CULTURE WARS, COST BENEFIT ANALYSIS, RISK AVERSION AND INTER-GENERATIONAL JUSTICE.

Apologies to regular readers who expect this site to provide analysis or comment on the subject of climate change or the low carbon economy. My excuse for writing about the pandemic here is that the parallels and connections with climate questions will become ever more apparent, and will be with us for the foreseeable future.

Cost benefit struggles with the big issues, but it does help to expose the questions. The economy versus public health poses a false dichotomy. The real debates should be about inequality. And in terms of inter-generational divides, climate change is a much more relevant matter. 

As many people[1] are starting to observe, the debate over how to balance protection from the virus against maintaining economic activity is already playing into the culture wars that have developed over the last few years.  Very loosely, Trump, vocal Brexit supporters (but not necessarily a majority of those who voted for it), opposition to climate action and denial of climate science, market fundamentalism, Tory donors, and much of the political Right are to be found on one side, arguing for the primacy of “the economy” and that “the cure [lockdown] is now worse than the disease”. Internationally one might add, at different times, populist authoritarians such as Bolsonaro, Erdogan and Duterte.  Those favouring the “cure” include the WHO, internationalists[2], most medical professionals, many Left-leaning liberals, (typically) climate activists sometimes citing environmental factors as a likely cause of the pandemic, and currently the greater part of public opinion. If one had to sum up in a phrase the collective position of many in this group, then “… no return to business as usual” might be an approximation.

These loose coalitions are of course both stereotypes. Both sides will in future be forced to recognise the difficulties inherent in maintaining consistent positions that assign absolute priority to either health or national income. Both will also have to reconcile inevitable pressure for less future reliance on global supply chains (less of China) with an equally powerful case for more, or at least better, international cooperation both in health and wider economy issues. Most governments are caught in the middle, enforcing restrictions while hoping for “business as usual”.

With hindsight of course it seems likely that early and effective action, as in Germany, would have avoided some of the stark choices now confronting us. But we (in the UK) are where we are, and for a variety of economic, health and social reasons, long term total lockdown is also proving untenable. The direction of travel is towards a compromise – the search for gradual relaxations that keep infections within some degree of control.

However, the cost benefit arguments remain important, not least because they reflect so much on our implicit values and choices, and represent dilemmas that will continue to haunt us for some time.  It is worth evaluating the arguments, in the first instance on the wisdom of imposing strict lockdowns rather than just advisory and fairly minimal social distancing.  And in order to concentrate on the essential choice, rather than unhelpfully suggesting that the answers lie, as they often do, “somewhere in the middle”, we should contrast the first extreme, the primacy of the economy and the need to avoid negative impact on GDP, with the range of policies that are effective in reducing infection but result in major economic shutdown.   The purist cost benefit argument is that an enormous economic cost has been incurred in order to protect the lives of predominantly elderly and infirm people, and that that cost will in turn bring its own health costs through increased poverty, unemployment and inequality. The cost is typically quantified either in terms of likely lost GDP or of the cost to the Treasury (c. £350 bn) and the public purse, which can be set against an estimated number (perhaps 250,000) of (disproportionately elderly) lives saved. The implied valuation of human life comfortably exceeds the values normally implicit in government policies, in health and elsewhere.

Attaching a value to human life in this way is not a heartless obsession with financial indicators or economics. It is simply a recognition of reality, especially in almost anything involving health or safety. In health policies the concept is explicitly recognised and refined as “quality of life adjusted life-years” (QALYs). In a resource constrained world most people would accept that, forced to choose between life-saving treatment for children and young adults, on the one hand, and short life extensions for the elderly on the other, the former would usually win. QALYs form a realistic basis for assessing the relative value of different medical interventions, and are widely accepted as a starting point for an informed discussion of what should be prioritised in a health system.

Calculations appear to show an “excessive” expenditure from current policies to save a relatively small number of QALYs. It is additionally argued that the economic impact of lockdowns will itself lead to large amounts of not necessarily well-recorded ill health and death, including treatments postponed or not sought, and increases in domestic violence and mental illness.

Finally, this can be seen as yet another example of inter-generational inequity in which the young are made to suffer for the benefit of the old.

