Stumbling and Mumbling

Author: chris dillow   |   Latest post: Sat, 4 Jul 2020, 1:33 PM


Origins of a disaster

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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. Chess

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.

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