Ryan Bourne: Will the Government’s new High Potential Individual visa actually attract top global talent?

28 Jul

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

Advocates of free market policies could be forgiven for having a sense of despair right now. With the revival of industrial policy, a high and growing tax burden, mooted expansions in age-related spending, and nannying lifestyle and environmental agendas emanating from Downing Street, it’s easy to fear the direction of Conservative economics.

Among all the gloom, though, several winnable battles are emerging. Trade minister Liz Truss’s gusto in pursuing liberalising trade agreements appears ascendant against Tory protectionists. And just last week another Cabinet liberal showed aggression in pursuing an outward-facing policy generating plaudits in Washington DC. Kwasi Kwarteng’s BEIS laid down a marker towards liberalising high-skilled immigration to attract top global talent to the UK.

The Government’s Innovation Strategy, in which the policy is explained, still had bits of central planning on the movement of people. A dubiously named cross-departmental “Office for Talent” will apparently smooth the passageway to the UK for the very top scientists and innovators. Why the Government will be any better at identifying “potential” talent than selecting the industries of the future is an open question.

That said, the strategy would strip away obvious barriers to high-skilled people locating here. The centrepiece would be a new “High Potential Individual” visa route, which global graduates from “top” universities worldwide would be eligible to apply for. This route would require no job offer or sponsor.

Many have interpreted it as simply a new freedom for well-educated individuals to come here, work, or switch jobs as they please. In the U.S. it has certainly been read that way. Alongside the Hong Kong citizenship offer, the UK’s message of openness to top talent has not gone unnoticed.

Caleb Watney, Director of Innovation Policy at the Progressive Policy Institute in DC, tweeted “The UK is really getting aggressive about recruiting high-skill immigrants.” The text explaining the new visa was cheered by the US digital editor of The Economist, Bloomberg columnist Noah Smith, and hundreds of other Americans who suggested the US should copy it.

That’s because the economic evidence is clear-cut. High-skilled immigrants have been shown to increase the production of knowledge through patents, innovation, and entrepreneurship, without harming natives.

The flow of new ideas tends to be constrained by the supply of talented scientists, engineers, technicians, and innovative entrepreneurs. Fewer barriers to them moving here means more knowledge production, more productive new technologies, and so higher productivity growth—an Achilles heel for the UK economy in the past decade.

U.S. studies have found high-skilled migrants boost innovation. A percentage point increase in the population share of immigrant graduates was found by some economists to increase patents per capita by over 10 per cent. Other economists have estimated that a “1 percentage point increase in the foreign STEM share of a city’s total employment increased the wage growth of native college [university] educated labour by about 7-8 percentage points and the wage growth of non-college educated natives by 3-4 percentage points.”

Barriers to top scientists moving, in particular, have been shown to harm global knowledge production too, preventing people clustering where their research efforts are most effective. If the UK could make itself a haven for the globally talented, then, we would reap the rewards domestically, but also contribute to expanding the global knowledge frontier.

The question, then, is whether the visa route will truly be as liberal as some have implied. Within government, there appears some dispute on how open or prescriptive conditions should be as the details are thrashed out.

The Business Secretary shared a tweet last week that implied the policy was indeed an invitation for all top university graduates to freely move here. But I’ve been told that the Home Office sees the “top university graduate” requirement to be a necessary but not sufficient condition for a successful application. In other words, it wants other criteria to be attached—supporting previous indications that the number of High Potential Individual visas might even be capped, or at least combined with other bureaucratic criterion to assess a person’s “potential.”

The strategy’s text itself is ambiguous, on both what constitutes a top university and whether that alone is enough to qualify as “high potential” or is merely one prerequisite. Theresa May, of course, scrapped the final incarnation of the old “Highly Skilled Migrant programme” on the grounds that it was too broad in terms of eligibility for graduates, using the fact some beneficiaries from lesser institutions went on to take low-skilled jobs as evidence against the programme.

Given this visa route would discriminate by university, that “problem” would be mitigated against significantly. But the “top university” condition alone doesn’t appear enough to satisfy Home Office thinking. These people see high immigration numbers as bad per se, and want more conditions to increase the probability of applicant success. They dislike the idea of a visa route open to *anyone* meeting one high-bar condition, precisely because it is potentially open-ended.

True, graduating from a “top university” is no guarantor of talent or future success. But that cuts both ways. Mark Zuckerberg, Steve Jobs, Daniel Ek, and other top entrepreneurs didn’t graduate from a top university.

Research from 2016 showed that 25 per cent of self-made global billionaires were high school or university drop-outs. Covering these and other bases is presumably why the Government is proposing a “start-up route” for would-be employees of rapidly growing companies and a “revitalised” Innovator route, on top of the Global Business Mobility visa for worker transfers, and the Global Entrepreneur Programme too.

But a simple “top university graduate” condition would surely include most high-skilled talent, while remaining more acceptable to the constraint of public opinion. Indeed, if the UK is truly ambitious about being a high knowledge economy, it should be willing to take risks on high-skilled immigrants with uncertain potential in order to capture the great mavericks, rather than overly-circumscribing according to government judgements of potential.

Nobody pretends, of course, that the location decisions for global talent are just about visa policy. Personal tax rates are important for determining where top foreign inventors and scientists move to.

Having sufficient university places and a pathway for graduates remaining here is key too. U.S. evidence has found that immigrant business founders were “likely to start their companies in the state in which they were educated.” More migrants want to move to the U.S. than anywhere else. Ensuring an economically open environment, while treating people well when here, then, are needed complements to removing immigration barriers to compete for talent.

But with Brexit and the pandemic, the UK has a real opportunity to reset migration policy in a pro-growth direction. We should not sacrifice that opportunity on the altar of a May-ite lust for controlling outcomes.

Ryan Bourne: The tax hikes that could fall in the south. And tear the Tory coalition apart

22 Jun

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

Who’s going to pay for all this? Andrew Neil’s GB News interview of Rishi Sunak has changed the fiscal conversation. The Chancellor deflected the question by saying he couldn’t discuss tax policy outside of Parliamentary “fiscal events.” Convenient. But many commentators are “rolling the pitch” for higher taxes to fund all this higher government spending already – often devoid of context of today’s true burden.

Much debate starts with the ahistorical view that the UK is a “low tax” economy. Yet revenues from taxes are already forecast to exceed 34 percent of GDP every year from 2023/24 onwards—a threshold not breached in consecutive years since Hugh Gaitskell and Rab Butler were Chancellors in the early 1950s. The world wars don’t bode well for the longer-term legacy of an acute borrowing shock either. Ten years’ after World War One, the tax burden was 12.5 per cent of GDP higher than pre-war; ten years’ after WW2, it was 11.4 percent higher again.

The pandemic is shorter and less destructive than mass mobilisation wars. We also don’t need a second welfare state. But we do have an aging population and slower growth. With those pressures, any government unwilling to reform age-related entitlements and committed to major new state investments will need revenues eventually.

Internationally, many Western European countries tax their populations more heavily than us. The UK was just below the OECD average as a share of GDP in 2019. But UK taxes are already higher than in English-speaking developed economies: Australia, New Zealand, Ireland and the United States. The rises that Sunak has pre-announced would take us close to the levels of pre-pandemic Spain and Poland. Go a bit further, and we will have gone Germanic.

