, or that Cummings’ departure means that Johnson will reveal his true social liberal self, think again. The Conservatives were using immigration as a weapon against Blair under William “foreign land” Hague, and will continue to try and capture socially conservative voters after Cummings' exit, because it works at winning elections.


One solution is for Labour to try and do what it did in 2017, and effectively match the Conservatives on the key culture war issues. However, that creates two related problems. The first is that Labour’s current base is very socially liberal. The second is that other socially liberal parties exist. The danger is that we see a repeat of what happened in the period before the 2019 election, where voters defecting over Labour’s socially conservative stance leads to lost votes whatever choice it makes. I'm not saying that Labour cannot succeed doing this, but it is hard and divisive. 


Both this problem, and the problem of the socially liberal vote being split among parties, can be overcome by elections determined by some form of proportional representation (PR).


A traditional argument for the UK’s existing first past the post system, and the constitutional system in the US, is that it keeps out political extremes as both major parties strive to capture the centre ground. This has been completely refuted by events over the last decade. It appears, in fact, that both systems allow governments that are politically extreme to capture power.


While there seems little chance that the US will change its system, there is more hope in the UK. It requires a Labour government to be elected that is committed to some form of PR. It has to be a commitment before they gain power, because once elected every Labour government believes it can now become the natural party of government. One advantage of a prior commitment to PR is that it makes cooperation between Labour and other socially liberal parties easier during the election.


There is considerable support for electoral reform within the Labour party. Unfortunately any Labour leadership that thinks it can win power is also a leadership that prefers to remain in power rather than becoming part of a coalition that any subsequent PR election is more likely to bring. While we can appeal to statistics to show the dominance of Conservative governments, political leadership is naturally focused on its own short term.











Monday, 9 November 2020

COVID, the US election and media balance

 

I want to start with my last post. It contrasted a minority of countries that were good, were not too bad and the majority that were terrible at handling the pandemic. What surprised me was how willing people were to believe that each of the good countries had some special attribute that explained their superior performance, rather than accept the more obvious explanation that they had more practice at handling pandemics, or just had better governance. These countries that have handled the pandemic well knew that you needed a good TTI operation, you needed to keep case numbers low, you needed strong border control and in most cases that if you lose control of case numbers you lock down quickly and hard.


The UK has failed on all these counts. The experts learnt not to underestimate the virus after the first wave. They recommended a short lockdown in the early stages of the second wave. This is just the kind of thing that the good countries in my classification from last week would do. Johnson (or was it Sunak’s with a veto?) rejected their advice, using the spurious grounds that he was balancing health against the economy. You are balancing nothing when you leave R>1. Johnson and Sunak were wrong and we now have to have a month long lockdown, at least.


One of the consequences of this failure to deal with a second wave is that people get restive about lockdowns. Almost no one likes a lockdown, and restrictions on social life together with constant precautions against the virus get to people. They certainly have begun to get to me. Yet despite this, in the UK most people still support the current lockdown, even among 18-24 year olds. But there are also signs of lockdown fatigue: while a YouGov poll gave only 3% who didn’t support lockdown in the Spring, that figure has risen to 23%.


One important factor behind this growing antagonism to lockdowns is the anti-lockdown crusade that I talked about in an earlier post. The vocal political minority that do not want lockdowns at all are implicitly prepared to see hundreds of people die, and their health services overwhelmed. They talk about protecting the vulnerable but these claims fall to dust on examination.


Some members of the anti-lockdown crusade may really believe they have a better way to save lives, but for most the motivation is different. There is a lot of talk of libertarian ideology, or right-libertarianism, and I’m sure some of the Tory MPs who voted against their government last week see their opposition to lockdown that way. But increasingly this looks like liberty for some, and the opposite for others: doctors and nurses who will have to treat COVID cases in overcrowded hospitals, the vulnerable (however defined) whose liberty is indefinitely postponed, and those who die for the short term liberty of others.


Among the population, there is no doubt that among the minority that oppose lockdowns there are some who are simply selfish. Something along the lines of ‘why should we not be able to do the things we enjoy doing for a year or more of our lives when we know it is unlikely that the virus will kill me’. In addition there are risk takers, who somehow think that they will avoid the fate of others.


