Covid-19 – Page 2 – thinking liberal

The two worlds of post-lockdown Britain

On Monday the Prime Minister, Boris Johnson, happily announced a tranche of relaxations of England’s lockdown restrictions, to be timed for 4 July. The public weren’t going to wait, flocking to the country’s beaches to take advantage of a few days of sunshine. I took the first picture here in Broadstairs, Kent on 31 May, thinking it was crowded (we had become used to this beach being deserted), but look at yesterday by comparison. The country seems to be making a dash for normality. Disappointment lies ahead.

The relaxations come after some hefty lobbying by businesses, who are experiencing huge strains. They highlight a legitimate concern, as many jobs are under threat as businesses face the danger of folding. Public finances are under strain too, though by how much and why remains a matter for debate. But the problem is a deadly virus for which there is no vaccine or cure, not overzealous lockdown regulations. So if you don’t want to risk catching the disease, and the prospect of a horrible death, just how safe are you being made to feel? The country is dividing on this question.

I have heard quite a few lobbyists for the hospitality industry on the radio. For the most part they do not inspire confidence. They are anxious to abolish the two-metre social distancing rule, but are reluctant to explain how they can still be safe. Some of them even grumble about the idea that they would have to keep records of all those attending their establishments, even though this is an obvious quid quo pro to relaxing distancing requirements in the high-risk settings that most of them obviously run. One expert offered a list of potential mitigations for reduced distancing: not facing people, masks, reducing time of contact, low noise levels so that people can talk softly. Not much of this helps if you are indoors in a pub or restaurant, although if customers are seated at tables only with members of their isolation group, then at least you won’t be facing others. To be fair some hosts on television are doing a better job of explaining themselves: instead of whinging about the rules they are showing viewers all the precautions they are taking to make people feel safe.

But a lot of people don’t really care. They are fed up with confinement, and note the reduced prevalence of the disease, and therefore the reduced risk of catching it. Many are younger and fitter people who feel less at risk of suffering badly. Many also draw confidence from other countries where restrictions have been relaxed. They miss two aspects of these overseas examples. First is that in the more successful countries they applied relaxation after they had beaten back the disease further than England has, and that even then they have had to identify and manage local outbreaks. And England’s track and trace infrastructure inspires little confidence that it is up to this task. The second is that in other countries that have relaxed (notably in some states of the USA), they are moving headlong into a relapse. Two things about the epidemic strain our intuitive way of understanding the world. First is the time lag between picking up the disease and diagnosing it, then between diagnosis and hospitalisation, and finally between hospitalisation and death. The second is the exponential nature of the spread, and the way a small number moves very rapidly to a big one and so the need to intervene when it feels too early. This is what led to some countries failing to take the disease seriously enough until too late. It is clear that the US President Donald Trump, ever the intuitive leader, struggles with both these things.

But while one, very conspicuous, group are making a headlong dash for normality, another, usually older and more vulnerable, group remain very frightened. They are staying indoors, so remain nearly invisible. But this applies to my household and many others that I know. This is both good and bad news. The good news is that if this group stays out of trouble, then the most vulnerable people will be protected, keeping hospitalisations and death rates down. The bad news is that this large number of often quite high-spending people will not be the free-spending agents needed for a full economic recovery. And if infection rates start to rise, they will become even more scared.

All of which gives an impressive of a government that doesn’t think things through. If it wanted to tempt older people back into shops and other facilities it needed to work a bit harder to reassure them. The words are there but the body-language isn’t. For example the government says that the 2-metre rule is replaced by “one-metre plus”. The plus is meant to suggest alternative mitigation, and yet this has been totally drowned out in the messaging. If it had been combined with a clear directive for people to wear face coverings in virtually all indoor settings, then it might have been easier to convey this. Instead they promote the idea that the risks are reduced so you don’t need precautions like masks; of course they don’t say that, but observing people around me that seems to be what is happening. And the problem about masks is that everybody needs to wear them for it to work. It is no use if just the worried people do.

Still, the government has probably bought itself a month or two before any obvious problems emerge. And then it looks likely to face a twin threat. A faltering economy as the worried sit on their savings while government support schemes, like furlough funding, run their course. And rising infection rates working their way slowly but surely through the system, beyond the country’s capacity to contain it on a local level. I really hope I’m wrong.

Henry Ford’s shadow: from France 1944 to Covid-19

A Sherman tank of the US Third Army in WW2

In September 1944 the US Third Army under General George Patton approached the Eastern French city of Nancy. Its vehicles, notably Sherman tanks, had driven there under their own power after landing in Normandy in July. And not by the most direct route: the army pushed south from Normandy before turning east. This journey of hundreds of miles, with rail networks unavailable, had taken a very low toll on the army’s vehicles, including the Shermans. The Germans were organising a counterattack. But their Panther tanks had to make the trip mostly by rail, subject to Allied air attacks, and a third of their strength broke down while driving the 30 or so miles from the railhead to the jump-off point.