That, sadly, appears where we are headed. ConHome’s Editor explained yesterday that  “levelling up” need not mean just more tax-and-spend, but might be centred on the supply-side. He should tell CCHQ. The “levelling up” member survey recently used that banner to ask for views on more NHS spending, the “lifetime skills guarantee,” catch-up schools funding, infrastructure investment, the Towns Fund, and money for high-street regeneration. The direction of travel is clear: levelling up means more redistribution—hence why a strange coalition of fiscal conservatives and certain level-uppers want to whack up taxes on the old Tory base to shower the new.

This is where the politics of tax becomes interesting though. For the “progressives of all the parties” have talked so far as if “someone else will pay” for any largesse. Polly Toynbee says that UK voters want a Scandivanian welfare state with US-style tax rates. But it’s the redistributionists that are selling the Red Wall something for nothing. How about “asking for more” from the top one per cent, big tech companies, wealthy homeowners, tax-avoiding multinationals or other bogeymen, they say? Ordinary hard-working families will be spared for all the goodies.

As a new Institute for Fiscal Studies tax tool shows, however, the difference between the UK and the big governments of Western Europe is not lower taxes on the rich. No, broad-based social security contributions are higher in Europe. The evidence there suggests a more generous welfare state or higher permanent spatial redistribution requires tax rises “larger for the median worker than for one near the top of the distribution”. Good luck selling to your new blue-collar voters.

And so, thus far, an unwillingness for broader hikes, coupled with an uncertainty about the wisdom of burning the old base, has meant that the “tax debate” has been all smoke and mirrors. Efforts to raise revenues have been stealthy. The headline Corporation Tax rate is being raised again, with Sunak stating that it was “fair and necessary to ask businesses to contribute.” Of course, research shows the ultimate burden of profit taxes falls on workers, as well as shareholders – not the message the Chancellor would be keen to promote.

Income tax thresholds have similarly been frozen until 2026, and the 45p rate threshold has been kept at £150,000 since 2010. This will slowly lure more and more upper middle income families into higher tax nets. The problem is that spiralling spending demands quickly use up the options which voters don’t notice. Eventually you need other big sources of revenue, and that’s when the discussion usually re-centres on taxing savings income or pensions more heavily, or indeed hiking property taxes—despite the fact that the UK has the highest overall property tax burden in the OECD already.

Let’s leave aside the economics here. What do these policies all have in common? Well, the highest earners, the more expensive properties, and those with the highest savings are more likely to reside in the South East. The only Conservatives making the running on the “who is going to pay for it?” question so far, then, are those level-uppers who want to whack the South East to keep the goodies for the north flowing.

Yet not all are convinced. This is a growing Conservative faultline among MPs and the party’s voters. The Brexit coalition incorporated relatively affluent home counties’ areas and a working class elderly base nationwide. For some Westminster types, it simply makes sense to deliver for the new voters by squeezing the south.

Others, though, think the older working class Northerners don’t want Labour-lite, and that the best way to deliver for both would be targeted hawkishness on spending. For what it’s worth, Dominic Cummings told me: “the gvt wastes so much I’d rather save and not put up taxes.” He usually understands what these voters truly want, but would Johnson’s government slay any meaningful spending projects without him?

Tax policy, I suspect, will really test this Tory coalition. Hot housing markets in the South East have widened regional wealth inequality in the past 15 years, but after-housing-cost incomes have risen slower in London as people rent or service large mortgages. So many people feel squeezed, even before new tax bills come in. And massive geographic redistribution occurs already: London and the South East generate large public sector surpluses—averaging net public surpluses of £4,350 and £2,380 per person.

Now I’m not going to go all Mary Riddell and suggest last week’s by-election result already reflected a middle-class tax revolt. But if the mood music is for higher and higher spending in the North, and the conversation about paying for it focuses on raising property taxes, raiding pension pots, taxing savings, alongside stealthy income tax squeezes for the middle-classes, would it be surprising if voters in traditional Tory heartlands reassessed their allegiances? In a world of ever-rising spending and an unwillingness for broadening tax bases, there’s only so long the Chancellor can obfuscate on who will really pay.

Ryan Bourne: School catch-up for the disadvantaged? Of course. But do all pupils need it? Not really. The Treasury has a point.

8 Jun

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

There are plenty of economic known unknowns when it comes to the pandemic’s legacy. How will the geographic and industrial composition of the economy change as businesses and workers re-evaluate work arrangements and their desired careers? Will entrepreneurs in service industries become more risk-averse about certain investments? How many of the one-off, “emergency” programmes will become suggested parts of the policy firmament for fighting “normal” recessions?

Of all these many uncertainties, though, the magnitude of the lasting economic impact of school disruption on children is perhaps most unclear. Not that you’d know it from the public debate.

Nobody doubts the likely direction of the effect. School closures and the inadequacies for many of the remote learning substitute has left plenty of kids behind where they’d usually be expected to be. Department of Education-funded research last year found that primary and secondary kids were up to two months behind on reading and three months on maths, on average. More recent research confirms these sorts of magnitudes. Outcomes are particularly bad for disadvantaged children.

These deficiencies can compound, as Sir Kevan Collins rightly warns. Fail to adequately learn to read and write at a young age, and you can’t accumulate other knowledge or skills. Evidence from the legacy of school disruptions from a Pakistan earthquake and Hurricane Katrina suggests some kids’ development can be severely retarded, even with modest lost classroom time. So the case for precautionary remedial action, targeted especially at young and disadvantaged kids and for basic skills, is reasonably strong, even if you think much other state education is a waste of time.

That said, the attempt to bounce the Treasury into a massive much broader investment of £15 billion or even £30 billion over three years has been predicated on some pretty wildly speculative predictions of the economic benefits. The Institute for Fiscal Studies, for example, claimed last week that the 8.7 million kids affected by the pandemic could face lost lifetime earnings of something like £350 billion without remedial action. One academic at Bristol puts the total economic costs of lost learning at £2.15 trillion. Spending big to deliver catch-up and prevent these losses is therefore said to be a prudent “investment” that would supposedly “pay for itself.”

If you really believe these extreme numbers, you probably should have opposed school closures through the pandemic. That aside, the IFS explanation highlights where these questionable figures come from: the idea that schools are human capital factories.

Kids are assumed to learn knowledge and skills at school that make them more productive at work. The IFS illustration then takes the average estimated private earnings return to an extra year of education from around the world of eight per cent per year, adjusts it down for school days lost here, and, voila, it has £350 billion. No wonder Collins and others are angry that the Government is unwilling to spend just £15 billion to institute longer school days and the private tuition required to catch up.

Such simplistic calculations, however, are clearly fraught with danger. Yes, schools impart some skills and knowledge. The ability to read is an important prerequisite for most work, and so remediation to counter this and loss of maths skills has significant value, if such efforts work.

But the average historic private returns to an extra year of education worldwide seems a bizarre number to use symmetrically to assess the impacts of school closures. Remote learning did occur for many. In this instance, all kids worldwide were affected to a lesser or greater extent by the pandemic. And, crucially, not all this private earning premium from school is due to honing skills or acquiring knowledge.

