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New leaders, new lockdowns

Massive policy shifts – the lockdown and the public spending boosts to offset it – are being implemented to curb the spread of the pandemic. This means that centre stage in public policy lies one fundamental topic: the balance between economics and epidemiology.

Newsletter from 6 November 2020

If you want to predict an election, ask an economist. On Monday, we put up a short data piece on political polarisation, based on the work of Olivier Coibion, Yuriy Gorodnichenko and Michael Weber. In short, it showed that both sides in the US presidential election were almost certain that their favoured candidate would win: 87% of Democrats expected Joe Biden to come out on top while 84% of Republicans expected a Donald Trump victory. (Check out a fuller summary of the work over at VoxEU). Clearly, such deep division meant the election could produce only one thing: large-scale disappointment, with the potential for fights over the results and protracted legal battles.

This analysis, it turned out, got to the core of the topic that capped off a momentous week, which also saw renewed lockdown measures in England and major shifts in policy from both the Bank of England and the Treasury. Thankfully, contributors to the Economics Observatory offer balanced and clear analysis on all of this.

Figure showing distribution of perceived chances of Trump winning

Remember, remember

The fifth of November saw England enter a second lockdown, which is currently intended to last until early December. The new shutdown is far less onerous than the first one: schools and universities are open; manufacturing and construction firms are being actively encouraged to keep operating; estate agencies and removal companies are working as normal. The pain, as a new piece by NIESR’s Rory MacQueen explains, will be focused on the retail and hospitality sectors. Forecasting the economy-wide implications of this localised hit is difficult, but assuming 90% of the post-April recovery in hospitality is lost, GDP could drop by around 12% in November compared with October.

The knowledge that more damage is on the way explains why the UK economy received a combined fiscal and monetary boost this week. The Bank of England announced another £150 billion in quantitative easing; HM Treasury delayed its plan to trim the generosity of the furlough scheme, committing to cover 80% of eligible workers’ wages until March. For analysis of ‘QE’ and furlough schemes, see the pieces by Michael McMahon and Corrado Macchiarelli, and Richard Disney respectively.

These are grim times economically, and the urge to look overseas is natural: are France, Germany or Spain doing any better? What about the Nordic approach? But making these comparisons is tough, as a new piece on comparing the economic costs by Oxford’s Michael McMahon and Matthew McKernan explains.

On the face of it, things look bad for the UK (figure below). But the authors detail that some of this is down to accounting: because we measure GDP on a quarterly basis, the precise date within which the lockdown was imposed matters. Another gremlin is the fact that different countries measure their economies differently (see their striking Figure 3, here). The lesson is that while (as in all crises) people would like to learn from the Swedish model, careful work is needed to compare apples with äpplen. In the near future, as Diane Coyle has pointed out, we need to improve on GDP.

Figure showing comparison of GDP growth rates

Economics meets epidemiology

These massive policy shifts – the lockdown and the public spending boosts to offset it – are being implemented to curb the spread of the pandemic. This means that centre stage in public policy lies one fundamental topic: the balance between economics and epidemiology. This question, which I suspect is set to define economics this year and next, is the subject of a new video released today, featuring a cast of the country’s top experts, with Economics Observatory lead editor Tim Besley as the anchor.

In ‘Economics meets epidemiology’ the government’s chief scientific adviser Patrick Vallance and global public health expert Devi Sridhar clearly explain why a trade-off between lives and livelihoods is not correct: in short, good policy can get you better health and better economic outcomes. Former head of the civil service Gus O'Donnell, someone who has seen many a crisis first-hand, makes a passionate call for a kind of analytical pluralism: drawing together hard and social sciences to come up with the best policy response.

There are concrete ways in which economic thinking can help, set out by economists Abi Adams-Prassl and Ben Moll, and chemistry Nobel laureate and Royal Society president Venki Ramakrishnan. Standard epidemiological models track viruses rather than human behaviour. This means that they can miss feedback effects, as people change behaviour in response to different policies or levels of the virus. But tracing such linkages in systems (in the jargon, analysing in ‘general’ rather than ‘partial’ equilibrium) is at the core of what economists do.

This means that plugging the two approaches together to make an ‘epi-economic’ model can help us design and target policy. Importantly, the results are not something common sense or intuition would point to, including a ‘Pigou-style’ tax on crowds (for example, in restaurants). I thoroughly recommend the video to any economists and teachers. (To read the cutting-edge work, see Ben’s paper with Greg Kaplan and Gianluca Violante).

Getting the epi-economic balance right is something the Economics Observatory will return to in coming weeks. But what about a simple, blunt option: doing nothing and allowing the virus to run its course?

My final highlight of the week was a piece by Chryssi Giannitsarou and Flavio Toxvaerd, who examine this idea and ask whether Covid-19 will take its ‘pound of flesh’ whatever we do. The article explains why this is a fallacy – lockdowns don’t just delay the inevitable, they lower the death toll. It is reminder that there are tough times ahead and of the importance of plugging our best researchers into public policy – there is no easy way out.

Author: Richard Davies, Director
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