In a series of five podcasts, broadcast on BBC Radio 4 in the first week of January 2021, Amol Rajan and guests examine different aspects of inequality and consider the concept of fairness.
As the notes to the programme state:
The pandemic brought renewed focus on how we value those who have kept shelves stacked, transport running and the old and sick cared for. So is now the time to bring about a fundamental shift in how our society and economy work?
The first podcast, linked below, examines the distribution of wealth in the UK and how it has changed over time. It looks at how rising property and share prices and a lightly taxed inheritance system have widened inequality of wealth.
It also examines rising inequality of incomes, a problem made worse by rising wealth inequality, the move to zero-hour contracts, gig working and short-term contracts, the lack of social mobility, austerity following the financial crisis of 2007–9 and the lockdowns and restrictions to contain the coronavirus pandemic, with layoffs, people put on furlough and more and more having to turn to food banks.
Is this rising inequality fair? Should fairness be considered entirely in monetary terms, or should it be considered more broadly in social terms? These are issues discussed by the guests. They also look at what policies can be pursued. If the pay of health and care workers, for example, don’t reflect their value to our society, what can be done to increase their pay? If wealth is very unequally distributed, should it be redistributed and how?
The questions below are based directly on the issues covered in the podcast in the order they are discussed.
- In what ways has Covid-19 been the great ‘unequaliser’?
- What scarring/hysteresis effects are there likely to be from the pandemic?
- To what extent is it true that ‘the more your job benefits other people, the less you get paid’?
- How has the pandemic affected inter-generational inequality?
- How have changes in house prices skewed wealth in the UK over the past decade?
- How have changes in the pension system contributed to inter-generational inequality?
- How has quantitative easing affected the distribution of wealth?
- Why is care work so poorly paid and how can the problem be addressed?
- How desirable is the pursuit of wealth?
- How would you set about defining ‘fairness’?
- Is a mix of taxation and benefits the best means of tackling economic unfairness?
- How would you set about deciding an optimum rate of inheritance tax?
- How do you account for the growth of in-work poverty?
- In what ways could wealth be taxed? What are the advantages and disadvantages of such taxes?
Mid-December saw a rapid rise in coronavirus cases in London and the South East and parts of eastern and central southern England. This was due to a new strain of Covid, which is more infectious. In response, the UK government introduced a new tier 4 level of restrictions for these areas from 20 December. These amount to a complete lockdown. The devolved administrations also announced lockdowns. In addition, the Christmas relaxation of rules was tightened across the UK. Households (up to three) were only allowed to get together on Christmas day and not the days either side (or one day between 23 and 27 December in the case of Northern Ireland). Tier 4 residents were not allowed to visit other households even on Christmas day.
The lockdowns aimed to slow the spread of the virus and reduce deaths. But this comes at a considerable short-term economic cost, especially to the retail and leisure sectors, which are required to close while the lockdowns remain in force. In taking the decision to introduce these tougher measures, the four administrations had to weigh up the benefits of reduced deaths and illness and pressure on the NHS against the short-term economic damage. As far a long-term economic damage is concerned, this might be even greater if lockdowns were not imposed and the virus spread more rapidly.
In a blog back in September, we examined the use of cost–benefit analysis (CBA) to aid decision-making about such decisions. The following is an updated version of that blog.
The use of cost–benefit analysis
It is commonplace to use cost–benefit analysis (CBA) in assessing public policies, such as whether to build a new hospital, road or rail line. Various attempts in the past few months have been made to use CBA in assessing policies to reduce the spread of the coronavirus. These have involved weighing up the costs and benefits of national or local lockdowns or other containment measures. But, as with other areas where CBA is used, there are serious problems of measuring costs and benefits and assessing risks. This is particularly problematic where human life is involved and where a value has to be attached to a life saved or lost.
The first step in a CBA is to identify the benefits and costs of the policy.
