DEATH and DEMOCRACY

   Self-Love in the Time of Corona

Amidst  the depressing statistics of sickness and death piling up from so many countries, the most alarming of all is the news that 60% of Americans believe that President Trump has done a good job in handling the coronavirus crisis. It is only marginally more frightening than the  surge in sales of guns in that country. Democracy can surely not survive where there is a popular unwillingness to face facts, which goes hand in hand with the pernicious notions that all opinions are equal and that public lying is OK.

 It is unnecessary to rehearse all of Trump’s failures in the face of the coronavirus pandemic. His unfitness for office is encapsulated in his boast when visiting the HQ of the US Government’s Centers for Disease Control. He said that doctors asked him “How do you know so much about this?” A remark that even the North Korean dictator Kim Jong-Un might hesitate to make. If the American people re-elect this man in November, they will deserve what they get. He will not hesitate to use the new surveillance technologies, recently enhanced to cope with the spread of the virus, to cement his control over political life in America.

Across the Atlantic another buffoon, albeit a less dangerous one, is in charge of the United Kingdom Government’s handling of the corona pandemic. Whether one looks at the development of strategies to cope with the spread of the disease, the organisation of  testing,  the provision of ventilators for the seriously ill or the supply of protective clothing for staff in hospitals and care homes, it has so far been a complete shambles. In the face of this reality, Prime Minister Johnson’s self-regarding posturing and pompous rhetoric has earned him nothing but praise. Not just from the slavishly sycophantic Conservative newspapers but even from the normally nonpartisan Financial Times that admired his “sunny rhetoric”. And the Archbishop of Canterbury who purred on BBC Television News that “Boris Johnson has risen to the occasion”. The facts are otherwise.

Strategy

At the beginning of the outbreak in February, the Chief Medical Officer for England was talking about achieving ‘herd immunity’. By this he meant that some 60% of the population of the UK, i.e. around 40 million people, should become infected with the virus. Applying a hospitalisation rate of 15% implies that beds and staffing would have to be found for 6 million people, while a death rate of 1% would imply 400,000 fatalities.

Both of these numbers seem unthinkable. The Government’s scientific advisers then suggested that a strategy of voluntary self-isolation, measures that they called ‘delay’ or ‘mitigation’, might reduce the number of fatalities to 250,000. Later, the even more restrictive measures, ‘suppression’, that came into force on 23 March  were said to be able to lower the number of deaths dramatically to the much more manageable number of 20,000. (For comparison, the number of people who died in the UK was just over 616,000 in 2018, while deaths from seasonal flu  have averaged around 17,000 over the past four years. )

Notice, however, that even this number implies 2 million cases of infection which in turn implies 300,000 extra people requiring hospital treatment. (For comparison, there were around 150, 000 hospital beds in England in 2017.)

Testing

 On January 12 China released the genetic code for the coronavirus, a blueprint for producing tests. The UK was one of the first countries to develop an accurate test and quickly began to track down potential carriers. But it did not follow the strategy of mass testing adopted by South Korea, Germany and other countries. Why not? According to FT reports, the processing of the tests was initially confined to one laboratory in North London which even now is processing only 500 tests a day. Only much later were more labs enlisted.

On March 11, the Government said it had carried out 25,000 tests in total up to that date, and was aiming for 10,000 tests per day, a target that has yet to be reached. In contrast, testing in Germany is reported to average 70,000 tests per day, which may in part account for the relatively low death rate from the virus in that country. On March 14 the Government indicated it was changing its strategy from contact-and- trace to prioritise the testing of the most seriously ill patients in hospital. This triggered a petition from junior doctors demanding that NHS workers be tested so that they would know whether they were safe to work or not. In response, officials said they were aiming for 25,000 tests a day. One day later Boris Johnson made the Trumpian claim that daily testing would rise to 250,000 a day! At the time of writing  testing in the UK has reached about 6,500 a day, and officials said it would not reach 25,000 a day until the middle of April.

Ventilators

The Government has stated that a total of 30,000 ventilators will be required to deal with the outbreak, that 8,000 are available at present and that a further 8,000 “under order” should be available “in the next few weeks”. But several existing suppliers, including two that offered to source 25,000 ventilators from China, say that their offers were ignored. The Government also missed out on taking part in an EU-wide procurement plan. Using another Trumpian rhetorical device, the flat-out lie, it said it hadn’t been informed. Instead, it ordered 10,000 ventilators to be designed from scratch by Dyson, a manufacturer with no experience in the field. Meanwhile, a team at University College London has adapted an existing breathing device that is less invasive than a ventilator. If its trials prove positive, then it will be produced by Mercedes Formula One engineers at the rate of 1,000 per day, starting in less than a week.

