Who needs experts?

During the Brexit referendum campaign, Michael Gove, who at the time went by the Orwellian job title of Secretary of State for Justice, said in a TV interview with Sky News that “I think the people in this country have had enough of experts.” When quizzed on this, he went further and suggested that “these people are the same ones who got consistently wrong what was happening.” It was a somewhat off the cuff remark but it instantly caught the mood of the times. Recall the summer of 2016 was the time when British politicians exaggerated the benefits of Brexit. It was also the first time that the world became aware of just how little regard Donald Trump has for the truth – those inconvenient pieces of evidence that suggest that one’s prejudices may not always be right. But this attitude has had a hugely damaging effect on the quality of policy debate, and nowhere is this more important than in the debate over Covid-19.

As an economist who does not always get every forecast right, this argument is sometimes thrown in my direction. After all, what use are experts if they are not infallible? I have explained on numerous occasions that economics is not a predictive discipline – economists cannot foretell the future – but in the public mind that is what we do. When it comes to matters scientific, the public holds the view that there is a single body of evidence which represents the truth and anything that is not inside this envelope of perceived wisdom must be false. But just as with economics, the public perception of science is not wholly true. Scientific conclusions on issues such as epidemiology depend on a host of input assumptions, which if changed can result in very different outcomes.

There has been much debate in recent weeks about the size of the R (or reproductive) number associated with Covid-19. As we are all now aware, an R number in excess of one implies the rate of infection is rising. It is extremely difficult to measure R in real time and estimates for the UK in the range 0.7 to 0.9 imply a margin for error that puts it dangerously close to one. It also varies by geography so if it is higher than one in some places, this runs the risk of a second wave of Covid-19 cases. The R value is calculated using data such as hospital admissions, intensive care unit admissions and deaths. However if the cause of death is wrongly attributed, this will impact on estimates of R. Since age is also a factor in deaths from Covid-19, the overall R value may be biased upwards if we do not take sufficient account of this.

Those responsible for making these calculations are acknowledged experts in their field, and are aware that their estimates are subject to a margin of uncertainty. The problem then becomes one of deciding whether the estimates form a sufficiently strong basis for the decisions made by policymakers, who ultimately have to carry the can. Or to put it another way, is the science sufficiently robust to support some of the recent policy actions? 

With the UK having suffered the second highest recorded death rate from Covid-19, questions are increasingly being asked of the policies adopted over recent months. Quite how an island has significantly more deaths than other European countries which share land borders suggests that there have been policy mistakes. The government has consistently stated that it is “following the science,” therefore either the advice was flawed or the policy implementation was. 

The most obvious question is why the UK did not impose some form of border controls – after all, they were employed by nearly all other European countries? As it happens, the minutes of the Scientific Advisory Group for Emergencies (SAGE) for 23 March suggested that “closing borders would have a negligible impact on spread.” Yet on Monday the UK introduced a quarantine regime in which people entering from overseas are now expected to self-isolate for 14 days. This appears to be somewhat self-defeating since the rates of infection are now lower in other European countries than the UK, and it would have made more sense to implement these restrictions in March. Nor is it clear how the policy is enforceable since there is no guarantee that the address people give on the form which they are legally required to fill in is necessarily where they intend to stay. 

The policy on schools closure has been similarly muddled. The SAGE view on 16 March was that “school closures constitutes one of the less effective single measure to reduce the epidemic peak.” Two days later, “SAGE reviewed available evidence and modelling on the potential impact of school closures. The evidence indicates that school closures, combined with other measures, could help to bring the R₀ number below 1.” On the basis that the government believed the epidemic to be under control, it announced that primary school pupils would return to school at the start of June. But many local authorities, and indeed parents, questioned whether the policy was safe and many children simply did not show up at school. With attendance rates last week running at just 7% the government this week conceded that its plan was not workable and backtracked on its school reopening policy. 