Both selfishness and risk-taking is emboldened by those who question the wisdom of lockdowns when cases are increasing out of control. Politicians and the press attacking lockdowns give selfishness and risk taking an excuse they need for their behaviour. They also provide an excuse for those who want to ignore lockdown restrictions. This is why the media should be very careful not to suggest that scientific and public health opinion is evenly divided on the wisdom of lockdowns, because it is not. There are clear parallels with climate change. Unfortunately our media is ruled by political balance, which nowadays all too often means balancing the truth with lies.


This is not the only reason why people may oppose lockdowns. An imperfect safety net for individuals who are adversely affected by lockdowns can give a much more compelling reason why people might turn against the whole idea. If you see a lockdown destroying your business, running down your savings, losing your job or even making you or your children go hungry you have a strong motivation for arguing strongly against it. It is difficult to call this being selfish.


The safety net is far from complete in the UK. The Chancellor has stubbornly refused to increase statutory sick pay for those who have been advised to isolate themselves. But in terms of safety nets the UK is far better than the US. I have seen a few remarks along the lines that without COVID Trump would have easily won the US election. I’m not sure that is right for two reasons.


The most obvious is that without COVID Biden would not have made COVID central to his campaign, and would instead have focused on other issues where Trump is weak. However a second reason is that Trump may be getting strong support from those that don’t want their businesses to close, who don’t want to be thrown out of work and don’t want to rely on an uncertain stimulus cheque.


We can see that to some extent in the national election exit polls. When asked about the issue that mattered most to people voting for each side, three issues stood out for Biden voters: racial inequality, the pandemic and health care. For Trump voters it was the economy followed by crime and safety. The contrast between racial equality for Biden voters and crime and safety for Trump voters is pure culture war. Social liberals rejoice over the black lives matter movement, while social conservatives see it as a threat.


The more interesting contrast is between the pandemic and the economy. The economy, normally near the top of most lists of voter concerns, comes fifth out of five for Biden voters. The pandemic has taken its place, and rightly so because the economy is not going to fully recover while the pandemic rages unchecked. In contrast among Trump voters the economy completely dominates the pandemic as a top issue, perhaps because measures to deal with the pandemic are seen as a threat to their livelihoods. [1]


While the broadcast media, at least in the UK, plays “both sides” games with the pandemic, contrasting the expert consensus with the anti-lockdown crusade as if each has an equal claim to truth, the mainstream US broadcast media stopped playing these games with Trump’s claims about voter fraud. It was impressive to watch CNN fill in the gaps between new votes coming in telling viewers why all votes should be counted, and Trump’s claims had no basis. (Yes, I know I had better things to do.)


These big media organisations (excluding Fox) were fortunate that Trump telegraphed what he planned to do well in advance, so they had time to work out their response together. When it came their response was emphatic, to the extent that most stopped broadcasting Trump’s speech when he started making these claims, telling viewers that such claims had no basis in fact. It is quite something to stop broadcasting a sitting President when he starts telling lies, although by then they knew he was not going to be President for much longer.


That is something to build on. Why not be equally emphatic about voter suppression, widely practiced in the US and coming to the UK. What is the essential difference between claims of widespread voter fraud and climate change denial? What is the difference between claims of voter fraud and claims that lockdowns don’t work and are unnecessary when cases are increasing? How can the BBC justify not following this example? Once media organisations start recognising that balance does not apply when one side is lying, why not stop balancing truth with lies more often?

[1] (added 10/11/20) Another example of how lockdowns can be unpopular comes from the Czech Republic, where it is widely believed that a lockdown was postponed until after senate and regional elections had taken place.  











Monday, 2 November 2020

How governments in the West failed to learn

 

You would think, after so many countries were taken by surprise by a pandemic caused by a new virus in the Spring of this year, these countries would resolve to never let it happen again. They would be mad, knowing what they now know, to let cases explode in a similar manner to they did earlier this year. In what we call the West we like to think we have reasonably rational governments that listen to expert advice on matters of life and death.


Well at least some of us thought that. I am prepared to make an exception of the UK and US. The UK is run by fantasists who thought we would hold all the cards in any negotiations with the EU and there would be sunlit uplands. These are the kind of people who would be quite happy to ignore experts. Some of them are even busy right now promoting a kind of death cult. The US is run by someone who only thinks of himself. I could make an exception in both these cases.


Now look at this chart.




These are new COVID cases each day per million people. Cases in most of the countries shown here began rising seriously in September. (Both the US and Spain were already high.) Yet only now, nearly two months later, are some countries beginning to repeat the lockdowns that were so effective at getting cases down in the Spring. Two months of doing nothing or doing very little. Two months of keeping restaurants open where the virus was free to spread. Two months of doing too little, too late.


