The second Covid crisis

As the second wave of Covid intensifies and with the WHO about to send a team to China to examine the origins of Covid-19, it is interesting to reflect on where we stand in the current cycle and what we know from past pandemics. To date, more than 1.9 million people worldwide are estimated to have died during the current pandemic which has now entered its second year (the first death in China was recorded on 11 January 2020). This compares with the inappropriately named Spanish Flu epidemic of 1918-19 which is estimated to have claimed more than 50 million lives. 

Comparisons with the Spanish Flu 

Evidence based on records back to the sixteenth century suggests that the influenza virus mutates relatively slowly with a dominant strain emerging only every 2-3 years. Since each variant tends to adapt to prevailing climatic conditions, seasonal weather patterns and the associated change in human behaviour reduce its ability to thrive thus limiting its spread and the potential for rapid mutation. This was not the case in 1918-19 when there were three waves of the disease within a relatively short period (chart 1). In the words of Jeffery Taubenberger and David Morens in this excellent paper, “Acquiring viral drift sufficient to produce new influenza strains capable of escaping population immunity is believed to take years of global circulation, not weeks of local circulation. And having occurred, such mutated viruses normally take months to spread around the world.” Even now it is not clear that virus mutation was responsible for the spread of the disease but it remains the most plausible explanation.

Just as was the case a century ago, a second wave has emerged very quickly and it is almost certainly the result of virus mutation. Developments in genome sequencing mean that we can now identify new strains more quickly. The variant of Covid-19 that spread across the world last spring (D614G) was already different from the initial SARS-CoV-2 strain identified in China, and new strains have since been identified in the UK, South Africa and Japan. The UK variant is known to be more infectious than previous strains of the virus, raising the R (reproductive) number in Britain by between 0.4 and 0.7 with latest estimates putting the R value between 1.0 and 1.4 (infections will only tail off if the R number is below one). For the record, at its peak the Spanish Flu virus was estimated to have an R number between 2 and 3.

Getting worse before it gets better

It now appears that countries which escaped relatively lightly during the first wave of the pandemic are being more heavily affected this time around. At the start of November, Germany and Switzerland reported mortality rates of 13 and 27 respectively per 100,000 of population. Latest statistics suggest the German mortality rate has almost quadrupled to 49 whilst the Swiss figure has risen to 94. Mortality rates in the US and UK, which were running at 70 per 100,000 in early November, have risen to 114 and 122 respectively whilst Italy is running at 130 and Belgium has spiked up to 175 (chart 2). There will be a time to discuss what different countries did right and what they did wrong which has led to such differing incidences of the disease. But that time is not now: We can leave the recriminations until later as governments put their efforts into bringing the spread of Covid-19 under control.

Lockdowns: Harder or smarter?

There are high hopes that the vaccines which are now being rolled out will help limit the spread of the disease, reducing the strain on the health system and ultimately mortality rates. But these will take time to work through the population and we must thus continue to rely on lockdown measures. Lockdowns remain highly controversial almost ten months after they were introduced across Europe and not surprisingly the longer they last, the more people begin to get fed up. Psychologists argue that they can only work on a sustainable basis when there is a partnership between governments and the people. There must be no “them and us.” It is thus vital to get the tone of the message right when asking society to make significant sacrifices.

The approach by the UK Home Secretary, Priti Patel, who noted in yesterday’s daily briefing that a minority of people are “putting the health of the nation at risk by not following the rules … If you do not play your part, our selfless police officers... will enforce the regulations and I will back them to do so” is precisely the wrong way to go about ensuring compliance. The psychologist Stephen Reicher, who is part of the government’s Scientific Advisory Group for Emergencies (SAGE), argues that blaming the public for non-compliance undermines trust and threatens the success of the measures He noted in a Tweet that, “Patel is disastrously wrong in nearly every way: Lack of public compliance is NOT the problem: by and large people ARE complying.” He further noted that “the real problem is not that people are 'flexing’ the rules but that the rules are too flexible … And harsh enforcement only makes a dire policy still worse … Certainly use enforcement as a last resort, but engaging explaining and encouraging the public works far better.”