Indeed, although some of the “premium” no doubt arises from enhanced human capital, the private returns to extra years in education also incorporate credential effects: the wage uplift from students undertaking subjects and obtaining qualifications to prove they have certain attributes, but for which the specific knowledge or skills honed wouldn’t affect their work abilities.

For these aspects of schooling, as well as things such as sports time, there’s arguably a negative social rate of return for remedial education, because the signalling component is socially wasteful. For many secondary students, their cognitive abilities and earnings by, say, aged 25 are likely to be unchanged, despite the pandemic. Even the fears of potential loss of earnings from, say, a poorer grade are likely to be mitigated as employers and universities will no doubt judge these years with an asterisk.

While there’s a strong economic case for targeted remediation at the disadvantaged, young, and obviously struggling, then, there’s not one for attempting “full catch-up”. Tutoring and reorienting within-school activity should deliver the high return spending, without requiring drastic measures such as school day extensions for everyone or kids repeating whole years (indeed, reducing the years in work by one year for, say, a current sixth former, would negatively affect lifetime earnings for many).

Now, I’m not well placed to say whether the £1.5 billion announced is sufficient to ameliorate the worst consequences of the pandemic. What I do know though is that the extra £15 billion deemed the alternative seems an arbitrary “nice” number and that in three years’ time, any plans to let this “emergency spending” fall away will be dubbed “savage cuts” to education by Labour, schools, and a host of “progressive” Tories.

Spending today simply becomes tomorrow’s baseline. We don’t need theories to presume this. Look at how the debate over the level of universal credit payments or free school meals is shaping up. Or indeed the political reaction to Conservatives cutting planned “emergency stimulus” by Gordon Brown from 2010 onwards.

To be clear: nobody is questioning that targeted tutoring or more instruction time can improve outcomes for kids. The point is that good economics happens at the margin. That schooling can improve earning potential doesn’t mean that ever-more schooling is good for all kids in the aftermath of a pandemic. We should be looking to isolate where remediation actually has benefits, as opposed to just trying to “make up for” the past year.

At a time when the zeitgeist set by Joe Biden is just to throw money at pandemic-related problems and pick up the pieces later, we should be grateful for the Treasury’s apparent sceptical eye. Taxpayer funding (we can dream) should always be justified according to firm evidence it will bring net benefits. We should not just presume so based on some global historical assessments of education in very different conditions. Nor should governments get into the game of making wild spending commitments to “show they value” something.

Ryan Bourne: GB News will offer viewers a new choice – within the rules. Which is precisely why the left fears it.

25 May

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

There’s a fundamental conflation error in much coverage of the soon-to-air GB News. From the Guardian’s Marina Hyde to the campaign group “Stop Funding Hate,” many on the left think that because Andrew Neil, the project’s founder, and Angelos Frangopoulous, its Chief Executive Officer, are vocal about incumbent broadcasters’ inadequacies, GB News is somehow “anti-impartiality.”

The thesis goes like this: “Andrew Neil says he wants GB News to counter an “increasingly woke and out of touch” news media, which is “too metropolitan, too southern and too middle-class.” That sounds like he wants a very partial right-wing channel pushing culture war politics, and acting as a political mouthpiece for the Conservatives. Have you seen what’s happened with Fox News in America?”

Now given GB News hasn’t aired yet, and repeatedly says it is committed to the UK’s impartiality rules, which the US doesn’t have, speculating like this seems a bit unhinged. For the record, as a libertarian, I really do object to the Ofcom rules on free speech grounds, especially given the rampant discretion in interpreting them. But my views aren’t the point here: the new channel’s critics are confusing different concepts – “impartiality”  rules and the inevitability of human “bias.”

Ofcom’s rules insist on “due accuracy” and “due impartiality.” Broadcasters have a responsibility to use facts accurately and to explore different viewpoints on a show, or across episodes of the show, on news matters for news shows or issues of political controversy generally. Presenters can express opinions, especially where viewers expect them, but other viewpoints should be represented, even if only through presenters challenging guests from various perspectives.

“Due impartiality,” then, is about making efforts to hear different sides of a story, without a strict requirement for equal airtime or a duty to cover all views. It’s what Andrew Neil himself is a master at as a political interviewer.

Yet as Channel 4 News shows us every day, you can meet due impartiality rules while still being “biased” in the loosest sense of the word. To be unbiased means not having any personal prejudice and predilection. Yet relative biases are inevitable: journalists ultimately must make subjective editorial decisions on what to cover, who to interview, and how to present arguments. All these are shaped by the prior views of journalists.

Past and present BBC employees, including Andrew Marr, Peter Sissons, and Roger Mosey, admit, for example, that given the background and demographics of BBC staff, the organisation is biased towards a left-liberal worldview compared with the UK population.  Nobody can watch or listen to BBC shows without concluding they are hostile to free enterprise, anti-Brexit, anti-Israel, and usually anti-questioning of the policy response to climate change. Yet the BBC can exhibit these relative biases without falling foul of Ofcom regulations.

A left-liberal BBC worldview can create “biases by omission,” where certain viewpoints are just not entertained as serious. Hardly ever does a BBC watcher see a libertarian objection to a government function. For years before the referendum too, except for  Nigel Farage, you would rarely hear someone who explicitly wanted Britain to leave the EU, despite at least a third of the population backing that policy.

We see “bias by selection” too. How many more major TV items do we see on inequality or climate change, over the importance of economic growth? Or appearances by left-leaning Nobel prize winning economist Paul Krugman rather than, say, Eugene Fama? The evaluative judgments of journalists considering what’s important or appropriate guests reflect their own prejudices.

Then, of course, there’s “bias by presentation.” The way guests are treated can tilt the deck. This might come through interruptions, or via “health warnings” that make viewers question a guest’s credibility. Other times it can come from the presentation of  a statistic: remember the BBC’s Norman Smith describing spending cuts as taking us “back to the 1930s”?

Now some biases, no doubt, are in the eyes of a beholder. There are Corbynistas who think that the corporation is biased against the left, after all. SNP types often see it as a unionist propaganda unit, and many republicans think it overly dotes on the Royal Family (which is tougher to argue after this week).

So my point here is not to suggest then that the BBC is uniquely biased against conservatives or that some totally unbiased media organisation is even attainable in reality. It’s to simply point out that believing the public is ill-represented by the current news media’s cultural biases, and so building an institution to ameliorate them, is just not synonymous with trampling on due impartiality rules.

In fact, it’s perfectly within the Ofcom rules to build a news channel that will run different stories or perspectives – and Neil wants to run “good news” stories and shift away from assuming every problem has a government solution. You are allowed to hire, as  GB News has, card-carrying conservatives, ex-Labour MPs or people from outside of London with very different assumptions in thinking about what news is important. And, yes, you are free to have colourful presenters with attitude to liven up discussions, provided you still showcase various perspectives.

Why, then, are some on the left so afraid of this pluralism? Maybe they don’t accept biases exist on other news channels (Channel 4 News, really?), and so think any stated attempt to counter them is retrogressive. Perhaps they simply fear a politically strengthened  conservatism. For others, no doubt, there is a concern that the Government’s mooted appointment of Paul Dacre to Ofcom is a precursor to watering down impartiality rules as well.

