Costs, benefits, etc

Any sort of serious cost-benefit analysis undertaken by officials to advise ministers and inform the public has been notably absent over the 19 months now since Covid has been an issue for New Zealand. You may hazily recall last year that neither Treasury nor the Ministry of Health ever attempted any such disciplined analysis – presumably in the spirit of the senior minister in the previous government who responded to a question I once asked about some expensive initiative he was implementing observing that a cost-benefit analysis wasn’t needed because he already knew the correct answer. There were, of course, a few outsiders who made the effort – from the sceptical side consultant and former academic Martin Lally, and also an analyst at the Productivity Commission (whose efforts seemed to rile up those who already knew the right answer). Earlier in the year when the government extended its regulatory Covid reach, I OIA’ed the Ministry of Health for any cost-benefit analysis undertaken in conjunction with this new restriction. I was quite surprised to get a very prompt response, making it clear that none had been undertaken. Only later did it become clear that the Ministry of Health itself had opposed the initiative.

Of course, for any remotely-complex issue the best cost-benefit analysis in the world won’t produce a single definitive answer that everyone agrees on. But it forces proponents of a course of action (or inaction) to identify and write down their assumptions, think in a disciplined way about how people are likely to behave, think about a wide range of costs, and so on. It should sharpen the thinking of decisionmakers and those advising them, and aid the public scrutiny of ministers and officials,

The thinking that results in this post was initially sparked by seeing a comment in an interview earlier in the week by the Reserve Bank’s deputy chief executive responsible for economics and monetary policy where he claimed that

“Lockdowns have been about delaying the timing of spending rather than taking away spending in total”

and then yesterday I noticed the government’s adviser, and eminent epidemiologist, David Skegg suggest that we might as well push on with the elimination strategy as (words to the effect of) there was no real cost to doing so.

I don’t suppose the Reserve Bank has any real input into Covid policy – and his comment was mostly in the context of output gaps and inflation outlooks perhaps a year out – but Hawkesby is a smart guy, and it was a weird comment, tending to minimise the costs of restrictions.

This chart is an illustration of what I have in mind.

covid GDP losses

Quite clearly what happened was that spending/production returned to more or less normal levels relatively quickly, but “the hole” was never filled in. Real GDP per capita was about 12 per cent lower than otherwise in the June quarter of last year, and 2 per cent lower than normal in March quarter. GDP just prior to Covid had been about $80 billion a quarter, so almost $12 billion of GDP (value-added) we would normally have expected to have occurred in the first half of last year never happened. And there is no sign it was ever made up for later (not surprisingly, since few of the people who couldn’t work at all in April would have gone on to work twice the hours in June). These are really big losses – rather swamping the most recent derided example of planned government waste, the proposed walking/cycling bridge across Waitemata harbour. And those GDP outcomes were held up – to an extent not yet clear – by really huge fiscal outlays, which represents a future burden on New Zealand taxpayers.

Note that I am not citing these numbers to get into a debate about last year’s lockdown, and in thinking about the regulatory restrictions in that period it is vital to recall that many of those losses would have happened anyway (at least given the rest of policy up to mid-March), as individuals were already beginning to take their own precautions. But that was then when – if one wanted to be charitable – one could note that the government and officials were to some extent flying blind.

My concern is more about this year. Ministers and officials now had a good basis for knowing that lockdowns (of the draconian New Zealand sort) did not come cheap. There are all sorts of costs other than the ones captured in GDP – read the heartrending example in Matthew Hooton’s column this morning – but the GDP ones are real enough. I’ve seen mentions that The Treasury is working on an assumption of 25 per cent of GDP lost under “Level 4”, so we’ll use that assumption. Applied to last quarter’s GDP that represents a loss – unlikely ever to be recovered (see above) – of $1.6 billion dollars a week. After 10 days of nationwide level 4 that is already about $2.3 billion – and on a best-case scenario there is probably the best part of another couple of billion to come. $4bn might do as a rough estimate (five cycling bridges) in economic costs alone (and preservation of basic freedoms should itself be valued highly).

