How to do a post-epidemic economic miracle

Our economy has taken a real hit during the crisis. It’s been hit hard because so much of it is service sector. With pubs, restaurants and entertainment centres closed, and people staying indoors, much the economy has shut down, and needs to be restarted.

Some suggest public stimulus, shoveling public funds to favoured sectors to restart them. No. It doesn’t work. It takes cash from those who might have invested it wisely, and lets ministers and civil servants invest it unwisely.

Others advocate central planning to regulate and steer the economy into recovery. Again, no. That doesn’t work either. Central planning by remote bureaucrats with nothing to lose is not a patch on individual planning by those with skin in the game.

Fortunately, history has given us a lesson in something that does work. Postwar West Germany was a basket case, its industry smashed and its infrastructure in ruins. The shops were empty and the people unemployed and under-nourished.

Economics minister, Ludwig Erhard, staged an economic coup over a weekend in June 1948. He abolished price controls. He introduced a new currency, the Deutschemark, and removed allocation and rationing regulations. He dramatically cut the top income tax rate from 95% first to 50%, and then to an effective rate of 18% for most earners.

It’s said he did it over a weekend when the Allied generals running Germany would be out playing golf. It became known as the “Bonfire of Restrictions.” He exceeded his authority, but he got away with it. The commanding US general called him on Monday to report that his economic advisors were telling him these moves were very dangerous. Erhard replied “That’s what mine say.”

It worked with astonishing rapidity. The shops began to fill from the Monday as farmers thought produce now worth selling at market prices instead of fixed low ones. People began to go to work, now they could now keep most of their wages. Industrial production was up 50% by Christmas, and the economy never looked back. It became the German Economic Miracle, and made West Germany an economic powerhouse, while the UK languished under regulation, rationing, and state controls.

It points a way forward for the UK after the epidemic. The answer is not higher taxes with state regulation and direction to reboot the economy. It is to make a bonfire of restrictions, as Germany did, and to lower taxes to make enterprise more worthwhile. It is to remove the barriers that limit and dampen the entrepreneurial spirit, just as Erhard did, and to let a freed-up economy kickstart itself by seizing and developing the opportunities created.

It is to recreate here an economic miracle that has proved in practice that it works.

How the UK has failed to ramp up testing

Matthew Lesh spoke to the Sun and explained our latest report, Testing Times, to explain how Public Health England’s overly centralised approach to testing has held back the ability to test people for COVID19 effectively — and so hampered the ability of the country to understand and control the spread of the disease.

Our latest paper on the country’s most pressing topic has garnered much attention with Viscount Matt Ridley writing on the issue in the Spectator, Matthew Lesh explaing in the Telegraph that we must not allow bureaucratic fiefdoms to get in the way of saving lives any more (their Science Editor also wrote an article about the report), and for The Critic how to expand capacity quickly. He also appeared on TalkRadio and the Sky News daily podcast

Matt Kilcoyne was quoted in the Sun, saying that we need to summon the Dunkirk spirit to ensure every lab: big, small, public, or private, is used in this fight. And Morgan Schondelmeier was on 1828 explaining the shameful difference between the US and the UK. Guido,  CityAM,  CapX,  ConservativeHome, the Daily Express, The Week, and Spiked also led with the report in their coverage of the slow increase in testing.

Crises show the resilience of capitalism, actually

You have to hand it to capitalism. It took—what?—two weeks of panic buying, and suddenly, again, the supermarket shelves are full of toilet rolls.

The Soviet Union never managed that in 70 years. Nor could it fill its empty shelves with eggs, meat, cereal or pasta. Except in the shops reserved for Party insiders and rich visitors, of course.

Even then, the choice was pretty lean.

On the hundredth anniversary of the Russian Revolution, an Adam Smith Institute report exposed how poorly Soviet citizens actually lived.

They ate a SIXTH as much meat and a THIRD as much fish as Americans—all of it much lower quality. They also ate a sixth of the fruit and vegetables. Much of the crop rotted by the side of the fields because the distribution system was chaotic. No wonder that disease was rife, with 30 times as many typhoid cases than the US. In the sixties and seventies, life expectancy actually fell.

It’s at a time of national crisis that you realise just how resilient the market economy really is. Far more so, indeed, than our state healthcare system, which struggles to provide its own workers with testing kits and protective equipment. Isn’t it time we welcomed a little free market ingenuity into that sector as well?