But given that no such policy has been signalled, and we have not yet seen GB News in action, we must judge them at their word. Neil himself thinks, rightly, that a “British Fox” riding roughshod over Ofcom rules just wouldn’t be successful. “Overwhelmingly, Brits value impartiality and accuracy and, during recent years, in fact, the proportion of Brits thinking the BBC and ITV provide an impartial service has fallen.” GB News is keen to harness that particular audience, yes. But having spoken to numerous staffers, they are determined to avoid political bias, and to be robust in providing respectful disagreement more broadly too.

That’s the key point here: Ofcom’s rules that say “news, in whatever form, must be reported with due accuracy and presented with due impartiality” still leaves huge scope to decide what to cover, who to interview, and how to present the stories. Those regulations require hosting various perspectives and doing so accurately. But we still live in a world with enough liberty for a new channel to attempt to reach an audience and hire journalists with different priors and interests to employees of the BBC or the Guardian.  And, you know what? That’s a good thing.

Ryan Bourne: How Government is making childcare more expensive

11 May

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

Childcare is a hot topic again. Boris Johnson allegedly sought donations to finance a nanny to care for his son. In the U.S., Joe Biden plans to cap how much low and middle income families spend on childcare as a percentage of income, with the federal government covering the rest and funding pre-school for three and four year olds. All this, we are told out here Stateside, will reduce costs for parents, help child development, and facilitate mothers returning to work.

Which is funny, because we heard similar claims in the UK, where there is already up to 30 hours of government-funded care for three and four year olds, as well as subsidised care for disadvantanged two year olds. That’s in addition to Sure Start centres in places, “tax-free childcare”, support for school-based after-school care, and childcare cost relief through Universal Credit.

And yet Johnson’s worries about childcare costs sparked much hand-wringing anyway, with high prices variously described as a “devastating tax on motherhood” or evidence of long-neglected “social infrastructure.” The consensus takeaway, as ever, is that high prices necessitate yet more government support.

Come on, guys. Is anyone actually thinking in a joined-up way about the impacts of this snowballing state takeover of childcare? Subsidies don’t make something inherently cheaper. At best, they change who pays for it, while driving up prices for those ineligible for the programmes through pumping up demand. Far from the lack of state intervention being the problem, it’s obvious that government policies are driving up costs and eliminating options for parents.

A free society should produce a wide array of childcare options, with everything from parental and grandparent-provided informal care, right the way through to round-the-clock pre-school, if that is what parents want.

Yet governments have sought to professionalise and formalise the sector through heavy regulation, constraining supply, while then subsidising demand. This has brought a whole host of dissatisfaction, as well as rising market prices.

Yes, childcare is a labor-intensive, personalised service entailing the care of something parents value highly. As we become richer, we tend to spend more on higher quality services. Wealthier families, in particular, like the idea of care not just being about minding children, but as a form of early education. That sort of “quality” costs money. But present government policies push towards entrenching these preferences for everyone, stamping out cheaper options and raising out-of-pocket prices.

Looking after children need not be particularly expensive, given the reserve army of stay-at-home parents who could scale up to care for another kid. But if money is exchanged and the child is cared for in the friend’s home, the government dictates that person must apply to be a registered childminder, going through childminder registration, extensive training, Ofsted inspections and more.

These expanding supply-sapping constraints, coupled with subsidies for nurseries that crowd out childminder demand, have seen registered numbers plunge from 103,000 in the mid-1990s to less than 40,000 by the pandemic’s onset.

Restrictions on childcare supply don’t stop there, of course. Brexit has undermined the au pair childcare option, whereby a young foreigner, usually from the EU, lived in your house, obtaining free lodgings in exchange for a modest payment of £5,000 per year to learn English while providing regular childcare. Now applicants must go through the new visa route for a skilled occupation, which requires a salary of at least £20,480. This raises the cost to something comparable with a British nanny, an alternative which itself brings all the responsibilities and paperwork associated with hiring an employee.

Then there are the regulatory restrictions in the form of staff:child ratios across settings, something which the Conservatives wanted to relax early last decade, though their coalition Lib Dem partners blocked them. When such regulations bind, they have the perverse impacts of either making childcare more expensive or reducing wages for childcare workers, by reducing staff members’ revenue-earning potential. From the childcare-specific to the general, “low-skilled immigration” restrictions, minimum wage increases, and tight planning laws all raise the costs of childcare provision too.

Ofsted and governments claim childcare regulations are needed to ensure “quality” – so that carers aren’t overburdened with kids and have the right training to improve child development. But why are governments, rather than parents, the best judges of “quality” here? It seems upper class professionals are imposing their preferences for formal settings on everyone else, with this attempt to “raise quality” bringing the inevitable trade-off of higher prices and fewer affordable providers.

The demand for subsidies and government commitments to deliver “free care” is, in large part, a reaction to this. But subsidies don’t solve the underlying problem of inflated costs making provision uneconomic. Just the opposite, in fact. When governments provide “free” care, they have to cap the rates they are willing to pay, lest providers ramp up prices. Yet these effective price controls are often lower than would-be market prices, putting a big squeeze on even nurseries.

This has perverse consequences. Providers tend to cross-subsidise government-financed rates by charging more for unsubsidised families with older or younger kids. As “free” care has broadened to 30 hours per week for three and four year olds, the opportunities to price discriminate like this have fallen, further straining the viability of many nurseries.

A full 39 per cent of child-care settings said their profits fell as the 15 hours of care for three and four year olds was extended to 30 hours. The Professional Association for Childcare and Early Years warned back then that providers were losing some of their best staff because they were simply unable to increase wages given the level of government payments. Others began to strip back services offered for vulnerable two-year-olds, because these children were relatively less profitable given the tighter regulations on staff-to-children ratios for that age group.

The result: more dissatisfaction. The steady descent into a highly regulated, highly subsidized model has raised market prices for those still paying out-of-pocket, seen some providers go out of business, and brought ever-rising demands for governments to step in with yet higher subsidies or even direct provision. Covid-19, of course, has plunged the sector into more disarray, with discussion of as many as a quarter of providers going under.

It’s time we unwound this costly experiment, rather than doubling down with yet more subsidies. High prices and the restricted availability of childcare is in large part a result of bad policy. Politicians must recognise that, as with housing, they have constrained the supply of childcare and then bid up demand. In doing so, they have not just made out-of-pocket childcare less affordable, but suffocated the sort of pluralism a market would provide.

Ryan Bourne: A lesson from the pandemic. We place high value on all our lives – including those of the elderly.

27 Apr

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

The pandemic tends to make us immune to shock when it comes to extraordinary statistics. There was barely a murmur last week, for example, when it was announced that, during the financial year 2020/21, UK government borrowing topped £303 billion—a peacetime record of 14.5 per cent of GDP.

Nevertheless, another striking statistic recently caught my eye as indicating just how profound this period has been. Kip Viscusi, the renowned U.S economist, has calculated the direct mortality costs of Covid-19 across countries. His estimates now imply that the UK’s 127,410 Covid-19 deaths represent a collective loss in value of £717 billion—around a third of annual GDP.