Identifying the benefits and costs of the lockdown
The benefits of the lockdown include lives saved and a reduction in suffering, not only for those who otherwise would have caught the virus but also for their family and friends. It also includes lives saved from other diseases whose treatment would have been put (even more) on hold if the pandemic had been allowed to rage and more people were hospitalised with the virus. In material terms, there is the benefit of saving in healthcare and medicines and the saving of labour resources. Then there are the environmental gains from less traffic and polluting activities.
On the cost side, there is the decline in output from businesses being shut and people being furloughed or not being able to find work. There is also a cost if schools have to close and children’s education is thereby compromised. Then there is the personal cost to people of being confined to home, a cost that could be great for those in cramped living conditions or in abusive relationships. Over the longer term, there is a cost from people becoming deskilled and firms not investing – so-called scarring effects. Here there are the direct effects and the multiplier effects on the rest of the economy.
Estimating uncertain outcomes
It is difficult enough identifying all the costs and benefits, but many occur in the future and here there is the problem of estimating the probability of their occurrence and their likely magnitude. Just how many lives will be saved from the policy and just how much will the economy be affected? Epidemiological and economic models can help, but there is a huge degree of uncertainty over predictions made about the spread of the disease, especially with a new strain of the virus, and the economic effects, especially over the longer term.
One estimate of the number of lives saved was made by Miles et al. in the NIESR paper linked below. A figure of 440 000 was calculated by subtracting the 60 000 actual excess deaths over the period of the first lockdown (March to June 2020) from a figure of 500 000 lives lost which, according to predictions, would have been the consequence of no lockdown. However, the authors acknowledge that this is likely to be a considerable overestimate because:
It does not account for changes in behaviour that would have occurred without the government lockdown; it does not count future higher deaths from side effects of the lockdown (extra cancer deaths for example); and it does not allow for the fact that some of those ‘saved’ deaths may just have been postponed because when restrictions are eased, and in the absence of a vaccine or of widespread immunity, deaths may pick up again.
Some help in estimating likely outcomes from locking down or not locking down the economy can be gained by comparing countries which have taken different approaches. The final article in the first list below compares the approaches in the UK and Sweden. Sweden had much lighter control measures than the UK and did not impose a lockdown. Using comparisons of the two approaches, the authors estimate that some 20 000 lives were saved by the lockdown – considerably less than the 440 000 estimate.
Estimating the value of a human life
To assess whether the saving of 20 000 lives was ‘worth it’, a value would have to be put on a life saved. Although putting a monetary value on a human life may be repugnant to many people, such calculations are made whenever a project is assessed which either saves or costs lives. As we say in the 10th edition of Economics (page 381):
Some people argue ‘You can’t put a price on a human life: life is priceless.’ But just what are they saying here? Are they saying that life has an infinite value? If so, the project must be carried out whatever the costs, and even if other benefits are zero! Clearly, when evaluating lives saved from the project, a value less than infinity must be given.
Other people might argue that human life cannot be treated like other costs and benefits and put into mathematical calculations. But what are these people saying? That the question of lives saved should be excluded from the cost–benefit study? If so, the implication is that life has a zero value! Again this is clearly not the case.
In practice, there are two approaches used to measure the value of a human life.
The first uses the value of a statistical life (VSL). This is based on the amount extra the average person would need to be paid to work in a job where there is a known probability of losing their life. So if people on average needed to be paid an extra £10 000 to work in a job with a 1% chance of losing their life, they would be valuing a life at £1 000 000 (£10 000/0.01). To avoid the obvious problem of young people’s lives being valued the same as old people’s ones, even though a 20 year-old on average will live much longer than a 70 year-old, a more common measure is the value of a statistical life year (VSLY).
A problem with VSL or VSLY measures is that they only take into account the quantity of years of life lost or saved, not the quality.
