Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 27 April 2020

Did the scientists advising the government on COVID-19 make serious mistakes?

The government has now said it will begin to wind down the lockdown with an extensive test, trace and isolate (TTI) regime in place. Containment, having been abandoned on March 12th, is back but this time the UK government is serious about it. It has a much greater chance of success not just because there is more testing capability available, and there will be an app to help with tracing, but also because it will take place with a degree of social distancing.

We can only hope that this works, and that government actions match their words. But what seems very puzzling to me is why the scientists advising the government seem to have been preoccupied with moderated herd immunity as the only way to deal with this virus, and largely neglected the possibility that containment could be made to work.

Managed herd immunity plus behavioural worries

This is not just a UK issue. Herd immunity, together with limited and advisory social distancing, is the strategy that is being tried in Sweden, following the advice of their chief epidemiologist. It is controversial there too, with many other scientists arguing against this strategy, and with deaths in Sweden well above those in other Nordic countries.

The logic of the argument for herd immunity is set out in a very interesting debate on Channel 4 on 13th March. It was between John Edmunds, an epidemiologist and member of SAGE, and Tomas Pueyo. (Although I saw this at the time, thanks to @cubic_logic for reminding me of it.) Both seem to agree that a lockdown of some sort is required to avoid the health service being overwhelmed, with the disagreement being how quickly that is required, but at the end it seems both are in agreement about the principle of herd immunity.

Why not impose a lockdown until a vaccine is discovered. You can also achieve herd immunity with a vaccine, without hundreds of thousands of people dying. If there was no cost to a lockdown, and it could be successfully imposed for a year or more, the optimal strategy is clearly to impose the lockdown as quickly as possible and retain it until the vaccine arrives. Obviously a lockdown of that length would be very costly, but the reason Edmunds gives in this debate for not doing this is that people would stop observing it. This is the ‘behavioural’ element to the story that has been talked about.

The behavioural element is crucial for the following reason. Even if it is not successful, containment could allow the following strategy. You start with containment (as we did), switch to total lockdown when containment is obviously failing, and once that lockdown brings the number of cases right down abandon it and revert to containment. This on/off for the economy could get us to the point where a vaccine is produced in large quantities. Compared to herd immunity we would almost certainly cause far less deaths without too greater economic cost.

To reject this outcome requires a pretty firm belief that people would become so tired of lockdowns by the Autumn that whatever the government did there would be an uncontrolled epidemic in the winter with a worse outcome for the NHS than managed herd immunity could achieve. Where that belief comes from I don’t know, and neither will we know until after the pandemic ends because the government has refused to publish the scientific advice it received until then. You would think that this behavioural assumption would depend in part on the economic support individuals were receiving, but as far as I know no Treasury officials or other economists were involved. Equally no sociologists were involved.

It is here that politics and science interact. Speaking to reuters’ journalists, John Edmunds is reported to have said:
“We had milder interventions in place because no one thought it would be acceptable politically to shut the country down.” He added: “We didn’t model it because it didn’t seem to be on the agenda. And Imperial didn’t look at it either.”

This is dangerous territory for any scientist. In the blink of an eye a scientist believing something is not on the agenda can be a politician saying that no one told us about this alternative.

Once those advising the government believed that lockdowns were off the agenda or too fragile because of the behavioural response then the government’s strategy begins to make more sense. You try containment, because containment would be the best outcome, but you suspect that without some social distancing and other measures it is unlikely to work, but you don’t want to impose those for behavioural reasons. You then move to managed herd immunity, where you want to impose as little restrictions as you can get away with, again for behavioural reasons, such that the NHS stays above the water line.

The strategy in action

On 9th March, during the containment phase, according to reuters:
“Johnson held out against stringent measures, saying he was following the advice of the government’s scientists. He asserted on March 9: “We are doing everything we can to combat this outbreak, based on the very latest scientific and medical advice.” Indeed, the government’s Scientific Advisory Group for Emergencies, SAGE, had recommended that day, with no dissension recorded in its summary, that the UK reject a China-style lockdown. SAGE decided that “implementing a subset of measures would be ideal,” according to a record of its conclusions. Tougher measures could create a “large second epidemic wave once the measures were lifted,” SAGE said.”

Whether this was a unanimous view is disputed by Lawrence Freedman, who says some members did favour something closer to a Wuhan lockdown.

