Throughout the pandemic, the fight against COVID-19 has often been framed in terms of striking a balance between the health of the public and the health of the economy. This leads to the assumption that a trade-off must exist between these two objectives. Countries, therefore, have to decide between lives and livelihoods. However, one year on since lockdowns swept the globe the evidence suggests that the trade-off between sacrificing lives and sacrificing the economy is not necessarily clear cut.
Controlling the virus
Restrictions such as social distancing and lockdowns were introduced in order to minimise the spread of the virus, prevent hospitals from being overwhelmed, and ultimately save lives. However, as these measures are put in place, schools were closed, businesses and factories stopped operating, and economic activity shrank. This would suggest therefore, that society inevitably faces a trade-off between lost lives versus lost livelihoods.
It could be argued, therefore, that in the short run these interventions create a ‘health–wealth trade-off’. The lockdown restrictions save lives by preventing transmission, but they came at the cost of lost output, income and therefore GDP. This would also imply that the trade-off works in reverse when the lockdown restrictions are eased. As measures are relaxed, the economy can begin to recover but at the cost of an increased threat of the virus spreading again.
What are the costs?
In order to work out if a trade-off exists and what costs are involved, there must be a monetary value placed on human life. While this may seem unethical, governments, civil courts, regulatory bodies and companies do it all the time. The very existence of the life insurance industry is testament to the fact that human lives can be measured in monetary terms. One approach to measuring valuing life, commonly used by economists who conduct cost-benefit analyses, is the ‘value of statistical life’. It measures the loss or gain that arises from changes in the incidence of death, by eliciting people’s willingness to pay for small reductions in the probability of death, or their willingness to accept compensation in exchange for tolerating a small increase in the chance of death. (see the blog Lockdown – again. Is it worth it?)
Take the example of a complete lockdown. The potential number of lives saved can be estimated based on infection and fatality rates estimated from epidemiological models. This can then be multiplied by value of statistical life to compute the monetary value of saved lives. If this number exceeds the economic costs of a complete lockdown, then we know that it is desirable.
The trade-off between lost lives versus the economy is often erroneously viewed as an all-or-nothing choice between complete lockdown versus zero restrictions. However, in reality, there is a continuum in stringency of restrictions and it is not an all-or-nothing comparison.
Death rates vs downturns
In order to explore the existence of this trade-off, we can compare the health and economic impacts of the pandemic in different countries. If such a trade-off exists, then countries with lower death rates should have experienced larger economic downturns. However, when comparing the COVID-19 death rates with GDP data, the result is the opposite: countries that have managed to protect their population’s health in the pandemic have generally also protected their economy too. This suggests that there was never a simple binary trade-off between the two factors. Those countries that experienced the biggest first wave of excess deaths, also had the biggest hits to the economy.
The UK was the hardest hit of similar countries on both measures within the G7 group of industrialised countries. The shape of the recession in the UK from the pandemic and lockdowns was extraordinary and historic. However, it was also unique as there was a very sharp fall followed by a rapid rebound. Over 2020, GDP saw the largest hit in three centuries; larger than any single year of the Great Wars or the 1920s Depression.
Studies of the declines in GDP contradict the idea of a trade-off, showing that countries that suffered the most severe economic downturns, such as Peru, Spain and the UK, were generally among the countries with the highest COVID-19 death rates. There are countries that have experienced the reverse too; Taiwan, South Korea, and Lithuania all experienced modest declines in economic output but have also managed to keep the death rate low.
It should also be noted that some countries that had similar falls in GDP experienced very different death rates from each other. When comparing the USA and Sweden with Denmark and Poland, they all saw similar declines in the economy with contractions of around 8–9%. However, the USA and Sweden recorded 5–10 times more deaths per million. This therefore suggests that there is no clear trade-off between the health of the population and the health of the economy.
There will be many different factors that impact on the death rate for each individual country and by how much the economy has been affected. Such factors will even go beyond the policy decisions that have been made throughout the pandemic about how best to suppress the transmission of the virus. However, from the data available, there is no clear evidence to suggest that a trade-off between the health and the economy exists. If anything, it suggests that the relationship works in the opposite direction.
