Terms of reference for a new Centre for Economics and Epidemiology

In a previous post [scroll down!], I called for the UK [and other countries] to set up new, local centres for Economics and Epidemiology.  This is because the economic-epidemiological outlooks are impoverished by the two disciplines – at least at the point of making contact with policy and actual forecasts – are cleaved in two.  Epidemiological forecasts have too little economics;  macroeconomic forecasts have no epidemiology.  The result is public health and economic policymaking that is not on a sure foundation.

The problem can be remedied relatively cheaply.  Perhaps £5-10m per 5 year period.  In replies to my tweets about the idea, many suggested this thing start as an outgrowth of existing institutions, like the IFS, or NIESR.  I think this is a bad idea.  The task is important and special enough to demand a singular focus, and a custom-built pool of expertise.

I tweeted out a hypothetical terms of reference.  This post recaps on that thread.  I would propose that such a centre is asked:

  1.  To reflect on the risk of future pandemics, their macro implications, and the policy trade-offs inherent in policies to mitigate, with a view to understanding optimal prevention and mitigation policy.
  2. To provide high frequency updates on the progress of an ongoing epidemic, including the macroeconomic implications of the epidemic, and the epidemiological implications of the economic outlook and social distancing measures, public and private.
  3. To undertake, facilitate and sponsor state of the art research into models of economic epidemiology, with a view to designing and updating tools to undertake [for example] tasks 1 and 2 above.
  4. As part of 3, to pay particular attention to fostering inter-disciplinary collaboration, knowledge exchange between academic and other economists and epidemiologists.
  5. As part of 2 and 3 above, reflect and advise on the spatial dimension of the effects of the economy on the epidemic, and vice versa.
  6. Again as part of 2 and 3 above, reflect and advise on the distributional implications of the health and economic consequences of the epidemic, and policies to mitigate;  and how other policies can be used to redress those consequences.
  7. Understand the microeconomics of the epidemic, in particular the effects of health and safety, labour market, welfare regulations on the economy and the epidemic;  also the effects of land use, building design, planning laws and transport infrastructure and choices on the supply side and epidemiological risk.
  8. Act so as to encourage the establishment of similar centres overseas, and liase with those that exist currently, sharing and returning insights gained.
  9.  Develop resources for public information and education about the interplay between economics and epidemiology, the trade-offs and choices that it throws up for society.
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We need a new UK Centre for Epidemiology and Economics

The UK covid19 crisis kicked off with forecasts of the epidemic with and without mitigation measures like lockdowns.  They were ultimately alarming enough to persuade the government to lockdown.

The forecasts joined epidemiological insights with social science – evidence on the propensity of different groups to contact each other.  But they did not tread further into economics.  Economists like Toxvaerd and Fenichel, and subsequently many others who joined in after covid19 emerged  [including Moll, Werning, Acemoglu, Eichenbaum, Trabandt, Rebelo and more] showed how to take this extra step.

In a variety of relatively simple models these authors study how behaviour responds to the progression of the epidemic;  how the risk of infection affects incentives to work and consume.  The contribution of private social distancing;  how behaviour differs across groups differently affected by the health risks;  the benefit and costs of lockdowns.

Since the opening salvo of epidemiological policy models with no economics, we have had a lot of economics coming out of government and other economic institutions [like the Bank of England, the OBR and others] with no epidemiology.

The Government’s lockdown release program – seemingly motivated by the desire to get the economy going again – has been rhetorically and probably analytically disconnected from a scientific analysis of the consequences for the epidemic, and thus aftewards for the economy itself.  We restarted some social contacts.  Allowed more exercise.  The formation of bubbles.  Opened pubs.  Then gyms and swimming pools.  None of this was done with open and coherent analysis of its economic and epidemiological consequences.  Yet it was done!

The policy decisions taken affect all of us, and a small minority, tragically.  Each alternative path for reopening and restarting connections implies a predicted number of contacts and hospitalisations, and subsequent disability and death.  How much death should we choose?  How much disability?  Every month that goes by with restricted economic activity and schooling hits the young and those who are not earning, and those who will ultimately fork out the taxes to pay the debt incurred to fund the income support schemes.  How much poverty and missed education should we choose?

These decisions were not made on a sound analytical basis, or at least all the evidence is that they are not.  It might be that the analysis is being done and kept secret, but I doubt it.

Institutions like the OBR and the BoE and other macro oriented non-Governmental economics bodies are not equipped and have been understandably reluctant to cross into epidemiology.  But someone needs to do it.