Harsh enforcement measures serve to stir up public anger and give oxygen to the anti-lockdown campaigners, who argue that Covid tends to be of greatest harm to the elderly and those with pre-existing health conditions and that the disease is little more deadly than normal seasonal flu (even now, this kind of false message is being peddled on websites such as lockdownsceptics.org). The fact that this view is widely held has forced the media to confront the issue. But as this BBC interview from last week demonstrates, the debate continues to be held in an echo chamber. Since neither the pro- nor anti-lockdown protagonist have a background in epidemiology, most people were left with the impression that the interview was designed merely to stoke up debate rather than shed any light. Moreover, the below-the-line comments on YouTube were overwhelmingly in favour of the anti-lockdown proponent. The government’s message is clearly not getting through.

Whilst there is a growing body of empirical work to support the notion that lockdowns work, they do impose a large economic cost. This raises the question whether it is possible to impose lockdowns whilst minimising the degree of disruption. A paper by Chen et al in the CEPR’s large and expanding collection of Covid economic research (here), which suggested that the type of lockdown matters, thus caught my eye. Their empirical analysis across 75 countries which tracks changes in the R value against the Oxford COVID-19 Government Measure Tracker (OxCGRT) and the Google mobility indices concludes that “gathering bans appear to be more effective than workplace and school closures.” They also offered empirical support for the belief that larger household sizes tend to diminish the effectiveness of mobility reductions which mitigates against the effectiveness of such measures in developing countries.

This is an important insight ahead of suggestions that the UK government may be considering an even stricter lockdown. However, the evidence suggests that the rate of infections may be slowing down – the number of positive tests on 11 January was more than 20% below the levels a week earlier. We may be able to get away without any appreciable tightening of the restrictions. Indeed, based on the OxCGRT data Germany, the Netherlands and Sweden are amongst the few countries to have a stricter lockdown in place today than in the spring of last year and the strictness of the European average lockdown index is somewhat lower than at its 2020 peak (chart 3).

Even if lockdowns are not tightened, they are almost certainly not going to be eased anytime soon. The German government has suggested that lockdown measures could remain in place for another 8 or 10 weeks whilst the Dutch national lockdown has been extended by three weeks to the end of the first week of February. As a result the pain experienced by the services industries, which are most heavily impacted by social distancing rules, will continue into the early months of 2021. It is increasingly looking as though the early part of the year will register significant output contractions across Europe as the hoped-for economic recovery remains elusive.

There may be trouble ahead

It's not what was done ...

I have never known such a sombre mood in the UK as that which prevails today. As if 2020 has not been bad enough, the weekend news that the government has cancelled the planned five day relaxation of social distancing restrictions over Christmas in response to rising infection rates has thrown the plans of millions into chaos. This was done with the best of intentions in the face of a new variant of SARS-Cov-2 which appears to be more infectious than previous strains. But in response more than 40 countries have, at the time of writing, placed bans on travellers arriving from the UK to limit the spread of the new variant. The most serious of these is the French decision to impose a 48-hour ban on passengers and freight entering from the UK which will severely disrupt cross-border trade.

The first reaction of many people was to direct their anger at the government. After all they were promised just three days earlier by Boris Johnson that it would be “inhuman” to ban Christmas as he defended plans to allow households to socialise over the festive period (the fact that local lockdowns in late July were announced hours before the start of the Eid festival did not go unremarked on social media). That said, we should cut the government some slack regarding the decision to impose new restrictions in the face of the most serious health crisis in a century. Many people may disagree, but the experience of the first lockdown was that it did result in a significant reduction in the spread of the disease, albeit at a very high economic cost. Those arguing that the UK should have followed the Swedish model are less vociferous in the face of mounting acceptance in Sweden that the government’s strategy was a mistake, with even the King suggesting that the policy has “failed”.