Then there is the vexed question of the lockdown. On 18 March, SAGE concluded that there was a case for a lockdown in London but “measures such as restricting public transport … would have minimal impact.”  Five days later, there was a stronger case for “reducing contact with friends and family outside the household, and contact in shops and other areas.” One of the attendees at this meeting was the epidemiologist Professor Neil Ferguson, who yesterday told a committee of MPs that “had we introduced lockdown measures a week earlier, we would have reduced the final death toll by at least a half.” Yet the SAGE minutes do not suggest that the scientific consensus was pushing for an earlier lockdown. Nor is there much evidence during the early stages of the debate that they paid much attention to the problem of shielding the older, more vulnerable members of society despite the fact that some estimates suggest “more than half of England’s coronavirus-related deaths will be people from care homes.”

It is easy to be critical of a government which has presided over the highest number of Covid-19 deaths in Europe, and its communication strategy has been muddled and inconsistent (viz. the Dominic Cummings affair). However, its claim to be following the science does appear to stand up to scrutiny – at least to some degree – as a cursory glance of the SAGE minutes suggests. The government has made errors and will ultimately be held accountable for them (we hope). But the scientific advice has also flip-flopped. This is not to say that the SAGE committee was wrong – it was acting on the best information available at the time, and like all good scientists members changed their views in the face of new evidence.

Whilst the experts may not get everything right, they do get more right than they do wrong. Deductive failures do not mean that we can do without experts – Michael Gove was wrong about that. But next time you hear the media calls suggesting that economists’ forecasts are always wrong remember that the so-called hard science disciplines do not always get it right either

Trust me. I'm a politician!

The importance of trust

One of the qualities which a politician in a democratic society must possess in abundance is trust. Without it, it is almost impossible to repeatedly go back to the electorate in order to ask voters for their support. There does not appear to be much trust around at the present time however. Trust in the British government has recently fallen sharply as dissatisfaction with its handling of the Covid-19 crisis has mounted. But this is more than about Covid, as evidenced by the recent riots on the streets of the US. 

Trust is the basis of our economic system. It is the foundation upon which contracts are drawn and on which trade takes place. To put it even more simply, in the absence of trust many value-generating transactions would simply not take place. The basis of trust in western democracies is rooted in governments: They draw up the legal framework upon which our economies operate and it is therefore important that we continue to have confidence in them. The basis of that trust began to fray in the wake of the 2008 financial crash when governments assured their electorate that a return to normality would occur sooner rather than later. When that did not occur, populist voices began to make themselves heard in countries as disparate as Greece, Italy, the Philippines, UK and the United States. Voters stopped believing that the system was helping them and the perception became entrenched that it was biased in favour of others, be it the rich, foreigners or those from a different ethnic background. As a result, the US elected Donald Trump as President and the UK voted in favour of Brexit as these were solutions which it was promised would look after the interests of voters.

... And how to lose it

But the roots of populism do not run deep. Neither the Johnson government nor the Trump Administration have a coherent plan of what they want to do, other than deliver on the populist platforms on which they were elected. Trump’s America First strategy has resulted in conflict with China and undermined the institutional framework which has supported the global economy for the past 70 years. In the UK, the Johnson government continues to believe it has a duty to deliver a full departure from the EU by the end of this year, irrespective of the fact that the landscape has changed since the December election, and irrespective of the economic costs that the current policy orientation is likely to inflict.

Indeed, based on his past performance Boris Johnson is the least trustworthy occupant of the Prime Minister’s office in modern history (it is one of history’s great ironies that the British electorate trusted Jeremy Corbyn, his opponent in the 2019 general election, even less). Johnson was a brilliant cheerleader for Brexit but never once has he stopped to consider its economic consequences. The Covid-19 crisis has called his judgement further into question. Although Johnson gained considerable personal sympathy following his brush with the coronavirus, and for a time his polling ratings surged, the fact that Britain has the highest death rate in Europe has raised a lot of questions about the government’s handling of the crisis. 