Thus on 10-13th March the Cheltenham racing festival went ahead. There is now evidence of a concentration of COVID cases in the area of Cheltenham racecourse. Other sporting events were allowed to go ahead. While this seems negligent if your concern is reducing deaths, if you think herd immunity is the only option and you want to delay even a partial lockdown for as long as possible it makes sense. On 12th March containment ended, and in his first COVID press conference the PM said “many more families will lose loved ones before their time.” Testing is now limited to hospitals.

Yet at the same time the Imperial team produced a new analysis suggesting that further measures were needed to avoid overwhelming the NHS. This was ‘the science changing’ according to the BBC. In reality this was still the strategy of managed herd immunity. Freedman reports:
“Now, promoted by the Imperial study, the advice from the operations subgroup of the Scientific Pandemic Influenza group on Modelling (SPI-M-O) on 16 March was notably different in tone from a week earlier. The measures at first envisaged – case-by-case isolation, household isolation and social distancing of vulnerable groups – was now “unlikely to prevent critical care facilities being overwhelmed”. Everything now had to be tried, including “general social distancing and school closures”, which offered the best chance of disease control.”

But was this really just the science changing? The reuters article says:
“What allowed Britain to alter course, said Edmunds, was a lockdown in Italy that “opened up the policy space” coupled with new data. First came a paper by Edmunds’ own London School team that examined intermittent lockdowns, sent to the modelling committee on March 11 and validated by Edinburgh University. Ferguson’s revised Imperial research followed. Woolhouse, the Edinburgh professor, confirmed the sequence. Edmunds said these new studies together had demonstrated that if the British government imposed a lengthy period of tougher measures, perhaps relaxed periodically, then the size of the epidemic could be substantially reduced.”

What changed was the politics, which had “opened up” the alternative strategy of intermittent lockdowns that I described at the beginning of this post. It was inevitable that the politics would change. I noted before Chris Giles commenting that the herd immunity strategy was time inconsistent: once deaths started increasing and people saw the pandemic overwhelming other countries politicians were bound to change strategy. But Johnson remained very reluctant to do so. As an article in the New England Journal of Medicine says about the measures introduced on 16th March:
“People should work from home if possible, but that was largely up to employers to decide. Vague. Anyone over 70 was advised to avoid “nonessential social contact.” Vague again. The government was “moving emphatically away from” mass gatherings, but again these were still not (and are still not) banned. British understatement was in full swing — citizens, businesses, and nursing homes were asked to read between the lines and go beyond explicit government policy. The prime minister’s father announced that he would be going to the pub if he chose to, since they needed the customers.”

We had to wait until 23rd March for the current lockdown to be imposed, that replaced advice with something much stronger. The French President threatened to close its borders with the UK if this was not done. As I noted in last week’s blog post, the 10 days delay between the containment phase ending and full lockdown probably cost the majority of lives lost in the UK. I don’t think the difference between weak advice (16th March) and the currrent lockdown (23rd March) can be pinned on the scientists.

What mistakes did scientists make

How much of all this the fault of the scientists advising the government. They certainly made mistakes. Three stand out. The first was NERVTAG keeping the threat level at moderate in mid-February, with Edmunds the only one objecting. This failed to convey the urgency of the situation to the government. The second, mentioned above, was scientists sticking to an agenda that seemed to rule out a lockdown, or other scientists pretending they knew with any certainty that lockdowns could not be sustained for long. Cummings taking part in the meeting didn’t help here. People who say his presence had no impact on the other people in the room, when his actions could potentially hurt many of those people, have no imagination.

The third, and by far the most important, was the failure to realise that containment if taken seriously was an alternative to herd immunity or total lockdowns. East Asian countries like South Korea suggest that alternative, if done properly and with supporting measures, can work for some time. You test people who may have the virus, and if they do you trace their contacts over the period they have been infectious and isolate both them and their contacts. The South Korean experience suggests that you can even bring down very high numbers of cases using this strategy. Professor Ferguson now agrees this is the country to learn from.

As long as a vaccine comes along within two years, this is a strategy that can get you through the period with no vaccine with far less cases and deaths than with herd immunity. This option comes up in the Channel 4 discussion noted above, but Edmunds dismisses it as having been tried and failed in the UK. In the UK this phase failed to stop the number of daily cases increasing.