... but how it was done

A far bigger problem has been the government’s communications strategy. The decision on Saturday afternoon to add a fourth tier of restrictions to the 3-tier system with just a few hours’ notice seemed very rushed. Worse, it flew in the face of the message given just three days earlier. Since the government has known about the new Covid variant for some time, it calls last week’s comments defending previous Christmas plans into question. However, this is in keeping with the pattern which Johnson has followed throughout the year. He was late in implementing the first lockdown in March; he resisted the scientists’ calls for a national lockdown in September, instead opting for a series of badly implemented regional lockdowns, before being forced to bow to the inevitable and implementing a second lockdown in November and now the latest U-turn.

Preparing for border disorder

But it is the restrictions on the flow of goods and people across borders which are the most sobering aspect of the whole issue. Even before the events of recent days queues were mounting on both sides of the Channel as firms attempted to build up stocks ahead of disruption in the event of a no-deal Brexit. One of the consequences has been that the cost of transporting a container of goods has significantly increased, with reports that a container of goods from China to Felixstowe now costs $10,000 per load – four times the usual rate. The French border closure has made the problem significantly worse because hauliers have no incentive to enter the UK for fear of being stuck on this side of the Channel. None of this should come as any real surprise. I did point out two years ago that problems at the ports would quickly lead to large queues.

It may be that the border closure is partly motivated by the desire of the French government to fire a warning shot at Downing Street to indicate what could happen in the event of a no-deal Brexit. Contrary to what the diehards have maintained over the last four years, the UK really does not hold all the cards – it is questionable how many it holds at all. In the absence of either a Brexit deal or an extension of the transition period, this could be just a foretaste of what is to come. Latest reports from within government suggest that the UK has ruled out any Brexit extension. Given Johnson’s record on U-turns, we should not necessarily take this at face value. But if this really is the government’s position, it should brace itself for the mother of all political backlashes in 2021. It is extremely difficult to believe that voters will stand idly by whilst restrictions on cross-border traffic cause such inconvenience, resulting in higher prices and a reduction in the range of goods available for purchase.

Interestingly, a recent IMF working paper looked at pandemics across a range of countries over the period 2001 to 2018 to assess whether they lead to higher inequality and increased social unrest. It concluded that “the results from local projections show that social unrest increases about 14 months after pandemics on average. The direct effect peaks in about 24 months post-pandemic.” Add in the self-inflicted pain of a senselessly hard Brexit and I would not want to be in Johnson’s shoes in 2021.

It's nothing  personal - I just oppose incompetence

I was recently accused of peddling Anti-Tory propaganda. Since the respondent was anonymous I am sure they will not remind me repeating their response to one of my blog posts: “From the very first words of this article, it's glaringly obvious that the writer is a remoaner. The colouring of the language clearly lays a foundation for the rest of the article to be another Brexit/Tory-bashing tiresome monologue. So, it puts me off. It didn't start as balanced, so I (and I'm guessing many others) didn't read through, because they already knew the theme and conclusion of the story. Shame. There may be many salient points buried within these 1489 words, but I won't go in search for them. I have better things to do with my time.”

Whoever they are, they have missed the point of everything I have written over recent years. My criticisms are not party political (they should read what I wrote about Jeremy Corbyn). They are a response to government incompetence. It is not my intention to take pot shots at the government for the sake of it – I leave that job to the professional columnists with this article by The Observer’s Andrew Rawnsley neatly summarising Johnson’s unsuitability for leadership at a time when more than flowery rhetoric is required. As Rawnsley put it, if there is light at the end of the tunnel it  “will have to be exceedingly bright to wipe away all the memories of how long and dark, stumbling and flailing has been the nation’s journey through the tunnel.”

Markets keen on the vaccine

2020 has proven to be the year from hell, yet two pieces of good news have today given markets a rocket-propelled surge. Markets were overjoyed enough with the news that the uncertainty surrounding the US election is effectively over but the news that a promising vaccine has been developed against Covid-19 sent them into ecstasy. The vaccine has been developed by Pfizer Inc. and BioNTech and is 90% effective, according to the manufacturers. It is obviously very early days to be talking about a solution to the pandemic which has produced the biggest collapse in global activity in 90 years. The vaccine may yet prove to be a damp squib, and it will not prevent the next few months being exceptionally difficult for the European and US economies. But it does represent a potential game changer. 