This was a triumph of US engineering and industrial organisation. The Panthers had a much better gun and thicker armour than the Sherman, but that was no use if they couldn’t make it to where they were needed. American industrial superiority was repeated everywhere: air, land and sea. Robust, well-designed weapons were put into combat in overwhelming numbers. The Germans produced clever designs in all these fields, but their artisanal industrial organisation led to unreliability, limited production capacity, and often, as in the case of the Panther, designs that were hard to fix when they went wrong. The Americans outshone their German and Japanese enemies and their British allies. Only the Soviet Union could compare. The Russians could not match the Americans’ production quality or sophistication, but their designs were robust and factory output reached the battlefields in vast numbers. They didn’t need to last long when they got there. Only for lorries did the Soviets crave those vehicles made in Detroit.

It is often assumed that the way the Americans and Russians outproduced their enemies was just a matter of scale and resources. But that is not so: superior industrial organisation was necessary for those nations to respond with the speed that they did to the German and Japanese onslaughts. They also needed strong military organisation and tactics: and both nations also had these, though the German methods continued to outshine both until mid-1944. But the lessons of military organisation were quickly forgotten when the war ended, whereas industrial organisation was needed to win the peace. It is no wonder that the way their industry won the war so dominated public policy in America and the Soviet Union, and in Britain too, as it tried unsuccessfully to emulate American prowess.

And what was the American method, successfully used also by the Russians? It was the production-line, developed in the motor industry by Henry Ford. Its key features were the use of standardised designs (“Any color as long as it is black”), simplified as far as possible, high technical specialism in the workforce, segregating human tasks so that minimal skill was needed, and a highly centralised, hierarchical command and control structure. And above all it celebrated economies of scale, the expectation of which became the standard for business and political elites Small was regarded as necessarily inefficient. It is an approach suited to those with an imperial frame of mind, so it is not hard to see why it was popular with Russia’s Communist leaders, and even in post-imperial but backward-looking Britain. It is interesting that it took such hold in democratic America, but the scale of that country invited imperial thinking too amongst it is business leaders.

But the Henry Ford method has weaknesses. It is slow to respond to change, and becomes very inefficient where a feedback loop is needed between user and supplier, or any area where complexity is built-in. Bottlenecks, delays and queues become routine. Furthermore organisations built around the production-line mindset, especially outside the urgencies of wartime, become ossified, divided into fiefdoms that fail to cooperate. But leaders remain locked into its thinking. When things go wrong, the management response is to tinker, by adding bureaucratic controls that slow things down and promises that lessons have been learned that always disappoint in their results. That the Henry Ford method was failing first became apparent when Japanese manufacturing started to outcompete American and British firms in the 1960s and 70s. At first this was put down to “cheating”: underpaid workers doing excessive hours, and so on. But then managers started to realise that the Japanese had been adapting their manufacturing techniques using an idea referred to as “Total Quality Management” (TQM), which involved much more delegated decision-making, and organisation-undermining cross-departmental teams. This realisation came too late for most of British manufacturing industry, with the motor industry weighed down by mediocre management and bad industrial relations, often driven by demarcation disputes, a common outgrowth of Fordism. The new ideas were beyond the imagination of management and union leaders alike. America embraced the new ideas more successfully, notably by Jac Welch’s General Electric in the early 1990s.

But the world was moving on, as Baumol’s law started to diminish manufacturing industry’s economic importance, just as it had done to agriculture a century before. Service industry became critical, and services are less easy to fit into a standardised mould. At first management thinkers adapted their manufacturing techniques, arguing that services were just another product. But by the mid 1990s thinking had moved on to an idea that was centred on a service mindset, where manufacturing products were seen as just another service. This was Business Process Reengineering (BPR). The user experience became central to business organisation, delegated decision-making critical, and layers of hierarchical management were dismantled. This was catching on just as I was taking responsibility for a mediocrely performing organisation administering savings plans. I used it to reorganise everything, doubling productivity and improving quality of output too (actually, that was linked). This was a heady time in management thinking, with optimistic “both and”, and “win-win” ideas taking hold. In Britain the most eye-catching business using BPR was Virgin Atlantic, offering a superior travelling experience at a reasonable cost. It even infected Tony Blair’s New Labour, who took on the heady optimism of leading business people, with the idea of “Stakeholder Capitalism”. Mr Blair’s subsequent period in office showed that he had no idea about what all this actually meant, however.

But then things turned darker. The rise of the internet was the most eye-catching aspect of this: but there is no reason that this should have undermined BPR thinking. A bigger issue was the rise of cheap labour in Asia, which new technology could help tie into longer supply chains. Meanwhile managers were bewitched by the idea of “Shareholder Value”, which quickly pushed away the fuzzier and more inclusive thinking of Stakeholder Capitalism. This legitimised management and shareholder greed and corporate empire-building.. The customer experience was given lip service but not priority. Ryanair replaced Virgin as the airline success story.

And Henry Ford made a comeback, with a twist. That was that businesses embraced outsourcing (Ford wanted his organisation to do everything itself), which improved communications technology now enabled. But hierarchical management, standardisation, deskilled work (preferably done by robots) and economies of scale reestablished themselves in the way managers thought about organising work. New technology, it was thought, could make up for Fordism’s defects (more recently with high hopes being placed on artificial intelligence). Conservative ministers in Britain accepted this without question as the remade public services by reorganising and outsourcing to firms that embraced the new Fordism.