One of the lessons from the countries with successful TTI strategies is that you close down travel from infected areas very quickly, or impose compulsory isolation for incoming travellers. (One of those countries, Taiwan, has an epidemiologist as its deputy President, which just shows that not all epidemiologists, or even a majority? believe in herd immunity.) The UK failed to do this during our containment phase. In addition, having mobile phone based tracing apps is extremely helpful in tracing who people have been in contact with, and the UK did not have that during its containment phase. But more generally, mild forms of social distancing can be used to help TTI work. Stopping large gatherings like Cheltenham races is an obvious example. We can put the same point another way. The UK did nothing to help the containment phase work. Was this due to politics or the absence of advice from SAGE?

If TTI fails, as it has in Singapore for example, then governments quickly need to impose a lockdown. But this is not a reversion to a herd immunity strategy, but just a measure required to get cases back down to a level where TTI can work again. Even if TTI has to be accompanied by occasional lockdowns, it will still involve many less deaths than herd immunity or ‘running the NHS hot’ does, simply because of the mathematics.

Do these failures by scientists advising the government, if they were not politically influenced, get politicians off the hook? Absolutely not. Most politicians, on being advised that the only sure way of responding to a new virus was to let hundreds of thousands of people die (as they were told in the UK), would surely want to be absolutely sure that there really wasn’t any alternative. They would ask basic questions, like are other countries doing the same, or are there examples of countries that have chosen a different and less deadly approach. Scientists would not have kept what China and South Korea are doing from ministers, and they are unlikely to have said that these countries' experience was of zero relevance.

If our government had done that, I’m pretty sure we would have had containment with more support in terms of controlling international travel, banning large gatherings and so on. Herd immunity wouldn't have been on the agenda, and a lockdown would have been imposed earlier. Probably most of those who have died would still be with us. The reason we tried containment in a half hearted way without social distancing support or border controls were because politicians were too content with a strategy that would kill huge numbers of people.

We are where we are because our current Prime Minister and some in his cabinet, even in the face of predictions of hundreds of thousands of deaths, was too content to do nothing, take it on the chin, and too fearful of curtailing economic freedoms to interrogate the advice they were given. It was the same slowness to act, rather than anything coming from the scientists said, that led to inadequate PPE provision, or to waiting until mid-March to appeal for ventilators or make requests to labs for assistance with testing.

What happens next

There still seems to be divergent views within government about how quickly the lockdown should be relaxed, where by relaxed I mean allowing more people to get COVID-19. There shouldn't be any debate. The number of cases need to be brought down as quickly as possible to a level where the TTI regime can be pretty sure to work. The current lockdown has to continue until that point is reached, and in addition some sort of quarantine system has to operate on anyone coming into the country.

At that point the TTI system can begin to operate. (Earlier testing should iron out any teething problems.) Only when this system has been operating for enough time to see that it is clearly working can we begin to relax lockdown. But these relaxations in lockdown need to be done step by step, and in each case we need to ensure that TTI can still work successfully.

Monday 20 April 2020

Now is not the time?

This post was written before the Sunday Times article on 19th April, and has been slightly changed as a result. The most serious failings of the government were already known to anyone who had the inclination to look. Rather than looking at the time line, this piece looks at the types of mistake made. 

We keep hearing the phrase in the title (without the question mark), particularly but not only from those sympathetic to this government. Now is not the time to talk about what could have been done given hindsight. Instead we need to focus on saving lives.

You could see why this might be true. Resources are finite, and we would rather politicians were focusing on getting things done right now rather than defending themselves over past (in)actions. If you follow this line of thought you might even say that criticism could cost lives.

However there is an alternative point of view, which I find much more persuasive. If the government does not take the time to learn why it made mistakes in the past, it is in danger of making them again. Its natural defensive attitude means that these mistakes have to be publicly recognised at the time. To put it in a slightly more nuanced form, if past mistakes had come from a certain attitude of mind, a certain balancing of priorities, then there is the danger that these will continue to lead the government to make mistakes.

There is a second strong argument for thinking about the past right now, and that is because of calls by right wing commentators that suggest we have been too quick to impose a lock down. (Calls which, of course, takes no notice of the call to leave criticism until a later time.) In my view, and the overwhelming majority of experts, these calls are nonsense and should just be dismissed as another example of theory-based evidence exercises (see Jonathan Portes here, for example). But we know this government is particularly susceptible to arguments coming from this quarter.