Again, I cite these numbers not to question the current lockdown (callously and deliberately cruel and inhumane as parts of it are), but to highlight that officials and ministers have known the cost of this sort of scenario all year. So you’d have supposed they’d have done absolutely everything possible, including spending lots of money if necessary, to make sure it didn’t happen. After all, Parliament had appropriated lots of money in the Covid fund.

Now people might push back and say that it was only in the last few months that the enhanced threat of the Delta variant became apparent, and no doubt that is true. But our politicians and officials are entrusted – paid – with the responsibility to prepare against a wide range of contingencies (just as, say, in a defence and foreign policy context). Similarly, we heard for months public health people bemoaning the alleged “complacency” of the public, but the public aren’t charged with preparing against all such contingencies and the government (politicians and officials) is. And the idea that a more troublesome variant might arise was hardly a new one no one had ever contemplated before Delta.

The only reasonable conclusion is that this draconian lockdown – and the extreme intrusions/restrictions should be priced quite highly – was preventable and the government objectively chose not to prevent it. I don’t suppose they wished it, but – having decided firmly on elimination (and quite probably sensibly so) – with all the resources of the public sector – and the wider base of expertise beyond it – they chose not to do the things that would have made it unnecessary (whether by preventing Delta arriving in the first place, or having the population and systems in a position where much less onerous and costly restrictions might have been appropriate). And I don’t suppose anyone anywhere in the public sector stopped and did some serious cost-benefit type of thinking. Frittering away the Covid fund on wider Labour political preferences must have been so much easier and more fun for the politicians. And as for the officials, who can say, but presumably the quiet and comfortable life suited them. It wasn’t as if they did nothing ever, but that is hardly the test when faced with such a threat.

What might the government have done (and been reasonably expected to have done, not just with the benefit of hindsight)?

There is a pretty standard list by now of things that could have been put in place over months, some of which would have made a difference with certainty, some just probabilistically (but this is a game of probabilities):

  • the astonishing lack of urgency the government displayed in securing vaccines (whether that is about when orders were placed, whether anything could have accelerated Pfizer deliveries, or the choice  – pure choice – to put themselves in the hands of a single supplier),
  •  the neglect of saliva-test options (now widely used abroad, and cheap –  to individuals and governments),
  • the now-apparent failure to put in place systems to prioritise testing (and processing of test of) close contacts),
  • the clear failure to have stress-tested and war-gamed the contact tracing system to ensure that it could really cope with what was being promised.

There were, of course, small things even last week.   Knowing by then, with utter confidence, of how threatening Delta was, when a community case was discovered in Auckland first the Prime Minister and her Covid minister hightailed it out of Auckland (how could they then know whether or not they had been contacts?) but more generally people were allowed to leave Auckland –  with no isolation requirements at all –  for almost 2.5 days after the first Auckland community case was known about.  Now, sure, there would have been contacts outside Auckland anyway, but the government’s choice knowingly added to the problem (some of the Wellington cases were people who left after the initial case was known) –  the numbers, the testing, the processing, the risks (that lockdowns are now designed to contain).

And then there is the border.  They knew the border was not totally secure –  after all, there had been several breaches here over the months.   And it probably could not be made 100 per cent secure –  for every person arriving (by air, or as crew on ships) there was some chance, however individually small, of a breach.  If it wasn’t obvious to them, the Skegg report was telling them a breach was inevitable at some point.   