It would fulfill an urgent policy need if we were to have a new research institution for economics and epidemiology.  Relative to the sums required to support vaccine and therapy development, which run into the tens of billions, such an institution would be very cheap.  £5-10m would fund it for a few years easily.  In the grand scheme of things, this is not peanuts, it is mere dust.   And given the phenomenal gaps – at the interface between econ and epidemiology – in the heart of policymaking, and policymaking scrutiny, I think the returns would be very large.

This is not a task that can be bolted onto academic economic or epidemiology jobs unproblematically.  You can’t get publications out of questions like ‘what will happen if we open gyms and swimming pools and should we do it?’.  Many of the questions will arrive and have to be turned around at high frequency.  The methods used to answer them will soon become unoriginal and mundane, but the answers needed all the same.  [See, for example, the outputs of macro models, which rarely generate journal articles].

But then again you will need the economic and scientific heft and to tempt people who have it in to such work [analogously to recruiting economists who can operate at the frontier in a central bank] you will have to offer them research time, especially since staff who spend time in a place like this will probably want to have the option to go [back?] to academia or a similar destination afterwards.

Academic economists are turning in numbers towards epidemiology, seemingly.  [Some of them have been ploughing the furrow for a long time!]  But they are always going to have to prioritize first of all publications in peer reviwed and high ranking journals.

Such an institution would need to have good access to, and be oriented at economic/epidemiological policy.

It would probably be best if it were parochial;  the urgent questions are specific to UK government policies;  and to UK specific information about the spatial dimension to our social and economic behaviour.  An international centre in Geneva, or wherever, is not going to prioritize simulating the effects of a Leicester lockdown on the midlands economy.  Even better, of course, if there were a network of similar bodies elsewhere to share experience, staff and expertise.

It would need to be responsive to but independent of government, and completely transparent, with code, forecasts, policy analysis, minutes and so on all openly available.

Given our new ways of working, it would be relatively straightforward to set such an institution up quickly.  One would not need premises to begin with.   Intensive computing resources, as Twitter followers with more up to date IT than I told me, can be bought from the cloud.  All that is needed is a very small amount of money – small relative to the investment in vaccines, and relative to the sums that can be wasted with policy errors – and the will.

We would have been in a better position had such a body existed at the start of the outbreak.  But it is not too late for such an effort to make a difference.

The government made a hash of the lockdown – moving far too late – and seem to be making a hash of the reopening – taking unwarranted risks.  So the chances are the virus will be with us for a long time yet.  Even with a vaccine or therapy, this will take time to deliver;  may well not give complete immunity, or be avoided by many, and may not reach large populations in the rest of the world.  And, as we are all very aware, this is probably not going to be the last pandemic.

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Vouchers: with poor timing, perhaps the worst kind of counter-covid recession policy

I am crystallizing my concern about retail vouchers, part of Rishi Sunak’s latest package [and recommended by others, including one of my affilliations/clients, Resolution Foundation], and mostly thanks to a Jason Furman tweet.

Sunak has seen his challenge as wanting to target stimulus and support policies at the sectors hardest hit by the covid19 crisis.  This motive is understandable.  Despite what the MMT headcases will tell you, fiscal support involves the government using scarce current and future tax raising powers.

So you want to maximise the bang for your buck.  Why give money, in this case, to sectors or people that were not particularly hard hit, and therefore don’t need it?

A related issue of waste-avoidance is giving money to people who are not short of money, and therefore might save it and not spend it.   ‘Forced’ saving by those able to carry on working from home during the covid19 crisis has been pronounced.   Borrowing to give those people even more money to save is rightly judged not to be a good use of future taxes.  Money saved lowers the cost of finance for those who want to borrow, but this is low anyway.  The effect on others’ income and spending power if government handouts are spent is much greater.

A solution to both of these problems is to give people time-limited discounts or spending vouchers, aimed at the sectors that were hardest hit.  The money is attached to spending and can’t be saved.  And in the case of the restaurant discounts it is obviously only of value there:  part of the hospitality sector hardest hit by the pandemic.

However, the clear problem with this is that it is straining to encourage us to engage in the risky, contact and infectiion-inducing behaviour that the government itself banned at the start of the lockdown.

Unless the risk of infection had passed [the small numbers infected so far means still a lot suceptible] or the activities that were risky were now no longer risky [social distancing measures are required, but they seem lax and are not going to eliminate risk, or be perfectly enforced], this activity is going to generate more covid19 cases.  Videos of Rishi Sunak playing waiter, not socially distancing, holding customers plates with his bare hands, and not wearing a mask, are not a good signal of the government’s strategy to transform formerly risky activities into safe ones.

The dilemma is that the policy that maximises a naively-interpreted stimulus impact is also one that maximises new covid19 cases.