We can strongly suspect that too strong a reluctance to close the economy down was an important factor in leading to the fateful delay in imposing a UK lock down. Here is the Prime Minister talking on 3rd February about free trade:
“when there is a risk that new diseases such as coronavirus will trigger a panic and a desire for market segregation that go beyond what is medically rational to the point of doing real and unnecessary economic damage, then at that moment humanity needs some government somewhere that is willing at least to make the case powerfully for freedom of exchange, some country ready to take off its Clark Kent spectacles and leap into the phone booth and emerge with its cloak flowing as the supercharged champion, of the right of the populations of the earth to buy and sell freely among each other.”

It is not hard to imagine how that same sentiment could have translated from trade among nations to trade within nations.

Of course he does talk about what is “medically rational”. But we know that the government ignored what was happening in countries all around them, ignored what many in the UK science community were shouting, ignored what WHO were advising, and planned to champion the idea that we could ignore the virus and allow economic activity to continue.

How many did that strategy kill? There are lots of different ways of doing the calculation: here is just one, powerfully written. But they all lead to the same conclusion. Most of the people who have died could have been saved if the government had locked down just 11 days earlier, when it abandoned its test, trace and isolate strategy. By most I mean something around two thirds or three quarters of deaths could have been avoided. By why just 11 days? We know that the government was warned by the team led by John Edmunds about the scale of possible deaths in the UK 4 weeks before we locked down. If the government had acted then, even more lives would have been saved.

When the government claims that the science changed, what it really means is that they waited until almost every single scientist was making recommendations it couldn’t ignore. It had been ignoring the UK scientists who had been imploring it to do something much earlier, and those in Italy who were saying how can the UK possibly be repeating our mistakes? It is very easy to imagine politicians whose priority was more about saving lives than protecting the economy would have acted earlier. Indeed we don’t need to imagine, because we can see many examples around the world.

Some say we cannot know for sure that the government has made a colossal mistake until a vaccine finally arrives, because a lock down that came too early might lead to dangerous second peaks. This argument doesn’t stand up, because the time before another peak might emerge can give us time to ensure we can control it. Our original attempt to test, trace and isolate didn’t work because not enough resources and subsidiary action was taken to allow it to work. By winter we can ensure that next time this isn’t true, and even if that regime fails we can lock down again quickly. The mathematics of exponential growth in cases means two lock downs imposed quickly always result in less deaths than allowing a delay of weeks before starting just one, which also has to last longer. 

Which brings me to the point of going over the mistakes that the government made now, which is to ensure they are not made again. If this government’s inaction, which led to most of the excess deaths the UK has seen, was influenced by a desire to keep the economy going, then there is a danger that it will end the lock down before an adequate test, trace and isolate regime is in place, or it will fail to take the necessary additional action required to make that regime work. It may even not try that approach at all.

But that is not the only mistake the government made. The second mistake was disastrous for those doctors, nurses and other hospital workers and their patients, and for those in care homes and those they are caring for. We know from his speech on 3rd February (and other information) that the government was well aware of a potential pandemic that could hit the UK. Whatever plans they may have had for dealing with it then, it made sense to take substantial precautionary action in three areas: to ramp up testing capability, to prepare for much increased PPE demand, and to order additional ventilators.

Even with a herd immunity strategy, the idea was to protect the vulnerable and elderly, and for that to be possible meant ensuring that those caring for them were regularly screening for the virus. Those carers would need PPE equipment along with hospital staff. More ventilators would be needed for sure. Whatever action was taken in February appears totally inadequate, as events have shown. As a senior department of health insider described to the Sunday Times:
“We just watched. A pandemic was always at the top of our national risk register — always — but when it came we just slowly watched. We could have been Germany but instead we were doomed by our incompetence, our hubris and our austerity.”

I have no idea how many in care homes have died as a result, or how many medical staff have suffered the same fate because of inadequate PPE. The fact that even now supplies of PPE are inadequate reveals a third failure made by this government, and that is a failure to get things done. That failure may stem from another, which is misplaced arrogance.

Arrogance that we are familiar with over Brexit. After all Brexit is the defining characteristic of this Prime Minister's cabinet. Arrogance that the UK would come to no economic harm while incomes were already at least 2% below what they might have been if the vote had gone the other way. Arrogance over how the UK would cope with a No Deal Brexit, and arrogance that persists with a failure to extend the transition period. The connections with Brexit, as David Edgerton suggests, may go beyond arrogance. It also seems from the Sunday Times article above that preparing for a No Deal Brexit also prevented some pandemic planning and training.

