Spurring Economic Activity Will Be – And Must Be

by Andrea Galeotti, Professor of Economics, London Business School

After nearly six months of continually adjusted degrees of lockdown, the spirit of careful, ever hastening economic forward momentum, exercised to the incantation of Prime Minister Boris Johnson’s new catchphrase, ‘Hands, face, space…knees and toes’, has never seemed more urgent.

It is a movement and momentum of the utmost urgency because of the number of people claiming unemployment benefits, which surged to 2.7 million between March and July. It is urgent because of the millions of people who are furloughed, those on zero-hours contracts but not getting shifts, or people on temporary unpaid leave from a job. It is also urgent because of the unprecedented impact on a wide cross section of sectors – hospitality, airline operators, textiles, clothing, automotive industries – the list goes on.

Yet it is the silent scream in all of the government communiques and catchphrases that is the most urgent and frightening aspect of the COVID-19 pandemic. It is the scream of countries, not least Great Britain, waging a war against the coronavirus based on the dynamics of a game of chance. This in turn produces considerable anxiety about the economy, people’s jobs and the duration of the terrifyingly large slump that COVID-19 has precipitated.

Above all, it is the absence of data, which produces a lack of concrete purpose and substance to the actions of government and businesses. It is this single issue – one of purblind behaviour based on an absence of information – which has now been codified and addressed in the report, ‘Economic Aspects of the COVID-19 Crisis in the UK’.

The report has been released by the Royal Society’s DELVE – Data Evaluation and Learning for Viral Epidemics, a data analytics group convened to tackle COVID-19, and is authored by a team of experts, of which I am proud to be a member.

DELVE has released this report in order to call on the UK government to pursue a cautious and prolonged reopening strategy in order to save both lives and livelihoods, calling for targeted government support for businesses and workers. This approached is needed during a time when the economy restructures to accommodate physical distancing requirements, smoothing the transition to a “new normal” in which coronavirus remains a risk without a lasting vaccine. Most importantly, the report raises the concern of lifting coronavirus restrictions too quickly, thereby triggering a higher death toll and double-dip recession.

One are of key importance in the report concerns tracking the impact of economic shocks using real-time transaction data, an area where my colleague, London Business School’s Professor Paolo Surico, has made contributions of considerable importance. The coronavirus pandemic has led to the rapid development of an empirical literature in economics that uses individual financial transactions made by households and firms to track the impact of spread of virus, lockdown, and other government policies. DELVE argues for an expanded effort for data collection in the UK, which up to now lags behind other major economies such as US in the availability of financial transaction data for policy analysis.

Unlike official national statistics, which often take months to compile, financial transactions provide a near real-time account of economic activity. This is a particularly important policy tool when the economy is in crisis and can support evidence-based timely policy responses to major economic shocks.

An additional advantage is the inclusion of payments data, which offers further granularity, allowing one to measure which firms and households are most affected by economic shocks. For example, one can determine which sectors and regions are hardest hit by lockdown, and design fiscal stimulus accordingly.

It is worth noting that while data for financial transactions have been heavily used for households, there is much less for companies. The impact of uncertainty on investment is likely to be of the same order of magnitude as that for domestic consumption and therefore more work on the corporate side of payments data is clearly required.

Another are of importance in the report identifies possible combinations of economic and epidemiological data to model different scenarios. Policymakers can seek to tailor interventions to sectors and firms in ways that help to mitigate the risks of both a second peak and the looming prospect of a double dip recession.

Such innovative non-pharmaceutical interventions would recognise that sectors, firms and individuals are interlinked, with measures taken in one sector likely to affect other parts of the economy. Also, that fear of contracting the virus – or uncertainty about how to manage it – are strong drivers of economic behaviour, meaning continuing anxiety will likely affect consumer confidence. Further, that that the prospects for an effective vaccine are uncertain, and that the extent to which infection leads to immunity remains poorly understood, creating a need for non-pharmaceutical interventions that may need to persist long-term.