A second measure rectifies this problem. This is the ‘quality of life adjusted year (QALY)’. This involves giving a value to a year of full health and then reducing it according to how much people’s quality of life is reduced by illness, injury or poverty. The problem with this measure is the moral one that a sick or disabled person’s life is being valued less than the life of a healthy person. But it is usual to make such adjustments when considering medical intervention with limited resources.
One adjustment often made to QALYs or VSLYs is to discount years, so that one year gained would be given the full value and each subsequent year would be discounted by a certain percentage from the previous year – say, 3%. This would give a lower weighting to years in the distant future than years in the near future and hence would reduce the gap in predicted gains from a policy between young and old people.
Cost–effectiveness analysis (CEA)
Even using QALYs, there is still the problem of measuring life and health/sickness. A simpler approach is to use cost–effectiveness analysis (CEA). This takes a social goal, such as reducing the virus production rate (R) below 1 (e.g. to 0.9), and then finding the least-cost way of achieving this. As Mark Carney says in his third Reith Lecture:
As advocated by the economists Nick Stern and Tim Besley, the ideal is to define our core purpose first and then determine the most cost-effective interventions to achieve this goal. Such cost–effectiveness analysis explicitly seeks to achieve society’s values.
Cost–effectiveness analysis can take account of various externalities – as many of the costs will be – by giving them a value. For example, the costs of a lockdown to people in the hospitality sector or to the education of the young could be estimated and included in the costs. The analysis can also take into account issues of fairness by identifying the effects on inequality when certain groups suffer particularly badly from Covid or lockdown policies – groups such as the poor, the elderly and children. Achieving the goal of a specific R for the least cost, including external costs and attaching higher weights on the effects on certain groups then becomes the goal. As Carney says:
R brings public health and economics together. Relaxations of restrictions increase R, with economic, health and social consequences. A strategic approach to Covid is the best combination of policies to achieve the desired level of infection control at minimum economic cost with due respect for inequality, mental health and other social consequences, and calculating those costs then provides guidance when considering different containment strategies. That means paying attention to the impact on measures of fairness, the social returns to education, intergenerational equity and economic dynamism.
Given the uncertainties surrounding the measurement of the number of lives saved and the difficulties of assigning a value to them, and given the difficulties of estimating the economic and social effects of lockdowns, it is not surprising that the conclusions of a cost–benefit analysis, or even a cost–effectiveness analysis of a lockdown will be contentious. But, at least such analysis can help to inform discussion and drive future policy decisions. And a cost–effectiveness analysis can be a practical way of helping politicians reach difficult decisions about life and death and the economy.
Articles (original blog)
- When Does the Cure Become Worse Than the Disease? Applying Cost-Benefit Analysis to the Covid-19 Recovery
Journal of Medical Ethics, blog, Derek Soled, Michelle Bayefsky and Rahul Nayak (19/5/20)
- How much did the Covid-19 lockdown really cost the UK?
The Guardian, Larry Elliott (6/9/20)
- The UK lockdown: Balancing costs against benefits
VoxEU, David Miles (13/7/20)
- How Economists Calculate The Costs And Benefits Of COVID-19 Lockdowns
Forbes, Chris Conover (27/3/20)
- Coronavirus Is Giving Cost-Benefit Analysts Fits
Bloomberg, Cass R. Sunstein (12/5/20)
- “Stay at Home, Protect the National Health Service, Save Lives”: a cost benefit analysis of the lockdown in the United Kingdom
Wiley Online Library, David Miles, Mike Stedman and Adrian Heald (13/8/20)
- COVID-19 is Forcing Economists to Rethink the Value of Life
RealClearPolicy, James Broughel (20/8/20)
- A cost–benefit analysis of the COVID-19 disease
Oxford Review of Economic Policy, Robert Rowthorn and Jan Maciejowski (28/8/20)
- Living with Covid-19: Balancing Costs against Benefits in the Face of the Virus
National Institute Economic Review, vol. 253, David Miles, Mike Stedman and Adrian Heald (28/7/20)
- How Many Lives Has Lockdown Saved in the UK?
medRxiv, Rickard Nyman and Paul Ormerod (21/8/20)
- What are the arguments for and against putting a monetary value on a life saved?