Save the economy by saving lives
Given the arguments against the existence of the trade-off, it could be argued that in order to limit the economic damage caused by the pandemic, the focus needs to start and end with controlling the spread of the virus. Experiments that have been conducted across the world definitively show that no country can prevent the economic damage without first addressing the pandemic that causes it. Those countries that acted swiftly in implementing harsh measures to control the virus, are now reopening in stages and their economies are growing. Countries such as China, Australia, New Zealand, Iceland, and Singapore, which all invested primarily in swift coronavirus suppression, have effectively eliminated the virus and are seeing their economies begin to grow again.
China, in particular, stands out amongst this group of countries. The Chinese authorities acted very quickly, and firmly, but also the levels of compliance of the population have been very high. However, it could be argued that few countries possess the infrastructure that exists in China to facilitate such high compliance. The fact that the lockdown in China was so effective reduced both losses to the economy and the need for stimulus measures. China is also one of the few countries that have achieved a “V-shaped” recovery. Countries such as Korea, Norway and Finland also appear to have responded relatively well.
Most of the countries that prioritised supporting their economies and resisted, limited, or prematurely curtailed interventions to control the pandemic faced runaway rates of infection and further national lockdowns. The examples of the UK, the USA and Brazil are often quoted, with many arguing that these countries responded too late and too haphazardly. Both have experienced high numbers of deaths.
Discussions around the responses to the pandemic and what appropriate action should be taken have predominately been about how countries can strike the balance between protecting people’s health and protecting the economy. However, from observing the GDP data available there is no clear evidence of a definitive trade-off; rather the relationship between the health and economic impacts of the pandemic goes in the opposite direction. As well as saving lives, countries controlling the outbreak effectively may have adopted the best economic strategy too. It is important to recognise that many factors have affected the death rate and the impact on the economy, and the full impacts of the pandemic are yet to be seen. However, it is by no means clear that the trade-off between greater emphasis on sacrificing lives or sacrificing the economy is as real as has been suggested. If such a trade-off does exist, it is, at best, a weak one.
- In a pandemic it isn’t a case of health v wealth
BBC News, Faisal Islam (17/3/21)
- To Save the Economy, Save People First
Institute for New Economics Thinking, Phillip Alvelda, Thomas Ferguson, and John C. Mallery (18/11/20)
- Covid-19: Is there a trade-off between economic damage and loss of life?
LSE Blogs, Bernard H Casey (18/12/20)
- The COVID-19 dilemma: Public health versus the economy
Asian Development Bank Blogs, Euston Quah, Eik Leong Swee and Donghyun Park (24/11/20)
- Valuating health vs wealth: The effect of information and how this matters for COVID-19 policymaking
VOXEU, Shaun P. Hargreaves Heap, Christel Koop, Konstantinos Matakos, Asli Unan, Nina Weber (6/6/20)
- Which countries have protected both health and the economy in the pandemic?
Our World in Data, Joe Hasell (1/9/20)
- Define and explain the difference between a substitute and complementary good.
- Using your answer to question 1, describe the existence of a trade-off.
- Discuss the reasons why the trade-off between health and the economy would work in the opposite direction.
Speculation in markets can lead to wild swings in prices as exuberance drives up prices and
pessimism leads to price crashes. When the rise in price exceeds underlying fundamentals, such as profit, the result is a bubble. And bubbles burst.
There have been many examples of bubbles throughout history. One of the most famous is that of tulips in the 17th century. As Box 2.4 in Essential Economics for Business (6th edition) explains:
Between November 1636 and February 1637, there was a 20-fold increase in the price of tulip bulbs, such that a skilled worker’s annual salary would not even cover the price of one bulb. Some were even worth more than a luxury home! But, only three months later, their price had fallen by 99 per cent. Some traders refused to pay the high price and others began to sell their tulips. Prices began falling. This dampened demand (as tulips were seen to be a poor investment) and encouraged more people to sell their tulips. Soon the price was in freefall, with everyone selling. The bubble had burst .
