Q2 2020: Responding to COVID-19 by prioritising sustainability and wellbeing in the recovery

With thanks to Maximilian Magnacca Sancho for his help with this article.

The COVID-19 pandemic is changing the way that we live our lives. As time passes it is becoming apparent that even once the lockdown policies have been eased and some level of normality has been resumed, the new world that we live in will be different to the one we knew before. This article focuses on emerging trends that have largely taken place as a result of COVID-19, or in some cases the pandemic has simply accelerated a trend that was already occurring. We then look to offer a range of public policy solutions for the recovery period, where the overarching objective is to increase wellbeing in society in a sustainable way.

But first, before we get to the policy solutions, briefly, what are the main economic and wellbeing effects that we have seen as a result of COVID-19? In 2020, it is expected that the fall in overall economic output is going to be larger than during the financial crisis in 2008. Much of this is due to the level of decline in economic activity as a result of the UK governments lockdown policy. This was a necessary decision in order to reduce the spread of the virus and ensure the NHS still has capacity to treat those that have unfortunately caught the disease. However, it has led to a significant income shock for both households and businesses. Levels of consumer spending have declined rapidly, and large portions of the labour market are now out of work. Alongside sharp falls in measures of economic performance, measures of wellbeing have declined rapidly as well. Increases in measures of uncertainty have mirrored increases in anxiety. While, social isolation policies are having a large impact on measures of happiness.

The UK government responded to the shock posed by COVID-19 with a range of policy interventions to provide funding to those that have been most impacted. At a macro level, the long-lasting effects of this crisis will be more pertinent if economic activity does not respond quickly after the government’s schemes have ended. Large portions of UK businesses have limited cash reserves to fall back on in a scenario where demand remains subdued for some time. However, even if the recovery period is strong there will still have been some clear winners and losers during this crisis. Younger workers, those on lower incomes and those with atypical work contracts are the ones that have been most heavily impacted. Whilst those on higher incomes, that are more likely to be able to work from home, have increased their household savings during this period, due to less opportunities to consume.

The policy solutions outlined below aim to be complementary of one another and look to amplify observed trends that are positive for wellbeing and to provide intervention where trends have been negative for wellbeing:

1.      Climate at the centre of the response: This is less a policy recommendation and more a theme for the response. However, our message here is that increased public spending projects, focused towards green initiatives should be combined with a coherent carbon tax policy which influences incentives and helps to support the UK’s transition to a low carbon economy.

2.     Labour market reforms: The government should look to develop a centralised job retraining and job matching scheme that supports workers most impacted by COVID-19, helps to encourage structural transformation towards emerging industries and increases the amount of highly skilled workers in the UK workforce.

3.     Tough decisions on business: Some businesses will require further assistance from the UK government in the form of equity funding, rather than the debt funding seen so far. This should be done on a conditional basis, requiring all these businesses to comply with the UK’s climate objectives and should only be provided to businesses in industries that are expanding or strategically important to the UK economy.

4.     Modernising the regions on a cleaner, greener and higher level: Looking to build on the governments ‘levelling up the regions’ policy to reduce regional inequalities, our policy consists of government funded infrastructure spending that includes green investments for regions outside of the UK’s capital.  

5.     Harbouring that rainbow effect: Building on the increased community spirit that has been observed during the pandemic, this policy solution looks to increase localised community funding to maintain social cohesion and support those with mental health issues. 

Lastly, as the policy recommendations focus on expanding public investment to support the recovery, it is important to consider what this means for public debt sustainability in the UK. The conclusion is that as a result of the low interest rate environment, the most efficient way out of this recession is to borrow and spend on projects that will increase resilience to future shocks and support the UK’s transition to a low carbon economy.

Please click on the link below to read about this in more detail. Comments are welcome.

Responding to Climate Change

As of March 2019, 195 UN members have signed the Paris Agreement. The long-term goal of this agreement is to keep the increase in global average temperatures to well below 2 degrees Celsius above pre-industrial levels, and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius. 

This paper shows that if we continue with our current policies we can expect temperatures will rise to between 3.1-3.7 degrees Celsius by the year 2100. And even if we put in place all of the national pledges that countries have committed to recently, temperatures are expected to increase to between 2.6-3.2 degrees Celsius - far above the “well below 2 degrees Celsius” target.

There are now currently ongoing discussions between policymakers as to what is the most effective way in which policies should be designed to achieve the goals set out in the Paris Agreement. The two main policies being discussed is a carbon tax or a range of targeted infrastructure government spending projects combined with regulation, such as the ‘Green New Deal’ that is being proposed by Democrats in the US. 

The carbon tax is an efficient way to create a reduction in pollution and force firms and individuals to develop more environmentally friendly alternatives to carbon. It’s not only this; it’s very difficult to foresee what could be the full economic benefits of the tax due to the billions of knock-on effects it will have across the economic system. For example, it may encourage people to use greener modes transport such as cycling or walking which will lead to health benefits that go beyond the reduction in pollution. 

The main criticism of this policy is that firms’ production may simply shift to countries that don’t have carbon taxes. Therefore, until all of the countries in the world adopt the tax, it’s not likely to work. In addition, the cost of adopting such a tax has the potential be quite expensive (depending on how it is designed), reducing its efficiency. Related to this, there are lots of questions surrounding the optimal design for this tax, how do you determine the correct tax rate? Do you tax every carbon emitter in the country or only the largest producers of carbon? How do you prevent tax evasion from carbon production in an efficient way? 

Then for the alternative policy: from an ideological perspective, this policy is based around large government injections into the economy in order to structurally shift towards a green and renewable based economic system. The benefits are clear from developing a policy framework under this goal; the criticism is that current plans in this area have been vague and its highly likely to be a large political challenge to gain widespread support for this due to the lack fo tangible benefits today from implementing these policies.

Before we offer our view in this debate, we’d like to briefly just explain why as an organisation that focuses on happiness economics research we are discussing this topic in the first place. From a happiness economics perspective there is no greater pressing issue than climate change at the moment. Improvements in quality of life, development and wellbeing all fall second in line to risks faced by not acting now to protect the future of the planet.  This is not an overdramatic or pessimistic statement; it’s a realistic one based on the facts – the diagram in Figure 1 in the article below shows this quite clearly.

In terms of a policy response our view is that both a carbon tax and a targeted infrastructure plan should be put in place, in as many countries as is feasible. The carbon tax should be a starting point and should be implemented swiftly – the optimal design of this policy could be debated for decades, it will never be perfect, but its implementation will represent a large step in the right direction. Then in terms of the infrastructure spending plans, this should be done by taking the revenues from the carbon tax (and additional government spending, where possible) to change the structure of high-carbon producing economies to become green and renewable based.

Our view is that the best way that this can be implemented is through a top-down approach with government co-ordination with industries to find intelligent solutions for facilitating these structural changes. For example, governments should put in place overarching targets (similar to the ones in the Paris Agreement) and then show how they plan to reach these targets through sub-targets for reductions in greenhouse gas emissions across a range of important industries in that country. This needs to be a well-defined co-ordinated plan that is publicly accountable, such that should participants fail to meet their targets they will be publicly named and there should be financial disincentives should participants fail to meet targets several times.