I don’t know enough about each of these countries, but I’d hazard a guess that epidemiologists and public health experts in all of these cases are in despair at the lack of action shown by their politicians. What were the politicians thinking? That it would all go away, Donald Trump style. Or more likely that they were balancing health concerns against the economy. That was why I wrote this post.


There is one country stuck at the bottom of the chart above, Japan, which I’ll come to shortly. But first how about some countries in Europe who I always think of as having relatively rational governments: Germany (because it is run by a scientist) and the Scandivian countries.




My hypothesis is correct. Compare the left hand scales of the two charts. These countries would all be stuck at the bottom of the previous chart. However for Denmark, Germany and Sweden the pattern is similar, if at a much lower level of cases. Only Norway and Finland have avoided exponential growth during this period. The media should stop looking at Sweden, and look at Finland instead.


Japan is stuck very happily at the bottom of this chart too. But it is not alone. Here are some countries in what we sometimes call the Far East.




I’ve kept the best of the Scandivian countries, Finland, there for comparison, and started the chart at the beginning or July rather than September. We can see that Australia, and to a much lesser extent Japan, had a flare-up in July and August, but both countries managed to bring it back under control very quickly. South Korea had a smaller flare-up at the end of August but it’s very effective test, trace and isolate (TTI) infrastructure helping bring it quickly under control. To all intents and purposes New Zealand, Australia, Thailand, Taiwan, Vietnam and China have completely suppressed the virus.


There are three overriding lessons. The first is the importance of an effective TTI infrastructure that has the capacity to scale up quickly [1]. The second is that if you start seeing a rapid rise in cases, and your TTI system is beginning to fail, you need to lock down rapidly and hard. Both lessons should have been learnt in Western countries, but were not. One reason may be a third lesson, which is the importance of a clear and shared understanding that the goal is virus suppression. Deaths from the virus are not something to be tolerated as long as they are at a low level, or balanced against the needs of the economy, but something that needs to be reduced to the lowest number possible, and kept there.


We can say, correctly, that unlike the countries in the last chart we in the West are not used to dealing with pandemics as serious as COVID-19. But that is a reasonable excuse for the first wave in the Spring (although not for countries like the UK that lagged behind others), but not for this second wave. Whichever way you look at it, the second COVID wave represents a serious failure of government in most countries.


[1] A weak link for many countries is isolation. Some of the countries above have COVID hotels where those with the virus are isolated. The reason is simply to ensure infected people do not infect others. Many in the West find such an idea intolerable, but Australia only isolates in this way if you have travelled from overseas, so it may not be a necessary requirement for suppression.






Monday, 26 October 2020

Starve a kid to save a quid [1]

 

One of the myths perpetuated by mediamacro is that management of the public finances is all about controlling our debt by keeping deficits down. As with so much of mediamacro, this is something no academic macroeconomist would say. Econ 101 (first year undergraduate economics) tells you that the deficit should rise and fall with the economic cycle. In particular in major recessions deficits rise rather a lot, and that is exactly what they should do.


Econ101 also tells you that in a recession caused by collapsing demand, it makes sense to increase the size of an already large deficit through fiscal stimulus. It becomes absolutely necessary to do so when interest rates can no longer stimulate the economy because they are stuck at their lower bound. Fiscal stimulus is the way you get out of recession much quicker, and according to some models the only way to get out of recession.


Much the same applies to a national crisis. No one worries about rising debt in a war, and no one should worry about rising debt in a pandemic. Government debt and monetary financing are all about being able to spend big in emergencies without having to worry about running out of money. Worrying about debt and future generations is particularly inappropriate in the current circumstances, when new borrowing attracts a fixed interest rate that is below, and sometimes well below, the underlying rate of growth of the nominal economy. For more on all this see here.


In contrast mediamacro (macroeconomics as understood by much of the media) treats the economy as a household. The government is not like a household, and trying to treat it like a household causes huge damage. Mediamacro’s failure cannot be put down to the simplicity of their message. Here is an equally simple one that is much nearer the truth than mediamacro: worry about the deficit in booms but not recessions. [2]


George Osborne acted as if he didn’t understand that, and it would seem Rishi Sunak does not understand that either. And like Osborne, Sunak too is already causing a lot of damage by worrying about a deficit in a recession. Worse still for Sunak deficit obsession seems to have taken on a religious dimension. In his conference speech he said the government has a “sacred responsibility” to balance the books for future generations.