- Are QALYs the best way of measuring lives saved from a policy such as a lockdown?
- Compare the relative merits of cost–benefit analysis and cost–effectiveness analysis.
- If the outcomes of a lockdown are highly uncertain, does this strengthen or weaken the case for a lockdown? Explain.
- What specific problems are there in estimating the number of lives saved by a lockdown?
- How might the age distribution of people dying from Covid-19 affect the calculation of the cost of these deaths (or the benefits or avoiding them)?
- How might you estimate the costs to people who suffer long-term health effects from having had Covid-19?
- What are the arguments for and against using discounting in estimating future QALYs?
- The Department of Transport currently uses a figure of £1 958 303 (in 2018 prices) for the value of a life saved from a road safety project. Find out how this is figure derived and comment on it. See Box 12.5 in Economics 10th edition and Accident and casualty costs, Tables RAS60001 and RA60003, (Department of Transport, 2019).
Each year the BBC hosts the Reith Lectures – a series of talks given by an eminent person in their field. This year’s lecturer is Mark Carney, former Governor of the Bank of England. His series of four weekly lectures began on 2 December 2020. Their topic is ‘How we get what we value’. As the BBC site states, the lectures:
chart how we have come to esteem financial value over human value and how we have gone from market economies to market societies. He argues that this has contributed to a trio of crises: of credit, Covid and climate. And the former Bank of England governor will outline how we can turn this around.
In lectures 2, 3 and 4, he looks at three crises and how they have shaped and are shaping what we value. The crises are the financial crisis of 2007–9, the coronavirus pandemic and the climate crisis. They have challenged how we value money, health and the environment respectively and, more broadly, have prompted people to question what is valuable for individuals and society, both today and into the future.
The questions posed by Carney are how can we establish what is valuable to individuals and society, how well are such values met by economies and how can mechanisms be improved to ensure that we make the best use of resources in meeting those values.
Value and the market
In the first lecture he probes the concept of value. He explores how economists and philosophers have tried to value the goods, services and human interactions that we desire.
First there is ‘objective value’ propounded by classical economists, such as Adam smith, David Ricardo and Karl Marx. Here the value of goods and services depends on the amount of resources used to make them and fundamentally on the amount of labour. In other words, value is a supply-side concept.
This he contrasts with ‘subjective value’. Here the value of goods and services depends on how well they satisfy wants – how much utility they give the consumer. For these neoclassical economists, value is in the eye of the beholder; it is a demand-side concept.
The two are reconciled in the market, with market prices reflecting the balance of demand and supply. Market prices provided a solution to the famous diamonds/water paradox (see Box 4.2 in Economics (10th edition) or Case Study 4.3 in Essentials of Economics (8th edition) – the paradox of ‘why water, which is essential for life, is virtually free, but diamonds, which have limited utility beyond their beauty, are so expensive.’ The answer is to do with scarcity and marginal utility. Because diamonds are rare, the marginal utility is high, even though the total utility is low. And because water is abundant, even though its total utility is high, for most people its marginal utility is low. In other words, the value at the margin depends on the balance of demand and supply. Diamonds are much scarcer than water.
But is the market balance the right balance? Are the values implied by the market the same as those of society? ‘Why do financial markets rate Amazon as one of the world’s most valuable companies, but the value of the vast region of the Amazon appears on no ledger until it’s stripped of its foliage and converted into farmland?’ – another paradox highlighted by Carney.
It has long been recognised that markets fail in a number of ways. They are not perfect, with large firms able to make supernormal profits by charging more and producing less, and consumers often being ill-informed and behaving impulsively or being swayed by clever marketing. And many valuable things that we experience, such as human interaction and the beauty of nature, are not bought and sold and thus do not appear in measures of GDP – one of the main ways of valuing a country.