Another example was the South Sea Bubble of 1720. Here, shares in the South Sea Company, given a monopoly by the British government to trade with South America, increased by 900% before collapsing through a lack of trade.
Another, more recent, example is that of Poseidon. This was an Australian nickel mining company which announced in September 1969 that it had discovered a large seam of nickel at Mount Windarra, WA. What followed was a bubble. The share price rose from $0.80 in mid-1969 to a peak of $280 in February 1970 and then crashed to just a few dollars.
Other examples are the Dotcom bubble of the 1990s, the US housing bubble of the mid-2000s and BitCoin, which has seen more than one bubble.
Bubbles always burst eventually. If you buy at a low price and sell at the peak, you can make a lot of money. But many will get their fingers burnt. Those who come late into the market may pay a high price and, if they are slow to sell, can then make a large loss.
GameStop shares – an unlikely candidate for a bubble
The most recent example of a bubble is GameStop. This is a chain of shops in the USA selling games, consoles and other electronic items. During the pandemic it has struggled, as games consumers have turned to online sellers of consoles and online games. It has been forced to close a number of stores. In July 2020, its share price was around $4. With the general recovery in stock markets, this drifted upwards to just under $20 by 12 January 2021.
Then the bubble began.
Hedge fund shorting
Believing that the GameStop shares were now overvalued and likely to fall, many hedge funds started shorting the shares. Shorting (or ‘short selling’) is where investors borrow shares for a fee and immediately sell them on at the current price, agreeing to return them to the lender on a specified day in the near future (the ‘expiration date’). But as the investors have sold the shares they borrowed, they must now buy them at the current price on or before the expiration date so they can return them to the lenders. If the price falls between the two dates, the investors will gain. For example, if you borrow shares and immediately sell them at a current price of £5 and then by the expiration date the price has fallen to $2 and you buy them back at that price to return them to the lender, you make a £3 profit.
But this is a risky strategy. If the price rises between the two dates, investors will lose – as events were to prove.
The swarm of small investors
Enter the ‘armchair investor’. During lockdown, small-scale amateur investing in shares has become a popular activity, with people seeking to make easy gains from the comfort of their own homes. This has been facilitated by online trading platforms such as Robinhood and Trading212. These are easy and cheap, or even free, to use.
What is more, many users of these sites were also collaborating on social media platforms, such as Reddit. They were encouraging each other to buy shares in GameStop and some other companies. In fact, many of these small investors were seeing it as a battle with large-scale institutional investors, such as hedge funds – a David vs. Goliath battle.
With swarms of small investors buying GameStop, its share price surged. From $20 on 12 January, it doubled in price within two days and had reached $77 by 25 January. The frenzy on Reddit then really gathered pace. The share price peaked at $468 early on 28 January. It then fell to $126 less than two hours later, only to rise again to $354 at the beginning of the next day.
Many large investors who had shorted GameStop shares made big losses. Analytics firm Ortex estimated that hedge funds lost a total of $12.5 billion in January. Many small investors, however, who bought early and sold at the peak made huge gains. Other small investors who got the timing wrong made large losses.
And it was not just GameStop. Social media were buzzing with suggestions about buying shares in other poorly performing companies that large-scale institutional investors were shorting. Another target was silver and silver mines. At one point, silver prices rose by more than 10% on 1 February. However, money invested in silver is huge relative to GameStop and hence small investors were unlikely to shift prices by anything like as much as GameStop shares.
Amidst this turmoil, the US Securities and Exchange Commission (SEC) issued a statement on 29 January. It warned that it was working closely with other regulators and the US stock exchange ‘to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing’. It remains to be seen, however, what it can do to curb the concerted activities of small investors. Perhaps, only the experience of bubbles bursting and the severe losses that can result will make small investors think twice about backing failing companies. Some Davids may beat Goliath; others will be defeated.
- GameStop: The competing forces trading blows over lowly gaming retaile
Sky News (30/1/21)
- Tempted to join the GameStop ‘angry mob’? Lessons on bubbles, market abuse and stock picking from the investment experts… including perma-bear Albert Edwards
This is Money, Tanya Jefferies (29/1/21)
- A year ago on Reddit I suggested investing in GameStop. But I never expected this
The Guardian, Desmund Delaney (29/1/21)
- The real lesson of the GameStop story is the power of the swarm
The Guardian, Brett Scott (30/1/21)
- GameStop: What is it and why is it trending?
