Blame lockdown failures for today’s inflation disaster

The era of high inflation is about to enter its third year. US inflation has remained above 6 per cent since October 2021. In the UK, the problem has been worse, hitting double digits in early 2023.

There is little disagreement today over the drivers of high inflation. Hundreds of billions were spent by governments to support individuals and firms through lockdowns, and to stimulate the economy after them. It led to an increase in demand that supply could not meet in many areas.

But why has it persisted? In our view, the ongoing high inflation is a consequence of the public losing trust in economists to do their main job: subject new laws and policy proposals to rigorous cost-benefit analysis. The public has little reason to expect that future government spending and other policies will be balanced. And without such expectations, a return to low inflation will remain unlikely.

The economics profession failed to speak out in 2020 about the predictable harms of Covid lockdowns and school closures to children and those on lowest incomes. Economists believed that many people would stay home because they feared the virus, not because of lockdown. Hence, they reasoned, restrictions themselves were not responsible to any significant degree for the damage done to the economy.

Surveys suggested many economists were united in their support for draconian controls. Surveys of economists did not even ask about inflation until far too late (June 2021) and never asked about the terrible human cost of school closures.

But the fear of the virus that drove much of the behavioural change did not happen independent of lockdowns, nor did it correspond to objective facts about the disease. Surveys consistently showed that the perceived mortality and hospitalisation risks far exceeded the objective risks from a Covid infection for young and middle-aged people.

And the recent Lockdown Files revelations published by the Telegraph help explain why. Ministers plotted to strategically release information that would maximise public panic and ensure maximum compliance. This adherence – which economists considered voluntary and rational – was achieved by inducing panic and excess fear. Furthermore, contrary to what economists may have hoped, lockdowns did not stop Covid.

Economists eschewed their number one job – enumerating the costs and benefits of policies. The concept of QALYs, where health economists put a monetary value on people’s lives according to the number of years they have left and the quality of that life, was all but abandoned.

Had economists raised the alarm about Covid policies’ likely long-term impacts and costs, it would not have prevented all lockdowns, school closures, and stimulus programmes. But the debate would have been more balanced and policies perhaps more moderate. Lower inflation and less learning loss would have left families and children much better off than they are today.

In the end, policymakers only have themselves to blame for the choices they make. But some humility is now needed in the economics profession, after it failed to warn against often ineffective and wasteful policies. Work will need to be done on regaining credibility.

Central banks are fighting against inflation with interest rate rises. It will be tamed, but at very high price to workers and businesses.

Jay Bhattacharya is a professor of health policy at Stanford University

Mikko Packalén is associate professor of economics at the University of Waterloo in Canada