Yes, this is what a fall in GDP means

There’s a distressing lack of knowledge concerning reality on display here:

Councils in England fear they will have to make budget cuts of 20% and face a social care funding shortfall of £3.5bn due to the coronavirus pandemic.

Labour claims local authorities are facing a £10bn black hole as they encounter spiralling costs while revenue streams such as parking charges dry up amid the lockdown.

Cuts of up to 21% could be needed to balance the books, according to the analysis by Labour, seen by the Guardian.

This is just what a fall in GDP means. Forget money for the moment, that’s just vouchers showing who gets what. The important thing is the underlying what there is for people to get. That’s what GDP is, the value added, the value produced, within an economy. That has fallen by 5 or 6% just in March and the likelihood is that our April figures, when they arrive, will show a fall of 20 to 30%.

There is, at that rough guess, some 20% less of everything to be had. Therefore everything gets cut by 20%. This is as true of social care as it is of haircuts, beer and motor cars. There are simply less of all those things around - everyone can therefore have fewer of them. This is just what it means to have a fall in GDP.

Of course, there is an answer, open up the economy again, spiced with lot more of that capitalist free marketry red in tooth and claw, and watch GDP bounce back. At which point, and only at that point, will we have the resources to have the level of social care that we used to have. Or the number of haircuts, beer and motor cars. For it is by definition true that richer places can have more of all those things and we are currently poorer, therefore we can have fewer.

Once again we find ourselves agreeing with George Monbiot

It really is appalling the level of education these days. People just don’t seem to get the most basic - and most important - things about the world we live in. Of course, we do slightly differ over what it is that people are ignorant about:

The issues about which most people live in ignorance are, by contrast, matters of life and death.

I don’t blame anyone for not knowing. This is a collective failure: a crashing lapse in education, that is designed for a world in which we no longer live. The way we are taught misleads us about who we are and where we stand.

We agree so far. Monbiot then goes on to tell us that economics is wrong and ecology is where it’s at. Something that would carry more weight as a critique if his knowledge of economics included a little more finesse. Or even knowledge:

In mainstream economics, for example, humankind is at the centre of the universe, and the constraints of the natural world are either invisible or marginal to the models.

The entire subject starts with the observation that human beings want lots of things but we happen to be in a universe of scarce resources with which to sate them. That concept of scarcity is central to the entire intellectual edifice. In fact, items for which there is no scarcity are non-economic goods. Quite how the very subject that studies the allocation of scarce goods is not cognisant of resource constraints is difficult to understand.

In an age in which we urgently need to cooperate, we are educated for individual success in competition with others.

We are only solely in competition with others for things which are in fixed supply. Where we cooperate we manage to increase supply. This is one of the arguments in favour of economic growth - we cooperate, increase supply and so are not trapped in a zero sum competition.

Large numbers of people now reject this approach to learning – and to life. A survey reported this week suggests that six out of 10 people in the UK want the government to prioritise health and wellbeing ahead of growth when we emerge from the pandemic. This is one of the most hopeful results I have seen in years.

If only those basic concepts of economics were understood. The assumption is that humans desire to, strive to, maximise their utility. This includes such concepts as health and the limited meaning of wellbeing used by Monbiot. It is also that larger sense of wellbeing - whatever it is that the individual concerned thinks maximises their wellbeing in this world of constrained and scarce resources to apply to that wellbeing.

This is the time for a Great Reset.

Which is where we come back to agreeing with Monbiot. Yes, let us have that great reset. We could start by in insisting those advocating a change in the economy, in the teaching of economics, gain a clue concerning the subject under discussion. Wouldn’t that be a nice change, a nice place to start the conversation - dealing only with these who already grasped the basics?

Just one of those damned things about people

We have to admit that we thought this amusing:

For the French capital and the rest of the country, it was a case of “back to abnormal” as thousands of shops, businesses and schools re-opened after two months of lockdown; but things were not quite as they once were.

Paris transport authorities had insisted social distancing would be respected but outages overnight leading to a 40-minute delay made a mockery of stickers on the floor supposed to keep passengers safely apart.

“It’s a catastrophe,” said one commuter. “The trains are totally packed without respecting the measures our leaders decreed. I should have known it.”

How nicely that plays to every English prejudice about the French, excitable Latins who won’t do what they’re told etc.

Except, of course, it’s not actually about the French at all, nor even Latins, excitable or not. It’s about people. For one of those great truths about us human beings is that we’ll do what seems best to us at the time and in the circumstances. What we’ve been told to do comes rather a distant second to this self-calculation of our own interests.

