Month: July 2021

The British government attempts a covid endgame

In England 19 July is “Freedom Day” when most covid-related legal restrictions will be lifted in England. This was first trailed a couple of weeks ago, when the government billed it as a major step forward in the battle against he virus, and delighted lockdown sceptics, which include a substantial number of Conservative MPs. Alas it looks like heavy going for the government.

Freedom Day was originally billed for 21 June, but the government lost its nerve. At the time I defended this postponement, based on the government’s narrative that we were experiencing a race between the virus and the vaccine, and that the extra four weeks will allow the ever increasing number of vaccinations to slow the progress of the virus. Alas for my understanding of epidemiology. There is no sign that the level of vaccinations is having much impact on the spread of the new Delta variant, which is following a similar exponential path to the Alpha variant in the Spring. There is no sign of the vaunted herd immunity, so beloved of lockdown sceptics. Delta may be just too contagious.

Instead the government’s strategy, as originally explained by the new Health Secretary Sajid Javed, is to let the disease rip, and rely on the vaccine to keep people out of hospital, and so limit the stress on the health system. Mr Javid made no attempt to deny that infections would continue their exponential path, up to 100,000 a day and beyond. Reckless as this sounds, this is perfectly logical, and even shows a degree of leadership in the face legions of people urging caution of some sort or another. There has to be an endgame, and ours is based on a high level of vaccination, using the more effective vaccines, such as Pfizer, Astra Zeneca and Moderna. We only have to look at Australian, where Delta is breaking out into a population with a low vaccination rate. Australia had managed the disease by keeping people out, but failed to focus on the endgame, and messed up its acquisition and roll out of vaccines as a result.

But the government’s strategy had clearly not been thought through. This was evident from one of the goverment’s core arguments: “If not now, when?”, whose logic I find unfathomable. They seem to be hoping that the disease will burn itself out before the busy winter season, but it looks just as likely to make things worse. Two big problems have emerged. The first is the use of face masks. Some people can’t be vaccinated; others will derive less protection than the norm; many more (I have to include myself) are far from sanguine about catching the virus, even though double vaccinated. Even most vaccine sceptics have understood that some efforts need to made to protect the vulnerable – they just don’t want the tail to wag the dog, as they see it. Where this has come to a head is on mask-wearing. As we have better understood the virus, our appreciation of the effectiveness of masks in stopping the spread has grown. It seems sensible to most people to continue to require people to wear them in those public spaces which vulnerable people will find it hard to avoid. This does not include pubs and night clubs – but surely does include public transport and most shops. And the government yet wants to drop all legal requirement to wear a mask, and at first suggested that such matters could be left entirely to personal discretion. One Tory MP (admittedly not a minister) suggested that freedom from mask wearing was essential to getting people using public transport again – his argument seemly was that if we ignored the disease our worries would cease. Slowly but surely the government is being forced into retreat on this; by this morning they were suggesting that operators should use their powers to enforce mask -wearing on public transport. But the messaging has been fatally mixed.

And them came a problem with the NHS covid app, which pings people who have come into near contact (within 2 metres for 15 minutes) with somebody who has tested positive and tells them to self-isolate for 10 days. The government said that it was going to leave this in place until mid-August, when double-vaccinated people would asked to do a test instead. They weren’t very clear on why this delay was being instituted – I suspect it simply takes that long to change the app and test it. But the consequences look worrying if infections are likely to reach 50,000 a day next week, and 100,000 a day not so long after that. The opening up was supposed to help the economy to get moving again, but the projected volume of people being told to self-isolate will hit it right back down again, remembering that these self-isolation requests will tend to cluster in particular workplaces, the disease being what it is. The government’s response has been to suggest that it would de-sensitise the app, so that fewer people would be pinged – within one metre for 30 minutes, say. As a response to the virus becoming more contagious this is nonsense – it leads to the question of what they are hoping to achieve by keeping the app in being. And it points to an easy answer to the government’s “If not now?” question. Then again, if the government wants to let the disease rip and peak before the winter comes, won’t the app just slow things down? Unlike mask-wearing it looks an inefficient way of trying to protect the vulnerable.