 Personal Protective Equipment

From the outset, medical staff facing patients suspected of being infected with the virus, whether they be doctors, nurses, ambulance drivers or care home workers, have complained bitterly that they lack adequate masks, gloves and clothing to protect themselves. There have been two high profile cases of young doctors dying as a result. The Government’s response has been to say that they are working as fast as they can to meet the demand, but details of progress have not been forthcoming.

The Virus And The Economy

The case just cited of an existing piece of medical equipment being adapted to perform the urgently needed functions of a ventilator is an example of a universal phenomenon that the pandemic has highlighted, the speed with which suppliers respond to a perceived market demand.

Economics textbooks teach that the most important function of a market economy is to allocate the available amounts of labour, capital and other resources between different activities in such a way that, at any moment in time, these resources will be earning the same rate of return in every activity. This is known as allocative efficiency. But perhaps the most valuable function of a market economy is not its allocative efficiency but its adaptability. Its lack of adaptability, its inability to innovate as fast as the market economies of the West, is what did for the planned economy of the Soviet Union, and thereby for the Soviet Union itself. Today there are countless vivid examples of the resilience of the market economy in the face of the coronavirus pandemic.

Whether it be the Mercedes Formula One team combing with UCL to produce a substitute ventilator, high-tech start-ups from California to Berlin racing each other to devise simpler and more accurate virus tests, effective anti-viral drugs and  vaccines, manufacturers of luxury perfumes like L’Oreal and Christian Dior responding within seventy two hours to Government requests to switch their production to make sanitising gel  for Paris hospitals, or food shops in small towns everywhere spontaneously combining with local distributors and community groups to deliver essential supplies to housebound consumers, the  market economy is doing its job.

 But in an emergency like the present one, only Governments can set the priorities within which the markets operate. The present situation resembles a wartime economy. To achieve the overriding objective of victory, individual liberties have to be curtailed. Governments, not markets, must decide what goods and services are essential, and prioritise their production and distribution.  In September 1939 a huge range of activities deemed non-essential were closed down overnight, and the workers redirected to key jobs in the production of such essentials as aircraft, tanks ammunition and food, and in transport, health and other public services as well as to the armed forces. As a result, there was no unemployment and little unused capacity. The Government did not nationalise (i.e. take ownership of) firms in key industries, but it did assume the powers to tell these firms what goods to produce, and to allocate to them the necessary workers and raw materials. Today we have seen governments make use of both procurement contracts and direct controls to organise the supply of certain types of medical equipment, the provision of emergency hospital beds and the recruitment of additional workers to the NHS and social care services. Responsibility for the production and distribution of adequate supplies of food remains with the market.

A big difference between wartime and the present day is that no-one knew then how long the war was going to last or what it’s outcome might be. Whereas today we can be sure that the health crisis will pass. Within six months or so it should largely be ended, no matter how many people may have died in between. So why go to the trouble of re-deploying resources throughout the economy if the emergency will soon be over?  If a wartime approach could be adopted to produce at scale urgently needed medical equipment like ventilators and protective clothing, the quantities need not be limited to  foreseeable domestic needs: there will soon be an almost unlimited demand for these things from heavily populated countries like India, Nigeria and Bangladesh.

Controlling the Casino

The large uncertainties about the eventual dimensions of the pandemic and its consequences have been reflected in the volatile response of financial markets around the world. Not only have equity markets fallen and risen by record proportions, there has been a flight from bonds to cash, in particular to the US dollar. Currencies of major countries like Brazil and Mexico have fallen by as much as 25% against the dollar.

In 1936 John Maynard Keynes observed that investment in the UK was a by-product of the workings of a casino, by which he meant the stock market. He himself was a player in the financial markets, not just as an individual but on behalf of the funds he managed or advised. In the subsequent wartime economy, interest rates were fixed and strict controls were placed on the movement of capital. It may be that the time has again come , if not to close down the casino then at least to limit its operations.  A tax on financial market transactions  would not only raise badly needed revenues for the Government but would also curb one of the most egregious sources of income inequality. This is especially important when so many people suddenly find themselves without any income at all. However, implementation of such a tax would require a willingness for Governments to co-operate, a commodity in short supply right now.

Financial markets  are sending out the wrong signals. Abetted by a decade of Government money printing operations, carried out in the name of avoiding another recession, an environment of near-zero interest rates has been created throughout the Western world. This has led to serious distortions in the real economy.  Abnormal rates of interest have lowered business confidence, undermined the pensions prospects of citizens, and rendered core banking operations unprofitable. At the same time, resources that should have gone to their more productive competitors have been absorbed by ‘zombie’ companies, i.e. companies that in a normal interest rate environment would be out of business.