I say ‘naively’ here, because, as Stephen Bush pointed out in his morning email today [subscribe if you don’t already, it’s great], the vouchers not only amount to a reversing of course for the lockdown policy, but they have to lean against the fears people have for their own health when they contemplate resuming social activities that now carry new risk.  Stephen gives the example of hypothetically slashing taxes on cigarettes, hoping people will ignore the health risks.

For vouchers to be the right policy  you would have to believe that consumers are overestimating the risks they face;  and that you will persuade them to spend in spite of the risks.  Even then, the risk overestimation needs to factor in that going to a restaurant entails risks not only for themselves, but in making themselves a vector for the rest of us.  An ‘externality’, in the jargon.

Returning to analogies, the restaurant discount is like paying people to drink and drive:  doing so stimulates the economy [more alcohol sales] but puts in mortal peril those on your route home.

If there were spare capacity in the test/trace/isolate system in the UK, you might believe that the extra infections generated by encouraging risky restaurant attendance could be contained successfully.

Assessing the efficacy of this system from the outside is not easy, but there are lots of discouraging signs.  Tales of confusion, accidental and deliberate, in the test statistics;  pseudonymous anecdotes penned by idle and farcically managed trainee testers;  evidence that local authorities are not getting timely and accurate information about the case load in their own jurisdictions [see, for example, Leicester].

Most discouraging of all is that the reopening and stimulus policy is so rhetorically detatched from how it is made possible [or limited] by test and trace.  It is almost as if the virus had just gone away and there was something about its nature now that meant we did not have to worry about resuming our old ways.  That would only be approximately true if, contrary to most of the evidence so far, it turned out that enough people had acquired immunity one way or another [either by exposure to covid19, or some other condition] to make it hard for infected people to encounter new vectors to propagate the virus.

It is hard to quell the thought that the government know that test and trace is not up to it, but hope that we are so desparate to get going again that we will forgive a new surge of deaths, or somehow judge it to be an unfortunate error only with hindsight.

In the absence of firm hope and evidence that test and trace can mop up infections after restaurant goers and other risk takers have had their fun with government vouchers, it would be better simply to give those sectors hardest hit money, [or rather to continue to do so] without using us consumers as virus vectors to carry the funds to them and demand that they put themselves at risk working for those funds.


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Make the BoE work for their oak panelled offices and get them to identify the missing stimulus needed

The Bank of England is, arguably, at the end of the road as far as currently agreed methods of monetary stimulus are concerned.

Interest rates are at their effective floor – in the UK, as understood by the Monetary Policy Committee – 0.1 per cent.  QE purchases of assets stand at £745bn.   This is unlikely to have done much harm [although some contest this] but equally, has probably not, at least as far as its later increments are concerned, imparted much stimulus either.  At root QE policy is about swapping one zero interest, default-risk-free asset for another [reserves for gilts].

It would be reasonable to ask what the Bank’s senior officials are doing, then, in the oak panelled offices that they periodically visit, or on those zoom meetings that we presume happen.  OK, so there are financial stability concerns and there have been interventions to stave off market dysfunction in the gilts market, but my rhetorical point is about the efficacy of monetary policy as conventionally understood.

Long before the covid19 crisis, many commentators, myself included, [but importantly see Krugman, Wren-Lewis, Portes and others] have wondered about the need for a variety of monetary-fiscal cooperation in the vicinity of the zero bound to interest rates.  The pandemic has underscored the need for it.  As news about the state of the virus itself, the ebb and flow of social distancing information, and economic indicators rolls in, there will be a need for successive rounds of fiscal stimulus, even contraction as we get to the point where good news arrives.

The BoE could be contributing to this, using its expensive and considerable analytical heft, currently functionally idel, and giving the government technocratic cover for fiscal fine- tuning that otherwise would be entirely political.

The Bank of England Act in 1998 was an attempt to delegate macroeconomic management to the central bank and remove it from the corrosive influence of politics.  With the benefit of hindsight, an inflation target that was too low [2 per cent] was chosen, and we have been stuck at the interest rate floor since the onset of the financial crisis.  Since that point, in large part, business cycle management has reverted to the Treasury, by default, with all the attendant costs [politics, smaller centre of expertise] and benefits [democratic legitimacy].

A relatively minor institutional reform could improve things while we are stuck with conventional monetary policy levers exhausted.

