The End of the World as We Know It

The four decades from 1980 to 2020 produced the greatest growth of liberty and prosperity in human history. Most of the great 20th Century dictatorships that had imprisoned half of the world's population collapsed or were replaced by more liberal versions of themselves. Average human income as measured by GDP per capita increased from approximately $2500 (in current US Dollars) to more than $11,000, and those living in extreme poverty as defined by the World Bank reduced from 44% of the world's population to less than 10%. The economic deregulation of the 1980s resulted in a wave of technological innovation in medicine, telecommunications, energy production, finance and consumer goods that has enabled people all over the world to live better and longer lives. The social liberalism that started in the 1960s accelerated during this period and, in the West at least, most of the remaining discriminatory laws against minorities such as gay people were swept aside.

The authoritarian instinct wasn't gone, however. In China, the Communist Party refused to follow its Russian and European counterparts into oblivion and in 1989 at Tiananmen Square reasserted its totalitarian rule with a bloodbath of tanks and guns against unarmed protestors. A few formerly-liberal countries like Venezuela also bucked the trend and embraced an austere form of socialism of which even the Khmer Rouge might have been proud. The United States reacted to the terrorist attacks against the World Trade Centre and other major landmarks in 2001 by invading Afghanistan and Iraq and introducing the repressive Patriot Act, turning its sophisticated surveillance capabilities against its own people, and many other Western governments followed suit. We had some economic stumbles, most notably the dotcom crash of 2000 and the global financial crisis of 2008, but while these interrupted the long periods of growth, the overall upward trend continued.

That era is over. Covid-19 has been the catalyst for, but not the exclusive cause of, a sea change in our social, economic and political lives that is unlikely to be short-lived. The signs were there before the pandemic. Elements of the environmental movement such as Extinction Rebellion had become shrill in their calls to sacrifice our economic and political freedom to avert a millenarian doomsday, and a combination of enhanced censorship laws and a "cancel culture" - complete with virtual-pitchfork-wielding mobs - saw the casting out from mainstream discourse of anyone who defied the increasingly narrow political orthodoxy. Voters responded by electing contrarian political bruisers such as Donald Trump in the United States, Jair Bolsonaro in Brazil and Viktor Orbán in Hungary, who vowed to overturn some of their opponents' excesses and imposed a few of their own. Covid-19 has merely brought all of this to a head.

Whether or not the Covid-19 lockdowns that most countries have imposed are justified from a epidemiological perspective, there is no doubt now that the economic costs and the political and social impacts will be significant and long-lasting. The elimination of the spread of the disease within a country's borders is just the beginning of the journey back. We will have to live with a less-onerous form of lockdown, including quarantine at the border, until we have a vaccine or develop natural herd immunity. According to the OECD, the lockdowns will have an initial negative impact on GDP of between 15% (Ireland) and 35% (Greece). The longer term economic impact is uncertain, although many economists are now expecting a U-shaped, rather than a V-shaped, recovery. We almost certainly haven't seen the full impact on stock prices, and as earnings plummet and more companies fail, the consequential impact on global markets is likely to be felt for years to come. Governments that already have high levels of national debt and large deficits will have limited capacity to use monetary and fiscal policy to drive long-term economic recovery, particularly with interest rates at historic lows.

Many of the changes we have adopted during the lockdown will survive the easing of restrictions. Some of these changes are positive - for example, the widespread use of working-from-home technology lessening the need for people to commute to central city offices (with a consequential reduction in traffic congestion and pollution). Others aren't so positive - such as the permanent loss of jobs in retailing and food service from the accelerated use of online shopping and home delivery. One of the worst effects may be a permanent disruption to social relations, particularly amongst the elderly, as people struggle to restore tenuous community relationships that existed before the lockdown. The pandemic has seen traditional social niceties replaced by mutual suspicion and this trend won't be easily reversed.

The biggest permanent impact is likely to be political. Covid-19 has seen the largest expansion of state power over our lives since World War II. We have broken through an invisible wall of convention that constrained governments as much as any formal constitutional barriers - the presumption that a citizen can do anything so long as it isn't legally forbidden has given way to the expectation that our governments will tell what we are allowed to do. This hasn't happened in defiance of the will of the people - polls indicate that a majority of voters in most Western nations favour the extension of the lockdown, and any questioning of its necessity is regarded by many as disloyal. The established media have been cheerleaders of the measures and their traditional role of holding government to account has been assumed by bloggers and podcasters, who are often cast as troublemakers. The traditional Western political divide between conservatives and progressives hasn't defined the battlelines over the lockdowns - governments of both political hues have adopted similarly stringent measures and it has been the ultra-progressive Sweden that has been a libertarian outlier.