The government have clearly thought a bit harder about ta third issue – the effect increased infections will have on the NHS. The link between infections and hospitalisations – and that to ICU usage and deaths – has been weakened but not broken. Hospitalisations for covid now seem to be doubling every month, and we can expect that to increase after the loosening up. The levels are nothing like those experienced in previous peaks, but the NHS is fragile. Backlogs are massive; there are press reports of staff leaving, exhausted after the pressure placed on them over the last 18 months. Given the quality of the government’s ability to think things through elsewhere, there must be a degree of scepticism that they have got their calculations right.

I am more sympathetic with the government on another widespread criticism: that loosening up increases the chances of a new and deadlier variant turning up. With the virus rampant in the rest of the world, where vaccination is woefully slow in many places, what happens in Britain will make little difference. Besides, scientists are reporting that new variations are repeating. The possibilities of new variants for a simple thing like a virus must be limited, so maybe the chances of a significantly more dangerous new variant are not as high as some people are making out. That’s a bit speculative, of course.

So the government is facing a sticky few months, when it will continue to be on the defensive. Other issues loom. The government plans to withdraw the fiscal support it is giving to the covid-stricken economy. This is bound to lead to hardship and criticism; it is also likely that the economy will start to slow as well.

A government that was well-led and with a core of first-rate ministers would command a lot more confidence. But this government cannot seem to think anything through properly and lurches from one crisis to the next. It will be determined not to reimpose lockdown. Twice before it has thought it could wether the storm without reversing course, only to U-turn in the end. What odds would anyone offer that this does not happen again?

Should we be worrying about inflation?

Now is a very interesting time to be a macro-economist. The shock arising from the covid-19 pandemic is unprecedented in its extent (barring world wars, maybe) and its economic effects. Government responses, with very loose monetary policy combined with generous fiscal measures, is similarly unprecedented. The latter is remarkable in that its generosity is far greater than that shown by governments following the Great Financial Crisis that started in 2007. Economic conservatives have been routed and are grasping for evidence that their once confident assertions about the public debt and deficits have a basis in fact. These generally turn on the question of inflation.

Inflation plays a critical role in macro-economics. In theory it is what happens when supply fails to meet demand across an economy. There a number of reasons that this can happen but the most important, to macroeconomic commentators, is when a when aggregate demand is boosted by a government spending too much or taxing too little. Or, putting the same idea in a slightly different way, when too much money is being put into circulation by government policy. It is one of the points of agreement between orthodox conservatives, whose narrative is that bad things happen when governments intervene, and advocates on the left for Modern Monetary Theory (MMT), whose narrative is that governments can and should spend freely so long as inflation is kept at bay. Things get more complicated when you try to apply the theory to an open economy – one that trades substantially with others – that issues its own currency, but this is usually glossed over.

The theory of inflation had to be redeveloped after the 1970s, when inflation (excess demand) and high unemployment (inadequate demand) co-existed in so-called stagflation. The new theory, working its way through such ideas as monetarism, a craze of the 1980s, to the Neo-Keynesian consensus of the 1990s, built on the idea of inflation expectations. This suggested that inflation could happen simply as a function of the zeitgeist. The standard theory was that therefore it was essential that inflation expectations were “anchored”, and that it was the central bank’s job to do this. This theory has become so embedded that organs such as The Economist, who should know better, report it as fact.

In the first two decades of the 21st Century inflation in the developed world has been stable and quite low (around 2% per annum and often less). This has been hailed as a great success for central banks, who have firmly anchored those expectations. It has also been taken up by MMT enthusiasts as evidence that reticence over government spending and national debt, and especially the demon “austerity”, is vastly overdone.