The Consequences of the Accumulation of Additional Debt

The loss of output as a consequence of the shutting down of a range of activities by government decree, and the indirect effects on the suppliers of these activities, means that recorded output and employment are going to fall abruptly. Indeed the latest data for the US

shows that registered unemployment In March rose to 20%. This means that 33 million workers have registered themselves as unemployed. Some economists  think that GDP across the Western world could fall by 10%  between March and June this year, just as China is coming out of its period of shutdown. The same economists make comparisons between these numbers and what happened in the recession that followed the financial crash of 2008.

Although record numbers of people are at present out of work, it is a misuse of words to think of this as being evidence of a ‘recession’. That word applies to circumstances in which output and employment have fallen as the result of a decline in aggregate demand. The unemployment we see today is not the consequence of a decline in demand but the result of a decline in supply, namely a government-mandated cessation of work. The present situation is unlikely to last for more than a few months. What will happen when self-isolation ends and people are allowed to return to work? Since we have never been in this situation before, that remains a matter for conjecture. My own guess is that when people are once again allowed to congregate, say in June or July, a spurt of pent-up demand will be released that will temporarily boost economic activity. What happens after that?

Unlike their vacillating scientific approach to dealing with the pandemic, the governments of both the US and the UK have moved swiftly and decisively in their financial responses. Large sums of government expenditure have been promised in an effort to support the incomes of those whose livelihood has disappeared overnight, and to keep some businesses afloat. So a significant consequence of the period of self-isolation will be large increases in the stocks of government and corporate debt in most countries. As an example, the carmaker VW is reported to be losing 2 billion euros in cash per week. But, to keep things in proportion, the federal budget deficit this year might amount to some 10% of US GDP, whereas at the height of the second World War the annual deficit amounted to around 20% of GDP. But when it is added to existing debt, then the combined amounts will indeed be historically large in many of the leading countries.

We shall then return to the economic world we inhabited before the virus struck, a world marked by already high levels of corporate and sovereign debt, now augmented by the amounts incurred by governments and corporations in the last month or two. It is a world overdue for a remedial recession. By ‘remedial’, I mean one that will reduce some of the distortions caused by the prolonged period of artificially low interest rates.

In an ideal world, what should happen after a return to normality is that taxes would rise in the countries concerned until government debt is once again reduced to tolerable levels. Or the burden of the debt could be eroded by sustained economic growth,  or some combination of tax rises and growth that has often been the experience hitherto. But sustained rapid growth appears unlikely when the size of corporate debt acts as a constraint.

The prospect of tax rises in the US this year ahead of the Presidential election in November is non-existent. But would a new President, or a re-elected President Trump, raise taxes next year?

Will the Conservative Government in the UK, with a rock solid majority, raise taxes early in its term? The answer looks like being “No” to both questions, not just because such measures are anathema to the personal instincts of Messrs Trump and Johnson, but much more worryingly because the balance of opinion amongst Western economic policymakers about the merits of government budget deficits appears to have shifted decisively within the last twelve months.

Right down to the end of the Chancellorship of Philip Hammond in July 2019, the orthodox view that Governments should normally aim to balance their budgets was unquestioned among the leadership of the Conservative Party.  The only matter for debate was over what period it should be balanced. Hammond’s short-lived successor Sajid Javid appears to have taken a prudent view, which perhaps accounts for his dismissal. In the US, until Trump’s election in 2016, ‘sound money’ was the firmest plank in every Republican platform. Now Conservatives and Republicans alike seem to have embraced the principle of unbridled governmental profligacy. Jeremy Corbyn may justly claim to have won the battle of ideas, if not the majority of votes, at last December’s UK election. How has the climate of opinion changed so quickly?

Classical economists believe that money has evolved over the centuries as whatever serves different societies as an acceptable medium of exchange, the operational word here being ‘acceptable’. The new currently fashionable view, on the other hand, is that money is entirely a creature of the state. If the state needs money to build a hospital or a high speed railway line or to pay the wages of its civil servants, then all it has to do is print as much money as it needs. Anyone old enough to remember Major Douglas’s Social Credit Movement, which gained some traction in the 1930s, will recognise the principle. This time the old fallacy comes with a beguiling new name, ‘Modern Monetary Theory’; a number of economists have climbed on board as cheerleaders. They seem undeterred by the ample historical evidence that whenever Governments have relied on the printing press to finance their expenditures, the experiment has ended in tears. While there can sometimes be exceptional circumstances in which printing money can be beneficial to society, as the Scottish banker and economist John Law was the first to point out, our present circumstances are not among them. On the contrary, to print yet more money on top of what has already been printed is like offering a drunk man more whisky to cure his hangover.

Printing and distributing money is an idea that naturally appeals to politicians with short time horizons who have to submit themselves periodically to democratic elections. The Victorian statesman Lord Salisbury, three times Prime Minister between 1885 and 1902, is said to have remarked that putting the administration of the Poor Law under democratic control would be  like “leaving the cat in charge of the cream jug”. Today the political systems of the US and the UK may be fast approaching their cream jug moment.