Non-economists recoil at putting monetary “values on human lives” like this, while politicians prefer talking as if every life is infinitely valuable. But Viscusi follows Thomas Schelling, a Nobel prize-winning economist, in believing people’s willingness to pay to mitigate deaths risks, or to be paid to bear them, provide us with a reasonable guide to how much we should societally value mitigating mortality risks.

What does that mean in practice? People are often compensated to bear elevated mortality risks at work. Studies assessing these pay-risk trade-offs in dangerous jobs allow economists to calculate how much workers must be paid collectively for the statistical probability of any one death.

This represents a risk-specific “value of a statistical life” (VSL). For similar death risks to Covid-19, and adjusted for the UK’s income level, Viscusi estimates a population-wide £5.6 million VSL for Britain. Little wonder, then, given these stakes, that the public was willing to tolerate such costly disruption via lockdowns.

Lockdown sceptics, of course, dispute using population-wide VSLs. The age profile of death from this virus skews much older than most work risks, after all. Indeed, the largely unspoken message of those who continuously repeat that “the average age of death from Covid-19 is 80” is to support the “good innings” principle. Those most likely to die from Covid-19 are said to have “had a good run,” haven’t got long to live anyway, and would otherwise live in ill-health. Charles Walker explicitly said in Parliament “to compare the death of someone of 90 with the death of someone of 19 is not right.” When totting up the benefits of risk mitigation then, shouldn’t we adjust for age and quality of life?

Although valuing lives differently by age is itself ethically debatable, I agree that using a one-size-fits-all value is probably misguided. As I write in my own book, Economics In One Virus, the death risks faced by older people for Covid-19 are much, much higher than those faced in most workplace studies. As Walker’s constituency correspondence highlighted, at the very least the elderly are likely to have more varied preferences about bearing Covid-19 death risks than, say, miners with accidents. Importantly, we generally see a decline in the observed market value of a statistical lives derived from studies of the very elderly, at least after a peak in middle-age.

But the key point is that though we, societally, often assume young lives are “worth” much more, perhaps hundreds or thousands of times more, academic assessments of people’s behaviour in markets often finds values of statistical lives as high for someone aged 80 as someone aged 20. At most, they tend to differ from oldest to youngest by a factor of seven.

When pushed to adjust for age, Viscusi’s own work suggest that the average value of a statistical life given the age profile of Covid-19 deaths so far would still be between £2.7 million to £3.2 million per life. That would imply overall still huge mortality costs of around £344 billion to £408 billion. And that’s before we even try to account for the non-mortality risks associated with widespread disease, which people self-evidently are keen to avoid. Clearly, then, mitigating Covid-19 risks always offered potentially huge benefits.

There are two common reasons, I suspect, why people might wrongly presume that controlling for age would reduce these values more significantly. The first is misunderstanding life expectancy. That life expectancy at birth is 79.4 for males and 83.1 years for females doesn’t mean that someone at the average age of a Covid-19 death (80) is due to die imminently.

In fact, the UK’s National Life tables show someone who has reached 80 would, on average, live another eight and a half years if a man and 10 if a woman. That’s because life expectancy at birth averages across everyone, including those who will die much younger. So, even accounting for ill-health, a large proportion of Covid-19 deaths will still bring a significant loss of life years.

Second, and most importantly, despite our stated preferences, our revealed ones show the latter years of life are simply more highly valuable to people than commonly supposed. As the economist Jeremy Horpedahl argues, these are years in which people are generally at their wealthiest, with most time on their hands, and enjoying the pleasures of seeing their grandchildren develop. That we collectively spend so much on the elderly through the state pension and the NHS, in fact, shows we value the lives of our elders highly.

Why, then, are certain lockdown sceptics so keen to play down the loss of elderly lives? Aside from these errors, I suspect motivated reasoning is at play. After all, it makes no sense for someone who argues for “focused protection” of the elderly to then outline their lives aren’t worth much anyway.

Then again, many of these people celebrated the example of “no lockdown” South Dakota, which saw a larger proportion of elderly deaths in its total than many other U.S. states, despite a younger population. That suggests the ends (avoiding government lockdowns) are what justify the means (whether that’s disputing the worth of elderly lives in some contexts or arguing for focused protection in others).

My argument here should not be misconstrued: the fact that these market measures suggest the death costs of Covid-19 are massive isn’t a slam dunk for the action we’ve seen this past year. What matters when calculating the benefits of lockdowns, of course, is working out how many lives the policies have purportedly “saved,” not how many people died anyway. These then have to be weighed against the broader social costs of any restrictions on our lives, which have no doubt been very large too.

What Viscusi’s numbers do show, however, is that the decisions we make in markets imply we value our lives extremely highly—much more highly, it seems, than the sorts of threshold values used by the NHS’s rationing board, the National Institute for Health and Care Excellence. And those losses and potential losses of value are surely important in evaluating how we should have responded this past year.

Ryan Bourne: We can never be certain of the costs and benefits of lockdowns

30 Mar

Ryan Bourne occupies the R Evan Scharf Chair for the Public Understanding of Economics at Cato, and is the author of Economics In One Virus.

A year since the first UK lockdown, the economic question most asked about Covid-19 is whether shutdowns would pass a simple cost-benefit test.

Such analyses have been demanded by Covid Recovery Group MPs and, indeed, the correlation between those wanting such evaluations and lockdown scepticism is now strong. Philip Lemoine, a shutdown critic,even suggested in the Wall Street Journal recently that the absence of government economic appraisals worldwide showed policymakers knew lockdowns would fail these economic tests.

I think there’s a more charitable explanation to policymakers’ reluctance to do them: a lockdown cost-benefit analysis is actually incredibly difficult to do well.

Certain issues, such as how much we should value lives saved from mitigating death risks, are contentious at the best of times. But the costs and benefits of crude business shutdowns, school closures, and stay-at-home mandates are far more uncertain than, say, assessing a minor work safety regulation.

First, defining the counterfactual from which to measure lockdowns’ marginal impacts is hard. Clearly, the alternative to lockdowns is not an unmitigated spread of the virus. Evidence from around the world shows that countries which spurned lockdowns also saw waves of infections, rather than a massive outbreak leading to herd immunity. Voluntary social distancing and other mitigation attempts, in other words, appear sensitive to the prevalence of the disease. When cases get high enough, human contact falls, eventually pushing the transmission rate of the virus below one.

The problem is that when these tipping points occur appears a moveable feast across time and countries, unmoored from any consistent prevalence threshold, influenced by pandemic fatigue, and probably strongly affected by chatter of potential lockdowns too. That leaves scope for lockdowns reducing human contact to have big marginal benefits if applied earlier, or in accelerating the downswing of curves. But it also makes it incredibly difficult to precisely set out what would happen in a counterfactual world.

Sceptics are right that unpicking lockdowns’ precise impact requires more than just eyeballing curves. Particularly because a government using lockdowns might exacerbate waves: if people expect governments to lockdown when things are bad, they might begin judging unlocked periods as “safe.” But it would be laughably convenient if you assumed the public would voluntarily mimic the effects of lockdowns precisely when they would otherwise be introduced, as some UK sceptics appear to allege.