Which brings us to Covid-19. A lot of the way Britain has organised itself to meet the challenge reflects Henry Ford thinking. This particularly applies to testing, but also to PPE procurement and the contact tracing system, which has been outsourced to one of the usual large-scale suppliers. And the weaknesses of the Henry Ford approach have become evident. Queues, delays, bottlenecks; promises made by management that cannot be kept; bureaucracy being added in to try and make a broken system work better.

But some countries never fell for Henry Ford ideology. Service efficiency is legendary in Switzerland partly because they never embraced large-scale thinking, and they know instinctively how organise and delegate decisions so there are no delays and queues. Germany stuck with its artisanal, delegated approach, with much of its modern industrial prowess driven by medium-sized companies, which Forders would dismiss as being sub-scale. In German Covid contact-tracing is done by small local and professional multi-functional teams who carry out their own tests; in Britain newly recruited tracers helplessly sit by their computers waiting for referrals to come through, while their German counterparts are kept busy, using local knowledge to solve problems. British political and business elites fail to comprehend. It is probably too much to hope that Henry Ford’s ghost will be one of the casualties of Coronavirus.

Are buoyant stock markets a sign of financial trouble ahead?

I have written before about how well many stock market indices have performed, notwithstanding the pandemic. That good performance has continued, with the US S&P 500 reaching record levels last week. This is puzzling, and might be a sign of a crisis in the making.

What is clear is that few, if any, of the world’s economies are going to shake the crisis off quickly. A rapid partial recovery from the depths of the lockdown is more than plausible, but it is hard to see things getting all the way back to normal. Consumer demand, the main driver of modern economies, looks to be dented for the long term, as many of the public, older people in particular, remain cautious, even if most lockdown restrictions are completely lifted – which they won’t be. You can take a horse to water, but you cannot make it drink. And, of course, a lot businesses are going to fail because of the lockdown, meaning that a lot of people will be put out of work. Meanwhile many businesses and public agencies will suffer a significant loss in productivity as safety measures continue to be in operation. While that might benefit jobs, it implies reduced living standards too, which will also make it hard for businesses to bounce back. The prospect of a vaccine being universally available is distant. The whole world cannot eliminate the virus like New Zealand has done, at the expense of cutting itself off from the rest of the world.

So if the economy is unable to bounce back to where it was in December 2019, why are stocks doing so well, after they fell so far earlier in the year? The obvious answer is that investors have taken leave of their senses, falling for optimistic stories peddled outside the mainstream media. Well I have seen such craziness take hold, back in the late 1990s with the tech boom, but this does not look like it. There must be a more rational explanation. I can think of two, and neither are good news.

The first is that not all companies’ share prices are doing well, and the rise in well-publicised indices is based on large companies who are expected to do well out of the crisis. Companies like Amazon, Microsoft or Alphabet (i.e. Google). When businesses fail, others benefit. The crisis will provide stronger companies with opportunities. The stock market indices are not a representative cross-section of businesses in the economy, but a collection of the bigger ones. But for this to justify such a high level of price gain, it means that investors think these businesses will be able to take advantage of their market dominance to raise prices. In other words, the wreckage left behind by the crisis will lead to widespread price-gouging, which will benefit the companies represented in the indices. This would be bad news because it means that yet another dent in productivity that will reduce living standards of everybody except the lucky. I don’t think this is very likely, but it is plausible that this is what many investors think will happen. There would be parallels with the tech boom of the 1990s if so.

The second possible explanation for high stock prices is an idea I have read in quite a few commentaries. It is that investors “have nowhere else to go” except to put money into shares. In other words, there is a savings glut, and the alternatives to shares look a worse prospect. There is plenty of reason to think that there is a savings glut. Many people are saving more as a result of the crisis, because there are fewer opportunities to spend, while incomes are being propped up by government support schemes. Meanwhile businesses, with a few exceptions like pharmaceutical companies, are cutting investment due to uncertainty. More saving plus reduced investment means a glut. And many people have suggested the world economy has been stuck in a chronic savings glut for the last couple of decades anyway.

The main alternative investment to shares, if you are are looking for a home for trillions rather than mere billions of dollars, is bonds. But interest rates on public debt have been cut to minimal, even negative, levels as part of the monetary response to the crisis. This means almost no prospect of a positive return either from interest payments or capital gains (which would require interest rates to fall even further). Some private companies have bonds offering higher yields (i.e. ratio of interest to price), but that is because of a higher risk of default. These do not look an attractive prospect in the current environment.

Which leaves either keeping the money uninvested in bank accounts, or investing in shares. A lot of people are keeping their money in cash, but this suffers a similar problem to bonds: low interest and no capital gain. Which leaves shares, whose price then rises because demand exceeds supply. That does not necessarily mean that shares offer a better return in the long run. Most investment decisions are not made by people for their own money, but by middle men such as investment managers. They need a good story rather than a sober assessment to justify their decisions. One advantage of shares is that it is very easy to spin a story, and picking crisis winners, as well talking up a rebound, might be just such stories.