BBC News, Kirsty Grant (29/1/21)
- GameStop: Global watchdogs sound alarm as shares frenzy grows
BBC News (30/1/21)
- The GameStop affair is like tulip mania on steroids
The Guardian, Dan Davies (29/1/21)
- GameStop news: Short sellers lose $19bn as Omar says billionaires who pressured apps should go to jail
Independent, Andy Gregory, Graig Graziosi and Justin Vallejo (30/1/21)
- Robinhood tightens GameStop trading curbs again as SEC weighs in
Financial Times, Michael Mackenzie, Colby Smith, Kiran Stacey and Miles Kruppa (29/1/21)
- SEC Issues Vague Threats Against Everyone Involved in the GameStop Stock Saga
Gizmodo, Andrew Couts (29/1/21)
- SEC warns it is monitoring trade after GameStop surge
RTE News (29/1/21)
- GameStop short-squeeze losses at $12.5 billion YTD – Ortex data
- GameStop: I’m one of the WallStreetBets ‘degenerates’ – here’s why retail trading craze is just getting started
The Conversation, Mohammad Rajjaque (3/2/21)
- What the GameStop games really mean
Shares Magazine, Russ Mould (4/2/21)
- Distinguish between stabilising and destabilising speculation.
- Use a demand and supply diagram to illustrate destabilising speculation.
- Explain how short selling contributed to the financial crisis of 2007/8 (see Box 2.7 in Economics (10th edition) or Box 3.4 in Essentials of Economics (8th edition)).
- Why won’t shares such as GameStop go on rising rapidly in price for ever? What limits the rise?
- Find out some other shares that have been trending among small investors. Why were these specific shares targeted?
- How has quantitative easing impacted on stock markets? What might be the effect of a winding down of QE or even the use of quantitative tightening?
Each week, BBC Radio 4 broadcasts readings from a book serialised in five 15-minute episodes. In the week beginning 18 January 2021, the readings were from English Pastoral: An Inheritance by James Rebanks, a farmer from the Cumbrian fells. His farm is relatively small, covering 185 acres.
He has attempted to make it much more sustainable and less intensive, reintroducing traditional Herdwick sheep, having a mixture of cows and sheep rather than just sheep, a greater sub-division of fields, and more natural scrubland, peatbogs and trees. As a result, soil quality has improved and there has been an explosion of biodiversity, with an abundance of wild flowers and insects.
Apart from being an autobiography of his time as a farmer and his attempt to move towards more traditional methods, the book examines broader issues of agricultural sustainability. It looks at the pressures of consumers wanting cheap food, the market power of supermarkets and wholesalers, the cost pressures on farmers pushing them towards monoculture to achieve economies of scale, and the role of the agrichemicals industry promoting fertilisers, feeds and pesticides which bring short-term financial gains to farmers, but which cause longer-term damage to the land and to biodiversity.
Rebanks has gained quite a lot of media attention after the publication of his first book, The Shepherd’s Life, including being one of the guests on Desert Island Discs and the subject of an episode of The Food Programme.
Listen to the Food Programme podcast and try answering the questions, which are all based on the podcast in the order of the points made in the interview.
- What are the incentives of an unregulated market for food that result in monoculture and a loss of biodiversity?
- To what extent are consumers responsible for changes in farming methods?
- Have the changes helped the urban poor?
- How is the monopsony power of supermarkets and food wholesalers impacting on food production and the pattern of agriculture?
- There are various (private) economies of scale in food production, but these often involve substantial external costs and long-term private costs too. How does this impact on land use?
- What are some of the limits of technology in increasing crop, meat and dairy yields?
- Will more recent changes in the pattern of food consumption help to increase mixed farming and biodiversity?
- Is it ‘rational’ for many farmers to continue with intensive farming with high levels of artificial fertilisers and pesticides?
- Is diversity in farming across farms within a local area a public good? If so, how could such diversity be achieved?