Market implications 

In terms of the market reaction the FTSE100 today recorded its 17^th largest daily increase on data back to 1984 (9437 observations); the rise in the CAC40 was the 10^th largest on data back to 1969 (13528 data points) whilst the IBEX recorded its 6^th biggest increase since 1987 (8829 observations). That said, all three markets remain heavily underwater for the year (chart). Interestingly, sectors which have been particularly badly ravaged over the past six months have been amongst the strongest performers. The stock price of International Airlines Group rose by 25% in the course of today, although it is still 70% below the 2020 peak recorded in January. By contrast, companies whose business model has thrived during the lockdown have underperformed. Ocado Group Plc, which provides grocery home delivery services, was down 12%. On the other side of the Atlantic, Zoom’s price was down 14% at the time of writing and even Amazon was down 2%. All this strikes me as a little premature. A lot of international business meetings will likely continue to be conducted via Zoom rather than people jetting off for a one hour face-to-face as companies continue to bear down on costs.

Whilst it may be a little early to swap your Zoom stocks for IAG, there is some method in the market madness even though it is questionable whether it should be factoring in all the good news immediately. A combination of extremely low interest rates and the prospect of an economic recovery ought to support equities in the medium-term. Accordingly investors may reduce some of their exposure to safe haven assets such as fixed income and gold and position into equities, although a prudent investor who missed today’s rally may be advised to buy on the dips since some of today’s gains will undoubtedly be given back before long. 

Economic implications 

The prospect of a vaccine has major economic implications. After all there is a lot of pent-up demand which has been postponed since the spring. But the vaccine is nowhere near ready for widespread use and even if it does get approval before year-end, as has been suggested, it is unlikely to be widely available until the second half of next year at the earliest. Accordingly the impact on the wider economy is unlikely to be felt before 2022. Over the coming months governments will thus have to continue providing support to those who have lost their jobs or whose jobs are at risk. But the prospect of a vaccine changes the calculus by resolving the duration mismatch problem which governments have faced in the course of this year.

Whilst governments want to provide as much support to the economy as possible, they are also acutely aware of the costs The UK government has in recent months been particularly hesitant to open the taps further. Only last month Chancellor Rishi Sunak suggested that “we have a sacred responsibility to future generations to leave the public finances strong and … this Conservative government will always balance the books.” But if a vaccine is in the offing governments will not face an open-ended commitment to provide fiscal support: They can act in the near-term with a high degree of confidence that an economic recovery lies ahead.

This does not change my long-held view that there will be a considerable degree of economic scarring. It is highly likely that the pandemic will prove to be a watershed for the economy. Part of the change in economic behaviour observed over the last eight months will prove to be permanent with the result that there will be a period of resource reallocation as the economy transitions to a new structure. Such an outcome could be driven by a change in tastes (e.g. a preference for online shopping rather than physical shopping, which will have major implications for the retail sector). This in turn will almost certainly result in frictional unemployment which will take some time to be eliminated. It could also mean that the sectoral distribution of capital which prevailed prior to the pandemic will have to be significantly changed, implying a faster rate of capital scrapping in those areas where it is no longer required which turn will depress the economy’s potential growth rate (at least temporarily).

The UK will find itself in a worse position than other European economies. It is becoming increasingly evident that the form of Brexit the government is intent on delivering will be a much harder variant than imagined even a year ago (I will come back to this in a future post). Accordingly it is likely that even in the absence of the restrictions imposed by Covid-19 the UK will take longer to get back to pre-recession levels of output than elsewhere.

For all today’s optimism there is still the potential for the path out of the pandemic to prove torturous and uneven. However it represents the first piece of genuinely good news in the fight against Covid-19. As The Queen put it in her April broadcast “while we may have more still to endure, better days will return: we will be with our friends again; we will be with our families again; we will meet again.” But as the old song has it, “Don’t know where, don’t know when.”