We should reserve judgement until such times as a deeper investigation of the crisis is conducted but we can draw conclusions from the government’s handling of the Dominic Cummings affair. The overwhelming consensus of opinion is that Cummings, who is Johnson’s most trusted adviser, broke the lockdown rules. One of the more unedifying aspects of the whole affair was the way in which the Attorney General risked the independence of her office by aligning with the government. As Murray Hunt from the Bingham Centre for the Rule of Law put it the most important aspect of this issue “is what the episode reveals in general about the mutual dependency of the rule of law and public trust.” 

Impossible to trust the UK government on Brexit

Anybody who was already concerned about the government’s position on Brexit will not be assuaged by recent events. I have never been convinced that Brexit is about improving the wellbeing of the British people – there is, after all, no evidence to support this position. Efforts by the Johnson government to go so far as proroguing parliament to drive it through should wake people up to the lengths it is prepared to go to make this ideological project a reality. If the electorate increasingly distrusts its own government, it should come as no surprise that EU negotiators are not prepared to take the Johnson government at its word. The recent spat between the UK’s Sherpa David Frost and Michel Barnier makes clear that the two sides remain far apart as we move closer to the point at which the UK will have to make a decision on whether to extend the transition period.

There is some substance to the UK’s criticism that the EU is treating the UK differently to other parties seeking to do a trade deal, but it is disingenuous to claim that the proposals represent anything other than those outlined in the Political Declaration signed last October (as Barnier hinted without saying so explicitly). We thus find ourselves returning to the vexed issue of trust. There is an increasing sense in Brussels (and indeed elsewhere) that the UK has no intention of reaching a trade agreement with the EU by the end of this year, despite the fact that the Political Declaration suggests “the Parties envisage having an ambitious trading relationship on goods on the basis of a Free Trade Agreement, with a view to facilitating the ease of legitimate trade.” Nor is it prepared to seek an extension of the Transition Period, which implies that the UK will fall back to trading on WTO rules at the start of 2021.

As the tide of globalisation ebbs, there can have been no worse time in the post-1945 period to embark on a trade policy based on WTO rules. Many economists (including me) have made the point that failure to reach a trade agreement will impose significant economic costs on the UK. But what has changed in the interim is that the global economy now faces its deepest recession of modern times. A rational government would immediately have declared force majeure and asked for an extension. But the Johnson government has long since adopted an economically irrational approach to Brexit and I cannot determine whether its stance represents a crazy bargaining ploy in a bid to force more concessions from the EU or whether it means what it says about a no-deal Brexit.

You do not have to be as cynical as this jaded economist to believe that the government is prepared to hide the costs of a no-deal Brexit behind the smokescreen of a Covid-induced recession. After all, they say you should never let a good crisis go to waste. But the actions of this government over recent months with regard to fudging the rules (the Cummings case) and blurring the evidence (the selective use of data in reporting the UK Covid-19 outbreak) are consistent with the Albert Einstein view that “whoever is careless with the truth in small matters cannot be trusted with important matters.”

1968 and all that

It is interesting how society forms a popular view of recent history which is constantly reinforced by talking heads in the media, many of whom were not even born when the events in question took place. For example, many people look back to the 1950s with great nostalgia. Perhaps for Americans, looking back to a time when the country was relatively untroubled by military failure and the Great Depression was a rapidly fading memory, this may be understandable. But we tend to gloss over the fact that the country was riven by racism, particularly in the Deep South, which a decade later was to give such force to the Civil Rights movement. Continental Europeans do not have the same yearning for the 1950s, largely because their economies were being rebuilt after the shattering experience of World War II.

There seems little reason to look back to the 1950s with any great fondness in Britain either. Admittedly, the country was living in the afterglow of having been on the “right” side of history in the post-1945 era and living standards were rising rapidly. But the economy was in effect bankrupt, struggling to earn enough to pay the interest on its wartime debt, whilst food rationing continued until the middle of the decade and the Empire was being dismantled. Although people did not realise it at the time, Britain was vacating its position at the top table.