But the savings glut explanation is bad news. It is not a stable situation because it implies that demand is being sucked out of the economy. This is one of the standard principles of Economics that is taught in undergraduates’ first year (the so-called Economics 101). It is what caused economic depressions before the economist Maynard Keynes showed that governments could offset this with deficit spending. Governments are indulging in deficit spending to an extent that is unprecedented in peacetime, but the rise in stock markets seems to be showing that they are not doing enough, or rather that their interventions are being parked in savings rather than spent.

How might this play out? The financial system is under a high level of stress. Levels of private and public debt are very high in most of the major economies. Private debt is the most likely breaking point, both in terms of bond default and bank bad debts. This vulnerability plays out in different ways in different countries, but the USA, the EU and China all look vulnerable this time in their different ways. Britain has its own vulnerabilities too, with a high current account deficit, a badly managed epidemic and full departure from the EU about to impact later in the year. This could then lead to a more widespread financial calamity.

The Great Financial Crisis of 2008-2009 was preceded by over a year of unreality, when the nature of the crisis was exposed, but markets were in a sort of stunned disbelief. It was like a supersaturated solution waiting for speck of dust to start a mass crystallisation: the Lehman Brothers collapse was the speck of dust. I was scared enough in 2007 to move my pension fund into index-linked government stock – so I’m not using hindsight here. The situation now is different, but I think the same sort of unreality is present. This will be a very different crisis if it comes.

I don’t think that most countries will suffer a 1930s style depression. Governments will have to intervene big, but they can and look ready to do so, though this will be more complicated in the EU. My prediction is that this will not just take the form of measures to stimulate demand, but interventions to keep businesses going.A lot of wealth will be destroyed. It will be a great moment to be a socialist.

Have I finally succumbed to cabin-fever? I have noticed more than one columnist I respect going a bit off the rails (look at Matthew Parris in The Times this weekend). I will have to leave that to you to judge!

We need to escape 2m social distancing. We are going about it in the wrong way.

The UK government, in its capacity as the English government, has been easing the Coronavirus lockdown steadily over the last couple of weeks. Generally the public has been one step ahead. The picture shows the scene yesterday at one our nearby beaches yesterday; you would be pushed to find any difference from a normal day half-term week in May. The public toilets were open (big queues, no social distancing), and you could hire a windbreaker, buy ice creams and no doubt many other things too. Is this all happening too quickly?

Meanwhile, the scientific advisers seem to be behaving more and more like economists, and not always in a good way. They are very attached to their models predicting how the out break will develop. Abstract aggregated measures, especially the Reproduction or R-rate, are treated as if the are real, tangible things, rather than statistical abstractions. In one way they don’t behave like economists, though. They accuse our leaders of taking political decisions because they go against their advice. On probing them, it turns out that what the scientists mean by this is that the politicians are weighing up factors like the economy and mental health. Stuff that is somebody else’s problem for the scientists. Economists need no excuse to barge into somebody else’s field.

But even taking a broader view, the scientists have a point. The prevalence of Covid-19 is greatly reduced, though it is very hard to get a decent fix on this, given the weaknesses in the testing regime. This means that the risk of catching the disease is now quite small, depending on where in the country you are (though apparently the regional variations aren’t that great). But this low risk is precisely what led to complacency at the start of the epidemic. The countries that locked down early (i.e. before they had a visible problem) are the ones that have suffered least; Britain has one of the worst Covid-19 death rates on any country in the world.

The problem is this: living with the virus is very hard if it means maintaining 2m social distancing. So many activities become impossible: restaurants and bars for example, unless customers can stay outside. Reducing this distance to 1m, as I heard former Chancellor Norman Lamont suggest, is a bit of a nonsense. If you are indoors and with somebody for more than 15 minutes, then the risks escalate. This is what bars and restaurants are for, and you can’t mitigate them by getting everybody to wear a mask, as you can on a bus or aeroplane. 2m is probably not enough in this environment. Which is very bad news not just for those us dying to eat out again, but for the huge numbers of people employed in hospitality. At the same time shops, factories and the businesses can’t maintain their previous productivity.

The aim has to be to not have social distancing rules at all. How do you achieve this? The first step is to get infections down to a very low level. Much lower than is prevalent in any part of the UK at the moment. Then you implement a rigorous track and trace system, to identify and isolate anybody who has the disease. Extra regulations are required where people congregate in an enclosed space period of time, so that everybody can be rapidly identified if one of them turns out to be infected. People coming into the country need to be tested on arrival, with results coming back in 24 hours while they wait somewhere safe. This is all well-trodden territory for countries like South Korea, for example. This is not life returning to normal by any means, but it is much better than trying keep everybody 2m apart.

The loosening of the lockdown being implemented in England (and at a slower pace in other parts of the UK) may well not lead to a rapid escalation, as many fear. There seems to be a lot less danger associated with being outdoors, especially if it is sunny (and also, for different reasons, I suspect, if it is wet). 2m social distancing may be impossible all the time on beaches like the one in my picture (the family groups sitting and sunbathing are OK – but the problems are when you are moving around), but the risk is probably very low. Shops and schools, now opening up, are probably not very risky either, with the mitigation measures in place – though we need to be careful about people that work there. But if there is no major escalation, it seems unlikely that the opposite will happen either: that we can get infections down to the level where social distancing can be dropped. The danger is that Britain will be stuck in a no-man’s land between emergency levels of the disease and being on top of it.