A second, related difficulty in lockdown appraisal is that the costs and benefits change with our medical capabilities and knowledge of the virus: they are time and context specific. The UK’s first lockdown was introduced in spring 2020 under a cloud of uncertainty, with fears that, absent evasive action, hospital capacity could be overwhelmed, bringing severe social costs. At that time, we had little firm knowledge about whether a working vaccine would materialise either, and so whether “deaths averted” by lockdowns were merely “deaths delayed.”

The current national lockdown, in contrast, was introduced because of the highly transmissible variant and then-imminent vaccine rollout. The short-term benefits of this lockdown were thus more certain. But as vulnerable groups have now been jabbed at least once, the marginal benefits of lockdown days have now fallen dramatically, while the marginal costs of lockdowns continue to rise. Accounting for changing dynamics within a cost-benefit analysis, influenced by the availability of testing or vaccines that help “lock-in” any suppression of the virus, is therefore crucial to understanding lockdowns’ net effect.

A third and final difficulty arises because a whole range of lockdowns’ costs and benefits are subjective or highly uncertain. The worst attempted analyses so far just calculate the estimated value of lives saved and compare those to some estimate of lockdowns’ impact on GDP or, worse, government spending.

But this is hugely incomplete, ignoring worst-case tail risks and a range of other obvious impacts. On lockdowns’ benefits, for example, a lot of people self-evidently value avoiding infection risks, not just death risks. Some economists have even calculated that mitigating such non-fatality risks might double the monetary value of lockdowns’ health benefits.

On the cost side, the uncertainties are legion. Lost economic output is clearly a mere subset of lost wellbeing. How much should we value losses stemming from, say, someone being unable to attend the wedding of a family member, or visit a friend with depression? These are extremely subjective, but accumulate to very large costs indeed. That’s before we consider lost schooling’s effects on children’s life chances, or attempt to account for the impact of government shutdowns on entrepreneurialism.

No cost-benefit analysis I’ve seen so far has gotten close to developing a robust, country-specific counterfactual to lockdowns, nor accounted for all these effects. But that it is difficult doesn’t mean governments shouldn’t have attempted it, or that we now shouldn’t endeavour to carefully and retrospectively deliver such analysis.

Some dismiss cost-benefit analysis of lockdowns on the grounds that they may mislead the public given these uncertainties. Others, such as Mark Carney, think weighing health benefits against lost economic and social liberties is alien to society’s preferred values. The public clearly wanted to minimise the health impacts of Covid-19, Carney says, so governments should seek to deliver that in the least costly way possible.

Carney may be right on the psephology of what voters wanted and how this drove decision-making. But the trade-offs were real, and analysts shouldn’t shy away from highlighting them. Indeed, my own views on the UK lockdown experience are nuanced. They clearly “worked” in the sense of significantly reducing cases and deaths each time, while the case for them was strongest in Spring 2020 and December 2020, given the contexts of uncertainty and vaccine imminence.

And yet, overall, I still think the re-use of lockdowns after the summer Covid-19 lull is evidence of the failure of the government to think on the right margins. Even if lockdowns passed cost-benefit tests at certain times, that doesn’t make them “optimal.” The inability of the government to harness new knowledge and to unbundle the aspects of lockdowns that clearly imposed costs for scant public health gains, even after months to devise something less painful, is striking. Other countries likewise show how testing, tracing, cluster-busting, and guidance on ventilation, if done well, could have locked-in a lot of the gains of suppression without the massive downsides.

During the next few years, careful analyses will seek to unpick the effects of lockdown relative to counterfactual worlds. Such are the contestable assumptions and uncertainties, though, I suspect we’ll never get a cost-benefit analysis that “resolves” this debate.

Ryan Bourne: Are fears of a return of inflation overblown?

16 Mar

Ryan Bourne occupies the R Evan Scharf Chair for the Public Understanding of Economics at Cato, and is the author of Economics In One Virus.

“Inflation is coming” has been the perennial warning of conservative commentators over this past decade. After the financial crisis, it was feared that quantative easing would generate a sharply rising price level. Now, Rishi Sunak is kept up at night by the prospect of an inflation spike. Columns forewarning of one are increasingly common. Even some of the high priests of macroeconomic dovishness, such as Larry Summers and Olivier Blanchard, are sounding the alarm.

s this time different? And how worried should we in the UK be? When thinking through the economics we must unpack three related but different issues: Covid-19 price changes, the overall level of prices, and ongoing “inflation.”

Covid-19 price changes

As the economy reopens, certain sectors will see pent-up demand meet constrained supply. A lot of entertainment venues have gone out of business following a year without activity, for example. A freshly vaccinated public may suddenly be keen to go out and spend after June, despite less capacity in the sector than pre-crisis.

The flexible prices in such industries could therefore see sharp upward price volatility, with new entry taking time to reverse these relative price spikes. The scale will depend on whether demand peaks in a “big bang,” or if there is a gradual transition to whatever “normal” now is. But for a returning public, this will feel very much like a substantial cost-of-living increase.

The Price Level

“Inflation,” though, is “an ongoing rise in the general level of prices.” It is, as Milton Friedman famously said, a “monetary phenomenon,” seen when the money supply increases more quickly than the supply of goods and services. Here, the risks do look different to after 2008.

During the global financial crisis, the money base increased more than four-fold, but broader money supply measures (e.g. M2) barely changed.

Since the beginning of the Covid-19 pandemic, however, not only has the money base increased dramatically, but M2 has increased by over 25 per cent. This hasn’t “stimulated” higher overall nominal spending, since people have been unwilling or unable to engage in certain activities, leading to a sharp fall in money’s “velocity.” As velocity rebounds, extra funds circulating again will likely raise the price level as activity begins (i.e: we will see a “one-off” increase in prices, feeding through over a number of years).

This could see inflation temporarily running above the Bank of England’s two per cent annual target. Indeed, despite current CPI inflation at just 0.7 pe rcent, British macroeconomists believe the forecasts tilt upwards.

Asked which scenario was more likely to hold “on average” for the next decade, 37 per cent of Centre for Macroeconomics economists surveyed said inflation would be on target. But 41 percent said that the Bank of England would either “allow” or “wouldn’t be able to avoid” inflation exceeding its target (just 15 per cent thought inflation would be “allowed” or would inevitably remain below two per cent).

Whether inflation exceeding that two per cent target is considered a “bad thing” really depends on two individual judgments:

  • Whether “inflation targeting” is really the appropriate goal for monetary policy, or instead whether a level target for prices or nominal GDP is preferable, and;
  • Whether a period of significant inflationary pressure could or would be swiftly eliminated by the Bank of England afterwards without negative consequences.

The UK experienced a very dramatic collapse in nominal GDP last year, including a fall in inflation below the Bank’s inflation target. If one believes optimal policy maintains steady increases in the price level or in the level of nominal GDP over time, then a post-crisis overshoot of the inflation target in the service of returning to trend may be desirable. The Bank wouldn’t therefore need to drastically adjust policy, but could “look through” this price level uplift, aiming for the two per cent inflation target in the longer term.