I can well recall the 1970s, which are today characterised by their uniform awfulness when workers in “broken Britain” seemed to be permanently on strike and the country was apparently convulsed by social unrest. The Conservatives have spent 40 years playing on this image to remind everybody about the terrors of electing a left-leaning Labour Party. But it was nowhere near as bad as the popular imagination now believes. Britain at the time was still a major industrial power, albeit losing ground to Japan and Germany, jobs were fairly plentiful and for most of the decade unemployment remained relatively low - at its peak it was less than half the level of the early 1980s. Inflation was a problem but wages kept pace. The downside was that the economy’s global competitiveness suffered, but this was not evident in people’s day-to-day lives.

But it is the way that the 1960s are portrayed which I find most fascinating. The enduring image is one of cultural change – a decade characterised by an explosion in music and fashion, hippies and the Summer of Love. Not so long ago I recall watching a documentary in which an American academic described 1960s Britain as a time when “everyone” was living up to the idealised picture of the time, enjoying the music and taking the drugs. That was certainly not true of the childhood Britain that I remember, many of whose social structures were more closely related to the Victorian era than those of today are to the 1960s. For anyone who doubts that view, I would recommend dipping into the book by historian Dominic Sandbrook Never Had it so Good. One fascinating fact which summarises the difference between reality and recollection is that the album which spent the longest period at number one in the UK charts came not from The Beatles or Rolling Stones but was the soundtrack to the film The Sound of Music, which spent 69 weeks in the top spot compared with 30 for the Beatles 1963 debut album Please Please Me and 23 for Sergeant Pepper’s.This was a very conservative society.

It is the events of 1968 which resound so heavily today. My own memories of that year are pretty hazy, largely because I was only five years old, though two things stand out: my first day at school early in the year and the first manned orbit of the Moon by the crew of Apollo 8 just before Christmas. Sandwiched in between, and largely passing me by, were the ongoing war in Vietnam, the assassinations of Robert Kennedy and Martin Luther King and the student uprisings across Europe and the United States. In short it was a tumultuous period when governance appeared to be breaking down. 

I often wonder how I would have perceived that period had I viewed it through the eyes of an adult. Would I have been as bemused by the events of 1968 as I am by those of today, characterised by an American President who has been accused of “glorifying violence” as the city of Minneapolis erupted in protest at the death of yet another black man at the hands of the police? Would I have felt as outraged as those members of society protesting against social injustice in 1968 as those who are affronted by a British government which appears to believe that it can adhere to one set of rules whilst the rest abide by a different rulebook? And that is without considering the divisive effects of Brexit which, as I pointed out last year, is merely one front in a bigger culture war.

Perhaps what 1968 represented above all was the revolt of youth against a system which they perceived to be biased against them. This was the first roar of the baby boomers who have been running the show for the last 30 years. But maybe their time is drawing to a close. Although US voters may yet grant Donald Trump another four years in November, the boomers will soon have to cede to a younger generation with a different world outlook and different aspirations. As easy as it is to get carried away with recent events and conclude that we are on the slippery slope to a dystopian society, the lesson of 1968 is that positive change can come from apparent chaos.

Current events come against the backdrop of the Covid-19 crisis – an unprecedented event which is going to transform the structure and operation of our economies. Add in the desire for political change and the stage is set for a radical process of restructuring. We may not notice the difference tomorrow, or even next year. But it is a fair bet that in 50 years’ time, 2020 will go down as the year everything changed.

EU expansion

After appearing to drag its feet on the issuance of joint bonds, the German government last week endorsed a French proposal to set up a fund capable of delivering €500bn of grants to EU member states suffering from the economic impact of Covid-19. This week the European Commission went further by setting out a plan to borrow €750bn by directly issuing bonds and distributing the proceeds to member states. After a decade of wrangling, this is a very important step and is vital if the EU is to hold together as a cohesive body. At last, the Commission has decided to lend its weight to a plan to issue pan-European fiscal instruments and will thus back up the ECB which has done all the heavy lifting on policy up to now. There are many who see this as a game changing event. And if implemented, it will be. But there are a number of hurdles to be crossed before the plan can be realised.

What does the plan entail?

