Origins of a disaster

The FT reports that Johnson " is now convinced that the economy is facing a cliff-edge unless it starts to reopen." But as Simon says:

[This] is a tragic error, not just because it will lead to yet more deaths but also because it will delay any economic recovery...The idea that there is a trade-off between protecting the economy and protecting people’s health is not only wrong, it is also dangerous.

But why do so many ministers and their supporters believe otherwise? I suspect it's because of several errors.

One is the failure to sufficiently protect jobs and incomes. Yes, the furlough scheme is good. But it doesn't go far enough. As Eric says, the government could have returned last year's tax payments to companies and households - which would have done a lot to support the self-employed many of whom are suffering a lot. It could also have suspended loan repayments and rents.

Sure, the government could not prevent unemployment rising, if only because the lockdown is inhibiting job creation and hence preventing new entrants to the labour market from finding work. But it could have done much more to support incomes and hence given people greater security.

Of course, the lockdown means output must fall and hence incomes must fall. But in principle, all of this hit should have fallen upon the public finances rather than people. Or, to put it another way, the income hit should be smoothed out over decades and spread over all of us and future generations rather than be suffered by millions today.

In this sense, there has been a policy failure. Yes, the media would have us believe that Rishi Sunak is having a good crisis. But this is because it focuses far too much upon presentation and not enough upon policy. The standards for Tory politicians have fallen so low that being able to read a speech fluently suffices to make one a future PM.

But why was the policy response inadequate? Partly, it's because, as Eric says, "the failure of contingency-planning for a recession is unacceptable." This, I suspect, is a symptom of a widespread error - the neglect of tail risk, and failure to prepare for it.

It also reflects a continued fetishization of the public finances and aversion to borrowing. Of course, you don't need to be a modern monetary theorist to believe this is silly. With demand for gilts strong even at negative real yields, the government can borrow a lot and lock in low borrowing costs by borrowing long-term. What Keynes said in 1933 still holds true: "Look after the unemployment, and the Budget will look after itself."

I fear there's something else going on - the protestant work ethic. Protecting the economy from the lockdown means paying people not to work. Many people - not just Tories - are instinctively averse to this. Which is why unemployment benefits have been so mean for years.

Granted, there's an issue of horizontal equity here: is it fair to pay some people not to work whilst NHS workers are working flat out and risking their lives for low pay? But this can be solved later - for example by paying the latter a bonus.If your house is on fire, you put it out quickly and worry about tidying up the mess later.

But there's another mistake. The idea that lifting the lockdown will cause a strong rebound in economic activity assumes that we'll all return to pubs, shops and restaurants as normal once we are told to do so. But this is deeply doubtful. If the virus is still widespread people will stay at home out of fear. As Simon says, "nearly all academic economists understand that you cannot restart the economy without getting the virus under control."

The government's belief to the contrary arises from an error identified by Adam Smith in 1759:

The man of system... seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. (Theory of Moral Sentiments part six, section II ch 2)

It was this error that led New Labour to exaggerate the efficacy of targets because it under-estimated the extent to which these would be gamed. And it led Brexiters to think that leaving the EU would be easy - that as Michael Gove said, "the day after we vote to leave, we hold all the cards and we can choose the path we want." They under-estimated the extent to which the EU and Remainers in the Tory party, had principles of motion of their own and were not mere chess-pieces.

It is, of course, true that the government has mishandled this crisis from the start and is still mishandling it. Such mistakes, however, are not mere accidental, contingent quirks. Instead, they arise from a systematic ideology - and in some respects, one not confined only to Tories.

Comments

[Kevin Carson]

It could also have been dumped on public finances in a much more painless way. The idea that government spending has to be covered either by tax revenue or the sale of interest-bearing debt, rather than simply spent into existence, is Walpolean/Hamiltonian bullshit. There's no reason the state couldn't simply create enough new money, interest-free, to support furloughed workers' minimum necessary consumption and deposit it into their checking accounts every month. There's also no reason they couldn't simply cancel rent and mortgages for the duration, let the banks take the hit, and convert any banks that default into public institutions.

[The truth]

Your article is premised on the assumption that the lockdown has saved any lives so it should be maintained.

The dawning reality is that lockdown has damaged the economy and has not saved any lives. No government will admit that obviously hence the new rhetoric

[Ralph Musgrave]

"The furlough scheme is good"?? I fail to see the logic or fairness on one lot of people getting bog standard unemployment benefit, while another lot, whose circumstances (like number of children) are just the same as the first, get a lot more thanks to be being "furloughed".

[Dipper]

'the truth' would seem to be correct here.

The government had a plan. The media and assorted people with anti-government axes to grind launched a hysterical onslaught which forced the government to change policy from one with a logic to one with no logic. And now those same people are complaining about the consequences fo the policy for which they are responsible.

The performance of most of the media and many left-leaning academics has been absolutely lamentable, so bad that many of them will never be able to express a view in public without the failure of their Covid rants coming back to haunt them. To be specific, at the point where many are claiming that easing restrictions will cause a second wave, we have many examples from Europe of lockdowns being eased much more than the government here are planning without any cases of a second wave. If your job is to be a pundit, then one massive error sinks it forever. Well, here's hoping anyway.

And Ralph is right too. Teaching unions should not think that their cunning plan to spend three years not working but receiving full pay has not been noticed by the wider public. But then a certain kind of lefty thinks we can have massively high standards of living as a right without anyone doing any actual work.