Catching up fast

Today the Department of Health and Social Care is writing around to ask who can “supply COVID-19 relevant materials and equipment”.  Even asking me. Never mind that they have failed to respond to many offers to date, nor that the South Koreans did all this months ago.  

Whitehall is working night and day on this and should not be rushed.  How likely are 100,000 tests a day this month?

Of course, if you can offer help or resources, do so.

Babes, sucklings and Tory Cabinet Ministers

The Good Book tells us that out of the mouth of babes and sucklings comes strength and or praise, dependent upon the vintage of the part of the book we consult. At which point give us strength at this from a Tory Cabinet Minister:

We’ve waived import duties on medical equipment so the NHS can get supplies faster and more cheaply.

Great that other countries, including the United States and New Zealand are taking similar steps.

Important we work together to keep trade flowing.

Excellent, we can praise that specific action. And yet, why does the Trade Secretary support import duties that make supplies to the NHS slower and more expensive in normal times? Why, in those non-pandemic eras, does the government actively conspire to make that national religion, the health service, worse and the burden of paying for it heavier?

Within the proverbs of economics it is well known that the only fair trade is free trade, that the only rational policy stance is unilateral free trade. It seems something of a pity to have an unbeliever appointed to be the high priest of the process itself.

George Monbiot doesn't actually understand what a market is, does he?

George Monbiot wants to tell us all that the crisis of our times has shown that markets don’t work. Instead, there’s a grand upsurge in people indulging in voluntary cooperation:

You can watch neoliberalism collapsing in real time. Governments whose mission was to shrink the state, to cut taxes and borrowing and dismantle public services, are discovering that the market forces they fetishised cannot defend us from this crisis. The theory has been tested, and almost everywhere abandoned. It may not be true that there were no atheists in the trenches, but there are no neoliberals in a pandemic.

The shift is even more interesting than it first appears. Power has migrated not just from private money to the state, but from both market and state to another place altogether: the commons. All over the world, communities have mobilised where governments have failed.

That’s what the commons, communalism, is, voluntary cooperation. That’s what a market is too, voluntary cooperation.

It’s entirely true that cooperation mediated by money allows transactions with strangers, that the more communal form is necessarily limited to those known. But money is only the token of reciprocation at this level of the analysis - and try existing in a communal system without reciprocating for any length of time. You’ll be somewhere between shunned and an outcast in short order, possibly faster than someone known for not paying in a monetised economy.

To use the favourite journalistic example - given the trade’s experience of the places - the pub. The transaction with the bartender is voluntary and mediated by money. Whose round it is is entirely reciprocal and not mediated by mere cash. Yet the accounting is tracked just as eagerly and the failure to reciprocate - either to pay the landlord or to return the round - noted and the future flow of beer restricted for it.

That commons is a market just one using a non-money transaction form of accounting. How could it be otherwise when a market is the sum of voluntary transactions and communalism is a series of voluntary transactions?

At which point we might well have identified Monbiot’s confusion with the world. He thinks there’s some significant distance between people cooperating and exchanging with each other and people cooperating and exchanging with each other.

As to the death of neoliberalism us neoliberals are all in favour of people cooperating, voluntarily, the heck out of each other. That they’re doing it without the mediation of money bothers us not one jot, tittle nor iota.

Shutdowns must not mean everything shut down forever

A protracted shutdown of so many businesses is seriously bad news—producing lasting disruption, bankruptcies and unemployment. So, when the time is right, how can we get Britain working again?

 The first thing is to set clear aims: a gradual return to normality, with widespread testing of the results, while continuing to safeguard older and vulnerable people.

We can start by reopening businesses that are not classed as ‘essential’ but where social distancing can be managed—like plant nurseries. Maybe even restaurants if staff can be certified as immune and tables can be spaced out. 

People who prove immune can be invited to volunteer in high-risk situations like care homes, hospitals—and schools, which need to re-open quickly so that people in key jobs can get back to work.

 We need better hygiene and deep cleaning in all those places. And in public transport to, while maintaining teleworking where possible.

We should try different re-opening strategies in different areas, letting local officials and businesses decide what is right for them.

