Tuesday, April 28, 2020

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.





[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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3 comments:

Tom Brown said...

Thank you, John, an excellent reflection. Your point that death prevention versus economic growth was (and is) a false dichotomy is right, and indeed what the proponents of 're-opening the economy' now fail to recognise is that the lock-downs were effectively 'market-driven' and governments largely just legislated to confirm human behaviours and millions of individual judgements; stock-markets had already crashed and London largely already emptied the week before 23 March. Pubs and restaurants were ordered closed at midnight 20 March: at lunchtime on that day I and a friend were the only two customers in a gastro-pub which would have been rammed full on a normal Friday lunchtime. The economy will not restart until the population feels they will not risk being struck down by a potentially lethal virus. It's not an irrational fear.

On intergenerational justice I think there are seious issues which must be addressed. A tax system which overwhelmingly rewards those with savings capacity - the over 50s - and forces employees in the PAYE system to finance a disproportionate share of the NHS and care systems has been institutionally biased against the young for some time; the protection of landlord interests (which would have brought a smile to the faces of the bolshevist revolutionaries) against tenant interests is scandalous and is perpetuated in Sunak's granting of mortgage payment relief to the Landlord without a matching right of rent relief to the tenant.

More broadly, Martin Wolff in the FT has brilliantly analysed the catastrophic Liquidity Trap into which the economy has now fallen - quoting evidence given to the US Congress in 1932 in the midst of a similar slump - that the economy will not recover until the owners of savings and the capital stock - overwhelmingly the older population - start to invest in productive assets again. But this is where the opportunity to kick start the economy with a wave of Green investments should surely lie. This should be the death knell for carbon-driven growth.

Dermot Glynn said...

John,
Nice to hear from you, and to see that you are not ducking the big issues!
On intergenerational equity, I suppose one of the key questions is the extent to which legally correct contracts - such as between pensioners and pension funds - will in fact be enforceable.
On taxes on oil etc., my inexpert hunch is that we could see quite large tax increases, egged on by the environmentalists.
All the best,
Dermot

Ian Jones said...

I agree with everything you say, John. However, I would argue that if the counterfactual to the type of policies that were implemented to suppress the spread of the virus is properly specified, then the arguments about differential health impacts and inter-generational equity largely fall away. Thus there appears to be a large measure of agreement across the political spectrum that the type of massive fiscal policy interventions we have seen in all the major developed countries has been a totally justified response to the collapse in effective demand, which would have occurred under any plausible covid scenario, for the reasons you suggest. As even Robert Lucas has admitted, "in the trenches, we are all Keynesians". So, any realistic post-Covid future would have had a large increase in the ratios of public and private debt to GDP. And on the health front, it would also seen the impacts of higher unemployment and a weaker labour market on the mental health of younger people.
I entirely agree with your own and Tom Brown's comments re the environment and the case for a Green New Deal as an essential component of any post-Covid recovery strategy.