3 paths forward for the economy

The pandemic is affecting the entire world, but we are seeing very different approaches to dealing with it in different countries. I have identified 3 broad strategies each of which will have very different outcomes in terms of the economic outlook. In this post I am not looking to evaluate the approaches from an ethical or public health perspective, but purely on what the likely economic results will be.

Path 1 – Control the Virus e.g. New Zealand

This is the approach I have been advocating and which I spoke about on my recent IAN talk. Please click below if you are interested in watching.

https://us02web.zoom.us/rec/play/vcUpIuyqq243GdPA4QSDB_NwW460f_2s2yJN_adfzh7kBiECN1ahb7QRYObZgJqcT5PkXmHALrgTT-6W?autoplay=true&startTime=1589914624000

This approach has been very successful at controlling the virus in some countries such as New Zealand, Norway, Singapore, China and Australia. All of these countries now have low levels of infection and can look at a material reopening of their economies. Other countries have been trying to play catch up, are past the peak in their infections and are maintaining lockdowns until the level of infections comes to a low level. This group of countries includes Canada and most of the EU.

This has not been an easy path to follow and for it to be successful it does not only take the good public policy but also it critically requires huge public support for measures which involve massive changes in behaviour. The countries that have been successful have given clear and detailed public health messages which have been adhered to due to high levels of public support and trust in the country’s government and institutions.

The economic impact of COVID has been very severe but these countries are the most likely to hope to experience COVID as being economically similar to a natural disaster and see a sharp rebound in economic activity. Bernanke, ex-Chairman of the Federal Reserve in the US, likened COVID to a snowstorm. In a snowstorm, we halt much of the economic activity but once the snow melts, we can go back to how we were before.

Waiting until the level of infection is very low has two big economic benefits

  1. The number of people infected is low, which means that anyone you interact with is highly unlikely to have the virus and so all the allowed activities are in effect very safe. This means people are confident to go back to work and do the allowed activities as you reopen.
  2. There is room to experiment with the reopening and how it impacts R0. If the impact is larger than you expected for an activity, then you have time to reverse the policy as the absolute number of infections remains very low. There is no danger of the virus getting out of control quickly.

With COVID the world will not be the same as before, but it may be possible to reopen large parts of the economy while keeping the rate of transmission and level of infections low.

Path 2 – Herd Immunity e.g. Sweden

I have used Sweden as my example but at the moment, to be honest, it is my only one and is a global outlier. It is the only country I know which has chosen to follow this path with high public approval and consent which makes all the difference to the potential economic outcome.

The choice to manage the spread of the virus with the longer-term goal of herd immunity is clearly possible. The economy is not shocked by the strict lockdowns and only a milder form of restriction is made to slow rather than to reduce the virus. Sweden has high levels of public support with 70% of the population supporting its government’s approach. With public trust and support the economy continues to function with a far milder slowdown in economic activity.

The data from the antibodies tests in Stockholm last week were broadly in line with my expectations but completely shocking to the Swedish authorities. With only 7.3% of Stockholm residents testing positive for the antibodies we can imply a mortality rate of 1.5-2.0%. This is slightly higher than the results from New York, France, Spain and the UK which all suggested 1.0-1.5% but I would suggest is within a margin of error given the relatively small sample size.

From outside Sweden we might think that this result would lead to a change in policy and a dramatic fall in public support but so far this does not seem to be the case at all. This implies that Sweden is uniquely happy to follow this route and I cannot say that the economic outcome should be poor. Whether it is better or worse economically than the path chosen by other countries such as Norway is not clear yet, but I see no reason to think it materially better or worse.

While I said that Sweden is my only example of herd immunity with broad public support it is not my only example of a country pursuing this strategy. A good example is Brazil where the government under Bolsonaro has deemed COVID to be “a little flu” and will not pursue any public health measures. But the population is not supportive of this plan which will lead to severe economic disruption. Without consent the population is afraid and so its behaviours change, both on the supply side as people do not want to go to dangerous workplaces, and on the demand side as a lack of confidence leads to a decline in spending and investment.