What is more, many of things that are produced in the market have side-effects which are not reflected in prices. These externalities, whether good or bad, can be substantial: for example, the global warming caused by CO2 emissions from industry, transport and electricity production from fossil fuels.
And markets reflect people’s biases towards the present and hence lead to too little investment for the future, whether in healthcare, the environment or physical and social infrastructure. Markets reflect the scant regard many give to the damage we might be doing to the lives of future generations.
What is particularly corrosive, according to Carney, is the
drift from moral to market sentiments. …Increasingly, the value of something, some act or someone is equated with its monetary value, a monetary value that is determined by the market. The logic of buying and selling no longer applies only to material goods, but increasingly it governs the whole of life from the allocation of healthcare, education, public safety and environmental protection. …Market value is taken to represent intrinsic value, and if a good or activity is not in the market, it is not valued.
The drift from moral to market sentiments accelerated in the Thatcher/Regan era, when governments were portrayed as inefficient allocators, which stifled competition, innovation and the movement of capital. Deregulation and privatisation were the order of the day. This, according to Carney, ‘unleashed a new dynamism’ and ‘with the fall of communism at the end of the 1980s, the spread of the market grew unchecked.’
But this drift failed to recognise market failures. It has taken three crises, the financial crisis, Covid and the climate crisis to bring these failures to the top of the public agenda. They are examined in the other three lectures.
The Reith Lectures
- Distinguish between objective and subjective value.
- If your income rises, will you necessarily be happier? Explain.
- How is the concept of diminishing marginal utility of income relevant to explaining why ‘A Christmas bonus of £1000 means less to Mark Zuckerberg then £500 does to someone on a minimum wage.’
- Does the use of social cost–benefit analysis enable us to use adjusted prices as a measure of value?
- Listen to lectures 2, 3 and 4 and provide a 500-word summary of each.
- Assess the arguments Mark Carney uses in one of these three lectures.
With the election of Joe Biden, the USA will have a president committed to tackling climate change. This is in stark contrast to Donald Trump, who has been publicly sceptical about the link between human action and climate change and has actively supported the coal, oil and gas industries and has rolled back environmental protection legislation and regulation.
What is more, in June 2017, he announced that the USA would withdraw from the UN Paris Accord, the international agreement to cut greenhouse gas emissions so as to limit global warming to ‘well below’ 2°C above pre-industrial levels with efforts to limit it to 1.5°C. The USA’s withdrawal was finalised on 4 November 2020, a day after the US election. Joe Biden, however, pledged to rejoin the accord.
A growing number of countries are pledging to achieve carbon neutrality by mid-century or earlier. The EU is planning to achieve a 55% cut in greenhouse gas emissions by 2030 so as to reach neutrality by 2050. This will involve various taxes, subsidies and public investment. Similar pledges to achieve net zero emissions by 2050 have been made by Japan and South Korea and by 2060 by China. In the UK, legislation was passed requiring the government to reduce the UK’s net emissions 100% relative to 1990 levels by 2050 and thereby achieve net zero emissions.
Constraints on action
Short-termism. One of the problems with setting targets a long time in the future is that they take away the urgency to act now. There are huge time lags between introducing policies to curb carbon emissions and their impact on the climate. The costs of such policies for business and consumers, however, are felt immediately in terms of higher taxes and/or higher prices. Thus politicians may be quick to make long-term pledges but reluctant to take firm measures today. Instead they may prefer to appease various pressure groups, such as motoring organisations, and cut fuel taxes, or, at least, not raise them. Politically, then, it may be easier to focus policy on the short term and just make pledges without action for the future.
