Helicopter money has dropped into the discourse once again

Helicopter money is in the news again. The original concept was from Milton Friedman. In a 1969 paper he asked what might happen if banknotes were dropped from helicopters, and people knew it was a one-off event. In his case it was a thought experiment, but it has been put forward since as a serious policy proposal. 

The thinking is that if the economy has taken a hit, as happened with the corona virus, then a stimulus will be needed to help it restart and move into growth territory. The idea is that a consumer boost might be stimulated by giving people free money, as if dropped from helicopters. If it produces extra spending, businesses will take up the economic slack, and production will be increased, with a positive effect on jobs and wages. 

This might be fine in theory, but does it work? There have been tests of a kind, done under George W Bush in response to the 2008 financial crisis, and later under Obama. The evidence is open to interpretation, but there are indications that if people receive one-off cash sums, they don’t tend to spend it, and therefore don’t create the desired stimulus. They save it instead, with richer people adding it to investments, and those lower down using it to reduce debt, such as paying down credit card balances to reduce monthly repayments. 

The supposition is that if people think it is a once-only, not to be repeated, they don’t want it to go without trace. They behave differently, though, if the extra money comes not as a lump sum from the government, but as an increase in the size of their wage packet. If their tax rate and social security taxes are reduced, they see more in their wage packet, and they tend to spend it instead of saving it.

The reasoning is based on psychology. If they think this is now a regular increase, to be repeated every month, they are more inclined to spend it, knowing there’s more coming along. They save the one-off, thinking that’s all there is, but they spend the extra funds if they think there’ll be more where that came from.

The lesson seems to be that helicopter money can work to kick-start an economy fallen on hard times, but not if it’s dropped all at once in a single lump sum. Instead of that, if those helicopters drop regular sums into monthly pay packets by way of lower income tax and National Insurance rates, people will be readier to spend their new-found wealth, giving businesses the sales boost that can lead them to increase production and take on staff. 

So yes. After the epidemic we might get those helicopters flying, not dropping one-off lump sums to everyone, but dropping them extra spending power by leaving them more in their pay packets. Milton Friedman didn’t suggest helicopter money as policy, but he’d certainly have approved of lowering taxes.

Well, yes and no really, yes and no

Should women be involved in politics, should the political decisions about pandemics be made at least partially, or even equally, across genders? Sure, those who hold up half the sky should be part of what to do when the heavens open and tribulations fall like rain. However.

The however being not about the concept itself but the evidence being used to support the contention here:

That male drivers are much more dangerous to other road users than female ones is a proposition still considered extraordinary enough for an academic study confirming this widely observed phenomenon to have made headlines last week.

Discussing the difference, the authors note, in the journal Injury Prevention, the major gender imbalance in driving jobs and advise policymakers that “reduced risk to others could be a co-benefit from increasing gender equity”.

Possibly, but:

He took special exception to the idea, debated after the 2008 banking collapse, that such catastrophes might be less likely under the Lehman Sisters. Michael Lewis, author of The Big Short, for example, said that, were it up to him, “I would take steps to have 50% of women in risk positions in banks.” Christine Lagarde, the former head of the IMF, has likewise argued for increased female representation: “This very diversity also leads to more prudence and less of the reckless decision-making that provoked the crisis.”But guided, as ever, by the science, Raab dismissed such arguments as “playing on stereotypes that paint men as innately gung-ho and women as more risk-averse”.

All men are not more risk loving than all women, the original statement is that on average men are less risk averse - or, if you prefer, more risk loving - than women are on average. In a sexually dimorphic species with such extremely different investments in child production this won’t come as a surprise either.

However, it’s vital to understand the interplay between gender and risk attitudes. An all male environment is, generally and on average, more risk loving, less risk averse, than an all female one.

But mixed gender environments are more risk loving than either.

It is true that Lehman Sisters would have been likely to be less risky than Lehman Brothers. But the actual Lehman we had was a mixed gender environment which turned out to be really rather risky, didn’t it?

Again, this is not to even comment upon our having mixed gender groups in politics or decision making about pandemics or anything else. It is only to point at how the actual findings of science about risk are being missed. If the mitigation of risk taking is our aim then we need single gender groups. We ourselves say that the each half of the sky argument outweighs any extra risks that might be taken. But risk reduction cannot be used as an argument in favour of that gender equality in the decision making simply because it’s not the actual outcome of having the gender equal groupings. Quite the opposite in fact.

Let's not fall for the Nirvana Fallacy

In my logic book I classify it as “Unobtainable Perfection,” but it’s often nicknamed the “Nirvana” or the “Utopia” fallacy. It’s when you criticize something because it’s not perfect, like criticizing the present because it doesn’t reach the perfection of some imagined future world.

People on the Left often compare the present world with a hypothetical future one.  “ Wouldn’t it be nice if all our wants were satisfied, and people behaved better towards each other.” Yes, it might indeed be nice, but it’s not what’s on offer. What’s on offer is this world that might be made better. Not perfect, but certainly better.