Learning to live with the economics of Covid

Without any shadow of a doubt the biggest problem governments face at present is how to balance the benefits from measures to curb the pandemic against the economic costs of efforts to limit its spread. As the second wave of Covid-19 emerges it is clear that countries have coped in different ways. But what are the factors underpinning the differing performances and have countries learned from past mistakes which will prevent a repeat of the surge in mortality rates that we saw during the first wave?

An excellent paper in The Lancet looked at the varying approaches to assessing the criteria adopted by a number of industrialised economies for introducing lockdowns in the first place and the criteria for easing them. As is apparent from the differing infection and mortality rates across countries, there has been a wide diversity of responses. The authors of the study identify a number of factors which are necessary to ensure effective control of the spread. In the first instance we need some idea of the current status of infection rates which requires a surveillance system to be in place allowing us to track the reproduction number (R number) in real-time. A second prerequisite is community engagement which gives greater flexibility to local communities to take decisions to protect themselves. This has become a particularly fraught issue in the UK where government is highly centralised but where the four nations have increasingly adopted different approaches to easing the lockdown. Even in England there is now increasing tension between the London government and urban areas in the north, which threatens to have significant long-term political repercussions.

The authors note that “with few exceptions, such as Germany, New Zealand, Norway, Scotland, and South Korea, political leaders have struggled to secure public trust and thus support for continued lifestyle changes. More generally, countries with female leaders have done better at securing public confidence and adherence to new measures than have countries with male leaders.” Readers interested in the latter point can refer to the original paper (here).

One of the features of the past seven months across many countries has been the series of mixed messages which have sown confusion. This is evident, for example, in advice on how many people can congregate in confined spaces. More particularly it is evident in advice on wearing face coverings. At the start of the pandemic the World Health Organisation argued that masks would encourage a false sense of security and would deprive medical professionals of badly needed protective equipment. It also argued that there was insufficient evidence to suggest that healthy people should wear them. The WHO finally changed this advice in June. Whilst numerous Asian countries long ago adopted the practice of wearing masks in public places, it has been slower to catch on in Europe and North America and we have witnessed demonstrations in a number of countries against the requirement to wear a face covering. To add insult to injury, the UK government has recently confirmed that it will end the VAT waiver on personal protective equipment from 1 November. British households will thus have to pay 20% more for the masks which they are legally obliged to wear in shops and on public transport.

But by far the biggest factor determining the differences in performance across countries is the capacity of the heath system, most notably the track and trace system. Singapore and South Korea have mortality rates of 0.5 and 0.9 per 100,000 of population respectively compared with 66.9 in the UK, 68.1 in the US and 93.0 in Belgium. Singapore has a rigorously enforced system which has led some to complain about its personal data implications but its success cannot be denied. South Korea has introduced a mass testing regime and uses electronic health records, credit card transactions data and mobile phone-based GPS data to determine peoples’ movement. It also relies on tracers with detailed local knowledge to observe localised outbreaks. The UK’s experience has been much less impressive: after it abandoned its initial attempts at track and trace it attempted to develop its own smartphone app but later abandoned this approach and switched to an Apple–Google system – an approach which cost valuable time.

As the second wave intensifies, many industrialised countries have taken on board the lessons learned during the spring. Full lockdowns did prove to be effective in curbing the spread of the disease but they come at an enormous economic cost and they would only be repeated as a very last resort. There is thus a general recognition that over the coming winter, we are going to have live with Covid and keep the economy afloat as best we can, for even if we are close to a breakthrough in finding a vaccine it is not going to be widely available until the second half of 2021 at the earliest.