This always coming as a surprise to those who would plan society, people just don’t do as they’re told. Or, more accurately, the telling will only succeed when what is forced upon people is what they already agree is concordant with that self-calculation of own interest.

The implication of this should be obvious. It’s not possible to produce that planned society in any detail. It is possible to set fairly broad outlines - don’t murder and if we do we’ll get you - but anything at the level of don’t put paper in with the plastics recycling is doomed to failure. Therefore, if we want a set of rules that work - in the sense of their being obeyed and thus reaching the desired outcome - we can only have rules that everyone largely agrees with already.

Sure we can have the planned society, the rigid rules for the economy. Only not very many of them and only reinforcing what everyone does already.

Central purchasing and PPE in the time of coronavirus

We’re in The Times talking about the purchasing of PPE in these troubled days:

Given official intransigence, it is Edmund Burke’s little platoons who save the day. The website PPE Exchange has been cobbled together by the publicly minded, as distinct from the publicly employed, and does just what it says on the tin: it is an exchange for these necessaries, and one that claims to have two billion pieces of equipment available at time of writing.

The correct governmental solution to many problems is less of it, not more. Who knows, trusting the people might even catch on as an idea.

An argument against our preferred decentralised preference turns up in the comments. Not to particularly pick on this individual for it’s an idea we’ve seen in many another place:

In the USA states and federal government are getting played against each other in bidding wars instead of negotiating at scale.

Well, yes, but that’s rather the point. We not just want but should actively insist that the various people desirous of the thing be played against each other. This is what a market means.

At any one moment in time of course there is only some - unknown but fixed - amount of PPE in the world. If that moment were to last forever then the monopsonist buyer argument might have a point. But that moment is as long as it takes to retask a seamstress. Or, if you prefer, a plastic cutting machine, repurpose the output of an ethylene plant, pick your own example.

We have a rise in the demand for these varied things that we call personal protective equipment. None of them are hugely difficult to produce, an increase in production does not require the building of a new factory. The necessity is the repurposing of already extant trained labour, fairly low tech machinery, commonplace enough raw materials and a certain gumption and energy to make it all happen.

We’d also like people to be pondering whether they do truly need it. Perhaps the supermarket checkout can manage with a plastic visor to show willing, while a nurse on a ward requires full facial covering, possibly even a clean air supply. Who knows, who among us out here knows that is? This is something those directly involved will know better than anyone else.

So, how do we call into existence these two desirable behaviours? A consideration of what is to be used by whom and a scramble to produce more to be used by all?

We change the price. At which point it all happens as if by magic - any sufficiently advanced technology is indistinguishable from magic and the price system combined with markets is a technology, most advanced and thus indistinguishable from magic. We most certainly, from the above example, get all too many people asking “Well, how does that work then?”

The point being that it does. Further, it’s the only technology we’ve got that does.

We wish to increase the supply of PPE in this time of coronavirus. Would be purchasers of PPE being played against each other in bidding wars is not a problem, not something to be avoided, it’s the point, for it is the solution. Both supply and demand being elastic with respect to price, d’ye see?

If you’d prefer the “Shazzam!” explanation, the idea that there really is a wizard, then don’t look behind the curtain, it works all the same.

Business angels to the rescue

HM government has introduced substantial loan schemes to reinvigorate the private sector post-lockdown: the big banks lend the money and the government, to some extent, guarantees repayment.  One of the lessons of the last crash is that banks tend to demand repayment when it suits them, not the borrowers. The days of the friendly, open-door, local bank manager are long gone.  Today we have centralised, tick-box systems looking for reasons to say “no”.  The Chancellor had to coerce the banks to make the loans he was guaranteeing. 

In any case, such loans are intrinsically short term.  It can be much better for well heeled-companies and individuals to take equity interests in reviving businesses.  Cash is only part of the medicine; general support, experience and encouragement can be even more important.  Most of all: long-term shared interest. Venture capitalists, to some extent, meet these needs but most businesses find the City’s ramparts too steep to climb.

The government offers four venture capital support schemes:

• The Enterprise Investment Scheme (EIS), maximum investment £12M;

• The Seed Enterprise Investment Scheme (SEIS), maximum investment £150K;

• Social Investment Tax Relief (SITR), maximum investment £1.5M;

• Venture capital trust (VCT), maximum investment £12M.

The EIS was set up in 1994 and George Osborne, then Chancellor, added the SEIS for small start-ups in 2012. SITR was created in 2014; four years later, just 63 deals had been done. VCTs are a form of investment trust for City merchants with two levels of tax incentive: initial investments and subsequent share trading. The amounts raised by VCTs have grown slowly to £743M in 2018/19 and, though a helpful device, it is not relevant here. All four schemes offer financial support to small and medium sized companies and social enterprises significant tax advantages to the investor: e.g.