It is important to note that from a public health perspective Path 2 is the default strategy. Anything less than a strongly concerted effort to control the virus will make it continue to spread and grow. But going down this path with consent like Sweden has a very different economic outcome to doing it without consent.

Path 3 – Neither of the above e.g. UK, US

This occurs when there is a major divide between those who want to follow the two paths above. A majority of the population would prefer to take Path 1 and control the virus but a significant minority, including the government, prefer Path 2 to reopen the economy even if the virus is not controlled. This is the situation in the US and increasingly clearly also in the UK.

For both the US and the UK we went into lockdown late, made the lockdown not very strict and are moving to ease restrictions before the level of infection is low and declining. There has been some attempt to control the virus, but it has been half-hearted and thus ineffective.

Trump gets pretty uniformly panned in the UK for his approach but in a way, it has a certain brutal honesty to it. He does not really pretend that he cares about public health, he is very clear that he cares about the economy. He does not argue that it is safe to reopen, he argues that the economy comes first. The US public has a majority in favour of controlling the virus but has a significant minority that strongly prefers Path 2. Those people are also Trump’s support base and so politically it should not be surprising that he is pursuing a policy path which they support even if a majority of the broader country do not. Trump has never really been a President who wanted to govern for everyone, he governs for his base and his interests. It remains to be seen if he can generate widespread support for his approach.

The UK political landscape is somewhat different. We have a clear majority in favour of following Path 1 but again a significant minority who prefer Path 2. Looking at the opinion polls I do not see the strong divide in the country we had with Brexit. 73% of the UK population wants clear advice with detailed guidance, not the muddling appeal to “common sense” that we are getting. It is true that Conservative voters, Leave voters and older people are more likely to want to reopen earlier but there is a majority in all categories for a focus on public health and caution on reopening. But importantly the relatively small minority who are very keen on a rapid reopening are the small subset who are the type of people who are members of the Conservative Party and also the type of people who are Conservative MPs and in government.

https://docs.cdn.yougov.com/oygox62yaw/YouGov%20Covid%20Lockdown%20Results%20May%202020.pdf

I am sure there are many in the UK government who passionately want to follow Path 1, perhaps after his ICU experience that even includes Boris Johnson. But we also have Dominic Cummings who showed what he thought of the “Stay at Home” slogan by travelling 250 miles to Durham, and Rishi Sunak who is arguing for a swift reopening.

The effect of a split in government and a lack of clear direction is that the default strategy of letting the virus run away again becomes the effective policy. This is in effect the same policy that Trump has adopted but confusingly the rhetoric is entirely the opposite. When Trump argues for reopening, he talks about individual liberty and the economy. When the UK government argues for school reopening it does not say what everyone knows i.e. it is an economic priority. Instead, Gove tells us it is “safe”, and Williamson uses emotional blackmail on teachers to tell them their pupils need them. This contradiction between rhetoric and reality leads to further erosion of public trust.

To follow Path 1 the government needed to build a consensus in early March for measures which the public initially did not think we needed. It could still attempt to use the majority support for prioritising public health now to try again to make more effective policy. Instead, it is using the rhetoric of public health to sell the policies of reopening. Even now the slogan is

“Stay Alert – Control the Virus – Save Lives”

This is a slogan for Path 1. But all the policies are moving towards Path 2. I do not think this has a good outcome. The result will not be the economic recovery they hope for as without trust and security our confidence is so impaired that no recovery is possible.

If we combine the rhetoric of a government focused on controlling the virus, with the actions of a government that will not do so, I expect to see both a rising infection rate and also a misfiring economy. In this case, perhaps the government will admit its mistakes and refocus on being effective in controlling COVID. Or perhaps they will claim they have done everything they can, that controlling the virus was not possible as people did not “Stay Alert”, and we should move down Path 2.

Which of those sounds more in character for this government?

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