The epidemiologists who authored The Lancet article thus make a series of recommendations for the conduct of Covid policies:

i)             In the first instance governments should be transparent about which factors are being taken into account when assessing the threat level and “ideally, these … should explicitly state the levels or phases of easing restrictions, the criteria for moving to the next level or phase, and the containment measures that each level or phase entails.”

ii)            Lockdowns should not be eased until the infection situation can be adequately monitored which requires an emphasis on local conditions rather than simply the national average picture.

iii)           Since it is obvious that distancing restrictions will have to remain in place for quite some time to come, “governments should educate, engage, and empower all members of society, especially the most vulnerable, to participate in the pandemic response. Rather than crafting these measures on the basis of assumptions about what communities can or cannot accept, citizens should be directly involved in the process of coproducing tailored solutions appropriate for the local context.”

iv)           Most importantly, it is crucial to introduce an effective track, trace and isolate system. As the authors point out, “preliminary data for testing suggests that identifying and isolating mild and asymptomatic cases can significantly reduce R, health-care burden, and overall fatality.” Once the system is in place, it is important to ensure effective takeup, with some research suggesting that an overall participation rate of 56% is sufficient to stop transmission.

European governments have largely learned the importance of adhering to these conditions although they are complicated by differing forms of government with countries with decentralised government (e.g. Germany and Switzerland) posting better outcomes than more centralised systems such as France and the UK. 

They may also work better if people find it in their interests to comply with more rigorously enforced rules when they have a stake in their success. An under-appreciated economic consequence is the distributional impact of lockdown measures with some sectors expected to take a much bigger hit than others. As MPC member Gertjan Vlieghe noted in a speech last week “we are really not all in this together. It is far, far worse for some than for others.” Accordingly, the measures may be more likely to work if governments can give reasonable assurances that there will be work for people to go back to when the pandemic subsides. That alone may be a good reason for governments to continue providing labour market support over the winter months.

Here we go again

It was inevitable that we would see a sharp rise in Covid cases as the restrictions on social distancing were progressively eased over the summer, and we find ourselves celebrating the autumnal equinox with a big rise in infections and a major equity selloff as markets digest the implications of further lockdowns. It feels a bit like March all over again except that this time we have some idea of what we are letting ourselves in for. With the total of Covid deaths in the US today edging above 200,000 (roughly equivalent to the population of Salt Lake City), this should act as a reminder that the pandemic is quite literally a matter of life and death.

Turning first to the rising Covid infection rates, we should note that more tests are being carried out so it comes as no surprise that there are more positive results. The last time the UK 7-day average of cases burst through 3600 in early April, the daily number of deaths was already averaging 400-plus. Today it is running at just 22 – admittedly triple the number three weeks ago. According to estimates made by epidemiologists at the London Schoolof Hygiene and Tropical Medicine on Day One of the lockdown in March, around 100,000 people were being infected every day but at the time the official statistics were showing just 1000 new cases per day. One worrying development is that the number of positive cases relative to the total number of tests has picked up recently and it is now running at its highest since late-May. Roughly 2% of all tests show a positive result compared with 0.6% in late-August (chart). For the record, in early-April more than 35% of all tests registered positive though this is because initially testing was restricted to hospital patients.

We have learned from experience that the trends in other European countries should be followed closely. In March, Italy was the canary in the coalmine. Currently, we should be paying close attention to trends in France and Spain where the 7-day average mortality rate has risen from less than 10 in mid-August to 53 and 107 respectively. It thus should not come as any surprise that Boris Johnson announced a further raft of UK restrictions including the forced closure of pubs and restaurants at 10pm each day and the scrapping of efforts to open up sporting events to crowds from October. With official guidance now exhorting workers to work from home wherever possible, this marks a U-turn from previous policy to force them to return to the workplace. Whilst it is easy to criticise governments for the about-turn, it does appear to make sense to put some form of restrictions in place if we are to avoid over-burdening an already overstretched health service.

But it is less the imposition of restrictions that are the problem than the ill-judged rush to get people back into the office in the first place. Although government ministers did continue to highlight the risks of a second Covid wave, their actions were inconsistent with this caution. More than 64 million meals were served up at restaurants under the government’s Eat Out to Help Out scheme during August. Bringing people together in this way is likely to have played a role in facilitating the spread of the disease. Nor is it any surprise that the rate of infections has risen as schools across Europe reopened from late August. According to a study published last month in The Lancet the reopening of schools needs to go hand-in-hand with a coherent track and trace system in order to keep infection rates down. As the authors note in the case of the UK, “reopening of schools together with gradual relaxing of the lockdown measures are likely to induce a second wave that would peak in December, 2020, if schools open full-time in September, and in February, 2021, if a part-time rota system were adopted.”