These “non-pharmaceutical interventions” may include such measures as workplace rotation schemes. It is in this specific area of research that I have contributed to the DELVE report. Working with Professor Jeffrey Ely, Charles E. and Emma H. Morrison Professor of Economics at the Kellogg School of Management, Northwestern University and Jakub Steiner of CERGE-EI and University of Zurich, we observe that as appealing as rotation plans may seem, public health officials have said little about how organisations should implement them.

Government and business leaders have been left guessing about even the most basic decisions, such as how frequently they should rotate between groups—daily, weekly, monthly? This research – “Rotation as Contagion Mitigation.” (working paper) provides concrete guidance to organisations grappling with these questions, pinpointing which plan is best suited for which type of organisation, based on how equipped the organisation is to detect and react quickly to infections.

The DELVE report states that encouraging staff rotations within a workplace could reduce secondary infections of the virus to an eighth of the size of an outbreak where no such policies were in place. To encourage such policies, it said, government incentives could be used, including state subsidies for short-time working.

Another important area of focus within the DELVE report concerns assessing costs and the design of targeted interventions. The report notes that locking down a community, and closing down economic activity in certain sectors is costly economically, and that “those costs are not equally spread throughout the economy”. “For example,” the report states, “key production activities, such as textiles, chemicals, iron and steel, etc., that are more central in economy-wide supply chains have a much wider impact on the economy when idled.”

As I have previously commented in the Economics Observatory article, ‘How can production network analysis inform policy on COVID-19?’, “The economy is characterised by intricate linkages between consumers, businesses and sectors across national and global supply chains. Production network analysis provides insights into the effects of imposing and lifting lockdowns – and policies to support recovery.”

Furthermore, even if these central production nodes are kept open during a lockdown, their scale of operations is likely to decrease as downstream activities like retail, which serve UK households directly, are kept shut, thereby limiting their demand for intermediate goods and services. Finally, employment declines in such sectors under lockdown inevitably spill over into the rest of the economy via final demand, as households scale back consumption in face of job loss and income uncertainty.

My research into networks provides a framework to organise these complex patterns of propagation of economic disruption under lockdown, allowing one to estimate and quantify the economic costs of a particular lockdown strategy, either already implemented or proposed. Further, it allows policymakers to discover optimal targeted lockdown strategies.

In its concluding analysis, the DELVE report observes that a tight lockdown that is released too quickly, or too fully, would in all likelihood lead to “adverse outcomes in terms of both lives and livelihoods”.

“To be precise, too quickly or too fully here means relaxing the lockdown without sufficient regard for the state of the pandemic, the capacity of the health care system, and epidemiological markers such as the effective reproduction number. The rationale is simple: an abrupt and premature lockdown exit would lead to a second wave of infections that would bring with it both a higher death toll and additional costs for the economy.”

The report follows official figures released earlier in the month that showed that Britain’s economy had entered the deepest recession since modern records began in 1955, due to lockdown measures causing a dramatic decline in economic and social activity.

For further reading:

Royal Society DELVE Initiative: Economic Aspects of the COVID-19 Crisis in the UK Aug 14, 2020

‘What will be the impact of the crisis on household finances?’, Economics Observatory, 27th May, updated 23rd July 2020, by John Gathergood with contributions from Paulo Surico, Professor at London Business School

‘How much will lifting lockdown start to reverse the UK’s economic slump?’, Economics Observatory, 25th June, updated 10th July 2020, by Tim Munday and Paolo Surico

‘How can production network analysis inform policy on Covid-19?’ Economics Observatory, 27th July 2020 by Vasco Carvalho and Andrea Galeotti

‘Here’s the Best Way to Rotate Workers (or Students) into Buildings to Curb the Spread of Covid-19’, KelloggInsight, August 3rd, 2020 by Jeffrey Ely, Andrea Galeotti, Jakub Steiner

‘The Economics of a Pandemic; the case of Covid-19’ by Paolo Surico and Andrea Galeotti, Professor of Economics at London Business School [presentation regularly updated]