Alas Britain’s problems don’t end there. The government has still not mastered the logistics of mass testing, and of large-scale track and trace operations. The press is full of things going wrong, and especially of test results taking a very long time to come through, as well as difficulties in getting the tests to people that need them. To me it smells very strongly of an over-obsession with economies of scale – which lead to problems in linking the bits together. Much can be learned from the decentralised organisation of Germany, for example. Getting this infrastructure working properly is critical to moving beyond the world of social distancing. The bad news is that the people in charge don’t show any real grasp of what is causing the problems, and assume they can be solved by working a broken system harder.

Which means that the UK’s dismal record on tackling the Coronavirus is likely to continue. Well at least we aren’t Brazil.

Suddenly then gradually is how the economic downturn will be

On Friday (1 May) I was astounded to hear that the US stock market index S&P 500 had its best month since 1987, after its dramatic fall in the earlier months of the year. I was aghast when I further thought I heard that it had recovered practically all its lost ground in 2020. That reinforced an impression that many people are in denial about just how bad things are, especially in America.

Some notes of caution before readers rush to sell their American shares, or short the index. The S&P 500 was in fact still 13% below its starting point at the end of April, and fell nearly another 3% on that Friday. I probably misheard a comment about the tech-heavy NASDAQ, which was just 2% down. The movements of share prices arise from dark forces, whose nature only becomes apparent long after the event, if ever. Newspaper headlines attributing movements to some coincidental event (on Friday it was trade relations with China) are just speculation. There may well be a much more rational explanation for the stock index level other than delusion. Though it still looks like a long-term “sell”.

The impression of delusion was heightened by statements, from the President among others, that the USA is past the peak of the virus outbreak, and many states are relaxing their lockdowns. In Britain the Prime Minister, Boris Johnson, has been saying the same thing about being over the worst, though still very reticent about relaxing the lockdown. Economically at least, however, the world’s troubles have only just begun. The troubles are in several layers.

The first issue is that the virus has proved itself to be both very infectious and deadly, and it is still very far from beaten. The relaxation of restrictions in the USA is most likely to result in a surge of infections that will overwhelm the hospitals in the states where it happens. This is a complex business, and some US states may not in fact be very vulnerable, because their populations are very dispersed and populations relatively static. But that does not apply to many of the states relaxing restrictions, such as Georgia. In Europe each country is wrestling with how to relax the lockdown, without reigniting the crisis. Only a small number of states (and not in Europe) seem to be able to relax lockdown significantly, and that only by drastically limiting travel in and out. It will be impossible to get back to normal until a freely available vaccine or cure is found and distributed en masse. That’s a long way off.

The second issue is that this crisis is a global one; no country will be able to bounce back and lead the recovery. In the Great Financial Crisis, a relatively small number of countries took the initial brunt (the USA and Britain mostly); others (in particular other European countries) suffered in the aftershock, but while the initial impacts had stabilised. Across the globe countries were able to launch a massive stimulus to use up the spare capacity created by the crisis, with particular credit to both the USA and China. This will not happen this time; both of these countries have had suffered severe shocks to the supply sides of their economies, which limits their ability to carry out effective stimulus. States across the world are intervening massively to limit the economic damage of the pandemic, but this is strictly damage-limitation. Reversing much of the damage already done is another matter.

And this leads to a third problem, which is the biggest of all. The world is coming to the end of one of its 40-year growth cycles, and the crisis is about to cause a deep unravelling of the growth model that drove it. They old tricks don’t work any more, just like Keynesian stimulus did not work in the 1970s.

The current growth cycle began to take off in the 1980s. It was driven by three main things. The first was continued productivity growth by developed world businesses, partly through the application of new technology, and partly by a ruthless cutting away of “slack” regardless of whether this represented waste or sensible resilience. One feature was the extensive use of outsourcing, and the stretching of supply chains. The main problem with this steady transformation of business was that the rewards were skewed towards the owners of capital and the top managers and their advisers, and not most of their workers. The second growth driver was steadily increased consumer spending, driven by steadily increasing private sector borrowing, in turn linked to increasing property valuations. This allowed the mass of consumers not benefiting so much from the productivity gains to nevertheless keep growing their consumption. The problem with this is that it is not sustainable in the long term – but as the saying goes, tomorrow never comes. The third factor was the entry of the less developed Asian economies as a source of cheap labour. Japan was the first, followed by Korea and Taiwan, and then China and India. It is important to note that this development was not exploitative for the most part. Those Asian economies benefited hugely, which allows those taking a world view to say this 40 year cycle has been by far the most beneficial to humanity (if you gloss over environmental impact). What was happening is explainable using the ancient economic principle of comparative advantage, and benefited both sides. What people did not appreciate at the time, and for the most part still don’t, is that these gains are time-limited. As the developing nations catch up, their labour increases in price, and so the developed world ceases to benefit. And so it has been as China in particular closes the gap.