Longer-term inflation

What would obviously be problematic is were the broader money stock to continue growing faster than trends in nominal GDP or desired inflation, generating sustained higher inflation. Few doubt the Bank of England would have the tools to choke this off.

So the questions that arise from this possibility really are,

  • How much damage would be done if above-target inflation altered inflation expectations in the interim? an
  • Would the Bank of England be willing to bring inflation back to target even if it meant the government’s debt service costs spiking?

Economists such as Summers, scarred by the 1970s and early 1980s, believe it “naïve” to think the alternative to a low inflation world is a modest inflation world with the promise of future low inflation.

Playing with significantly above-target inflation for a time can instead help create a high and variable inflation world. If people feel and so come to expect higher inflation, they start shortening contracts, demand cost-of-living adjustments, alter the balance of their portfolios away from non-interest bearing assets, and delay certain investments. This can make the economy less efficient, and entrench the combination of slow growth and high inflation.

It previously took painful efforts to “re-anchor” inflation expectations and cement central banks’ monetary credibility. So is this credibility at risk again?

There have been some recent jitters, but as yet little sign of widespread concern here. Inflation expectations jumped swiftly to 3.8 pe rcent in December, but have since fallen back to normal levels. Expectations implied by inflation-protected gilts predict inflation will exceed its target over the coming decade, but again are not historically abnormal. Recent increases in gilt yields are more likely to reflect the expectation of a more robust recovery than large inflation concerns.

Obviously, we should be cognisant of fears of how high government debts, or political pressures to change central bank mandates, can corrupt price stability. Certain historic episodes have led to “fiscal dominance,” with central banks prioritising keeping governments’ debt servicing costs low over price stability. The U.S. has officially changed its mandate with an asymmetric bias towards lower unemployment. Any change to the Bank of England’s official mandate, or even just prolonged above-target inflation, could risk fears of monetary policy here being driven by fiscal concerns about debt servicing costs or 1970s-style desires to try to push unemployment lower too.

But as yet, again, should the UK doubt its institutions? Andrew Bailey hasn’t said anything suggesting that the Bank would ignore sustained inflation. The Chancellor, if anything, is too eager to close the deficit through damaging business tax hikes because he fears the inflation risk—something that paradoxically could worsen near-term price level pressures by choking off investment in productive capacity as spending rebounds.

All this means that I think the current fears are overblown. But, yes, the broader context requires longer-term vigilance – the balance of risks on inflation, driven by economic and political trends, has definitely shifted.

Ryan Bourne: Why is Sunak so taken with tax rises – when the tax burden is forecast to be its heaviest for 70 years?

2 Mar

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

If we made public policy decisions by opinion polls, we’d end up with something resembling national socialism in the UK. In principle, voters say they want utilities nationalisationprice controls, and swinging cuts to foreign aid. Today, we are told they want significant tax rises – predominantly on other people.

Now, call me cynical, but taking as meaningful that voters say “corporations” or “online giants” should bear Covid-19’s fiscal costs, without giving those polled context on the consequences for investment, delivery charges, and wages, perhaps tells us more about those writing this narrative than those surveyed.

Yes, vast borrowing through this pandemic has made the national debt salient again. James Johnson, Theresa May’s former pollster, says there’s been a marked shift from spending cuts to tax rises as the favoured deficit reduction means over the decade.

But is this surprising? Since 2016, May and then Boris Johnson have talked up the “end of austerity,” “the good government can do,” and, more recently, state investment-led rebalancing. No Conservative leader has made a robust case for less spending since George Osborne. If living in the U.S. under Trump taught me anything, it’s that leaders’ pulpits substantially shape public opinion.

All this throat-clearing is to say I don’t trust these polls reflect strong, vote-deciding preferences. Tony Blair thought polling answers demanding higher taxes were voodoo. Margaret Thatcher’s view was that what mattered electorally was policies’ results, not how they surveyed.

And on that front economists are united in believing that telegraphing major tax rises – including on business – is a bad idea coming out of this recession. Strong growth with rising wages is the best means of bolstering Boris’s re-election. Post-pandemic tax hikes are a headwind against that.

Now, we have to be careful about the veracity of pre-Budget briefings. But the Chancellor apparently welcomes this polling, believing it gives him the “space” to detail future tax rises now. That’s a worry, because it suggests that he considers significant tax-led deficit reduction necessary or desirable.

The official justification for signalling future tax hikes now is that Sunak has been “spooked” by gilt yield increases. Yet economists are taught “never reason from a price change”—in other words, try to understand why yields are rising before overly worrying.

The most convincing explanation for their jump to mid-2019 levels recently is not some market concern about fiscal sustainability, but that the vaccine rollout has heightened expectations of a robust demand recovery, which will generate growth and/or inflation.

Yes, the Chancellor is right that rising yields raise debt servicing costs. But a faster recovery will also see surging tax revenues and the swifter removal of emergency measures, reducing borrowing and leaving us with a lower debt-to-GDP ratio than with slower growth.

The real economic worry now is not fiscal sustainability, but ensuring that the recovery is “real” rather than “inflationary.” We are about to see pent-up demand unleased across sectors that have been shuttered for a year. Governments have to be careful not to overstimulate, but must ensure reopening is timely and the incentives are right for rebuilding market-led capacity. Investment-deterring tax rises clearly harm this process. At the very least, given uncertainties about the crisis’s legacy on the structural deficit, we should avoid higher taxes announced today, making a sluggish recovery a self-fulfilling prophecy.

On this front, the pre-Budget newspaper briefings have been wild, at various times proposing windfall taxes, corporation tax to 25 per cent, aligning capital gains tax rates with income tax, an online sales tax and cuts to pension tax relief. Even if many are mischievous or testing waters for November, there are clearly prominent Conservatives telling journalists that significant tax rises are good politics with little economic downside.

Some of this is no doubt old school fiscal conservatism – trusting the central OBR forecasts that this crisis will leave a structural deficit, and so wanting to lock-in support for consolidation while the scale of this emergency is memorable. Several briefings even say the quiet part out loud, talking (quite brazenly) of tax hikes now to allow cuts before an election.

But some of the noises are clearly ideological. The One Nation wing of the party desires a bigger state and sees this crisis as an opportunity to raise the taxes they’ve always want to – so showing this isn’t Maggie’s party anymore. A useful side-effect for them is extra revenue for the industrial policy and regional bungs they are convinced are the path to prosperity.

And this is where we get to the crux of the coming debate. Total government receipts as a share of GDP were already forecast to be 38.2 per cent in 2021/22, the highest level since the early 1980s. National taxes, stripping out government receipts from rents, charges and more, are forecast to see their highest burden since 1951.

Despite an historically high tax burden, then, Conservative pre-Budget messaging implies not just deficit concern, but an implicit belief that, beyond removing emergency spending, there is no major government waste left to attack, no meaningful excesses to trim, and no major state functions ripe for reform in any fiscal repair.

Despite spending already being projected to settle at the highest sustained level since before the Thatcher revolution, in fact, swathes of the Party think the pandemic proves the need for more. Hence, the supposed inevitability of tax rises.