And yet the government did nothing to reduce to an absolute minimum the number of people arriving.  If anything, it seemed to be constantly giving in to pressures to allow more in (not even compassionate cases, but discretionary sports, business and entertainment priorities of the government).  Just a few days before this lockdown there was the extraordinary proposal to allow home isolation for some (big end of town) vaccinated people, even as the government quite openly told us that any Delta breach would be likely to have an immediate Level 4 lockdown (with attendant cost).  Perhaps there was a case at the time for allowing quarantine-free travel from Australia, but even there they were astonishingly slow –  given what they knew of the cost of lockdowns –  to close down that travel when community cases arose in one or other of the Australian states (they seemed to rely on advice from Australian officials rather than taking the pro-active precautionary approach), and then kept allowing New Zealanders to leave Australia for a time even when the QFT was finally suspended altogether (sure, there was pre-departure testing, but that was more theatre than anything, given that the test could be taken up to three days prior to departure –  and many of them weren’t checked anyway).

(Of course, in any cost-benefit analysis you would want to include the costs to the individuals left unable to travel by a tighter approach at the border at the margin. It is likely to be a small number, relative to the costs imposed on five million of us.)

Given the commitment to elimination (which I am not questioning), it is simply inexcusable that ministers and officials were not doing this sort of cost-benefit calculation/analysis, and routinely updating it in the light of new information (including about Delta). One might not a year ago have put a 100 per cent chance of a new Level 4 lockdown a year ago, but perhaps it would have been prudent even then to have planned for a 30 per cent chance, with that probability clearly rise (to near inevitable in the Skegg report) as the year went on, and planned and prepared accordingly. Perhaps by mid this year it really was too late to do anything much to fix the vaccine problem, but – knowing the likely extreme costs of a lockdown (output never recovered, really high non-economic costs too – it should have led to even more of a focused drive to do everything to stop Delta getting in, and having foolproof, tested and robust, plans to immediately contain the spread (including beyond whatever area the first case was found in), Instead, it is if the lives, fortunes and freedoms of New Zealanders are just playthings for the government and officials – “it doesn’t really matter if we didn’t do our job well, after all, we can simply keep everyone shut up for days longer”. Hundreds of millions of dollars (and equivalent) lost/wasted? Never mind, we are well practised at that. After all, look at where the Covid fund went.

None of this bears on what choices Cabinet should make today, but it has real implications for the path ahead. If the government is committed to elimination for the time being, and holds over us constantly the Damoclean sword of Level 4 lockdowns, they need to take much more seriously minimising to the utmost the risks of future breaches.

$4 billion really is a lot of money – $800 per man, woman, and child – simply gone, and that on relatively optimistic estimates (and many of the costs not dollar-valued at all).

UPDATE 28/8: This Matt Nippert piece from today’s Herald, on the dawning awareness of the Delta variant, despite drawing on authorised officials in the Prime Minister’s own office presumably keen to provide cover for the government/officialdom, really makes my point. Even though the variant (then known as the Indian variant) was first identified late last year, was ravaging India in February, there is no hint in the article that ministers or officials were planning for really bad scenarios, and taking aggressive steps to prevent them being realised, until very late in the piece. It is one thing to hope for the best, but in officials/ministers charged with crisis management – and having themselves deliberately and consciously adopted the elimination strategy – it is no basis for planning. One wonders if there is any dedicated group anywhere in the official system charged with championing alternative (bad) scenarios, with a direct line to ministers.

16 thoughts on “Costs, benefits, etc

  1. The problem with CBAs is they require skilled people. The ability of most government departments to do a decent CBA is close to zero. This requires contractors who are usually the lowest bidders.
    Add to that the fact that a lot of economic consultancies re moving away from government CBAs and you have a recipe for complete hollowing out of government economic capabbility.

    Liked by 3 people

  2. An excellent summary of the lack of critical thinking from the government about covid!

    From where I’m looking the government decided it would keep the borders closed for approximately an additional six months for the benefit of only having to administer one vaccine. This for me is the single most inexcusable act of this pandemic, it was a clear trade-off decision with a clear huge downside for only a small upside. The government was happy to take the opportunity to restrict movement because at the time it did so such restrictions were popular, never mind that the huge costs and the complete predictability of growing calls to ease the restrictions.

    And all this was assuming a border breach was unlikely, which should have been a pretty dubious assumption!