The whole system is now unravelling at speed. Just how much developed world industry has been relying on reduced resilience to get next year’s increase in profits is only now becoming clear. As an illustration this Economist article on the US meat industry shows how scary it can get. And, of course, reliance on cheap foreign labour to keep prices down looks like a bad bet too, as hospitals scramble to find masks and gowns to protect their workers. But the most worrying development in terms of its potential impact is that the shock will puncture the ever growing cycle of consumption, debt and property values.

What this amounts to is a prolonged and almighty economic slump. Demand management through government stimulus will only help so far because the crisis is killing productivity and supply. What will emerge from this is hard to say. Many hope that it will be a kinder, more sustainable and more equal economic system. But there are other possibilities of course. I have written before that there will be a huge impetus to get back to familiar world of before, and this will undo many of the short-term hopes raised by the crisis. But over the longer term something better is possible.

“Gradually and then suddenly,” is the famous Ernest Hemingway quote about bankruptcy. With this crisis it will be the opposite.

The political consequences of Covid-19 depend on what the government does afterwards

There has been an understandable rallying round by the public during the Covid-19 crisis. Here in Britain, as in most places, the governing party has seen its popularity rise (the main exception is the USA). Will this last?

As with so much else in this crisis the answer seems to depend on which party you supported in the first place. Conservatives think they will keep the opposition parties on the back foot for the long term. The obvious precedent is the Falklands War in 1982. In spite of the initial calamity, which could be blamed on a careless government, people rallied to the flag. Mrs Thatcher’s Conservatives had been doing very badly in public opinion polls beforehand, but they won a landslide in the next two elections.

Opposition supporters, on the other hand, think there will be a reckoning as the dust starts to settle, and the government’s handling will be judged as inept. We are starting to see signs of a concerted assault on the government this weekend. The Sunday Times is running a story claiming that the government failed to follow scientific advice at the start and lost five weeks in its initial response. Kier Starmer, the new Labour leader, has joined in, after being reticent beforehand. Will the charges stick?

I certainly think the government made a false start. Contrary to what is repeatedly being said, though, this was not because they were ignoring scientific advice. That advice was muddled and contradictory; there were plenty of senior science types who backed the government up, though others were urging an earlier lockdown. There was a disastrous dalliance with the idea that the country should allow the virus to spread and build herd immunity; this was following one of the many strands of scientific advice. What was lacking was political nous. Politicians, not scientists, should be the experts on what the public will accept, and how best to communicate what the government wants it to do. The reason why so many governments went fast and hard for a lockdown in other countries was mainly political. It was a very simple message to communicate and it made them look decisive. Boris Johnson, the prime minister, showed poor judgement and has nobody else to blame.

But once the government grasped that the critical issue was not to overload hospitals, they started to do much better. The NHS built up capacity in intensive care with impressive speed, and, unlike in Italy, they have not been overloaded. The whole chain from reporting symptoms to admission to the ICU has been thought through and works (unless you live in a care home, unfortunately). Two issues nag, apart from neglect of care home residents: the slow rate of testing and the lack of personal protective equipment (PPE). Both partly go back to the government’s slow start, as other countries got ahead of the UK in stressed global markets. There has also been organisational ineptitude, especially in the case of testing. Public Health England, in charge of the testing (not actually part of the formal NHS) seems to have been using methods copied from Soviet Russia. They have been slow to take up available capacity, and getting the tests to the people that need them has been not been given much thought. Most people are expected to drive themselves to facilities set up in car parks, and even this is badly managed – I was caught in a 20 minute traffic jam outside the facility set up in Chessington World of Adventures, which I just wanted to drive past, and which would ordinarily handle much higher volumes with no disruption at all.

Still, the public probably don’t think anybody else would have done better – it doesn’t bear thinking about what would have happened if Labour had won the election last December and Jeremy Corbyn had been prime minister. I suspect the attacks on the government will resonate with the usual suspects and change few minds.

Much more important is what happens as the crisis subsides. There are some tricky decisions ahead about how and when to release people from the lockdown, but I don’t think the government is going to get this badly wrong. For all the criticism, it is managing the issue quite sensibly. The real risks are when life starts to return to normal, and the government works out what to do next.

Top of the agenda is our old friend Brexit. The government insists that it will not ask for an extension to the transition period, which ends on 31 December. It evokes too many bad memories of how Theresa May’s government lost control; there is also a powerful myth in the government’s inner elite that delaying deadlines weakens the government’s negotiating position. This is risky; the country is likely to plunge head first into a hard Brexit that could be very disruptive. On one view it would be throwing salt onto the woulds left by the pandemic; on another the pandemic will have dome so much damage already that few people will notice. We’ll have to see.

Next comes the economy. This deserves a separate post. The signs are that damage to the pre-crisis economy will be severe and there will be no quick bounce back. Also government finances will be in tatters. The challenge will be to make sure that panic about the latter does not prevent action about the former. With ultra-low interest rates, government finances are not nearly as scary as they will look. The early signs are that the Treasury has learnt from its mistakes after the Great Financial Crisis, and ministers are not ideologically averse to throwing government cash around. That should prevent catastrophe; the public will forgive a degree of recession.