This would be to have the Bank of England publish its estimate of what it sees as the missing stimulus:  what would it like to do with interest rates, if only doing that was stimulative, on the assumption that interest rate cuts had their nomal effect [the impact they have far from the zero bound]?  The next step would be for the Treasury to decide whether to accept or reject this advice [thus retaining ultimate control over fiscal levers], to explain why if it declined, and to design a stimulus plan [with details of what spending and tax instruments, and unwound over what period, presenting evidence as to how this implements BoE advice], and with the Office for Budget Responsibility commenting on how the plans rated for long run fiscal sustainability.

Critics might wonder why I have framed this question around the exhaustion of conventional instruments, and not suggested that the central bank contemplate helicopter money.  I am not completely against that as a policy option;  but at currently very low interest rates I don’t see the point of crossing that rubicon yet when there is no constraint on conventional fiscal stimulus measures in the next few years.  I certainly don’t see it as a motivation that helicopter money be considered above conventional fiscal stimulus for the sake of having the central bank be the author of it, rather than the government.  This would be a superficial authorship only.

Absent a reform like this, the BoE will anyway have to steel itself to point out why and the degree to which it can’t meet its flexible inflation target mandate, begging the question, therefore, why the government does not do something about it [the mandate was, after all authored by the government in the first place].  What I am suggesting happens in an orderly and premeditated way will, therefore, happen, to a degree, by default, but with a clumsiness and potential for conflict, or inhibited and impaired communication, that will make things work much less well, and without the checks and balances provided by the OBR input.

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Why did we release lockdown too early? Perhaps because we started too late.

It has been much commented on that the UK entered its lockdown to combat covid19 too late.  This had the consequence of allowing the virus to gain more of a foothold, generating an increasing flow of infections that quickly swamped our test and trace capacity at that point.

That in turn had the effect of meaning that the lockdown we did introduce needed to be in place for longer than otherwise.  The lockdown has the effect of reducing the reproductive rate of the virus, by reducing the number of contacts we have and the infections produced from them.  If the number of cases that our test and trace capacity can deal with is X, and we start from a number greater than that, Y, a reproductive rate of the virus that is less than 1 can convert Y into X over a certain time period, as infections cycle through the population.  If you start from a number greater even than Y, that lower reproductive rate has to do its work for longer.  [Or, equivalently, you would need a tighter and more costlier lockdown for the same amount of time].

Locking down the economy involves an enforced shuttering of some sectors of the economy, depriving those who work in them of their income, and the rest of us of their outputs.  The Governing party bore the political costs of this, and had to do it knowing that the costs come before the benefits [successful suppression of the virus at some date into the future].   Intertemporal sacrifices of this kind are notoriously hard for a government to make.  The UK governing party also had a significant strain of covid19 denialism;  and the interventions entailed by the lockdown and the income replacement schemed accompanying it ran counter to its [at least pre-Brexit] laissez-faire instincts.  For these reasons, it’s likely that there were forces acting to shorten the lockdown distinct from those connected with the public health rationale.

The decision to begin relaxing the lockdown, at a case load that was arguably high relative to our capacity to test and trace – the way of to define ‘early’ – is therefore potentially a consequence of starting the lockdown too late.   [‘Late’ defined analogously, as in ‘time elapsed once it became clear that the virus would, absent intervention, or alread had, exceeded test and trace capacity’].

You would normally hope that a social system had in-built mechanisms to self-correct and learn from its mistakes.  But this seems to be a candidate illustration of the opposite.  One tragic policy error necessitates another, compounding one.

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Lockdowns and lockdown releases are not going to be ‘fair’

A common passtime during the lockdown, or during phases of its release was to point out some activity that has been permitted and compare it to another one that has not.  How ridiculous, we all laughed, demonically!  What incompetence the whole thing demonstrated!

There are many ways in which the government’s handling of the crisis has been catastrophically bad, but there being apparent instancies of unfairness and inconsistency in the lockdown is not one of them.

Lockdown law is not like normal law.  The point is to figure out what amount of activity the country can cope with in the sense of the test-trace-isolate capacity being there to counter the effects of the contacts and infections that whatever activity it is – going to pubs, playing cricket – generates.

It could be that as you release the lockdown, your test-trace capacity increases by x thousand contacts [that is contacts you can trace and follow secondary contacts, and isolate, with enough efficacy].  In which case the question for public policy is not what new consistent place can be found where we can redraw the boundary of permitted activities, but how can we ‘spend’ the budget of 1000 contacts.

The next re-drawing could take you to the point where you contemplate opening up pubs, but there are too many pubs to open all of them, so you ration how many, or who can go to them.

Rationing could be done by prioritizing the acticity for economic benefit;  or targeting the benefit at those in most need [perhaps those who were most affected by the lockdown in the first place].  So, playing cricket is low down the list.  Visiting isolated relatives is high up the list.