- How can farmers be encouraged to think and act holistically?
- Is there a trade-off between food output and biodiversity?
- What are the dangers in the UK reaching an agricultural trade deal with the USA?
- What are the benefits and costs of encouraging local food markets?
In its latest Commodity Special Feature (pages 43 to 53 of the October 2020 World Economic Outlook), the IMF examines the future of oil and other commodity prices. With the collapse in oil demand during the early stages of the coronavirus pandemic, oil prices plummeted. Brent crude fell from around $60 per barrel in late January to below $20 in April.
However, oil prices then rose somewhat and have typically been between $40 and $45 per barrel since June 2020 – still more than 35% lower than at the beginning of the year (see chart below: click here for a PowerPoint). This rise was caused by a slight recovery in demand but largely by supply reductions. These were the result partly of limits agreed by OPEC+ (OPEC, Russia and some other non-OPEC oil producing countries) and partly of reduced drilling in the USA and the closure of many shale oil wells which the lower prices had made unprofitable.
The IMF considers the future for oil prices and concludes that prices will remain subdued. It forecasts that petroleum spot prices will average $47 per barrel in 2021, up only slightly from the $42 average it predicts for 2020.
On the supply side it predicts that ‘stronger oil production growth in several non-OPEC+ countries, a faster normalization of Libya’s oil production, and a breakdown of the OPEC+ agreement’ will push up supply and push down prices. Even if the OPEC+ agreement holds, the members are set to ease their production cut by nearly 25% at the start of 2021. This rise in supply will be offset to some extent by possibly ‘excessive cuts in oil and gas upstream investments and further bankruptcies in the energy sector’.
On the demand side, the speed of the recovery from the pandemic will be a major determinant. If the second wave is long-lasting and deep, with a vaccine available to all still some way off, oil demand could remain subdued for many months. This will be compounded by the accelerating shift to renewable energy and electric vehicles and by government policies to reduce CO2 emissions.
Oil price data
- Describe a scenario in which oil prices rebound significantly over the coming months. Illustrate your answer with a supply and demand diagram.
- Describe a scenario in which oil prices fall over the coming months. Again, illustrate your answer with a supply and demand diagram.
- How are the price elasticities of demand and supply relevant to the size of any oil price change?
- Project forward 10 years and predict whether oil prices will be higher or lower than now. What are the major determinants of supply and demand in your prediction?
- What are oil futures? What determines oil future prices?
- How does speculation affect oil prices?
The latest UK house price index reveals that annual house price growth in the UK slowed to just 1.2 per cent in May. This is the lowest rate of growth since January 2013. This is being driven, in part, by the London market where annual house price inflation rates have now been negative for 15 consecutive months. In May the annual rate of house price inflation in London fell to -4.4 per cent, it lowest since August 2009 as the financial crisis was unfolding. However, closer inspection of the figures show that while many other parts of the country continue to experience positive rates of annual house price inflation, once general inflation is accounted for, there is widespread evidence of widespread real house price deflation.
The average UK house price in May 2019 was £229,000. As Chart 1 shows, this masks considerable differences across the UK. In England the average price was £246,000 (an annual increase of 1.0 per cent), in Scotland it was £153,000 (an increase of 2.8 per cent), in Wales £159,000 (an increase of 3.0 per cent) and in Northern Ireland it was £137,000 (an increase of 2.1 per cent). (Click here to download a PowerPoint copy of the chart.)
The London market distorts considerably the English house price figures. In London the average house price in May 2019 was £457,000 (an annual decrease of 4.4 per cent). House prices were lowest in the North East region of England at £128,000. The North East was the only other English region alongside London to witness a negative rate of annual house price inflation, with house prices falling in the year to May 2019 by 0.7 per cent.
Chart 2 allows us to see more readily the rates of house price growth. It plots the annual rates of house price inflation across London, the UK and its nations. What is readily apparent is the volatility of house price growth. This is evidence of frequent imbalances between the flows of property on to the market to sell (instructions to sell) and the number of people looking to buy (instructions to buy). An increase in instructions to buy relative to those to sell puts upwards pressure on prices whereas an increase in the relative number of instructions to sell puts downward pressure on prices. (Click here to download a PowerPoint copy of the chart.)