But the big issue will be catching the zeitgeist of how to change things after the crisis. In my last post I said that people will want to get back to where we were before. But there will still be some shock and reevaluation; the public will expect more than a shrug. What to do about the working-class heroes of the crisis, the nurses, hospital workers and care home workers, will be central. There is a public perception that these groups are undervalued by society. But what to do? Paying them more will be very expensive on public finances and almost certainly need more taxes to balance it. If the government picks up and runs with this idea they could prove unstoppable at the next election. It would mean trashing 40 years of Conservative ideology. But that doesn’t mean it won’t happen.

Alas other issues thrown up by the crisis, such as the precarious nature of so many jobs, and the poor housing conditions of so many of the less well-off, will be rapidly forgotten by most people, and the government will take little or no action. A more interesting question is whether people will feel more sensitive to environmental issues, forcing the government to take these more seriously. Previous crises would suggest not, but this is a different crisis in a different time.

Politically all crises represent both threat and opportunity. There is plenty of both this time. It will be a real test of political mettle. We haven’t seen anything yet.

Covid-19 will not make the world a better place

In these strange times I have been thinking a lot about the meaning and consequences of it all. I’m not alone. With so little else to do in lock-down many others are thinking about the effects of Covid-19. Alas this effort is as unproductive as so much else that is going on right now.

For contrasting ideas compare these two pieces. In the New Statesman philosopher John Gray explains Why this crisis is a turning point in history. For him it marks the reverse of globalisation and the return of the nation-state as the dominant idea in political and economic organisation. On the other hand in The Times there is Matthew Parris who explains why We say everything will change but it won’t. For me Mr Parris is much more on the money, but then I have never liked Mr Gray, a very clever man who somehow always seems to miss the point.

The remarkable thing about almost all the predictions of change is that they are expressions of wish fulfilment. Environmentalists say that we will stop travelling by air and learn to value the environment we have so despoiled through largely pointless economic activity. Socialists say the crisis is a vindication of socialist organisation at the expense of markets and capitalism, and that we cannot return to “Neoliberal” ways. Nationalists say that it is all the fault of outsiders and countries will raise borders and expel foreigners. Critics of the European Union say the crisis proves its uselessness and will prove terminal for it. The Economist suggests that the crisis will be good for big companies and herald a period of consolidation and takeover (to be fair that newspaper does not openly advocate such consolidation as a good thing, but its bias in favour of bigness is very evident). Critics of Donald Trump say the crisis means his presidency will end this year. And so on. Perhaps with the crisis having so badly disrupted people’s expectations for how the year would progress, there is some kind subconscious compensation mechanism which leads them to conclude it will hasten what they were always advocating. There must be a silver lining to all those dark clouds.

A lot of these thoughts have merit, but we need to adjust the seasoning. One of the deepest instincts of humankind is conservatism and a desire to recreate better times in the past. When all this is over there will be an overwhelming wish to go back to how things were before, which will be seen as a sort of golden era. This may take a little while to emerge, as a lot of people have been genuinely scared by the idea they could be contaminated by their neighbours. But a lot of infrastructure is simply falling into disuse rather than being destroyed. The planes and airports are still there. Many airlines will go bust, but their assets will be bought up on the cheap by stronger airlines and new ones. Dirt cheap fights will be on offer and, alas for those of us who think it is mainly pointless and destructive , things will get back to something like what they were.

Still, a number questions are worth posing. The first is whether we will treat this affair as a nightmare to be put behind us and forgotten, or whether we will take real steps to make ourselves less vulnerable to future pandemics. Much of history points to the former conclusion, as Mr Parris points out. But one of the interesting things to emerge is how much better East Asian countries have proved to be at handling the pandemic. This applies as much to China’s Communist dictatorship as to Taiwan’s and South Korea’s vibrant democracies. The reason seems to be that they have had major scares before, such as SARS. So perhaps western societies will learn too. Also it may prove very hard to beat this virus. An effective vaccine, the silver bullet we seek, might prove elusive. That would mean that we would have to build longer-lasting systems to fight it, and in particular tighter surveillance of people’s health so that outbreaks can be detected and isolated quickly. This will not be dismantled so quickly.

A second question is how the world’s financial systems will cope with the surge in government spending required to confront the disease and to soften its economic effects. Each of three pillars of the world system is going to be put under immense strain: the US dollar as the world’s principal currency for reserves and international transactions; the Euro and the European financial system; and China’s opaque and highly manipulated system. Here in Britain our financial system looks a lot healthier than it did during the great financial crisis, but it cannot fail to be impacted if these other pillars start to falter.

And then there are things that people should be pondering but are not. The first are lessons about the most effective structure and governance of the state. Here in Britain we are seeing a lot of muddle, and many missed opportunities. A lot of these derive from excessive centralisation, which stops the government from making the most of many smaller organisations that could help unblock the bottlenecks in the supply of tests and personal protective equipment, for example. Instead people will probably conclude that the system was not centralised enough.

There is also a deeper philosophical question about our society. The lockdown shows how little of our economic activity we actually need to keep ourselves alive. Most economic activity is only of marginal worth when set against the big issues of life and death. Perhaps we should rethink our obsessions with economic growth and productivity, and instead try to build a society that is safer, more resilient, more sustainable and happier. But if that thought ever starts to get traction it will soon be crushed in our desire to put the nightmare behind us. I can’t yet see much of a silver lining to this cloud.