We can repair some of the damage done to businesses by axing the regulations that have hampered their response to the crisis. And reducing their taxes. That means government cutting unnecessary projects and bureaucracies. And mothballing the big vanity projects that now simply aren’t an affordable priority.

Business bailouts must not become the norm in normal times

Britain’s government is trying to help businesses through the present lockdown. It has promised loans to companies whose business is interrupted. It has agreed to pay 80% of their wages. And it has extended comparable support to nearly all self-employed persons.

These policies aren’t perfect. Most firms really don’t want to take on more debt. And the loans are hard to get because the banks are not relaxing their lending criteria. They feel that if they make loans easy and customers default, the government won’t bail them out. But unless something gives, a majority of locked-down businesses could fail within three months. Governments should be insurers of last resort, not lenders of last resort.

Likewise, the 80% salary grant is paid only if employees aren’t working. If they get a temporary job—even essential work like helping out food producers—it dries up. It’s paid only if workers do nothing—which wasn’t the idea. And the scheme is already being abused by bad employers who claim the money but actually make staff work from home.

Well, there are times you have to make policy on the hoof. So, such problems occur. The trick is to keep it simple and admit that it won’t please everyone. And set a time limit so people know this really is an emergency measure, not a future way of state-subsidised life.

Public choice economics spotted out there in the wild

Public choice economics simply says that those who govern us, politicians, bureaucrats, all those who inhabit the governing structure, are subject to the same enlightened self interest as the rest of us. They respond to incentives concerning their personal benefit just as the people they are.

Those in favour of ever yet more government action tend to dislike this theory. As if the receipt of a government paycheck negates basic humanity. Yes, easy to joke that clipboard wielders aren’t entirely human but that is a joke.

Worth noting that the idea doesn’t in fact militate against government action per se. It only says that we have to consider those incentives faced by those taking the action and perhaps rejig them so as to reflect the general, rather than specific, benefit.

Given all of that it’s useful to spot people reacting to said economic incentives in managing public policy. Oregon has decided to close the public schools in response to coronavirus. We’re not sure about that action but OK. Then they decided to close the online schools as well. Why would this be?

“Enrollment of new students to virtual public charter schools during the closure would impact school funding for districts across Oregon and therefore may impact the distribution of state school funds and delivery of services as directed under the executive order,” the department said in its guidance to districts.

People might actually like the online schools which are outside the standard public school bureaucracy and this would have funding implications for that standard public school bureaucracy in the future. Note that, observing the incentives faced and not considering the overall sensibleness of the policy, this does make perfect sense. The interest of the bureaucracy is not to have children escaping its tender ministrations therefore it acts to stop children doing so. An entirely rational response considering only that self interest.

There are reports of similar events in other states, Pennsylvania being mentioned more than once.

We thus have an example, out there in the wild, of public choice economics. The people within government take decisions based upon the incentives they face. Again, this does not mean that government should never do anything, it just means that we should be precise in our crafting of those incentives so as to end up with sensible decisions.

Oh, and, of course we also need to be distinctly suspicious of any decisions made until we’ve examined the incentives which lead to them.

We must ensure the cure is not worse than the complaint

My friend Vernon Smith argues that the US economy is not in free fall—just standing still.

Well, he has a Nobel Prize in Economics, but I’m not so sure.

Economies often go up and down, in what economists call business cycles. But look closer, and it is not a case of everything going up, going down, and going up again. In every recession, there are real losses. Business ventures fail, factories are abandoned, people lose their jobs.

That is because, to create goods and services, capital goods—factories, shops, equipment and indeed human talent—have to be brought together, and work together, very precisely. Each part of the capital structure has to work with each other. If one part is disrupted, the whole lot is thrown out of kilter. It takes time, effort, pain and expense to reconfigure it. And things are never quite the same again.

For instance, with retail stores closed, people are turning to online shopping. They are getting used to it: they might even come to prefer it. In time, our high streets will re-open. But their customers may have abandoned them.

Or again, because restaurants are closed, wholesalers are switching their offer from businesses to individuals. When the restaurants re-open, they may struggle to find new suppliers. Some may fail.

In other words, you cannot close down an economy and then expect it to re-open as if nothing had happened. There will to be real losses, real write-offs, real unemployment, just as there are in any recession.

We can only hope that the economic cure does not turn out to be worse than the medical complaint.