At first sight these look like powerful arguments, founded on both explicit cost benefit analysis, in this case loss of output (GDP) or public spending versus value of life, and an implicit cost benefit comparison in terms of different health outcomes. But, as often happens with really big issues, simple arguments can collapse under closer examination. There are several counter arguments:

·         the assumed counterfactual is incorrect; the implicit assumption that, had there not been lockdown, personal behaviour and the economy would have carried on more or less as normal, can now be seen to be demonstrably wrong. One reason is that individuals are risk averse and do not take the actuarial approach to personal risk implied in cost benefit analysis. A corollary is that, in the immediate context, the notion of a collective choice between public health and the national economy is, to a large extent, a false dichotomy.

·         poor health outcomes associated with macro-economic problems do not generally stem from lower GDP per se. They stem from inequality not from overall lower incomes. Promised government spend goes part of the way to redressing the uneven short-term effects of the crisis, and protecting the most severely affected. But the longer-term impacts, particularly if there are significant structural changes in the economy, will be much more important. Prevention or remedial action on any increasing inequality stemming from that will be essential. But that action is necessary anyway.

·         inter-generational injustice is an overstated issue; mortality means there are a limited number of ways in which one generation can steal from the future, and it is not obvious that this is one of them.

The counterfactual – not imposing lockdown and “letting the pandemic take its course”.

Countries have taken approaches that differ in detail, but most have been essentially similar in their approach. Even where fewer formal restrictions are imposed, as in Sweden, actual behaviours and outcomes are not so very different. Tellingly, many in the UK were already modifying their behaviour, and creating their own forms of social distancing before formal lockdown was imposed. With a full-blown explosion of cases and deaths, and hospitals collapsing under the weight of new cases, it is inconceivable that we would not have seen massive changes in personal behaviour, seeking the same outcomes, albeit in uncoordinated and less effective ways, and very likely  a degree of panic, with broadly similar damage to economic activity. The difference is that the damage would have been the result of individual consumer choice, not of government imposed restriction. Most of the economic damage therefore became inevitable as soon as the virus spread into much wider national populations. In reality there never was any way of avoiding the shock and its economic consequences, although there were and remain ways of handling the crisis well, badly or very badly.

There is a reason for this. In matters of life and death, people do not adopt the actuarial approach to personal risk that the cost benefit approach implicitly assumes.  Actuarial-style weighting of probabilities and multiplication by an assumed “cost of damage” makes sense in a policy context of comparing different health interventions. But it does not apply to personal choices. A simple well-known test demonstrates this – the Russian roulette question. “How much of your personal wealth would you sacrifice to avoid participation in the game?” The probabilities can be varied, and the actuarial assumption would be a linear progression from zero (infinitesimal risk) to 100% (when faced with certain death). Students and others faced with this (fortunately hypothetical) question invariably volunteer significantly more than the “expected value” of their survival.

This is not irrationality. It is simply personal preference. Faced with threats to life most people are substantially risk averse, and will make significant sacrifices for the safer option. We can argue that wide public support for lockdowns reflects rationality and risk aversion, rather than mass hysteria.

It's about inequality, stupid!

There is no doubt that the stress on health services is, unless treatment of Covid-19 patients were refused, inevitably bringing some unavoidable collateral damage through diversion of resources from other health problems. But the policy argument is usually much more focused on the potential mid and longer-term health effects of lower incomes and higher unemployment. The economic impact is already and will continue to be very unequal, with some untouched while others are devastated. Sensibly most current remedial measures are about protecting the worst affected individuals, in respect of mortgages and rents, and a degree of protection that will allow businesses, and future jobs, to continue to pay wages and survive the crisis.

In other words, the policies that enjoy almost universal support are about remedies for an immediate and horrendous inequality. It’s ironic that they should be implemented (in the UK) under a governing party not known for its commitment to equality objectives or public spending. But the same considerations should apply to medium term health impacts. It is the extent of inequality that matters, much more than the overall level of GDP. The point is well summarised in a recent Canadian Medical Association Journal article.[3]

“It should not be surprising that economic growth does not lead to improved health. A wide range of research studies of rich countries have revealed that greater national wealth, by nearly any measure, does not lead to better human welfare. The United States, with the highest GNP per capita in the world, has a lower life expectancy than nearly all the other rich countries and a few poor ones, despite spending half of the world’s health care bill. The United States also has the greatest levels of poverty of any rich country, with correspondingly poor health outcomes and huge health disparities. Its population’s health is on a par with that of Cuba, a poor nation that has faced economic embargoes for the past 50 years. The population of the United States is also less healthy than the population of Greece, whose economic status lies in between.