    Liked by 2 people

  3. And a vital statistic is not being disclosed: Of the hospitalised covid cases how many are fully / partially vaccinated ? Same data for new community case of covid. Such information should enable us to decide if the current vaccine is working or not.
    The saliva testing has been a total debacle – anybody knows of the reason(s) it has not been implemented in NZ?

    Liked by 2 people

  4. To your list of government failures to prepare for the current situation could be added failure to expand the capacity of the health system to deal with hospitalised covid cases.
    Furthermore, your chart of the GDP losses from the pandemic and the accompanying wording seems to treat the counterfactual as GDP equal to that just before the commencement of the pandemic. The counterfactual should be the forecast made just before the commencement of the pandemic of the future GDP path. The GDP loss from the pandemic (only some of which is due to lockdowns, as you note) is then even larger than you indicate. My estimate determined in this way is $43 billion for the pandemic, with $17 billion due to the lockdowns. That is $8,600 and $3,400 per person rather than $800. Furthermore, my estimate uses Treasury forecasts from just before the pandemic and from May 2021, and the latest lockdowns are likely to worsen the latter forecasts, thereby increasing the GDP losses.

    Liked by 1 person

    • THanks Martin. Entirely agree re health system, altho one could argue that is more an issue about preparing to move out of elimination. My post was really about taking them at their word: if elimination was the goal, and we know lockdowns are v expensive, what should a govt that was serious about aligning all its efforts have done.

      On GDP losses, one of the challenges is to distinguish pandemic losses from lockdown losses. For example – a point I deliberately didn’t make – presumably without the pandemic real GDP per capita would have risen 1-1.5% over 15 months (normal sort of growth extrapolated), but some unknown portion of that loss was unavoidable to us (given everyone else’s pandemic choices and policies). I just aimed at a bare minimum GDP cost of a new lockdown itself, being prepared to grant that we might relatively quickly snap back to pre-lockdown levels of GDP once the lockdown is ever (on the govt’s own assumption that the approach would work).

      Liked by 1 person

  5. The problem with having lots of people ready to do testing, tracking, and vaccination is that much of the time they would have very little to do. I expect many could do all three jobs if required to, responding to demand. Unfortunately, demand probably spikes for all roles simultaneously.

    Nowadays though, the NZ Defense Force employs around 15k very competent and well-disciplined people, including reserves (2..7k) & civilian (3.4k) staff. I know they are already helping with MIQ, but it seems very likely that many could be spared and quickly trained for the vital jobs related to the pandemic.

    I understand that the government chose Pfizer as it was seen to be the best vaccine at the time, and it must have seemed like we had plenty of time to distribute it due to how successful our strategy had been. I have to wonder why they didn’t put more effort into distributing it quickly though, as the sooner it was done, the sooner we could open up.

    Perhaps there were humanitarian concerns, as nearly every other country in the world needed it far more than we did. What do you think of the ethical implications of that? If there were, it’s sad that Labour feels it has to conceal them and even sadder that National doesn’t appear to have considered them.

    I do wish there had been more thinking along the lines of a CBA when Labour was deciding on the travel bubble with Australia. There was intense pressure to open up, but simply pointing out that if something went wrong it would cost us over a billion dollars a week should have been enough to shut it down.

    All in all, sometimes Labour are far more parsimonious than people realise, and that’s probably why we are so far behind on some things.

    Liked by 1 person

    • On your first point, I think they have been roping in public servants at short notice. In an ideal world, they might have been a bit like Territorials, incl drilled to ensure they can do the job well at short notice, and with exercises undertaken to increase the chances the overall surge capacity works. Probably the sort of thing that suggests MoH probably really should have an excellent operational manager at its head thru a time like the present, perhaps with someone like Bloomfield as a public face, since he seems quite good at comms.