Indeed, here we have the nub of the problem: The track and trace system has been a complete shambles. Just to give some anecdotal flavour, a friend of mine works in the NHS and was seconded to the testing team in the spring. He recently quit the role citing the shambolic nature of the organisation, and a lack of experience on the NHS Test and Trace board only one of whom has a background in public health. This rather supports the lurid media stories reporting the difficulties people face in obtaining a Covid test anywhere near their home (another friend faced a 110 mile round trip for their test, only to find that after they were not given the results within the mandated period, the testers claimed to have “lost” them). 

One of great misnomers is that the system goes under the banner of NHS. But in fact large parts of the testing have been subcontracted to private sector companies (talk about destroying a brand!). This is another illustration of the point I have made numerous times on this blog that the private sector often struggles to generate the scale necessary to manage big projects. Yet all this aside, there was a case for a limited reopening of the economy over the summer. However, it needed to be backed up by a coherent testing infrastructure and in the UK we are not at that point yet.

Medical experts are not particularly enthused by the new measures. Paul Hunter, professor of medicine at the University of East Anglia was quoted as saying “It is doubtful that the measures currently being enacted will be sufficient to reduce the R value to below one much before this side of Christmas.” Indeed, closing pubs at 10pm when people have been drinking for the previous 2-3 hours seems to be at best a marginal response.

As for the economic implications, it seems likely that the burden on the service sector will increase still further. Just when it thought it had a fighting chance of survival, additional lockdown rules will deal another heavy blow. The furlough scheme has so far prevented the worst of the recession from hitting the labour market, but it is set to be phased out at the end of October. So far the government has given no indication that it plans any extension. But by imposing restrictions on the economy, voters will expect some form of quid pro quo. There are suggestions that the Chancellor is considering a scheme in which companies would pay staff for the time they are at work, while the Treasury would cover part of their wages for time when they have no work (similar to the German Kurzarbeit system). This is naturally going to come at a big financial cost.

One of the calls made during the lockdown is for a more coherent approach to pandemic planning. Although the government claims to have followed the science, there is an argument that says a whole range of disciplines need to be involved in setting up a national contingency plan (as Tony Yates pointed out here). It is right that societies do their best to protect their citizens and we have to give governments credit for that. But this does come at a huge cost – financially and in other ways – which means that we need to have a proper debate about weighing up the costs and benefits. Governments will be judged on how they reacted to the pandemic and just as they have outsourced aspects of monetary and fiscal policy to experts, there is a strong argument to suggest that at some point we will have to consider outsourcing pandemic planning as well.

Caution: Data in use

Data are the lifeblood of analytical research. If it were not for people willing to go out and track the positions of the stars in the sky, the theories of Nicolaus Copernicus would remain unproven and we would be operating on the misconception that the Earth was the centre of the universe. Albert Einstein would just be another clever theorist with some whacky ideas unless people were able to validate his theories by observation and measurement. On a more prosaic level, data matters hugely for modern policy issues as we need some form of benchmark against which to judge whether a policy is working.

As an economist I spend my professional life assessing economic issues on the basis of the evidence in front of me. I may not always be able to foretell the future but I can make a pretty good fist of understanding what is going on based on the data at my disposal. The data may not always be accurate or may be distorted by factors which hide the true message and one of the keys to decision-making is to understand how the evidence is compiled upon which decisions are based. This matters because decisions taken on the basis of faulty data risk making outcomes even worse. Two pieces of evidence released this week highlight the problems inherent in making policy based on uncertain data. 