People on the centre right usually compare the present, not with the future, but with the past. They don’t ask “Could it be perfect,” they ask “Is it better than it was.” They usually say that it is. It’s better than billions fewer die of starvation and disease, that a tiny fraction of mothers now die in childbirth, or children in infancy. And they tend to favour doing more of what we know works in practice, rather than putting all our eggs in a restructured basket that probably won’t work. 

They try to improve the human condition, but cautiously, and alert for unintended consequences. Popper called this process “piecemeal social engineering,” and compared it favourably with utopian grand designs that have never worked in practice. 

A popular saying is that “The perfect is the enemy of the good,” meaning that if we reject initiatives that might improve things because they fall short of perfect, we risk not making any improvements at all. We do what we can with the limited knowledge we have, and we see if it works in practice. If it does, we do more of it. This real-world approach has achieved more for humanity than any of the grand conceptions of a perfect world, and certainly better than any of the catastrophic failures that resulted when people have attempted to bring one about. 

Most of us have encountered people who want to compare what capitalism, with all its flaws, has achieved in practice, with what some idealized concept of what a perfect socialist society might be like. No. We compare practice with practice or theory with theory. We don’t compare the apples of the real world with the pears of some fanciful world of the imagination.

Perfection might be for the next world, but for this one the target should be improvement.

Well, if you start with an incorrect assumption....

Starting with an incorrect assumption does rather mean that the conclusion reached is going to have problems in being correct. So it is with this from Simon Wren Lewis. Leave aside all his claims about austerity and so on and concentrate just upon this:

…a healthy NHS needs to grow faster than GDP to cope with an ageing population, technological change and other well known factors.

Note what happens according to this, over time the NHS becomes an ever larger part of the economy and, eventually, the economy becomes nothing but the NHS.

Now it’s true that health care is a luxury good, something that we tend to spend more of our incomes upon as our incomes rise but that’s not the claim being made here. Rather, the insistence is that even with static incomes our health care spending should and must rise.

The incorrect part of this being the idea that technological change means an increase in costs. Of course it doesn’t, the impact is the other way around. The only reason to ever adopt new tech is that it’s more efficient than the old way of doing things - that is, for a particular outturn, it’s cheaper.

Another way to make the same point is that new tech increases productivity. Or at least should and if it isn’t there’s something very wrong with the institution trying to apply it.

That is, it could be true that the NHS should gain ever more money because that’s how we want to spend our money. But it’s not true, entirely the opposite is in fact true, that advancing technology means the NHS requires ever more rivers of cash. For the only reason to adopt a new technology is because, for the same outcome, it’s cheaper.

Calls for price controls are economically illiterate

Recently there have been calls for the government to impose maximum prices on everyday goods. These are motivated by the belief that, during this crisis, shops and producers have been exploiting customers by raising the prices of essential items.

Figures from the Office of National Statistics show that this is plain wrong. From the middle to the end of March, prices of dried pasta, kitchen rolls, tinned soup and long-life milk actually fell 1%. Baby food and antibacterial wipes fell nearly three times that.

Yes, there were tiny increases in the price of handwash, toilet roles and cleaning products. And cough medicine is certainly up in price. But the general picture is that most retailers have not actually sought to exploit anyone.

But then, if they want to have any customers left after the crisis is over, that seems to me to be a perfectly sensible strategy.

More generally, though, the calls for the government to cap prices are economically illiterate. When things are in short supply and heavy demand, their prices do indeed edge up. But that induces producers to supply more, and prompts consumers to use things more sparingly, or find alternatives. Which is exactly what you want to happen.

If you put price caps on scarce, you just make them even scarcer. If you thought the shelves were bare after all the panic buying, just wait until you see the effect of price controls.

Owen Jones insists there's inequality and then there's inequality

There are different ways we can measure inequality, most certainly. The usual useful and overarching method is the Gini (either index or coefficient, whichever way you prefer to do it). It’s not a perfect measure given all those different ways that we can measure but it is the one most commonly used, the one referred to when we say that this society is more unequal than that and so on.

Which makes Owen Jones’ latest complaint interesting:

Coronavirus is not some great leveller: it is exacerbating inequality right now

That depends upon the measure of inequality we use. If we do use the Gini for income as our measure then inequality is falling right now. It always does in recessions. The richer among us depend more upon profits and capital income than the poorer. It is capital income which collapses in recessions - more than labour income at least. Those already dependent upon benefits of course see no diminution in their income at all.

Recessions reduce the Gini measure of inequality.

Owen Jones wishes to use different measures and that’s just entirely fine. But there is a proviso to using those different measures - he doesn’t get to come back to using the Gini as we exit recession and it rises, as it always does. Although we’d make a heavy bet at slim odds that he, along with many others, will attempt to so pick and choose their measures.

This economic management thing is difficult, isn't it?