Guest post: YOUNG PEOPLE HAVE PLENTY OF THINGS TO WORRY ABOUT. THE LONG-TERM EFFECTS OF THE CORONAVIRUS SHOULDN’T BE ONE OF THEM

Sorry for the lack of activity. I haven’t succumbed to Covid-19. I have just been exceptionally busy, not least with a house-move. And not just that: my Treasurer duties have been quite intense, and still are: I’m in the middle of an audit. I will recount my tale when things settle down a bit. Meanwhile it is my pleasure to publish this piece from John Medway.

A recent article in the Daily Mail raised the question of whether it might be better to accept a high death toll among the elderly from the coronavirus than to impose a huge financial burden on the younger generations by allowing major short-term disruption of the economy. Stephen Glover wrote (25 March 2020 ): “We have to ask ourselves a rather shocking question. Is it right that, in order to save the lives of mostly elderly people … the future lives of millions should be devastated?”

I must declare an interest here – I am elderly. To be fair to Glover, he doesn’t come down in favour of letting the elderly die off. He accepts an imperative to “throw the kitchen sink at the problem”. In any case, I’m going to leave aside the moral issue of balancing human lives against economic well-being. My view is that his prediction of long-lasting economic devastation from the coronavirus is simply bad economics. I don’t accept that we necessarily face years of austerity because of a generous approach to the temporary economic victims of the coronavirus.

The coronavirus episode will have some significant short- and medium-term economic effects. One is that resources are going to waste because workers are being made idle. This means that for a time, the economy will be smaller than normal and that on average we will be poorer for a short while. If the episode is prolonged and government support for businesses inadequate, there could be some lasting damage to the economy through premature retirements from the workforce, loss of skills and delays in training. These are real, medium-term effects but should be manageable. They should not mean that “the future lives of millions” will be “devastated”.

Glover’s main concern is not with short-term effects on the real economy – its ability to produce the goods and services we need or desire. It is rather with the sudden and huge surge in government expenditure, the loss of government revenue and rapid growth of government debt. “Let’s be in no doubt”, he writes, “that our country faces years of austerity that will almost certainly make the past decade look like a minor irritant.”

That would be true if an unreconstructed George Osborne were to return as Chancellor but I hope this is most unlikely. Thatcherites liked to portray the state and the country as a household whose expenditure was limited by its level of income or by its ability to borrow. This gave some cover for their aim of reducing the size of the state and passing as much of the public sector as possible to markets – an aim no doubt with a strong appeal to the sort of people who donate five- six- and seven-figure sums to the Conservative Party.

But a government does not always need to finance its deficit by borrowing. If, like the UK, it does not belong to a currency union, it can also do it, in co-operation with its central bank, by “printing” money – also known as “quantitative easing” or QE. The limit on the prudent printing of money is set (if not by ideology) by the perceived needs of the economy. If, once the coronavirus is beaten, the economy is held back by the inability of many firms and households to repay or finance their debts, an injection of liquidity through QE could solve the problem. This could be done through a generous welfare system and by offering cheap credit to basically sound firms in temporary financial difficulty.

It is, of course, tempting to think that governments can go on indefinitely financing their deficits through printing money. Some countries have done this, with disastrous results. The volume and speed at which money circulates needs to match the productive capacity of the economy or inflation results. As the economy recovers and nears its short-term limit, there may be a need to reduce rather than increase the money in circulation. This can be done by increasing interest rates, increasing taxes, reducing public expenditure or any combination of these. The important point here is that when printing money is an option, taxes are needed, not to pay for government expenditure, but to help keep the supply of money in the economy in line with productive capacity. In normal times, the notion that taxes are needed to “pay for” public expenditure is a useful approximation to the truth. But these are not normal times.

To a person who thinks in terms of public expenditure invariably needing to be paid for through taxation or other revenue, a sudden and enormous surge in government spending is deeply alarming. Glover’s alarm is perhaps because his perception of the nature of money, spending, borrowing and taxation is fundamentally different from mine.

There are big things to worry about in the British economy. One is the age imbalance in the population and the problem of caring for a growing elderly population – ironically, a problem that might be alleviated by a cull of the elderly population by the coronavirus if it gets truly out of control. The age imbalance is a problem in the real economy – the resources devoted to the care of elderly people. The problem is exacerbated by unfunded public-sector pension commitments, to which printing money will not be the answer.

More serious is the climate emergency. It is an emergency because global warming seems likely to prove catastrophic unless action is taken urgently to reduce carbon emissions. Governments generally show no sense of urgency and some (such as the US government) are in actual denial of the problem. The medium-term economic and social effects of dealing effectively with the climate emergency are likely to be far-reaching – for good or ill, depending on the attitude and skill with which governments and societies approach the problem. The price of failure could be one or more future generations of people for whom life is nasty, brutish and short.

Young people have plenty of things to worry about in the economy, society and environment that we oldies are bequeathing them. The long-term effect of the coronavirus should not be one of them.