Arrogance, perhaps, that led them to ignore not once but three times the opportunity to benefit from an EU scheme on PPE equipment. Arrogance that led them to think they had no reason to make more precautionary purchases of PPE equipment than they thought they needed to allow for contingencies, or to expand testing capacity. And arrogance that required two studies showing the lives lost by their inaction before they abandoned their do nothing approach.

Let us hope no more lives will be lost because of the failings in our government in the next stage of this pandemic. But can we really trust a group of politicians that failed to act time and again, and whose inactions led to tens of thousands of deaths, to get it right during the remaining months of this pandemic. The signs are not good. Allowing your citizens to die in their tens of thousands because of their inaction is the gravest of errors a government can make, and perhaps the safest path ahead would be for this government to make way for others who are more competent.

But of course this will not happen.

Tuesday 14 April 2020

Some myths about government debt and how it is financed

That the Bank of England was temporarily eliminating the limit on the Ways and Means Facility caused a bit of a stir last Thursday (9th April). It in effect meant that the Bank of England could credit the government with as much money as it needed in the current crisis. That it should cause such a stir illustrates how pervasive many of the myths are around government debt. Here are three familiar examples.

  1. It doesn’t matter that we are in a developing economic crisis, like a recession or a health pandemic, we still need to worry about what is happening to government debt.

    This is false for any country that prints its own currency, like the UK. In a crisis you should worry about dealing with the crisis. Government debt is what allows the government to put all necessary fiscal resources into fighting the crisis. To worry about debt is like worrying that a fire engine putting out a fire is using too much water.

  2. OK, but we should worry about government debt the moment output stops falling (or in a pandemic, the moment any lock down is relaxed).

    Again false. This was the mistake that some large economies made after the Global Financial Crisis (GFC). By worrying about debt they either slowed down, killed or reversed the recovery. Because governments can get the Bank of England to buy its debt (or continue to create money), there is no need to worry about debt until the economy has fully recovered from the crisis. This will be equally true in any recovery from the pandemic.

  3. When the government starts financing its deficit by printing money rather than issuing debt, rampant inflation is just around the corner.

Many thought this after the GFC, when central banks started buying government debt through their Quantitative Easing programme, because they bought the debt by creating money. Subsequent events have shown that those who thought inflation was inevitable were completely wrong, as many of us said at the time. The reason they were wrong is because interest rates are at their lower bound, and at the lower bound it does not matter too much how the government deficit is financed. The reason is intuitive: when rates are zero, you are indifferent between cash and short term debt. So why would issuing money rather than debt cause inflation when rates are zero? No reason at all.

Which brings us to the Ways and Means Facility. In practice this lifting of the limit is likely to be simple cash flow management, with the government still issuing debt at the end of the day. But the Bank of England will keep buying debt as part of their new QE scheme. Ironically it is possible that we may get some inflation this time round, but it will have nothing to do with QE, and everything to do with some sectors not hit by the pandemic taking advantage of high demand, or sectors still functioning but with some labour shortages passing on higher costs. The Bank of England is likely to ignore that inflation if it happens.

Why does the government prefer to issue debt rather than create money to cover its deficits? After all, doing so costs it money. Even when short term interest rates are zero, interest rates on long term government debt are higher, to compensate for having the money locked up or the capital risk in selling it earlier. To say that financing deficits by money creation creates inflation is too trite, because it appeals to a simple linkage between prices and central bank created money that we just noted fails to happen in recessions.

A better answer is the one Keynes gave. In a recession you can create a lot of money, because it is willingly held by nervous banks and investors. But outside a recession investors and banks will want to get rid of that money, which will force down rates of interest in the economy, encouraging too much borrowing and discouraging savings. That excess demand will create inflation. Central banks are only able to control the general level of interest rates in the economy by restricting the amount of money they create, which is why government deficits are largely financed by issuing debt.

If we shouldn’t worry about government debt during crises, or as crises are coming to an end, should we worry about it at all? It is a good question, which can only be answered by looking at why having high levels of government debt might be bad. So let’s look at three myths or misunderstandings about government debt.