We don't have to be dire pessimists to think that it will be many years before we shake off all of the effects of Covid-19. International travel, for example, won't return to normal until we have a vaccine and airlines may be required to make social distancing permanent, halving the number of passengers on a plane and doubling the fares, thereby returning air travel to the relative luxury of the 1970s. Perhaps we will see a levelling of the disparities in incomes that have grown up in recent decades between blue collar jobs and the managerial elite, as some of those "essential" workers demand wages more commensurate with the importance of their role in the lockdown. Recent moves towards greater protectionism in trade is likely to accelerate as nations embrace isolationism and autarky, which is likely to further constrain economic recovery and growth. And some governments will be reluctant to hand back the power they have assumed during the lockdown, justifying further constraints on liberty by the ongoing impacts of the lockdown itself, in a vicious circle of escalating repression. It will be a virtuous government indeed that abandons all of their lockdown measures at the earliest possible opportunity.

Those of us whose adult lives have largely played out over the last four decades should be grateful that we have lived through the best of times, but we owe it to our children and grandchildren to give them at least the same opportunities that we have had to enjoy happy, healthy and fulfilling lives. How we handle the recovery from Covid-19 will determine whether we do so.

Understanding Risk in the Time of Covid-19

I am something of a risk management expert. A significant part of my professional career has been advising organisations on how to effectively manage risk, so I can justly claim to know a thing or two about the subject. The responses of governments all around the world to the Covid-19 outbreak have demonstrated how poorly understood the science of risk management is amongst our leaders.

Risk is quantitatively assessed as likelihood times impact. In other words, the chances of the risk eventuating (if we don't do anything to avoid it) multiplied by what happens if it does. One of the problems with Covid-19 is that governments, at least initially, under assessed the likelihood. They have also overestimated the impact with their projections of huge numbers of deaths. Having assessed the risk, you then have to assess the possible mitigations and their costs. Governments have compounded their errors by going straight to the most extreme form of mitigation and not quantifying the costs.

Time can be a significant factor in risk mitigation. I was listening to a podcast this morning in which an academic in America was discussing the poor state of infrastructure in many US states. He gave an example where a state government had decided to defer repairs on a short stretch of highway that would cost $6m if done today. Leaving the maintenance unaddressed for just two more years would result in a six-fold increase in the cost of repair. Under those circumstances, it seems crazy not to carry out the mitigation today.

One of the worst effects of a lack of understanding of risk management is the precautionary principle. This is the belief that unless you have complete knowledge about the likelihood and impact of the risk, either you shouldn't take any action at all (e.g. not allowing the trial of a new drug) or you should go all-out to prevent the risk eventuating (e.g. locking down the population in a pandemic).

Imagine you have a sore leg and you go to the doctor, who takes one look at it and says it might be cancer and therefore he should amputate. This is the precautionary principle. At the very least, you would want to understand the likelihood of it actually being cancer and the prognosis for that particular form of cancer before you agreed to the surgery. Some cancers are benign and don't need to be treated at all. Others are minor and localised and a simple excision of the tumour might be sufficient. You would weigh up the likelihood and consequence of the diagnosis against the cost (in loss of mobility, ability to work, etc.) of the mitigation. You may decide that the cost of any mitigation is more than the benefit gained from the treatment (a not-uncommon decision particularly amongst elderly cancer patients).

The most obvious real-world example of reliance on the precautionary principle today is the various zero-carbon initiatives legislated by governments around the world. Stopping all or most of the use of fossil fuels, which we literally rely on to keep us alive, in the belief that it will prevent global warming is, from a risk management perspective, extreme folly. The claims of "settled science" notwithstanding, we have little certainty about the direct impact of manmade carbon dioxide emissions on the climate, so banning the most common, economic and safe forms of energy before we have the chance to develop reliable alternatives, is unjustified.

Some experts were calling for the New Zealand Government to quarantine everyone entering New Zealand back in February, when we had no Covid-19 cases. That mitigation, as disruptive as it would have been on our tourism and international education sectors, would have cost a fraction of the complete lockdown of our economy that was adopted once we had multiple cases of the disease within our borders. Philip Thomas, a professor of risk management at Bristol University, has estimated that if GDP falls by over 6.4 per cent over the next two years as a result of prolonged economic inactivity, more lives will be lost than saved thanks to rises in poverty, violent crime and suicide. So, even if you ignore the actual dollar costs, the lockdown may end up costing more in lives than the unmitigated impact of Covid-19 itself.

Effective risk management is almost always about choosing the lesser evil. There is seldom a costless mitigation option. Economists and actuaries understand this, which is why they quantify the value of human life in their models. For example, the economic cost of a death from a motor vehicle accident in New Zealand is valued at $4.34 million. Personally, I consider my life worth a lot more than that, but the transport authorities have to use an average value of life that represents the trade-off they are prepared to make in mitigating the risk of death on the roads. Make it too high, and the models would indicate we should ban all travel by motor vehicles, which would cost a lot more than the value of the lives lost. The problem with government responses to Covid-19 all around the world is that they haven't done these calculations, so it is not surprising they all jumped on the precautionary principle bandwagon and locked us all down.