What leads to health in the industrialized countries is not absolute wealth or growth but how the nation’s resources are shared across the population.  Above a certain threshold of inequality, a more egalitarian income distribution within a rich country is associated with better health.”

It will be interesting to see how far the lessons of the current crisis are carried through into future tax, expenditure and social policies.  It is again ironic that politicians and commentators, mainly on the Right, who give overwhelming primacy to the economy, and are now anxious to play up the social and health impacts of lockdown, have usually been those least concerned with the phenomenon of inequality. 

Inter-Generational Justice

It has always been the case that you are more fortunate to be born, or to reach the employment or housing market, in good times rather than bad. But the idea that one generation can collectively, and to its own advantage, permanently deprive its successors is more difficult. Mortality ensures that this is possible, essentially, in only two ways.

The first is through running up external debt. This is impossible in global terms. It is possible nationally, although since most countries will face similar challenges, there is no automatic reason to assume that it will happen. Measures to protect employment and businesses, will lead to an expansion of national and personal debt, but this consists of debts that we owe to each other. Since the holders of that debt tend to be excessively concentrated in higher income groups, or among older generations, there will be an enhanced case for redistributive taxation, and we have already identified the necessity for reducing inequality as a necessary condition for a healthy society.

The second is through running down the capital stock, of plant, buildings etc and also human capital. This is a more challenging question. There is no particular reason to expect physical destruction of capital stock, though there is likely to be significant re-assignment if consumer preferences and public choices change after the crisis.   

But this takes us to an even more important subject. The only way in which we are obviously and dramatically running down our capital stock is through continued destruction of the natural environment. That really is the impossible and undeserved legacy that we are bequeathing future generations.

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[1] Culture wars are infecting the UK’s pandemic strategy. Robert Shrimsley. Financial Times, 20 April 2020.

[2]A general term to include supporters of international institutions and cooperation as a general principle. I would have added the “Remain” camp, but a quick survey of FT online comments suggests this group may be quite divided on the issue.

[3] https://www.cmaj.ca/content/181/5/281.short  

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GLOBAL THREATS AND INTELLECTUAL PROPERTY

Another policy conundrum where the rules may need to be rewritten. Much of the logic of public goods and market failure will be common to most of the greatest issues facing humanity, but nowhere more than in health and the global environment. And knowledge is a crucial resource.

A number of my recent postings have discussed the concept of market failure in relation to global threats, most notably the current pandemic and the growing challenges posed by climate change. Freedom from disease can be regarded as a public good, as can a stable environment and climate, and in both instances there are numerous sources of potential market failure. One, though by no means the only one, is the way in which we manage knowledge and information of all kinds, and this leads us into some complex issues of policy, particularly in relation to the protection of intellectual property.

Knowledge is a public good in that its use by one person does not reduce the ability of others to use the same knowledge. A lighthouse has the same property – every ship that observes its beam can take action to avoid the same hazard. But like all public goods, if it is freely available, there may be an inadequate incentive to create it in the first place. With free use, then there may be insufficient incentive for the creator of that knowledge to invest their time or money in research or development while others can then enjoy a “free ride” on what they produce. Policies may therefore be necessary to support it, either by arranging to pay for it through public expenditure, or through the creation of property rights in respect of the knowledge created, through intellectual property law.

If knowledge is thereby not created (or discovered or reported), this is a market failure (under-production), which society, and hence governments, need to correct.

Intellectual property rights such as patents are one way to do this. But they do so at the expense of another market failure, and a potentially high economic cost. Monopolies prevent the full exploitation by others of the knowledge that is created, and the knowledge is under-used even though its further use would appear to have no cost to society as whole.

The relevant question for society is which of these two considerations is treated as more important in a given period or for particular social and economic conditions. Protection of intellectual property is of course often seen as a key component of free markets, and what we might loosely call modern capitalism, while more collectivist political philosophies, and in particular China, have been widely accused of refusing to respect this particular form of property right.

So it is perhaps surprising to discover the following quote from Thomas Jefferson, one of the most revered of the Founding Fathers and early Presidents of the United States. It is an impassioned defence of knowledge as a public good, and an argument against the idea of intellectual property.

