Finance: Research, Policy and Anecdotes

One year of pandemic and lockdowns has given us economists quite some material to talk about. In the following a collection of initial thoughts, on lessons learnt, the role of externalities, and post-pandemic challenges.

One first lesson is that few countries (in Europe) have been continuously successful in fighting the pandemic – initial success stories have struggled heavily in recent weeks, such as Germany when it comes to rolling out vaccinations. Initial basket cases have been successful in recent months, such as the UK in both mitigating a third wave and in rolling out mass vaccination.  A second important lesson: there is no trade-off between public health and the economy. Not locking down society or locking down too late, will damage the economy as either the lockdown will have to last longer or aggregate demand will fall dramatically as people are held back by fear of contagion. Third, even if relying on ‘common’ sense is not enough to reduce contagion risks, neither are lockdowns, a combination of both is critical.

What explains the different success of countries and why has it differed over the past year?  I will leave a rigorous answer to future research, but beyond specific country characteristics – smaller countries seem to have an easier time as do countries with no land borders – government reactions have been critical. On the one extreme are countries whose leaders simply ignored the pandemic or talked it down – the US until recently and Brazil come to mind.  Similarly, leaders who have been always late in decisions such as lock-downs – Boris Johnson in the UK comes to mind until recently.  On the other side, the large majority of political leaders who have muddled through, taking into account expert advice, but never sufficiently aggressive to bend the curve and protect lives.  In some countries, it seems governments have learned from past mistakes – Sweden has turned to lock-down like measures after the failure of the initial ‘let’s trust the people’ approach. The UK has learnt from the mistakes of opening up to quickly last summer and allowing mutants to come in through air traffic. I am not as confident that there has been as effective a learning process across countries.  In federally organised countries (e.g., Spain and Germany) there have been conflicts between state and federal governments, which has hindered the necessary public health responses in the second and third waves.  More centralised countries have not necessarily done better, however, as the examples of France or the UK have shown.

One thing has been clear – pre-pandemic rankings of preparedness for a pandemic have proven to be useless, while early rankings of country performance look outdated. It has become clear that it is not only about medical preparedness, but political willingness to act

Lockdown restrictions have not been accepted by everyone, with significant shares of the population across the globe protesting against restrictions of their freedom. As Article IV of the Déclaration des droits de l'homme et du citoyen de 1789 states: ”Liberty consists of doing anything which does not harm others”. Not respecting social distance, not wearing face masks does harm others. Catching the virus because of one’s own actions increases the risk that one can pass it on. A libertarian approach to the public health ignores the enormous negative externalities stemming from individual actions. As it is hard to deny such externalities, opponents have turned to denying the risk of Covid-19, the sad role of social media and some influencers in this context has been widely documented.

The crisis has also resulted in a clash between free market principles and principles of equity and fairness. Hoarding of toilet paper and price gouging in the early stages of the pandemic have led to calls for government interventions; common sense has prevailed in most cases. The production and distribution of vaccines has pitted countries against each other, with threats of (and actual) export prohibitions; vaccine nationalism ignores the important positive externalities of vaccinations and the public good nature of a world without Covid-19; only if the large majority of the world population has achieved herd immunity can the world return to a stable and sustainable global socio-economic equilibrium.

Talking about vaccinations, a recent conversation with an NHS volunteer focused on another interesting aspect – opt-in vs. opt-out – is the baseline assumption that everyone will be vaccinated unless they opt-out for a good reason or do people have to opt consciously into vaccination.  For most adults, this seems less than relevant, but it is an issue for people that might not be able to take their own decisions and for people that have religious concerns about vaccinations. The UK has decided for an opt-out regime, which might be one – of many – reasons why the mass vaccinations has been so successful.

Which brings me to the recent episodes of stopping (and then restarting) the use of the Astra Zeneca vaccine in several European countries. Public health authorities have (correctly) high standards when it comes to the risk-benefit trade-offs of medications and given the limited data available, there is a high degree of uncertainty and possibly risk involved with this vaccine. It seems to me, however, that the broader benefits of rapidly vaccinating large parts of the population might not have been taken into account in these decisions – similar to missing the macro-prudential picture when judging the stability of individual financial institutions.

Which brings me to a final lesson - the roles of experts and governments.  Early on, governments (re-)discovered the importance of experts, in guiding the public health response to the pandemic. It has also been clear, however, that experts have not all had the same opinion and advice (the Swedish non-lock down response seems to have been driven as much by experts as lockdown decisions in other countries). Further, experts cannot take political decisions such as to lock-down a society – these are decisions only for political leaders to take that are accountable to the electorate.  Important is the cooperation between experts and political leaders, especially for latter not to hide behind the former, but rather to own the analysis and ultimately the decisions. Communication is critical, but as important is the personal example and being humble when wrong – again, something where many government leaders have failed, but some have succeeded (and here I would point to Angela Merkel).

Will we ever get out of this pandemic?  Call me a naïve optimist, but I still believe that as in 1918-20, we will come out of this pandemic and – towards the end – it will be quicker than we fear now.  While this might reduce the immediate demand for epidemiologists’ advice, this might be the hour of economists – there will be lots of decisions to be taken – on the right macroeconomic mix of fiscal and monetary policy, on debt restructuring in the corporate sector, on possible bank fragility – but more broadly about challenges that we might be able to address as societies and economies might show some willingness for more radical changes than in normal times – moving towards a green economy and addressing inequality of income, wealth and opportunities, but also between different generations; and ultimately, all of these decisions have strong implications for the role of government.

Overview