A further problem with risk management is reliance on specialist expertise. This may seem a strange criticism for a risk management expert to make, but experts are, by definition, narrowly focused on their area of expertise. It would be surprising to find an epidemiologist, for example, who knows a lot about economics. So when governments take their advice exclusively from a epidemiologist, it isn't surprising that their response doesn't give sufficient weighting to the economic costs. Part of the challenge in defining and quantifying a risk is in finding the right range of expertise to do a balanced assessment of likelihood and impact. An engineer who specialises in fluid dynamics, for example, may be as qualified to advise about the spread of a disease as a doctor.

I feel like we're in the early stages of a nuclear war and there is still time to stop the missiles with only moderate damage to each side, but no one has the courage to agree a ceasefire. At some point rational thinking has to enter the higher realms of decision making about Covid-19. Our governments have largely ignored the costs of mitigation, but once these become apparent - like the smouldering remains of nuclear strikes - we're all going to wonder why we didn't come to our senses earlier.

Ignorance Upon Uncertainty

It has been more than a week since I last posted and since then in New Zealand we have come out of Covid-19 lockdown Level 4 into Level 3. I have no idea what these levels mean in terms of detailed rules and the authorities seem to be making it up as they go along, with the New Zealand Police refusing to release their own advice about the legality of their enforcement of the rules. This Kafkaesque uncertainty is the hallmark of authoritarian governments everywhere - if the rules are arbitrary, you can always be deemed to be in breach of them.

I have imagined that among the small blessings of the lockdown, an increased appreciation for the value of the producers in society might come out of this situation. People have become aware that they can't take it for granted that their supermarket has plenty of the right type of toilet paper or packaged flour. They have also become aware that the people who run the factories, who drive the trucks that deliver the goods, or who stack the shelves in the stores, should be considered "essential workers" as much as the doctors and the nurses tending the Covid-19 patients. But most don't understand the workings of the complex supply chains that ensure the shelves are full with what they need, or how the packages that they order on Amazon or AliExpress miraculously arrive at their door from the other side of the world. It would astound most people to know that there is no central organising authority that operates those supply chains, but rather they are a result of the collaborative efforts of a myriad of businesses, big and small, all around the world.

Even worse is the fact that most people (including many of our leaders) don't understand how the broader economy works, and they don't seem to appreciate the economic and social damage that is being done with the Covid-19 shutdown. They believe the government can flip a switch and turn the economy off or on at will and that all will soon be back to normal. Employers are being criticised in the media for laying off workers or even for closing down, as if the proprietors of such businesses are traitors acting against the national interest.

Our prime minister, Jacinda Ardern, showed her utter ignorance of how the economy works - or worse, a Marxist understanding of the economy - with her comments that the private sector should value their workforce in the same way government does. This is particularly galling to business owners who are struggling because of her lockdown policies (which, as I have written before, are only necessary because of Ardern's early inaction to prevent Covid-19 entering New Zealand) and in increasing numbers are losing their life's work. Does Ardern not realise that every cent government spends ultimately comes from a private business somewhere? She is criticising private business owners for not being as generous as she is with the money she seizes from them!

Ardern's criticism came after one of her colleagues, Deborah Russell, in an example of the most breathtaking left-wing arrogance, blamed businesses themselves for not being able to withstand the government-ordered lockdown. The left likes to go on about victim-blaming but in typically hypocritical fashion are happy to engage in a little of it themselves when the victims are business owners.

Meanwhile the deputy prime minister, Winston Peters, leader of the "far right" New Zealand First Party, wants to "put up the shutters" to foreign investment and trade, returning New Zealand to the "Polish shipyard" economy of his mentor Robert Muldoon's government during the 1970s and early 1980s. New Zealand at the time had a protected manufacturing sector that produced shoddy, expensive goods; draconian exchange controls that meant you had to apply to the Reserve Bank to get a strictly-limited amount of foreign currency before travelling overseas; and - Muldoon's coup de grace - wage and price controls that meant a corner store had to apply to the prime minister personally if it wanted to put up the price of tea. The economy was Soviet in all but name and it is to this state that Peters wants to return this country.

The problem is not just with central government. Local councils refuse to cut back their spending in the crisis and are intent on increasing their tax take from struggling businesses and home owners. They seem oblivious to the evidence that many New Zealanders are already struggling to meet their existing financial commitments.

All of the Covid-19 assistance programmes have involved greater spending by the state. The Government is acting like a benevolent rich uncle, doling out wage and salary assistance, business loans and increased welfare benefits as if New Zealanders won't realise they will have to pay back every cent. Perhaps the Government is right to count on the public's ignorance - it is apparent that many people do not realise governments have no source of funds other the taxes they extort from hardworking citizens. Even government borrowing is just a demand on future taxpayers.

I don't see any evidence that Covid-19 will result in an increased appreciation for the producers in society. I think we are fated to repeat the mistakes of the past, whereby governments and the public regard the producers as milch cows, to be exploited until they are empty vessels, and then to be blamed for not being productive enough. Perhaps if the economic downturn from the Covid-19 is long and deep enough, governments will realise at some point that they need to release their grip on the producers' throats. I fear that may take many years.