Do Conservative MPs agree? Do they interpret that their electoral mandate was to raise business taxes to pay for a load of green industrial policy and high street grants? Perhaps many do. But others privately worry that raising corporation tax will dampen inward investment when it is needed most, are concerned that the Treasury apparently sees self-employment as a mere tax dodge, and think whacking taxes on online sales is “levelling down.”

Far from having confidence in their arguments, I see tax raisers’ air war assault pushing lines like “this is what voters want” or “we’re just concerned about gilt yields,” combined with aggressive briefings about the consequences if MPs vote against the budget, as a sign of weakness: a lack of confidence that their economic ideas have yet won the hearts and minds of fellow MPs.

Sunak himself sang from the sheet of the “I’m a Conservative and I believe in low taxes, but…” hymn on Sunday. My sense, however, is that vast numbers of Conservatives aren’t buying the “we just have to do this” reasoning. Certainly not economists, business donors, or experienced MPs anyway.

By all accounts, a lot of the most unpopular measures will be booted to November. Yet Conservatives already recognise what we are hearing is a choice. And with Labour outflanking the Tories on the right on taxes today, I fully expect major Conservative anger at these mooted choices to go public soon.

Ryan Bourne: The lifting of lockdown. Yes to prudence but no to pessimism. The projections of these gloomy scientists seem absurd.

16 Feb

Ryan Bourne is the author of Economics In One Virus, a forthcoming book available for pre-order on Amazon UK. 

As Boris Johnson’s February 22 “roadmap out of lockdown” day draws closer, the Prime Minister faces sharply conflicting advice. The backbench Covid recovery group (CRG) demands that schools return on March 8, and that all lockdown restrictions are lifted by April’s end.

Scientists and Covid-19 modelers from Warwick University and Imperial College, on the other hand, say a gradual lifting of restrictions from March through July would see between 83,000 and 150,000 people perishing from a massive fourth wave death spike. They recommend “non-pharmaceutical interventions” remain intact through summer.

Who is right? Given what we know, the politicians appear slightly too bullish. The modelers, on the other hand, seem ridiculously pessimistic. But a great deal of uncertainty remains and value judgments abound.

Committing to the CRG’s timetable would leave the Prime Minister a hostage to disappointment if first vaccine doses prove less efficacious against death than widely believed. Precautionary prudence demands we wait to see clear trends in the data before delivering major policy change. Especially because a release, amplified by its signal, will inevitably raise the prevalence of the disease over time, including among those still susceptible who would be vaccinated soon.

Looking at the collapse of children’s infections during lockdowns suggests that school closures may have had a large impact on disease prevalence. So here, in particular, I’d be more cautious as first doses continue to be administered to groups 1-9. Yes, the societal damage of lost schooling is enormous. But is re-opening them entirely in early March, rather than a month or so later when prevalence is much lower, really so crucial to life chances, on the margin, to risk the lives of those for whom vaccinations will occur within weeks?

This is not to say that targeted relaxations cannot begin. Outdoor activity, certain sports, and indoor retail could be green-lighted relatively safely, with the usual social distancing protocols and stronger guidance on ventilation. If schools can do rapid surveillance testing, we could have targeted closures only if multiple cases arise. In the depressing absence of that, localised returns in rural low disease prevalence areas seems reasonable. But until the high first dose efficacy against death or severe disease is confirmed and we’ve vaccinated more people, I’d probably opt for slightly more caution.

For all that I might quibble with the CRG on timing, they appear to understand the coming trade-offs better than certain scientists. Pretty soon, almost all over-70s will have been vaccinated once. These demographics make up 88 per cent of deaths to date. Vaccinations should therefore slash deaths rates observably in March, in turn reducing lockdowns’ benefits.

Hospitalisations will prove stickier, because of the large numbers of middle-aged people susceptible to severe disease. The capacity of the hospital system will remain a binding constraint, hence why everyone is advocating a glidepath to normalisation, rather than a “big bang” reopening.

That said, the modelers’ pessimism for even gradual relaxations is jarring. The Warwick model predicts 2,000 deaths per day in August if we “fully reopen” by July, even if 95 per cent of care home residents and 85 percent of over 50s are vaccinated. That would mean more deaths this summer than the pandemic to date. Imperial’s model assumes an 85 per cent general population vaccine take-up, but similarly predicts 130,800 more deaths even if vaccines are administered at a sustained rate of three million per week.

The logic behind these shocking figures is that if 85 per cent of people get a first dose which is, say, 70 per cent effective against symptomatic disease, then 40.5 per cent of people remain “at risk.” Presuming normal Covid-19 death risks apply to those with symptomatic infection implies lots of people still susceptible to death. On the path to everyone getting vaccinated, then, they believe a gradual release of restrictions will see an increasingly unmitigated spread that kills many, even accounting for the higher efficacy Pfizer vaccine and second doses.

Yet these assumptions seem absurd. Vaccine take-up rates have been higher so far. Official data for England through 7 February suggests 93.5 per cent of those eligible in care homes have been jabbed once, as have 91 per cent of over 80s, 96 per cent of 75-79s, and 74 per cent of 70-74s already. The modeling, meanwhile, seems to ignore entirely the evidence that vaccines might mitigate against severe disease or death, even among those vaccinated who still catch Covid-19. If confirmed in data, that alone would invalidate these results.

What’s more, modelling restriction relaxation as if this is synonymous with unmitigated spread seems misguided. Those in vulnerable groups who cannot take vaccines will surely remain cautious. In fact, they would probably be even more careful in the knowledge others are mixing more. A host of voluntary social distancing, mask-wearing, and an ongoing preference for outdoor activity will surely remain for many younger people too ,as they seek to avoid disease in spring and summer before being vaccinated or boosted. Releasing government mandates, in other words, won’t return us to “normal” behaviour.

But even if we did a lot of normalisation, lockdown-like measures would still be disproportionate against the end risks. If severe disease and death rates will indeed plunge after one dose, the value of the health benefits of population-wide restrictions fall dramatically relative to their extraordinary costs too.

Some scientists advising Johnson use banalities such as “the lower the cases can get, the better.” But the idea that nationwide restrictions remain the most cost-effective policy in a world where the overall fatality and severe disease risks are low, and highly concentrated in a tiny slither of the population, is clearly absurd.

Once priority groups have had their vaccines, the Great Barrington Declaration will be essentially correct: “focused protection” for those still vulnerable will be the order of the day.  This will be all the more feasible given the smaller number of people still at risk. For a much lower social cost than lockdowns, we could send these people a healthy supply of N-95 masks, indoor ventilation machines, a year’s worth of rapid testing kits for any guests, and have taxpayers finance carer networks that minimize disease-spreading risks for them.

Such measures will obviously be far cheaper in mitigating the remaining risks than imposing massive restrictions on everyone indefinitely. And, of course, ongoing surveillance will continue to monitor new mutations and local clusters, just as many businesses will also maintain mask requirements that mitigate risks for vulnerable patrons.

What scientists must acknowledge, then, is that the same logic that said lockdowns’ benefits were huge when vaccinations were imminent says they could be tiny once vulnerable people are protected. If first dose efficacy proves as strong as we think, the Prime Minister will have to break with those overly cautious scientists who fail to think about the marginal costs and benefits of lockdowns as vaccinations proceed.