(i) Covid data

The first instance is the measurement of Covid-19 deaths in England. It is well known that the UK has reported the highest number of deaths in Europe. But what is less well known to the casual observer is the figures assume that once a person is diagnosed as Covid-19 positive, their eventual death will be attributed to Covid-19, irrespective of the manner of their demise and how long after the initial diagnosis. For example, if a person was diagnosed as Covid-19 positive this year but dies a year later as a result of a grand piano landing on their head, they will technically still be classified as a Covid death. The rationale for this approach was that the authorities did not know much about the incubation period of the disease and did not want to be accused of under-reporting mortality figures in the early stages of the pandemic. Incidentally, this explains why, in contrast to many other countries, the UK did not report figures on recoveries. Once you have had the disease, that’s it – you are marked for life.

Obviously this is not particularly sensible. Consequently Public Health England this week imposed a limit of 28 days from diagnosis as the basis for measuring Covid-19 mortality, bringing it into line with Scotland, Wales and Northern Ireland – and indeed the international consensus. This makes a lot of sense: Broadly speaking, if you have not died 28 days after diagnosis, the odds are very much in favour of you remaining alive. This also changes the UK’s position in an international comparison. By my reckoning, the mortality rate is reduced from 70 per 100,000 of population to 62, which is much closer to the figures for Italy, Sweden and Spain. The UK still has the fifth highest global number of deaths but it no longer looks quite the outlier that it did earlier this week. Not that this is to excuse the government’s many failings in the way it handled the Covid pandemic, but by treating the figures on the same basis as other countries we have a more fair picture of how the UK stacks up in an international context.

(ii) Assessing exam data

The second data issue concerns the way in which school leavers’ ‘A’ level results were graded following the cancellation of this year’s exams. For those readers outside the UK, I should point out that the reporting ritual of exam results has become a staple of August news bulletins when there is nothing else for the media to focus on. Until recent years, the cry was that exams were becoming too easy and too many students were achieving top grades. In response to this media outcry, the marking was toughened up. So you can imagine the field day the media have had when it was impossible to hold exams at all.

There was never a satisfactory way to go about assessing what grades students would have achieved in the absence of exams. The starting point was to ask teachers to predict grades, but as Ofqual (The Office of Qualifications and Examinations Regulation) pointed out  teachers tend to offer optimistic predictions of their students’ ability. Teachers were thus also asked to provide “a rank order of students for each grade for each subject” on the basis that empirical evidence suggests people are better at making relative judgements than absolute judgements. Having collated all the evidence, Ofqual concluded that this would “likely to lead to overall national results that were implausibly high.” Accordingly, it had to find a way of normalising the results.

Unfortunately the model it chose is primarily based “on the historical performance of the school or college in that subject.” Even allowing for numerous tweaks, the system contains built-in discrimination against bright students from schools which in the past may not have delivered great exam results and is particularly biased towards independent schools which have a tendency to deliver above-average results. Ofqual argues there is “no evidence that this year’s process of awarding grades has introduced bias.” The data suggest otherwise: The number of A and A* grades awarded to independent schools increased by 4.7% compared to 2019, whereas the increases awarded to sixth form colleges, which tend to be attended by more disadvantaged students, was just 0.3% (chart). The data also show that the most disadvantaged students were more likely to have their predicted grades marked down: The proportion of pupils achieving a C or above fell by 10.4 percentage points among the most deprived third of pupils, compared to 8.3 percentage points among the wealthiest third. For anyone interested in an expert view of the problem, this series of Tweets is worth a read.

For a government that is trying to level up the life chances of those outside the south east of England (if you recall that was the promise in the 2019 election campaign) the 2020 exam process seems to be an odd way to go about it. Moreover, to the extent that young people’s exam results are one of the benchmarks which determine which university they attend, which in turn has a bearing on their future employment prospects, the importance of their exam results matters. Unfortunately, it is difficult to justify the rationale behind the algorithm which predicts exam grades thus devaluing their usefulness as a predictor of student ability. This in turn means that the data generation process becomes more important than the data which it turns out and is an example of why we should not always take data used to feed into policy decisions at face value.

As for the students, it is hard not to feel sympathy for them. They may or may not have gone on to achieve the grades predicted for them. But had they fallen short during the exams, they would at least have done so on their own terms. As it is, they have had grades imposed upon them by what appears to be a flawed data generation process, and judging by the popular outcry, it is not a decision that has played well with the public.