• Income tax relief of 30% of investment;

• No capital gains tax on profits (if held for defined period);

• Investment losses can be offset against income tax;

• No inheritance tax on shares.

But like anything administered by HMRC, the schemes are complex and bureaucratic.  Many trades are excluded presumably because they are deemed unworthy of public support – residential care homes being a topical example.  And having HMRC marriage-broking in the private sector is odd: their skills lie in taking our money, not providing it. True to form their “guidance” on using the schemes boils down to a list of reasons why they should refuse the tax benefits. And HMRC have set up plenty of traps for the unwary.

I am not decrying these schemes, far from it, but tax incentives can only be the jam on the bread.  Fundamentally, government needs to lead us out of this Covid economic crisis by bringing together business angels and wealth creators. Only the private sector can do that, not tax inspectors.

Unlike lenders, equity investors are willing to take risk and a flexible time-line.  Life will not return to what it was in the past. More will work from home.  Meetings will be on Zoom or other web tools. Many will have to retool their business models and each company may need several iterations. Investors can be sympathetic to these needs and, using their own experience, valuably supportive.

In essence, the issue is how to bring private money to bear on rescuing the post-Covid economy.  The two main ways are taxation and private investment. Socialists believe in the former but experience shows that government’s wastefulness in collecting money is only rivalled by its wastefulness in spending it.  Leadership and tax incentives apart, the less government has to do with the rescue the better.

Leadership is needed in two areas: the array of networks for business angels and businesses seeking funding is bewildering.  It is (or was) a free country and those who wish to create networks should be allowed to do so but rising above all the confusion we need just one country-wide marriage broking (so to speak) website which should be sponsored by the government and/or the British Chambers of Commerce as the go-to web source for an angel or an investee seeking a partner. Informal local business hubs should also be encouraged, linked with their local Chambers of Commerce.

Secondly, the EIS, SEIS and SITR incentive schemes should be simplified, broadened and merged.  Just one site should explain what each pair of partners in a small business needs to know. Of course, each business may end up with multiple investors but, for simplicity here, I am assuming one will take the leadership role.  HMRC has the knowledge and skills to manage the incentive schemes website but they also bring two handicaps: their tendency to bureaucratise, complicate and not answer telephones on the one hand and their reluctance to publicise perfectly legal tax avoidance schemes on the other.  A great deal of private money lies fallow waiting to be hit by inheritance taxes when their times come.  Reviving the economy demands that these funds are not left mouldering in minimal interest bank accounts but are invested in recovering businesses, using the inheritance tax relief to the benefit of all (except the banks).

Broadening the merged tax incentive scheme means that the permitted trades should be extended to just about anything that is good for the economy or national well-being, care homes for example. Currently preference shares, now banned for no obvious reasons, should be permitted. The partners should be able to agree to any share structure that suits them, though limiting the angel to the current 30% seems sensible.  At present the tax schemes focus on start-ups, but post-Covid, reviving long-standing businesses will need as much, perhaps more, support. Maybe adjusting the tax reliefs would be the price but that should be for consultation.  

The central facilitator envisaged here is the marriage-broking website.  A prototype exists but is limited to SEIS and it lists only the businesses looking for investors.  It is part of a group of companies founded by Kate Jackson in 2012; the extent of the site’s usage is unclear. There are three levels of annual fees depending on the extent of the listing.

The publicly- or BCC-owned future website would require some level of funding by users and/or the owner, not so much for operating the website itself (not expensive) as for the publicity needed to kick-start the post-Covid economy. Some levels of anonymity and verification, as for any other dating agency, would be needed.  Since dating agencies already have the skills and the technology, why not invite them to tender for the website business leaving the size of the publicity budget for later consultation?

Back in 1993, Michael Heseltine, then President of the Board of Trade, sought to import the German model of bringing investors and businesses together to create wealth.  In the event, the civil servants took it over and “Business Link” failed.  HMRC was then put in charge with a “national helpline”. No prizes for guessing what happened then. The network of local advisers was disbanded in 2011 leaving some benighted business development officer in each larger local authority to do his or her best. That said, the local development officer can often be the most valuable point of contact for the smallest companies. They know how the system works. Furthermore, local crowd-funding may well be the best solution.

If we are to rescue the post-Covid economy along the lines proposed here, we need a strong leader with no other mission but this.

We agree with the strategy but not the tactic

The Observer tells us that this modern world of ours requires ever more international cooperation. We agree. The Observer then tells us that this means the United Nations is ever more important. We disagree. For there’s cooperation and there’s cooperation.