When the pandemic hit things seemed as if they might be different. Sunak followed other European countries in rolling out a generous furlough scheme (although some fell through its cracks). It is as if he has been regretting that policy ever since. [3]


Let’s look at some of the damage Sunak has already caused. At every opportunity, he encouraged Johnson to end aspects of the lockdown quickly, thereby ensuring that lockdown would finally end with a significant amount of COVID around. He then undertook a stimulus measure then would inevitably increase infection levels, just before a period when first returning schools and then universities were bound to put pressure on the test and trace regime. As we saw a second wave, he announced a support scheme that was less generous and far more limited than his original scheme. Since then he has had to backtrack somewhat (nothing to do with London going into Tier 2 of course), but many will have been made unemployed before his change of mind. He continues to refuse to increase statutory sick pay, even though this would help fight the pandemic. Perhaps worst of all, he encourages Johnson to think about balancing health and the economy (balancing SAGE with Sunak), when this just ensures the second wave will grow.


Then we have Marcus Rashford’s appeal to continue free school meals in the holiday period to stop some children going underfed as parts of the economy collapse. What was provided during the summer following Rashford’s first appeal is apparently no longer necessary, even though the pandemic is now at least as bad as it was in the summer. The decision to ignore Rashford’s appeal was terrible in so many ways, including politically. Putting Conservative MPs into the limelight to reveal all their prejudices about the poor is never a good idea.


It is a very human instinct to protect those who are most vulnerable in a crisis. Yet many Conservative MPs talk about parental responsibility and feckless parents, as if extending free meals to school holidays would significantly encourage such behaviour. Instead such arguments reveal that these MPs would see no problem in getting rid of free school meals completely. The truth is that Conservative governments have installed a benefit system that fails to provide some of its recipients enough to live on, and those failures become more acute in a crisis. That these failures are pervasive even outside a crisis is clear from the huge growth in food banks.


Why is this failure built into universal credit and our welfare system more generally? In part it reflects governments responding to stories of irresponsible parents with large families that regularly appear in the Tory tabloids. But it also reflects George Osborne’s obsession with the deficit. He cut universal credit supposedly in an effort to balance the books, while at the same time cutting various taxes. (For a good discussion of the impact of policy measures on the distribution of income since 2010, see here - HT Jonathan Portes.) Using concern about the deficit to make the poor poorer was pure deceit on his part, deceit mediamacro were happy to go along with.


The tax giveaways under Osborne tell us why he used to obsess about the deficit. It isn’t that he really believed cutting the deficit in bad times is a good idea. If Osborne was really so concerned about the deficit why did he cut taxes so often? Sunak seems to be following a similar path, showing no attempt to exert some control over the government wasting money on a defunct centralised and privatised test and trace system, or trying to stop the government overpaying for PPE.


This suggests that Sunak, like Osborne, only pretends to misunderstand the nature of government debt. I used to say this deficit deceit was really a pretext to reduce the size of the state, but I think we need to be more precise in the current climate. Many Conservative MPs today seem quite happy about the state paying too much money out to corporations who have previously or will subsequently give Conservative politicians seats on the board, and/or have given the party financial support. What they fear is government money going to the wrong people, people who are not their friends, donors or the very rich, and who are unlikely to vote for them.


[1] Title credit https://twitter.com/BremainInSpain/status/1319948693169209344?s=20

[2] For MMT devotees. You say governments should focus on how much resources are used and not the deficit. But that is only true if interest rates are unable to control inflation in booms or you prefer to use fiscal policy to control booms. As most people think interest rate policy is both effective at dealing with booms and should be used, then controlling the deficit in booms is important to prevent deficit bias. Try imagining most people are right, and think outside your MMT box.

[3] Stephen Bush suggests this change of mind is because Sunak now thinks the cavalry, in the form of a vaccine, will no longer arrive. However the alternative to a vaccine is not permanent lockdown, but reducing cases to near zero and keeping them there using an effective test and trace system. The problem here is in getting the government to admit that their world beating test and trace system is a failure.


Postscript (27/10/2020). I could have added so much more examples of inappropriate penny pinching going on right bow. Adding VAT on PPE equipment for example, or reducing the number of laptops schools get to help children. All this is penny pinching. Extending free school meals to cover the half term break costs about half a day's worth of Eat out to Help out.