Fool Me Once: The Moral Hazards of the Government's Coronavirus Strategy

 

While it may feel that life will never return to normal, in the grand scheme of history Covid 19 is a relatively harmless disease.  Compared to the 60% mortality rate of the Black Death,we’re comparatively lucky. Things may seem dire, but history proves they can always get worse. As individuals we must prepare the following will consider the Government’s impact on the future of pandemic preparation, and in particular how it has undermined private provision against more deadly pandemics.

While the human cost and its devastating emotional impact is always front and foremost, the brutal reality of a global pandemic is the destruction of labour. Another Black Death resulting in the demise of 60% of the world’s populations would destroy the intricate international division of labour. Without this division and its underlying mechanisms, it will not be possible to sustain a global population of 7.8bn . In this situation people around the globe would endure the disease only to then be ravaged by starvation.

It is therefore essential that we as individuals are prepared. The reality is that if we wish to minimise the impact of another pandemic then resources must be saved. Consumption today must be sacrificed for consumption tomorrow. One possible avenue that could rise to solve this challenge is Insurance.

Imagine if you will, a scenario where systems of insurance were specifically tailored to cope with the unique strains of a pandemic. Some packages could ensure monetary compensation in the event of job loss for diseases with a mortality rates below 0.5%. Pandemics with a mortality rate above 0.6% meanwhile, could provide fixed monetary installments for any irrespective of job status. While more expensive this would nonetheless meet the increased need created by a pandemic of such a gargantuan scale. Overall the variety of packages and prices available could be endless.

However, due to the unavoidably concentrated nature of payouts, insurance firms would have to be innovative in their financial structure and system of payout. Naturally, when a pandemic emerges stock markets crash; the FTSE 100 has fallen in value by almost 30% since January. A fall in the value of financial assets by such a magnitude would wreak havoc with actuarial calculations. Attempts by insurance companies to all simultaneously liquidate assets would also compound the problem.  

Nonetheless, provided appropriate financial foresight is employed, and prudent management of accounts conducted, insurers would be able to overcome such problems. Essentially, financial assets in balance sheets would need to be seriously and perpetually discounted. Only then could all contracted liabilities be met without the possibility of bankruptcies.

The real issue occurs when the money economy itself collapses. At the Black Death’s 60% mortality rate, for example, stock market prices would plunge to near zero. In this apocalyptic scenario, food production would be largely destroyed and high street banks would collapse. Money would cease to be of any practical value as inflation would soar. Without the ability to command goods and services, money can be of no value.    

This is clearly a worst-case scenario. Nonetheless, it still raises the question of how insurers would deal with such a predicament? In the wake of hyperinflation and severe economic downturn insurers could take the sensible precaution to utilise food and other tangible goods instead of financial assets, insurance policies could be tailored to contain provisions so that during such a downturn all payments will be provided in a specified food parcel form for a set period. Measurements for when this clause would be activated could include reaching a certain mortality rate. While certainly morbid this factor is nonetheless a tangible indicator in such an extreme scenario. Obviously these provisions would need to be enough for an extended period such as two years. Enough time to either develop a vaccine or for natural immunity to overcome the pandemic.

With this in mind, free enterprise is more than capable of storing long life food provisions and distributing them in the event of a disaster. Pasta appropriately stored can last over 30 years. At current prices, an average food bill for a family for two years is £6,302.

Being prudent and assuming a deadly pandemic occurs every thirty years or so, an insurer would need to charge £4.04 a week for thirty years to cover average household consumption for two years, on retail prices. Inevitably, many insures would advertise less expensive provisions by offering fewer goods.

In the event of a disease of the seriousness I have described Pandemic Insurance Companies (PICs) could prove to be the only hope for the majority of mankind. They would bridge the gap between disaster and a cure. Sadly however, the preceding shall be considered irrelevant to our current situation. The reverse is very much the case; for the actions that have been taken by the Government today have seriously imperiled the creation and development of such PICs. Moral hazard has put at risk the future survival of the human race.

By paying 80% of furloughed workers wages Sunak has inadvertently subsidized ignorance; an understandable ignorance, but ignorance nonetheless. The discipline of Nature has, therefore, ceased to be.

Pain is a necessary experience to induce better action. By taking such drastic action and thus preventing individuals from experiencing the full pain of this pandemic, the Government has stopped the creation of those actions to address such pain in the future. This time the government was in a financial position to take these measures, but there is no guarantee they will be in the same position next time and to assume so is not only irresponsible but foolish.  Employees will now take the view that the Government will ensure their survival. Consequentially pandemic insurance will fail to be created after this crisis. Ultimately this will mean that no one will take responsibility and we will be just as ill-prepared when the next pandemic strikes.

In the future, a pandemic with a mortality rate of 60% may occur. In such a situation current government measures would be useless to help the population. Borrowing or printing billions would be ineffectual, as there would be no food to purchase. In such a disaster PICs or similar measures would be an essential way to feed the population. In their absence, the global population would surely starve to death.

This is the scenario that the Government has inadvertently induced in the future. Unfortunately, Sunak’s action is the embodiment of the institutional short-termism of the state. Politicians are simply never going to be concerned with diverting scare resources to building up food supplies when elections every five years almost necessarily dictate that public funds are spent on the issue of the day.

Spending on pandemic preparation will only ever be called for during a pandemic itself, by which time the bells will have tolled for civilisation. I would argue therefore that only measures such as PICs, secure in the ownership of their assets, can provide the long term foresight that is necessary to ensure the food supply during a deadly pandemic. Only they can provide for our survival.

The State’s Coronaviurs Strategy has irretrievably destroyed the discipline of Nature. The absence of this discipline has ill-prepared the human race for the future. As the great 19th Century philosopher Herbert Spencer would have said: `The ultimate result of shielding men from the effects of folly is to fill the world with fools. `.

Written by Cllr Charles Amos, President of the KCLCA

 
 
 
 

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EconomicsCharles Amos