      The ethical argument is an interesting one – Hipkins did run it once. It doesn’t have much force for the govt to unilaterally make that call, as we elect them mainly to look after the interests of those here. More generally, I’m more or less persuaded by the sort of argument that Eric Crampton advances that big (high priced) orders early on from advanced countries help underpin demand and underwrite investment in production facilities, and that had we over-ordered (say 10m doses from each vaccine, we could easily give the excess away later).

      Liked by 3 people

  6. CBA ,BCR ,Investment Logic Mapping or other analysis needs to be done thoroughly and properly.
    Even when properly done it often does not give the “ right “ political result.
    So in fact they are little more than another guide for decision makers to consider,

    Liked by 1 person

  7. Back on April 19, 2020 I wrote a post on No Minister called More Epidemiology Modelling Problems, in which I linked to a post you had recently made about coronavirus and economic policy. The reason I linked was that your post, in turn, linked to a couple of papers dealing with these modelling problems.

    However, it’s the other paper by Professor John Gibson that is now appropriate and I’ll repeat the key quote:

    It turns out that life expectancy in New Zealand is more sensitive to changes in real income than is so for many countries. Using World Bank data on real GDP per capita (in purchasing power terms) and life expectancy, from 1990 to 2017, the income-elasticity of life expectancy for New Zealand is estimated as 0.171±0.009.

    In other words, a ten percent decrease in real per capita GDP reduces life expectancy by 1.7 percent. The most recent period life tables for New Zealand report that male life expectancy was 79.5 years and female life expectancy was 83.2 years, so 1.7 percent of the average of those two values is 1.4 years. In other words, if real per capita GDP in New Zealand falls by ten percent due to the lockdown and other effects associated with Covid-19, life expectancy would be predicted to fall by 1.4 years.

    And…

    if the lockdown leads to a ten percent fall in real GDP per capita, we can expect life expectancy to be 1.4 years less than otherwise. This could be justified as a rational investment in risk reduction if it prevented a Covid-19 death toll that would be ten times the usual flu shock.

    In contrast, if the death toll would otherwise have been four flu-shocks or less (so 3500 or fewer deaths), shrinking the economy by ten percent would reduce life expectancy by 1.4 years, in order to avert a risk that otherwise would have produced a 0.6 year decline in life expectancy.

    In other words, this mix of risk and response would take almost one year off the expected life span of everyone in New Zealand. The apparent kindness of doing everything possible to limit deaths due to Covid-19 would, instead, be killing more people by making them poorer.

    Liked by 2 people

  8. The risk of a breach of quarantine was considered in a Te Punana Matatiki paper last year. They did the official modelling work. They initially found that a 10 day quarantine was more effective than a 14 day quarantine because of the risk of cross infection. The response was a new model run where it was assumed that leakage and cross contamination in quarantine could be reduced to zero so the only remaining risk was illnesses not being picked up in the 14 days. They also reduced the period of ineffectivity so that risk was significantly educed. -down to something like one case every 18 months from memory. This also had the effect of making a 14 day quarantine better 10 day one. -For more detail it is in the Road to level 4 and back on tailrisk.co.nz

    Liked by 1 person

  9. What is striking is the lack of transparency and governance regarding the advice the NZ Government receives, and from whom, on COVID. The NZ Ministry of Health’s website contains a (small) list of the members of the Technical Advisory Group (note there is no mention of modelling or modellers), and that’s it.

    Contrast that with SAGE in the UK – there you’ll find comprehensive information & data, an extensive list of experts in multiple fields (including modelling) along with their conflicts of interests, as well as minutes of any SAGE meetings.

    Liked by 1 person

    • They did publish the (short) letters the Skegg group provided as a report back to the govt (and Shaun Hendy and Rodney Jones have had a fair amount of coverage from the modelling side).

      But more generally, I agree, and generalise the point to cover the policy advice ministers are getting from officials. A lot of papers are eventually pro-actively released, but there is no reason why – for example – Cabinet papers for each Covid decision could not be released straightaway as a matter of routine.

      Like

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