The Observer view on the world needing the United Nations more than ever

Observer editorial

Seventy-five years after VE Day, the pandemic is a sharp reminder of the urgency of international co-operation

One problem with the second part of their urging, the UN part, is clear from mere observation of what the UN actually does:

The UN is already heavily involved. It has established a multi-partner Covid-19 “response and recovery” trust fund. Agencies such as the World Food Programme and the children’s fund, Unicef, are on the frontline. Guterres is also showing a lead. He has warned of increasing Covid-related human rights abuses and a “tsunami of hate and xenophobia, scapegoating and scaremongering” around the world.

None of that’s greatly useful in either doing anything or getting anything done. Talking shops and the establishment of multi-partners being all very well but where’s the actual action?

More cooperation is of course fine by us. It’s just that there is, over and above using the failed national politicians who go into international politics, another way of doing that cooperation. Which is, you know, people cooperating with each other?

Think on it. What is globalisation if it’s not seven and a half billion people doing ever more of that cooperating the hell out of each other? If you desire to be more specific, Gilead testing remdesivir to treat Covid-19 is 11,800 people working in order to cooperate with those 7.5 billion by providing a drug for the pandemic. German (where 50% of Europe’s special type of paper comes from), Chinese and yes, even Turkish, factories churning out PPE are cooperating with the NHS and, given likely restrictions, everyone who wants to walk down the road in a face mask.

That is, global cooperation does not presuppose nor even require international bureaucracy. In fact, from observation, we can see that it’s the natural state of affairs when people are left free to get on with life as they see fit - they cooperate with each other across those national boundaries. That we call this form of cooperation markets rather than governance doesn’t mean that it’s not happening. Observation also tells us that markets are a more effective manner of gaining that cooperation….

We're missing cost benefit analysis in our COVID19 discussion

Cost-benefit analysis is a useful tool for working out what things to do. Most activities have costs, even if it’s only the time it takes to do them. We could have used that time to do something else. We ask if the gain we achieve is worth the time spent doing it. Some activities have risks, and we ask if the benefit derived from the activity justifies the level of risk involved in doing it.

Some surprisingly mundane activities have measurable risk of serious injury or death, including going upstairs, taking a bath, or crossing a road. Some activities have more obviously higher risks to be weighed against the benefits. Mountaineers know that people are killed every year climbing mountains, but do it anyway for the thrill of performing a difficult and dangerous task, and the exhilaration of a successful achievement. 

Cost-benefit analysis only works if both sides of the equation are considered, the gains as well as the possible downside. One problem today is that people have become so accustomed to a safety-first culture that they look only at the risk and ignore the benefits. Yes, some children might sustain injuries playing conkers, but they derive pleasure from playing it, a pleasure denied them when over-cautious schools ban the activity. 

Traditional village sports, such as annual cheese-rolling, are now routinely banned by health and safety officers looking only at the possible sprains and fractures that might come from rough and tumble activities, and ignoring the pleasure derived from participating in traditional community activities. Most people can’t live in cotton wool, and don’t want to. They want to make their own decisions about the balance between risks and benefits.

The precautionary principle represents this culture taken to extremes, with benefits ignored because of possible unknown and unquantifiable risks. Genetically modified foods have been widely consumed in the US for many years without ill-effects. But the safety-first brigade tell us there might be risks involved. Indeed there might be, as there might with more conventional cross-breeding, but the gains of abundant and cheaper foods, and of efficient land usage, seem to far outweigh that unknown and seemingly minute risk on the other side.  Even so, the EU culture is hostile to such innovation, as it seems to be to most innovation — seeing only dangers, instead of opportunities.

Cost-benefit analysis has been notably absent in handling the corona pandemic. The economy has been virtually shut down to minimize risk, without regard for the benefits that a functioning economy provides. People have been confined to their homes to minimize possible infection, without consideration of the benefits that derive from social interaction, in terms of mental health and happiness. 

The authorities do not seem to have considered trying to achieve a better balance between risk and reward, taking an increased, but acceptable, degree of risk in return for keeping the benefits of a still-functioning economy and social interaction tempered by cautious behaviour. It will be instructive to see the results of Sweden’s attempt to achieve such a balance. 

There is no right degree of risk and reward. These are matters of judgement. But both should be taken into account and weighed against each other. That’s what cost-benefit analysis is all about.

The Joy of Planning

As a result of the coronavirus we’re all - where possible at least - working from home. As we all return to our full employment the bet is that we’ll all be working from home more than we used to and perhaps less than we are now. Well, OK, facts have changed and so minds are.