“He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation. Inventions then cannot, in nature, be a subject of property. Society may give an exclusive right to the profits arising from them, as an encouragement to men to pursue ideas which may produce utility, but this may or may not be done, according to the will and convenience of the society, without claim or complaint from any body. Accordingly, it is a fact, as far as I am informed, that England was, until we copied her, the only country on earth which ever, by a general law, gave a legal right to the exclusive use of an idea. In some other countries it is sometimes done, in a great case, and by a special and personal act, but, generally speaking, other nations have thought that these monopolies produce more embarrassment than advantage to society; and it may be observed that the nations which refuse monopolies of invention, are as fruitful as England in new and useful devices.”

However despite Thomas Jefferson, and throughout the late 20th century, the conventional wisdom has been that intellectual property should be protected, even if this had the effect of creating private monopolies. The main mechanism has been stringent patents strictly enforced. But this has created major problems, even in advanced economies, leading to re-evaluation of other new and established means to encourage and finance research, of which there a number, ranging from direct public or charitable sponsoring of research to the offer of prizes for solutions that meet particular needs. It is perhaps ironic, too, that the truly great leaps forward in understanding, for example in the mathematics and physics[1] that underpin virtually every element in the modern world, from electronics to medicine, never depended on intellectual property protection and indeed were largely unpatentable. 

Nobel prize-winning economist Joseph Stiglitz has argued[2] that the conventional philosophy of reliance on patents/ monopolies is increasingly dysfunctional. It has led to “an increasingly dense patent thicket, in a world of products requiring thousands of patents, [this] has sometimes stifled innovation”. Even within the research itself, the incentive may be targeted less at new products than at extending, broadening and leveraging the monopoly power provided by the original patent. Increasingly the objective appears to be the protection of corporate revenues rather than the public interest. Stiglitz[3] also argues that “the preponderance of theoretical and empirical evidence indicates that the economic institutions and laws protecting knowledge in today’s advanced economies are increasingly inadequate to govern global economic activity and are poorly suited to meet the needs of developing countries and emerging markets. They are inimical to providing for basic human needs such as adequate healthcare.”

“The US supreme court’s 2013 decision that naturally occurring genes cannot be patented has provided a test of whether patents stimulate research and innovation, as advocates claim, or impede them by restricting access to knowledge. The results are unambiguous: innovation has been accelerated, leading to better diagnostic tests (for the presence of, say, the BRCA genes related to breast cancer) at much lower costs.”

Stiglitz mounts powerful general arguments for the reform of current arrangements in respect of intellectual property, which he sees as more or less inevitable in the context of increasingly “weightless” economies, and the growing influence of many of the developing world economies. But few demonstrations could be more eloquent than the importance of speedy transfer and exchange of information and research in relation to the coronavirus pandemic, or of the other even larger threat of global climate change.

Few recent stories will have generated more international outrage than the Die Welt report that the White House had attempted to relocate CareVac, a research company based in Tuebingen, in order to secure exclusive access to the vaccine “only for the United States”. Equally it is impossible to understate the importance of the Chinese authorities’ early release[4] of the virus genome (after earlier delays in recognising and admitting the seriousness of the outbreak), or the exchange of data between countries on their individual experiences of the disease. Had any of these been treated solely as the property of the gatherers of the initial information, for their own commercial advantage, efforts to deal with the virus would be in a much worse position than they are today.

Similar importance can be attached to the free exchange of information in relation to climate matters, both in terms of the climate science itself, and in terms of the technologies and ideas required to limit and mitigate its consequences. There is a double emphasis when both the objective, health or global environment, and the means of achievement, knowledge and information, can properly be classified as public goods of the greatest possible value.

Two comments on this post.

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[1] Without quantum theory, to take just one example, no transistors or electronic systems, no electron microscopes, and virtually nothing we take for granted in modern medicine.

[2] Wealth before Health? Why intellectual property laws are facing a counterattack. Joseph Stiglitz 19 October 2017. Guardian.

[3] Innovation, Intellectual Property, and Development: A Better Set of Approaches for the 21st Century.
Dean Baker, Arjun Jayadev and Joseph Stiglitz, July 2017. Shuttleworth Foundation.

[4] “Potentially really important moment in global public health-must be celebrated, everyone involved in Wuhan, in China & beyond acknowledged, thanked & get all the credit,” Jeremy Farrar, head of the Wellcome Trust in London, wrote in a tweet. “Sharing of data good for public health, great for those who did the work. Just needs those incentives & trust.”

PANDEMICS, CLIMATE AND OTHER THREATS TO HUMANITY.