Fairness is not to be dismissed entirely, of course, because since we are socialized and perhaps even evolved to expect it, the likelihood that we comply with a regulation might well be a function of how fair it seems.  So it’s understandable that an actual lockdown policy would reflect some balance of fairness and rational public health contact allocation.

This is partly because states rely on consent to some extent to make sure that laws are sustained.  There are not enough resources to compel us to follow all or probably any laws.

Enforcement of the lockdown, in the teeth of an epidemic, will generate new trade-offs.

This involves making a public health decision analogous to the drawing of the on-paper lockdown regulations.  What regulations are actually going to prevail, after enforcement?  The authorities have a limited budget for enforcement, and they might find it is better spent [in the sense of preventing more potential infections] by targeting in ways that don’t reflect consistency or fairness [eg if no-one is allowed to party in groups, going after every potential group party].

So, when we try to take apart lockdown regulations, and how they are policed, ask not whether they are consistent or fair, but whether they represent a sensible way of prioritizing activities given that we can only afford to generate a certain number of contacts and convid19 infections.

[Added later]. I had some good comments after publishing this post.  One, from Dan Davies, noted that some activities that are perceived by some as virtuous and necessary – like going to church – are very ‘expensive’ in terms of consuming large amounts of the available capacity to suppress contacts.  [See, for example, the tale of the early outbreak in South Korea, traced to one particular church].  While others, deemed very low down on the hierarchy of needs – like young people hanging out in parks, drinking – are probably actually very ‘cheap’, in the sense of generating very few new infections.

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Periscope q and a’s for non economists Friday 10am

In case you don’t encounter my Twitter feed, I’ve experimentally started doing Periscope broadcasts of me answering questions.  Friday 10am.  Last Friday’s can be viewed here.  The sessions are targeted at non economists into economics;  econ students;  schoolkids doing econ;  schoolteachers teaching econ or related topics.

The production technology is hopelessly shonky, as you might expect.  And you will no doubt grasp why I am not a telly broadcaster when you see one of them.  The broadcasts are live and can be picked up from my Twitter feed @t0nyyates or directly from Periscope’s site.

Tweet questions at #tonyyateseconq so I can collect them.   If more questions arrive, I’ll keep doing them.  Feedback welcome.  Talking into camera feels even more like pouring material into the void than hammering on a keyboard, so it is helpful to know whether these things are useful.

Topics covered so far are things like:  how will covid19 be paid for?  Will inflation rise?  How redistributive is monetary policy?  Are we headed to having universal basic income?  Is Bank of England independence a thing of the past?…. and more.

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Fiscal rules have been rightly blown out of the water by the covid19 crisis

This was a piece I wrote for the New Statesman.  I had to write it a few times.  It started life as a thing about the first post GE19 budget and how they were going to finesse the issue of sticking to rules in the manifesto, vs satisfying the new ‘Blue Wall’ of Tory seats in the North.  Then the pandemic rightly blew all of those discusssions out of the water.   At some point, when we have got to the point of beginning the end of the lockdown, and can estimate the likely impact of the support measures that were in place during it, the discussion about fiscal rules will start again.   Some paydown bargain will have to be struck between ourselves and future cohorts, many of whom are not around the table to express their opinions, weighing up our rights to spread the burden out into the future against their rights to preserve fiscal space to combat their own generational risks, like future pandemics, and climate change [something we dumped on them of course].

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New Statesman post on Mark Carney’s tenure

I laboured over this piece.  It was hard to cover all the ground, much of it technical, in a way that would interest anyone.  And I had to write it over and over to purge it of the sourness that can seep in from an ex central banker with no role other than to peer in and throw stones.  I probably did not get all the way to doing that.  Anyway, no-one cares any more about it, as the pandemic has swept such small details as ‘how should you communicate monetary policy’ and ‘what precisely are the subject bounds within which central bankers should confine their public oratory’ away as we focus on how to prevent the modern mixed economy and monetary system from collapsing entirely.  However, if you want to try to transport yourself away from the pandemic and back into that old mindset, and you are a non economist with a penchant for recent monetary history, this might be just the thing for you.

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‘Money printing’ is not yet a subordination of monetary policy, so keep your hair on

I wrote a thread a few days ago reacting to some of the Twitter commentary [and also to Martin Wolf’s FT piece which I don’t think struck the right tone], and this short post for The Independent covers the ground.   This should also be a counterpoint to Paul Mason’s recent New Statesman piece.  And it’s also worth reflecting back on the debates that were had as Corbyn was campaigning for the Labour leadership in 2015 and floating the idea of ‘People’s QE’.

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