Externalities. Various activities that cause carbon emissions, whether directly, such as heavy industry, dairy farming, aviation and shipping, or indirectly, such as oil and coal production, thereby impose environmental costs on society, both at home and abroad. These costs are negative externalities and, by their nature, are not borne by those who produce them. There are often powerful lobbies objecting to any attempt to internalise these externalities through taxes, subsidising green alternatives or regulation. Take the case of the USA. Fossil fuel producers, energy-intensive industries and farmers all claim that green policies will damage their businesses, leading to a loss of profits and jobs. These groups were courted by Donald Trump.
International competition. Countries may well be reluctant to impose green taxes or tough environmental regulation on producers, when competitors abroad do not face such constraints. Indeed, some countries are actively promoting dirty industries as part of their policies to stimulate economic recovery from the Covid-induced recession. Such countries include China, Russia and Turkey. This again was a major argument used in the Trump campaign that US industries should not be hobbled by environmental constraints but should be free to compete.
Misinformation. Politicians, knowing that taking tough environmental measures will be unpopular with large numbers of people, may well downplay the dangers of inaction. Some, such as Trump in America and Bolsonaro in Brazil deliberately appeal to climate change deniers or say that technology will sort things out. This makes it hard for other politicians to promote green policies, knowing that they will face scepticism about the science and the efficacy of their proposed policies.
Biden’s climate change policy
Although it will be difficult to persuade some Americans of the need for tougher policies to tackle climate change, Joe Biden has already made a number of pledges. He has stated that under his administration, the USA will rejoin the Paris Climate Agreement and will play a leading role in the November 2021 UN COP26 climate change conference summit in Glasgow. He has also pledged a Clean Energy Revolution to put the USA on an ‘irreversible path to achieve economy-wide net-zero emissions no later than 2050’.
But readopting the pledges under the Paris Agreement and advocating a clean energy revolution are not enough on their own. Specific measures will need to be taken. So, what can be done that is practical and likely to meet with the approval of the majority of Americans or, at least, of Biden’s supporters?
For a start, he can reintroduce many of the regulations that were overturned by the Trump administration, such as preventing oil and gas companies from flaring methane on public lands. He could introduce funding for the development of green technology. He could require public buildings to use green energy.
According to the Clean Energy Revolution, the US government will develop ‘rigorous new fuel economy standards aimed at ensuring 100% of new sales for light- and medium-duty vehicles will be zero emissions and annual improvements for heavy duty vehicles’.
One of the biggest commitments is to tackle external costs directly by enacting ‘legislation requiring polluters to bear the full cost of their climate pollution’. This may be met with considerable resistance from US corporations. It is thus politically important for Biden to stress the short-term benefits of his policies, not just the long-term ones.
Given the damage done to the economy by the spread of the pandemic, perhaps the main thing that Biden can do to persuade people of the benefits to them of his policies is to focus on green investment and green jobs. Building a green energy infrastructure of wind, solar and hydro and investing in zero-emissions vehicles and charging infrastructure will provide jobs and lead to multiplier effects throughout the economy.
- Trump Administration Removes Scientist in Charge of Assessing Climate Change
The New York Times, Christopher Flavelle, Lisa Friedman and Coral Davenport (9/11/20)
- As U.S. leaves Paris accord, climate policy hangs on election outcome
The Washington Post, Brady Dennis, Juliet Eilperin and Dino Grandoni (5/11/20)
- Where next for US action on Climate Change?
British Foreign Policy Group, Evie Aspinall (11/11/20)
- Media reaction: What Joe Biden’s US election victory means for climate change
Carbon Brief, Josh Gabbatiss (10/11/20)
- Joe Biden: How the president-elect plans to tackle climate change
BBC News, Matt McGrath (10/11/20)
- Biden victory ushers in ‘race to the top’ on climate change
Lexology, Baker McKenzie, David P Hackett and Ilona Millar (13/11/20)
- Climate heroes: the countries pioneering a green future
The Guardian, Jonathan Watts (11/11/20)
- ‘Hypocrites and greenwash’: Greta Thunberg blasts leaders over climate crisis
The Guardian, Damian Carrington (9/11/20)
- Five post-Trump obstacles to a global green recovery
The Guardian, Jonathan Watts (11/11/20)
- Biden’s climate change plans can quickly raise the bar, but can they be transformative?