 And the Ubiquitous Nature of Market Failure

"The huge sums of money being committed by the UK government and others to support companies will inevitably lead to a larger role for the state. This should not become the norm once the virus abates.” (Financial Times Editorial 29 March 2020)

"Nonsense. That ship has sailed. The torrent of interlinked challenges facing us, from climate change to oceans to antibiotic resistance, all have at their core some form of fundamental market failure - mainly failures to address externalities. All imply national and international interventions on a substantial scale.

Markets are an important and powerful force, but they need to be the servants of mankind not the masters.

Wake up FT. We are in the 21^st century." (A reader’s response.)

This recent exchange neatly summarises a fundamental sea change in political discussion and public attitudes, namely our perceptions of the respective roles of markets and the state. It also highlights the concept of market failure. The Oxford Martin School, to which I have an attachment within one of their most active programmes, has a focus on public policy problems with a global dimension, with several programmes in the field of health, climate change and the global environment.[1] Market failure emerges as the common thread, so it is worth examining the concept a bit more closely, not least because the implications may be too important to be left only to economists.

There are useful formal definitions, but the simplest characterisation of market failure is that individuals (or businesses or governments) have an incentive (or at least no disincentive) to do things which carry significant costs for others or society as a whole. Simple to understand examples in the context of the Martin School programmes might include casual disposal of waste plastic (oceans), individual failure to vaccinate or excessive use of antibiotics (health), and wasteful use of energy (climate). In each case this can be seen in contexts of both individuals’ actions and widespread commercial practices – a single unnecessary antibiotic prescription or widespread use in animal husbandry, or one person throwing an empty bottle in the river against the widespread promotion of single-use plastics. In all these examples there is no or negligible immediate cost of a particular action, but the collective impact over time on society as a whole may be huge.

Economists have sometimes classified market failures in terms of externalities such as those above, or on market failures that stem from unregulated monopolies, or on asymmetries of information. The latter typically occurs where the seller (buyer) has more information than the seller (buyer) and possibly also conceals it. Volkswagen cheating on diesel emissions tests[2] was a prime example. 

But the possibilities for market failure and similar perverse outcomes can arise from a variety of circumstances and some of the most common features are the following:

·         where there are public goods involved, where use by one individual does not reduce availability to others, but there are insufficient individual incentives for the resource to be created or maintained; the creation of knowledge is a prime example, and provides a key justification for patents and intellectual property protection.

·         “the tragedy of the commons”, where a common resource, like fish or grazing land, or indeed the capacity of the atmosphere to absorb additional carbon without adverse consequences, is limited and over–exploited

·         badly designed taxes or regulations which distort the market and create perverse incentives; in the UK energy sector social and environmental policy burdens are placed on the electricity sector, which is the future of carbon-free heating, but not on gas which accounts for significant greenhouse gas emissions.

·         tariffs that are not cost-reflective result in over-use of what is under-priced  and under-use of what is over-priced; the issue is explored for energy tariffs in an earlier posting on this subject

·         short termism, often itself associated with other market imperfections

·         uncertainty and risk, which most people find difficult to address in a consistent way

·         transactions costs, where markets can be established, but the complexity of the transactions results in costs that exceed the notional benefits of a competitive market, and results in distorted choices; the US health sector is a particularly good example

·         “moral hazard”, often stemming from asymmetric information

·         imperfections in capital markets

·         when active coordination, rather than competition, is essential to good outcomes (current competition between US states for medical resources to cope with the coronavirus is a good example)

·         inequality can be regarded both as a source of market failure and a result of it; of this subject deserves far fuller discussion in its own right.  

The above serve to illustrate some of the pitfalls in policy making. They do not apply only to the existential concerns of health and environment, both of which are now very high on policy agendas, but health and environment are both complex subjects and pose unique policy issues. Of course governments are capable of other policy failures too, even in the process of identifying and rectifying market failure, and that is something we should continue to examine on a policy by policy basis.

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[1] Current programmes include Collective Responsibility for Infectious Disease, Pandemic Genomics, Planetary Health, Renewable Energy, Post Carbon Transition, and Oceans.

[2] The Volkswagen emissions scandal began in September 2015, when the United States Environmental Protection Agency issued a notice of violation of the Clean Air Act to German automaker Volkswagen Group. Volkswagen had intentionally programmed turbocharged direct injection diesel engines to activate their emissions controls only during laboratory emissions testing. The vehicles' NO x output met US standards during regulatory testing, but emitted up to 40 times more NO x in real-world driving.