We have some sympathy with this argument, despite its source:

One clear example of an industry not needing a bailout is the supermarkets, which are set to receive a £3bn business rates holiday this year as a result of the government’s support package. Shortly after the rates holiday was announced, Sainsbury’s put out a stock market announcement welcoming the news and highlighting that the company paid more than £500m in business rates last year. The company’s share price surged – the rates holiday is worth more than twice the company’s annual profit. Tesco has a business rates bill of £700m – equal to 50% of its profits for 2019. On Wednesday, the company increased its dividend by 60% – proposing a payout to shareholders of £637m. What possible argument does the company have that it needs a government subsidy?

To find ourselves having even sympathy with an argument put forward by Tax Watch UK feels uncomfortable.

The point that we - rather than Tax Watch - would make about this being that gosh, this managing an economy in detail thing is hard, isn’t it? This being a useful observation for us to carry with us into those sunlit uplands of the post-coronavirus world.

That world out there, that economy, is complex. It isn’t possible for a few people to sit at the centre and decide what should be done in it. It’s not even, as the above shows, possible for those few Fat Controllers to decide in that detail how it should be taxed or not so the idea that they can do anything more complex like decide pay rates, production levels or methods is absurd.

We are, here in crisis, attempting to do some planning of the economy and that’s fine, it’s a crisis. But the lesson to be taken from how badly it’s being done is that it’s not something we should be trying to do in the future.

British business is adapting to crisis

Their response to this crisis shows just how innovative British businesses are.

For example, pubs and restaurants are now doing takeaway meals, which taxi drivers, who now have few other customers, are delivering.

Yesterday I got a box of fresh produce, delivered by a local restaurant. It’s the same produce they’ve always got from their suppliers, but instead of cooking it they are repacking it and delivering it to your door. Local shops are delivering too.

 Within days of the panic buying, supermarkets reserved special times for older people and gave all-day priority to health workers.

They countered hoarding with buying limits. But then stepped up their supplies so quickly that the shelves were re-filled and the limits lifted.

 They marked safe distances on the floor, gave their checkout staff protective screens, and stepped up the cleaning of pin-pads and surfaces.

Such response suggests to me that, when it comes to easing the lockdown, there is no need to impose some detailed Whitehall-style instruction manual on what shops and other businesses can or cannot do. We just need to say what the broad rules are. And within a week, businesses will come up with all sorts of ingenious ways to trade safely that civil servants could never dream up in a decade.

The potential effect of our current stasis on jobs is particularly worrying

I know someone who is an administrator in a large international company with offices round the world. That person has just been furloughed. So, until June, the firm will pay only 20% of their salary, and British taxpayers will pick up the other 80%. The only condition is that the employee does no work at all.

It wasn’t the government’s aim to pay people not to work. Nor that poorly paid local taxpayers should support well-paid international professionals.

Nor that the scheme should be so cynically exploited. In this case, it is only the firm’s UK workers that are being furloughed. That’s because our government’s scheme is so much more generous than those of other countries. This allows multinationals to shift their costs between countries — and get the locals to pay 80% of the bills.

The potential effect on jobs is particularly worrying. Multinationals who furlough British employees will probably shift their work to employees in other countries. When the furlough period is over, will they really want the cost and hassle of moving it back again? Perhaps not.

Of course, the government was pressured to act quickly. But I fear that, in its haste, it may have allowed British taxpayers to be exploited; and may have precipitated the movement of jobs out of Britain.

The quicker we restore economic normality, the better.

Gosh, planning is really difficult, isn't it?

When even The Guardian points out that a centralised and centrally planned system doesn’t work perhaps it really is true that a centralised and centrally planned system doesn’t work? As they are about testing for the coronavirus:

With 400 public health offices forging ahead with testing, the country is a model for others to emulate

As the coronavirus crisis tests the resilience of democracies around the globe, Germany has gone from cursing its lead-footed, decentralised political system to wondering if federalism’s tortoise versus hare logic puts it in a better position to brave the pandemic than most.

Our own system has been to spend £4 billion a year and change on Public Health England - a centralised and centrally planned organisation - to lecture us on the dangers of Cocoa Pops. That might not have been the right decision.

At least one forecast is suggesting that Britain’s outcome from this pandemic will be the worst in Europe. Leading to the thought that if the outcome is worse given exactly the same cause then it must be the system itself which is less than efficient.

However, the real point here is that we can see how difficult planning is in the face of uncertainty. We don’t - no one does - know what really should be done because we just don’t have the necessary information to be able to do so.

Which is all rather Hayek really, isn’t it? That centre cannot gain the information necessary to be able to make decisions. Therefore we cannot rely upon the centre and its plans.

But here’s the thing. Decision making in a pandemic is easy. Easy as compared to decision making about an economy in the absence of a pandemic that is. Currently we’re trying to decide whether to be poorer while retaining more of us or leave some more to die and not be so poor. If not a binary decision then at least close to it.

Now try managing a normal peacetime economy. 65 million people with unique and individual utility functions. At least one billion discrete items are on offer for sale in this economy. That number both growing and morphing as technology marches on and tastes change. That centre is going to be able to plan this?

No one is saying that the current planning - however well intentioned - for the coronavirus is being done all that well. It is though an obvious example of the impossibility of that same centralised and planned process performing a difficult task such as running our economy.