  1. High debt risks financing crises.

    The general view at the moment is that there is a shortage of safe assets in the world, and the clearest evidence for that is low interest rates on government debt. As to short term market panics, we have seen that for a country that prints its own currency that is not a concern.

  2. It is a burden on future generations

The idea here is that any debt has to be serviced (the interest has to be paid), and this can only be done by raising taxes. But the level of debt interest depends on interest rates as well, so when these are low, debt can be higher with the same ‘burden’. The other thing to be said (which should be obvious but is often missed) is that failing to stimulate in a recession can cause lasting damage to future generations. As can not dealing with climate change.

The same point applies to the idea that higher taxes to service debt discourages labour supply. When interest rates are very low, the impact of debt service on taxes is also low. There is a common error often made here. People note that the amount of money required for debt service could build many new hospitals, so let’s reduce debt to get more hospitals. But getting debt down to zero would require severe fiscal consolidation for decades before that goal was achieved.

  1. It crowds out investment

This is an obvious mistake during an era of low real interest rates. Government debt crowds out private capital in OLG models by raising interest rates. So if interest rates are low enough to finance any decent investment, there can be no harmful crowding out.

To sum up, in an era of very low interest rates government debt can safely be much higher.The case for reducing the debt to GDP ratio from what it ends up being after the pandemic is over has to be made, and that case needs to take account of what causes real interest rates to be so low (secular stagnation) as well as the literature on safe asset shortages. In particular, as Olivier Blanchard has emphasised, if real interest rates on government debt are less than the growth rate, positive shocks to debt caused by recessions will gradually unwind of their own accord.

I have, however, to end with one final myth. This is

Deficits don’t matter as long as they don’t create excess inflation.

This is just not true when independent central banks (ICBs) control interest rates, because central banks will vary interest rates to control inflation. ICBs have been very successful at bringing inflation right down to low levels, which is why no government or opposition is going to abandon them anytime soon. In that situation, deficits that are too large or small will lead to changes in interest rates rather than inflation. (ICB’s are not so good at preventing recessions when inflation is low, which is why we need a state dependent assignment.)

Once recessions, caused by whatever means, are over then it makes sense to have targets for the government deficit (excluding investment) as a share of GDP. What that target should be will depend on a view of what the ideal debt to GDP ratio should be. (For more detail see here.) These targets are there not because high deficits will be the end of the world - far from it. Instead they are a disciplining device for governments. In the past it was thought they were needed to stop left wing governments spending too much, but in the UK and US the more likely problem is of right wing governments taxing too little.

Which brings us to why so many people think government debt and deficits are much more important than they actually are. In the past spurious concern about deficits has been seen by many to be an essential way of keeping a lid on government spending when a left wing government is in power, or even as a way to shrink the state when a right wing government is in power. It is ironic that in a era when there is an imperative to reduce climate change, the importance of deficit targets may be to stop right wing governments cutting taxes.  

Tuesday 7 April 2020

Who still thinks austerity was a good idea?

It is getting towards autumn in 2020, and the new regime of test/trace and isolate with occasional local lockdowns seems to be working. The economy has begun to recover from the 30% fall in GDP compared to a year earlier in the second quarter. But the recovery is not what the media is talking about. Instead they are focusing on the massive government budget deficit that has been a natural consequence of that fall in GDP and the huge government support effort. In response to media concern, the government announces an immediate 5 year programme of cutbacks to government spending, although the NHS will be “protected”.

If you think that last sentence is unlikely to happen, I would agree. But this is pretty well what happened in the UK and elsewhere after the Global Financial Crisis (GFC). The GFC led to the largest recession since WWII, and as a result of that and the government’s measures to support the economy, the deficit rose rapidly. It was a record post-war deficit, just as the deficit over the next three months will also be a new record high. George Osborne condemned the equivalent of today’s measures to support the economy because they would increase the deficit. And the media followed his lead in making the rising deficit, rather than the economic recovery, the centre of concern.

Of course these two situations are not exactly the same. Whereas what was required, and what happened, in 2009 was a standard fiscal stimulus to combat deficient demand, today we have targeted fiscal support to help people through the consequences of social distancing. A generic fiscal stimulus would be of limited use today, when we are preventing consumers spending their money on a large range of consumer goods. (There is nevertheless a case for immediate transfers to those who are poor.) But what both have in common is that they, coupled with the impact of falling GDP, will raise the government's deficit substantially. 

