The government is responding to pressure and not thinking clearly about defeating coronavirus

In this article in the Guardian I lay out what the optimal strategy for handling COVID-19 should be for a country like the UK. How does the Prime Minister’s statement on Sunday evening compare to that strategy?

The key to relaxing a lockdown is having a test, trace and isolate infrastructure in place, and very low infection levels. We do not have either. So why was Johnson talking to the nation on Sunday?

He set out a general framework for relaxing the lockdown, all conditional on some function of infection levels and R. (He didn’t specify what the function was.) To set out an approach makes sense. To not tell anyone what exactly the conditions for relaxation are does not make sense, but it gives him flexibility to make it up as he goes along (or “follow the science” as he likes to call it).

In addition he relaxed some of the rules for what people can do outdoors. Those in holiday hotspots are not too happy, and just don’t try driving to Wales. What may prove to be more important, he changed the government’s mantra from ‘stay at home’ to ‘stay alert’. The problem was, apparently, that ‘stay at home’ was too effective. Everyone with any sense agrees that ‘stay alert’ is vacuous. Why was ‘stay at home’ too successful? The answer seems to be that some people who the government thinks should have been working were staying at home at the government’s expense.

Which leads us to the most controversial element in what he said. Those who couldn’t work at home should be working. They should try and maintain social distancing at work, and when getting to work, where possible. What happens when social distancing isn’t possible. We use “good solid British common sense”, according to Mr. Johnson. I guess those using some other country’s common sense might come to different conclusions.

This is an important easing of the lockdown, and one which is going to put some more workers in harm’s way. As Johnson said: “work from home if you can, but you should go to work if you can’t work from home “. There was no qualification to that instruction, no “but only if it is safe to do so” at the end. This chimes with talk from the Treasury of too many people being furloughed, and mooted plans to reduce how much furloughed workers are paid in the future.

It is not workers who choose to be furloughed, but firms who furlough them. Sunday’s message was encouraging them to go back to work, even though they cannot ensure social distancing at work. If you think I’m being alarmist, how about an industry where working has sometimes to break social distancing. Like removers (try moving a metre long chest of drawers staying two metres apart) where previously the governing body had advised its members it was not safe to do business. Here is what the British Association of Removers now say:

“It is clear from the change of emphasis in the PM’s message of Sunday 10th May, that many industries are being encouraged to return to work, but only on the basis of it being unviable for them to work from home AND now having the ability to comply with the stipulated social distancing measures. Following its meeting this morning, the position of the Board of Directors of the BAR is therefore to suggest that a cautious approach to returning to operational activity may now be possible, although it remains the case in our industry that we are unable to comply fully with the social distancing measures outlined by the Government, and our Members must therefore take all appropriate measures to mitigate any associated risks.”

In addition there is the issue of the safety of getting to work if you do not have a car.

Johnson’s “good solid British common sense” is about observing social distancing under all circumstances, unless you are at work. I would suggest this is not common sense at all. It is significantly increasing the risk of transmitting the virus, at a time when the test, trace and isolate infrastructure is not in place, and infection levels are still high. If you don’t believe me, read what most scientists think. It is moving too soon in order to save the Treasury some money in the short term.

I say short term because in the longer term this will cost HMT more. It will surely raise R, which will delay the time when virus numbers come down enough for most people to feel safe interacting with others. Only then can the economic recovery begin in earnest. As I said in the Guardian article, the quickest way to restart the economy is to get the virus under control so infection levels are very low. This is classic Treasury short term penny pinching with a longer term economic cost.

Starmer in his broadcast put this clearly:

"We needed to hear that nobody would be asked to go to work or send their children to school without it being safe to do so."

That clarity was absent from Johnson’s statement on Sunday, and I suspect deliberately so. Martin Fletcher describes the Prime Minister’s rationale well here:

“Caught between those cabinet hawks and party donors who want to reopen the economy as fast as possible, and the doves who stress the need to save lives, Johnson has produced a muddled compromise that has pleased neither camp.”

This is miles away from how a government should relax a lockdown.

One reason why monetary policy is preferred by New Keynesians

I promised to write something on this some time ago, so this post is overdue. It was inspired by markets in Provence, where I have been for the last week. (hence lack of posts, and delay in publishing comments).

There are practical reasons for preferring interest rate changes (when possible) to changes in government spending as the stabilisation tool of choice, although the extent to which these are inevitable or just conditional on current institutional arrangements is an interesting question. Here I want to give an economic reason for this preference.

Imagine a monetary economy made up of independent producers, each of whom produces a unique good, where these goods are exchanged in a market. The government can be a buyer in this market, and transforms the goods it buys into useful public goods. Total consumption is what each producer chooses to buy from other producers in the market, plus the public goods they receive. Producers have preferences over private and public goods which are independent of income, and let’s initially assume that the government provides just the right amount of public goods so as to achieve the optimum balance between private and public consumption. Because people can choose to use their income to buy goods or hold money, there is potentially an aggregate demand problem.

Suppose, for example, individuals decide for some reason that they want to hold more money. They expect to sell their output, but plan to buy less. If everyone does this, aggregate demand will fall, and producers will not sell all their output. If goods cannot be stored, and if producers cannot consume their own good, this could lead to pure waste: some goods remain unsold and rot away. (If all producers immediately cut their prices, then a new equilibrium is possible where producers’ desire to hold more real money balances is achieved by a fall in prices. So we need to rule this possibility out by having some form of price rigidity.)

The government could prevent waste in two ways. It could persuade consumers to hold less money and buy more goods, which we can call monetary policy. Or it could buy up all the surplus production and produce more public goods, which we could call fiscal policy. Both solutions eliminate waste, but monetary policy is preferable to fiscal policy because the public/private good mix remains optimal.

Three comments on this reason for preferring monetary policy. First, if for some reason monetary policy cannot do this job, clearly using fiscal policy is better than doing nothing. It is better to produce something useful with goods rather than letting them rot. We could extend this further. If for some reason the impact of monetary policy was uncertain, then that could also be a reason to prefer fiscal policy, which in this example is sure to eliminate waste. Second, the cost of using fiscal rather than monetary policy obviously depends on the form of public spending. If the public good was repairing the streets the market was held in one year earlier than originally planned the 'distortion' involved is pretty small. Third, another means of achieving the optimal solution, besides monetary policy, is for the government to give everyone the extra money they desire.