Ursula von der Leyen, the Commission President, outlined a programme dubbed Next Generation EU. This is very apt because if it can be made to stick the EU could be about to take the first steps on the way to a fiscal union. Who knows, but this plan may be to the formation of a common fiscal policy what the snake in the tunnel was to the single currency. If nothing else it would break the taboo on fiscal cooperation which has long been one of the structural issues which has prevented the euro zone/EU from becoming the economic entity that the 1990s generation of leaders envisaged. That said, this measure is viewed as a one-off plan, nor will the Commission take any responsibility for debt already incurred by member states.

The idea is that the Commission will use its strong credit rating to borrow €750bn on international capital markets and recoup the funds though future EU budgets “not before 2028 and not after 2058”(i.e. not within the current budgetary period). Of this total, €500bn will be distributed in the form of grants whilst the remainder will take the form of loans. But the Commission is not simply proposing to write blank cheques: The funds will be distributed via EU programmes designed to achieve specific goals such as boosting competitiveness, supporting a broader green agenda and building the digital economy.

In order to facilitate repayment, the Commission suggested that a number of additional revenue raising items could be agreed at the pan-European level with each country paying the revenues from these streams into a centralised budget. “These could include a new own resource based on the Emissions Trading Scheme, a Carbon Border Adjustment Mechanism and an own resource based on the operation of large companies. It could also include a new digital tax … These will be in addition to the Commission’s proposals for own resources based on a simplified Value Added Tax and non-recycled plastics.”

In terms of the entitlement of individual states, the Commission has set out a formula based on three main economic factors: (i) population; (ii) the inverse of GDP per capita and (iii) the average unemployment rate over the past 5 years compared to the EU average. Based on this formula, Italy would be entitled to the largest share of the grants (20.5%) followed by Spain (19.9%), whereas France would only be able to secure a maximum of 10% and Germany 7% (chart).

What are the obstacles?

The first obstacle, and the most difficult, will be to convince the ‘frugal four’ (Austria, Denmark, Netherlands and Sweden) to sign up. The plan requires unanimous approval from governments, primarily because it entails structural changes in the EU budget that demand ratification by national parliaments. The frugal four have consistently opposed the creation of a debt union and have led the opposition which the German government is not willing to explicitly lead but which its electorate supports. But although Germany may have come somewhat reluctantly to the table, the government realises that failure to take action will ultimately weaken the ties that bind the union. After all, rising euroscepticism in Italy risks taking the EU in a direction it would rather not go and Germany certainly does not want to be the trigger for a breakup of the union. Arguably, however, the frugal four have less to lose and since they do not have the clout to bring down the union on their own, they act as a useful sounding board for the fears of all the northern countries.

A second concern is whether the establishment of an EU-wide fund will prompt individual governments to reduce their own efforts to put in place measures to combat the economic crisis. There has long been a concern amongst northern European members that an EU-wide safety net would result in moral hazard issues.

There are also some concerns with regard to fiscal legitimacy. One of the biggest problems is that only national governments have the power to levy taxes on their citizens since the government derives its tax-raising power from its electorate. Although there is a European Parliament which derives its legitimacy from citizens of the EU, it looks after pan-EU interests rather than the local interests which are generally more important to electorates. The levying of specific taxes for pan-European purposes might thus be seen as problematic.

But a brave attempt for all that

A decade ago it was clear that the euro zone is not a proper economic union – it was effectively a fixed exchange rate system in which debtor nations had to bear the brunt of the necessary economic adjustment. Greece and Ireland learned this lesson in a very painful way as the global debt crisis unfolded. It was also equally clear that some form of fiscal transfer mechanism would be necessary if the euro zone were to survive in the longer term, but efforts by Emmanuel Macron to make headway over the last three years largely fell on deaf ears. Now the tide has turned. That said, the Commission’s proposals are unlikely to be accepted in their current form and a compromise will emerge instead. Nor do the proposals outlined this week constitute a fiscal union. But they do mean that some form of countercyclical transfer mechanism could be in place sooner rather than later. In my view it is a very heartening move – at least from an economic standpoint although we can argue about the politics. The only disappointment is that it took so long to get here.