[Paulc156]

Talking about 'other countries' easing lockdowns faster without a 'second wave' seems immune to our reality which is we would be/are easing from a worse position than many other countries, so making a long drawn out continuation of this wave more likely. And with almost daily u turns and target gaming being implemented by this hapless government a sizeable number of people can't or won't trust a word they now say.
The schools issue isn't simply unions (yes sadly for righties it isn't a complete free for all for employers in the UK ala Dickens era) being greedy and stubborn. My wife works in an East London (11 to 17yr olds) school. The head (who is quite antagonistic toward the unions on other matters) and the governors agreed weeks ago not to reopen before autumn term as it is impossible to socially distance in a Victorian built school with narrow corridors and only one main entrance. Blaming unions is at best a partially irrelevant indulgence.

[Dave Timoney]

"But then a certain kind of lefty thinks we can have massively high standards of living as a right without anyone doing any actual work."

This is pretty good example of the tenacity of the Protestant work ethic.

Wealth is cumulative (the Earth is a closed system), which means society has far greater resilience than in the days of Adam Smith ("There is a lot of ruin in a nation"). As the pandemic has proved, we can stand down a large part of the workforce without suffering a major reverse in aggregate wealth. It has also shown that the workers of most value are often the worst paid.

Going forward, the point is not to aim for a workless society of lotus-eating & robots, but one in which work & income (& accumulated wealth) is more evenly distributed and environmental & other externalities are reduced. The Protestant work ethic is probably the greatest impediment to achieving that.

[George Carty]

Dipper: "The government had a plan. The media and assorted people with anti-government axes to grind launched a hysterical onslaught which forced the government to change policy from one with a logic to one with no logic."

1. Wasn't the UK government coerced into introducing a lockdown more by President Macron's threat to close France to UK citizens (with the implied threat that other EU states would follow suit) than by any action on the part of the media or the government's domestic critics?

2. Wasn't the actual original strategy a test-and-trace one, which was dumped on March 12th (perhaps due to the influence of a document from 2007) because there were too many cases for the testing infrastructure to handle?

https://twitter.com/kadhim/status/1245435477647294464

[Dipper]

@ George Carty

1. Maybe. But lots of pro Lockdown people used that as a stick to beat the UK Govt with.

2. Originally tried but became clear the virus was already here in quantity.

Is seems odd for the author to simultaneously claim the UK economy is being trashed by the Lockdown, and that the government should have deepened the lockdown more.

[Dipper]

Oh and 'Simon' is as usual making statements without any evidence, or frankly, any clue about the science.

Economists think they can do science. As this pandemic has shown, they really can't. Nothing, absolutely nothing, in Economics, passes the threshold test for valid scientific observation.

When at the turn of the 19/20th century Classical Physics was having problems with high speeds, it wasn't solved by the majority opinion of reasonable people, it was solved by one very unreasonable person proposing something very unreasonable and intuitively ridiculous: That if I am stood stock still and you are overtaking me at a speed v, and light is coming towards us, then the speed of that light as it appears to both of us is exactly the same. So if I see the speed of light as c, you don't see the speed of light as c+v, you also see it as c. It is intuitively and obviously completely stupid, but is the explanation that explains all we observe. And that is why science is not like the humanities or economics.

[Bert Schlitz]

lol, the protestant work ethic was the jews printing money and giving it to the Aristocracy who then hired a nice nice fleet of indentured servants and slaves to do all the work. The tradition of the Germanic/Celtic people is tribalist by nature. Not individualist. Right Wingers need to give it up. Stop the conspiracy theories and stop acting like your "white saviors". We ALL know who finances you. Who runs you and who moves you for power. Your the New World Order's version of special forces. Make sure the good little house slaves continues to be that. Keep on printing the money, keep on thinking your "strong workers".

The con of a con........of a con. Listen, mitigation should have been the only real option. This isn't "Contagion" style super bug, but it still is a bug. When the UK celebrates its 100000 death next March, lets all give a grand welcome to shitty governments that weren't screaming "mitigate" in February. Not one country would have ever shut down.

[Bert Schlitz]

dipper give it up. maybe Boris can hide some more immigrants from Africa his rich friends want. he already is doing that like his buddy Donald the jew Trump.

[Robert Mitchell]

> is it fair to pay some people not to work whilst NHS workers are working flat out and risking their lives for low pay?

Just pay everyone a $3000 per month inflation-protected basic income and let those who want to, work.

> "the failure of contingency-planning for a recession is unacceptable." This, I suspect, is a symptom of a widespread error - the neglect of tail risk, and failure to prepare for it.

The central bank has a vertical supply curve on reserves, which should be used to address tail risk. Private banks rely on the central bank as tail risk insurance. Policy makers however maintain the fiction of "no free lunch, which has the opportunity cost of not using the central bank for tail risk. The private sector experiences no such opportunity cost ...

[Bert Schlitz]

Central Banks can vertically supply all they want. That just devalues capital. Once its devalued enough, the market plunges.

Capitalism died with WWI essentially. The low hanging fruit from the scientific revolution was over and capital expansion was simply not possible anymore without getting into full blown ponzi finance(which was the feature of the system since 1700's anyways, but all the new tech eventually created a rebound). The Michigan banking panic in the US, that started in February 33 was the next global contagion. It would have deep sixed it for good.

[Robert Mitchell]

The market only plunges so far before the Fed starts printing again to revive it ...