Despite the volatility in house prices, the longer-term trend in house prices is positive. The average annual rate of growth in house prices between January 1970 and May 2019 in the UK is 9.1 per cent. For England the figure is 9.4 per cent, for Wales 8.8 per cent, for Scotland 8.5 per cent and for Northern Ireland 8.3 per cent. In London the average rate of growth is 10.4 per cent per annum.
As Chart 3 illustrates, the longer-term growth in actual house prices cannot be fully explained by the growth in consumer prices. It shows house price values as if consumer prices, as measured by the Retail Prices Index (RPI), were fixed at their January 1987 levels. We see real increases in house prices or, expressed differently, in house prices relative to consumer prices. In real terms, UK house prices were 3.6 times higher in May 2019 compared to January 1970. For England the figure is 4.1 times, for Wales 3.1 times, for Scotland 2.9 times and for Northern Ireland 2.1 times. In London inflation-adjusted house prices were 5.7 times higher. (Click here to download a PowerPoint copy of the chart.)
The volatility in house prices continues to be evident when adjusted for changes in consumer prices. The UK’s annual rate of real house price inflation was as high as 40 per in January 1973, yet, on the other hand, in June 1975 inflation-adjusted house prices were 16 per cent lower than a year earlier. Over the period from January 1970 to May 2019, the average annual rate of real house price inflation was 3.2 per cent. Hence house prices have, on average, grown at an annual rate of consumer price inflation plus 3.2 per cent.
Chart 4 shows annual rates of real house price inflation since 2008 and, hence, from around the time the financial crisis began to unfold. The period is characterised by acute volatility and with real house prices across the UK falling at an annual rate of 16 per cent in 2009 and by as much 29 per cent in Northern Ireland. (Click here to download a PowerPoint copy of the chart.)
The UK saw a rebound in nominal and real house price growth in the period from 2013, driven by a strong surge in prices in London and the South East, and supported by government initiatives such as Help to Buy designed to help people afford to buy property. But house price growth then began to ease from early/mid 2016. Some of the easing may be partly due to any excessive fizz ebbing from the market, especially in London, and the impact on the demand for buy-to-let investments resulting from reductions in tax relief on interest payments on buy-to-let mortgages.
However, the housing market is notoriously sensitive to uncertainty, which is not surprising when you think of the size of the investment people are making when they enter the market. The uncertainty surrounding Brexit and the UK’s future trading relationships will have been a drag on demand and hence on house prices.
Chart 4 shows that by May 2019 all the UK nations were experiencing negative rates of real house price inflation, despite still experiencing positive rates of nominal house price inflation. In Wales the real annual house price inflation rate was -0.1 per cent, in Scotland -0.2 per cent, in Northern Ireland -0.9 per cent and in England -2.0 per cent. Meanwhile in London, where annual house price deflation has been evident for 15 consecutive months, real house prices in May 2019 were falling at an annual rate of 7.2 per cent.
Going forward the OBR’s Fiscal Risks Report predicts that, in the event of a no-deal, no-transition exit of the UK from the European Union, nominal UK house prices would fall by almost 10 per cent between the start of 2019 and mid-2021. This forecast is driven by the assumption that the UK would enter a year-long recession from the final quarter of 2019. It argues that property transactions and prices ‘move disproportionately’ during recessions. (See John’s blog The costs of a no-deal Brexit for a fuller discussion of the economics of a no-deal Brexit). The danger therefore is that the housing market becomes characterised by both nominal and real house price falls.
- Explain the difference between a rise in the rate of house price inflation a rise in the level of house prices.
- Explain the difference between nominal and real house prices.
- If nominal house prices rise can real house price fall? Explain your answer.
- What do you understand by the terms instructions to buy and instructions to sell?
- What factors are likely to affect the levels of instructions to buy and instructions to sell?
- How does the balance between instructions to buy and instructions to sell affect house prices?
- How can we differentiate between different housing markets? Illustrate your answer with examples.