The Conversation, Edward R Carr (10/11/20)
- Jana Shea/Shutterstock Climate change: Joe Biden could ride a wave of international momentum to break deadlock in US
The Conversation, Richard Beardsworth and Olaf Corry (10/11/20)
- Climate change after COVID-19: Harder to defeat politically, easier to tackle economically
VoxEU, Franziska Funke and David Klenert (17/8/20)
- Identify three specific climate change policies of Joe Biden and assess whether each one is likely to succeed.
- Draw a diagram to illustrate why a free market will lead to over production of a good which produces negative externalities.
- To what extent can education internalise the positive externalities of green consumption and production?
- What was agreed at the Paris climate change conference in December 2015 and what mechanisms were put in place to incentivise countries to meet the targets?
- Will the coronavirus pandemic have had any lasting effects on emissions? Explain.
- How may carbon trading lead to a reduction in carbon emissions? What determines the size of such reductions?
With the imposition of a new lockdown in England from 5 November to 2 December and in Wales from 3 October to 9 November, and with strong restrictions in Scotland and Northern Ireland, the UK economy is set to return to negative growth – a W-shaped GDP growth curve.
With the closure of leisure facilities and non-essential shops in England and Wales, spending is likely to fall. Without support, many businesses would fail and potential output would fall. In terms of aggregate demand and supply, both would decline, as the diagram below illustrates. (Click here for a PowerPoint.)
The aggregate demand curve shifts from AD1 to AD2 as consumption and investment fall. Exports also fall as demand is hit by the pandemic in other countries. The fall in aggregate supply is represented partly by a movement along the short-run aggregate supply curve (SRAS) as demand falls for businesses which remain open (such as transport services). Largely it is represented by a leftward shift in the curve from SRAS1 to SRAS2 as businesses such as non-essential shops and those in the hospitality and leisure sector are forced to close. What happens to the long-run supply curve depends on the extent to which businesses reopen when the lockdown and any other subsequent restrictions preventing their reopening are over. It also depends on the extent to which other firms spring up or existing firms grow to replace the business of those that have closed. The continuing rise in online retailing is an example.
With the prospect of falling GDP and rising unemployment, the UK government and the Bank of England have responded by giving a fiscal and monetary boost. We examine each in turn.
In March, the Chancellor introduced the furlough scheme, whereby employees temporarily laid off would receive 80% of their wages through a government grant to their employers. This scheme was due to end on 31 October, to be replaced by the less generous Job Support Scheme (see the blog, The new UK Job Support Scheme: how much will it slow the rise in unemployment?). However, the Chancellor first announced that the original furlough scheme would be extended until 2 December for England and then, on 5 November, to the end of March 2021 for the whole of the UK. He also announced that the self-employed income support grant would increase from 55% to 80% of average profits up to £7500.
In addition, the government announced cash grants of up to £3000 per month for businesses which are closed (worth more than £1 billion per month), extra money to local authorities to support businesses and an extension of existing loan schemes for business. Furthermore, the government is extending the scheme whereby people can claim a repayment ‘holiday’ for up to 6 months for mortgages, personal loans and car finance.
The government hopes that the boost to aggregate demand will help to slow, or even reverse, the predicted decline in GDP. What is more, by people being put on furlough rather than being laid off, it hopes to slow the rise in unemployment.
At the meeting of the Bank of England’s Monetary Policy Committee on 4 November, further expansionary monetary policy was announced. Rather than lowering Bank Rate from its current historically low rate of 0.1%, perhaps to a negative figure, it was decided to engage in further quantitative easing.