To start obsessing about the deficit once deaths start falling would be a crazy thing to do, just as it was a crazy thing to do after the GFC once output had stopped falling. By cutting public investment sharply, Osborne delayed the recovery from 2010 until 2013. The idea that the NHS was protected was classic spin: a healthy NHS needs to grow faster than GDP to cope with an ageing population, technological change and other well known factors. As the chart below shows, the government over the last ten years has shrunk the share of health spending in GDP over an unprecedented ten year period, and a system that today cannot cope with normal loads is the result. As the chart also shows, the amount spent on health rose in real terms, illustrating that just increasing real spending is not enough to truly protect the NHS.

The consequences of that shrinking of health spending can be seen today, as hospitals struggle to cope with the pandemic and other crucial operations are delayed. To understand what ‘running the NHS too hot’ actually means, I strongly recommend this from Chris Cook. But we were told constantly from 2010 that austerity had to be done, because reducing the deficit was the key economic goal. As subsequent research has shown, nearly all the mainstream media not only helped create the initial panic over the deficit, but continued to treat its reduction as the key test of economic success.

A group of academics in the US and UK made great efforts to successfully knock down every argument put forward for austerity. For example the government at the time talked about an imminent funding crisis that the coalition government with its actions just avoided. There was no evidence for this, beyond City folk predicting doom and gloom because they see the increased supply of gilts and ignore the increasing demand for them. These City folk were wrong and we were right, because interest rates on UK government debt fell. In one of my first blog posts I pointed out that for a country like the UK where the central bank (as part of its QE programme) was buying large quantities of government debt could not suffer a funding crisis. This, together with standard Keynesian economics, was a knock down argument against the need for austerity, but the media carried on regardless. 

The opposition’s initial attempt to strike some balance between the goals of reducing the deficit and protecting the recovery (a misguided balance - the recovery should have come first) were abandoned because the media had decided that reducing the deficit was the only game in town. As the majority of the media became more obsessed by the deficit, academic opinion was moving in the opposite direction, with a modest majority against austerity becoming an overwhelming majority. Here is a 2014 poll of leading US academics on whether Obama’s stimulus package was a good idea.

Despite the, by then clear, consensus from academic economists that austerity was a huge mistake, the media carried on promoting deficit reduction. This played a major role in the Conservatives winning the 2015 General Election. Real wages falling by an unprecedented amount? No, the economy is strong because the deficit had come down, according to the bizarre narrative that dominated the media.

After 2015 Osborne and his successor continued with austerity, making an already bad NHS situation even worse. As Jonathan Portes says 
The austerity programme of the last decade has prepared us neither for the health, social or economic consequences of the Covid-19 crisis; instead, it has left us far more vulnerable than necessary.”
Austerity is why the failures identified in Operation Cygnus, a 2016 pandemic simulation, were not rectified. It is important to understand this was all a failure of our media as well as a failure of the politicians of the party that still governs us. The costs of that failure is not only an NHS horribly vulnerable, but a loss of resources worth around £10,000 for the average household in the UK. If, as some economists now argue, austerity has permanently lowered potential GDP, the costs will be even greater still.
Will history repeat itself? Will those Paul Krugman labels ‘deficit scolds’ force the government to take measures to reduce the deficit before the economy has fully recovered from this pandemic? In the UK I suspect not, for a number of reasons. The first is that Boris Johnson in 2020 is not David Cameron in 2010. The second is that many have learnt the mistakes of austerity. The third is that the conditions of 2010 were particularly favourable in getting people to accept austerity was the right thing to do.

There are a number of reasons why austerity obtained popular support for many years. First, we had just had a financial crisis, and so the idea that the financial markets were like a capricious god that had to be appeased was strong. Second, consumers were saving more and borrowing less out of choice, so the idea that governments should do the same seemed common sense, to both voters and political commentators. It was this common sense that Keynes had shown to be disastrous in the 1930s. Third, in the UK and US the right wing parties that championed austerity were in opposition as the deficit rose, but now they are in power.

Perhaps governments will eventually decide that taxes need to rise once the economic recovery from this virus is complete. But that is a conversation to be had way down the track, and should not stop governments doing all they can to support people from the consequences of social distancing and then ensuring the economy recovers once social distancing ends. Those in the media who still want to panic about the deficit need to be reminded of the damage their siren calls did a decade ago.