And so here we are now. Many developed world governments, led by the United States, have thrown caution to the wind in response to the pandemic. This appears to have been remarkably successful in in that the economic impact of the calamity has been relatively limited. But now inflation seems to be breaking out everywhere. Optimists say that this is just the result of temporary supply bottlenecks, pessimists say that over generous economic policies are coming home to roost. Commentators pore over the available data and argue like mad.

If you find all this rather perplexing, you should. Macro-economists inevitably deal in simplified models that represent the actual world but imperfectly. The statistics they deal with, such as income and, indeed, inflation, are similarly imperfect representations of a complex reality. They all know this, but instead of taking on an air of humility, they find it easier to gloss over the difficulties and wallow in the vicarious power of dealing in the fate of millions. In the process most of them have become completely detached from reality.

Inflation is a case in point. What most economists seem to mean by the term is a devaluation of money: the price of everything going up without anything deeper going on. One of the 1980s economists suggested that “Inflation is everywhere and always a monetary phenomenon,” because it couldn’t happen in that favourite fiction of conservative economists, a barter economy. But a general rise in consumer prices may simply be part of a widespread balancing out of things across different markets. In the 19th Century, according to statisticians who estimate these things, there were many surges in prices, but compensated by falls at other times, so that there was no overall rise over the long term. Not coincidentally, money was closely linked to gold at the time, though that is incomplete as an explanation. A more recent example is the inflation that accompanied the economic boom in Ireland after it joined the Euro. This rise in prices was the only way an open economy could respond to a surge in productivity without a now-impossible currency revaluation. That didn’t stop the European Central Bank ticking the Irish government off. Another example came during the austerity years of the British Coalition government after 2010. There was persistent (though not especially high) consumer price inflation. But this wasn’t matched by wages, and it was simply the economy reflecting the reality of lower living standards. I remember one commentator suggesting that the inflation would make debt easier to pay off; nonsense because you pay debts out of income. Inflation then was not reflecting a devaluation of currency.

So what is happening now? Prices rises genuinely seem to reflect shortages in supply relative to demand, both in goods markets and labour markets. These may well reflect temporary bottlenecks. We can expect this to go on for some time as the pandemic has had far-reaching impacts on many supply chains and labour markets. Yesterday our local picture framer was complaining on behalf of his glass supplier that the cost of hiring a container from China had risen from £500 to £8,000 (or something like that), because all the containers are in the wrong places, not to mention the disruption to the Suez Canal. In Britain we have the added complication of Brexit disrupting both goods and labour markets; in that case when the dust settles most people are bound to end up a bit poorer. But the pessimists have a point too. The entrenched inflation of the 1970s started with similar temporary shocks, to the oil market in particular. If it really is all about expectations, this is how it starts. But there is so much noise in the statistics that it is really very hard to see what is going on.

Personally I am less concerned about inflation that many. I think the 1970s-style inflation was mainly a product of unionised labour markets and less flexible supply chains, which gave labour much more power. This certainly had a good side in ensuring a fairer distribution of wealth, but it prevented adjustment to economic realities. In today’s much more open world economy there are other ways than inflation for unsustainable excess demand to play out, in the most developed economies anyway. In the 1990s it may have been right to talk about inflation expectations being anchored by the central bank, but the world has moved a long way since then. Inflation is held in check by the forces of global trade. The stress is taken in the financial system through higher levels of debt and international capital flows. This is likely to end in financial busts rather than 1970s stagflation.

So if there’s trouble ahead we are looking in the wrong place. Is there trouble? Financial asset markets certainly look as if they are in a bubble, but the banking system looks a lot healthier than it was in 2007, when the last great financial crisis started to gather momentum. In Britain I think things are going to get much bumpier as the government tries to bring its budget deficit (currently an eye-watering 11.5% of GDP, though less than America’s 13.9%) back to a new normal. But there are so many uncertainties as to what a sustainable new normal will look like, that this very hard to predict. This is going to dominate politics from 2022 on as there is no coherence to the government’s message on this.

Interesting times indeed.