An additional £150 billion of government bonds will be purchased under the asset purchase facility (APF). This will bring the total vale of bonds purchased since the start of the pandemic to £450 billion (including £20 billion of corporate bonds) and to £895 billion since 2009 when QE was first introduced in response to the recession following the financial crisis of 2007–8.
The existing programme of asset purchases should be complete by the end of December this year. The Bank of England expects the additional £150 billion of purchases to begin in January 2021 and be completed within a year.
UK quantitative easing since the first round in March 2009 is shown in the chart above. The reserve liabilities represent the newly created money for the purchase of assets under the APF programme. (There are approximately £30 billion of other reserve liabilities outside the APF programme.) The grey area shows projected reserve liabilities to the end of the newly announced programme of purchases, by which time, as stated above, the total will be £895 billion. This, of course, assumes that the Bank does not announce any further QE, which it could well do if the recovery falters.
Justifying the decision, the MPC meeting’s minutes state that:
There are signs that consumer spending has softened across a range of high-frequency indicators, while investment intentions have remained weak. …The fall in activity over 2020 has reflected a decline in both demand and supply. Overall, there is judged to be a material amount of spare capacity in the economy.
How effective these fiscal and monetary policy measures will be in mitigating the effects of the Covid restrictions remains to be seen. A lot will depend on how successful the lockdown and other restrictions are in slowing the virus, how quickly a vaccine is developed and deployed, whether a Brexit deal is secured, and the confidence of both consumers, businesses and financial markets that the economy will bounce back in 2021. As the MPC’s minutes state:
The outlook for the economy remains unusually uncertain. It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom. It also depends on the responses of households, businesses and financial markets to these developments.
- Covid: Rishi Sunak to extend furlough scheme to end of March
BBC News (6/11/20)
- Furlough extended until March and self-employed support boosted again
MSE News, Callum Mason (6/11/20)
- Number on furlough in UK may double during England lockdown
The Guardian, Richard Partington (3/11/20)
- ‘We wouldn’t manage without it’: business owners on the furlough extension
The Guardian, Molly Blackall and Mattha Busby (6/11/20)
- Sunak’s abrupt turn on UK furlough scheme draws criticism from sceptics
Financial Times, Delphine Strauss (6/11/20)
- Coronavirus: Bank of England unleashes further £150bn of support for economy
Sky News, James Sillars (5/11/20)
- Bank of England boss pledges to do ‘everything we can’
BBC News, Szu Ping Chan (6/11/20)
- Savers are spared negative rates but the magic money tree delivers £150bn more QE: What the Bank of England’s charts tell us about the economy
This is Money, Simon Lambert (5/11/20)
- Covid-19 and the victory of quantitative easing
The Spectator, Bruce Anderson (26/10/20)
- Will the Bank of England’s reliance on quantitative easing work for the UK economy?
The Conversation, Ghulam Sorwar (9/11/20)
- With a W-shaped recession looming and debt piling up, the government should start issuing GDP-linked bonds
LSE British Politics and Policy blogs, Costas Milas (6/11/20)
- Illustrate the effects of expansionary fiscal and monetary policy on (a) a short-run aggregate supply and demand diagram; (b) a long-run aggregate supply and demand diagram.
- In the context of the fiscal and monetary policy measures examined in this blog, what will determine the amount that the curves shift?
- Illustrate on a Keynesian 45° line diagram the effects of (a) the lockdown and (b) the fiscal and monetary policy measures adopted by the government and Bank of England.
- If people move from full-time to part-time working, how is this reflected in the unemployment statistics? What is this type of unemployment called?
- How does quantitative easing through asset purchases work through the economy to affect output and employment? In other words, what is the transmission mechanism of the policy?
- What determines the effectiveness of quantitative easing?
- Under what circumstances will increasing the money supply affect (a) real output and (b) prices alone?
- Why might quantitative easing benefit the rich more than the poor?
- How could the government use quantitative easing to finance its budget deficit?