Britain builds the smallest new housing in Europe. Some 80 square metres is the average of a new dwelling. We’re told that there is a thriving industry in three quarters sized furniture specifically designed and sold to be installed in show homes - to make them appear less of the chicken coops they are.

Some 3% of our green and pleasant land is covered with housing. As we’ve noted here before more of Surrey is underneath golf courses than is under that housing that isn’t allowed to be built there. For the planners have decreed that Britons must be herded into that smallest housing in Europe in order to preserve the Green Belt. Or perhaps be punished for the temerity of whatever sins it is we’re all guilty of.

We are now all to work more from those homes that cats cannot be swung in.

So, clearly, those regulations on housing density - the small size is indeed as a result of government’s insistence on how many dwellings must, must, be put in a hectare of land that gains planning permission - are going to be changed, aren’t they?

Which is where we get to a major problem with planning overall. Because of course those housing density rules aren’t going to be changed. Facts may have, minds in one sense have, but the rules and regulations that plan us ain’t. That is, the one thing that planning doesn’t do is actually plan.

Britons are going to be working from home more often. Planning law is not going to change to increase the size of housing. What a lovely example of how planning doesn’t, you know, plan?

Economists use models to make astrologers look good

So goes the not entirely unfair joke, that an economic model is less accurate than pondering the influence of Saturn on which horse is going to win the 3.30 at Wincanton. And yet, if this is true, economic models are beginning to look pretty good:

Why has Sweden done so much better than many predicted? Because others failed to see that society could respond voluntarily to the pandemic. For example, the influential Imperial College model estimates a higher reproduction rate of the disease in Sweden than in other countries, “not because the mortality trends are significantly different from any other country, but as an artefact of our model…because no full lockdown has been ordered.”

In other words, the model could only handle two scenarios: an enforced national lockdown or zero change in behavior. It had no way of computing Swedes who decided to socially distance voluntarily. But we did.

For near the entirety of an economic model is trying to puzzle through how people will respond to changed incentives. Exactly the thing that - so it is claimed - the Imperial epidemiological model did not even try to consider. The assumption there being that there are only two sets of behaviour, that without any incentive to change habits at all, that is no presence of an infectious disease, or only those changes enforced by the power of the state.

This, clearly and obviously, not being how we humans do respond to a change in the incentives around us. Thus the model isn’t, in the slightest, representative of the alternative outcomes possible. The alternatives that are, if we are to restrict ourselves to dealing with only two, being “What would everyone do knowing about the problem but without being forced?” and “What would everyone do if forced?”

The answers being that some to many would change their behaviour with the information and without the force and some - an increasing number over time - would not change said behaviour even with the insistence of that state force. The merits of a forced lockdown are therefore very much less than is being assumed - simply because the model being used is worse than any economic one would ever be.

We are of the opinion that the damage done is vastly worse than the benefit gained so we’re not unbiased here. But it does still come as a surprise to find that the powers over us weren’t even considering the correct question. Which is, to repeat, what is the effect of a forced lockdown given that humans are humans? Instead of the question actually asked, what is the effect compared to no change in behaviour in the presence of a pandemic?

Given that, you know, we’re trying to figure out what humans will do it does seem odd to have left humans out of the question.

But then Hayek wasn’t right enough, was he? The centre can never have the information necessary to make decisions. Then we find out that they’re not even asking the right questions? The validity of government planning is what again?

Would you kill your granny for a haircut?

As economists just will keep on insisting revealed preferences beat expressed every time. As a source of information about what people truly desire that is.

Backstreet barbers are operating despite social distancing rules, causing the hairdressing industry body to issue a warning.

Hairdressers have been advised that they can show customers how to cut their hair via phone calls and social media, but cannot make home visits.

Hairdressers across the UK are taking calls and allowing clients to book home visits, to fix their lockdown hair. To do this would be flouting the coronavirus social distancing guidelines.

Hilary Hall, from the National Hair and Beauty Federation (NHBF), said hairdressers and barbers had been "besieged" with calls from clients wanting home visits.

No one would ever say that a haircut is more important than the health of the nation’s grannies. But some goodly number of people will act so. Something which is just another example of that problem planners face - how to find out what it is that the populace actually desires to be planned.

We’ve also agreed, along the way, with that gentleman in Sweden. Who keeps saying that yes, lockdowns are an important part of the fight but they must be reserved for the right moment. For they’ll only be effective as long as the majority obey them and the majority won’t for any great length of time. That’s just people for you.

So we’ve been - mildly, you understand - wondering what it is that will be that sign of the closure of society fracturing. We did think of haircuts but rejected it as being unlikely - see, planning is a difficult thing.