Is the Covid-19 crisis a Black Wednesday moment for the Government? In September 1992, sterling was forced out of the Exchange Rate Mechanism. The fact that this devaluation was inevitable whoever had won the general election did not matter. The Government took the blame but received little credit for the subsequent economic rebound. As a result, the Conservatives always looked likely to lose the next election, when it came over four years later.
This question needs to be asked as the UK – currently with less than 1 per cent of the world's population and 2 per cent of its GDP – accounts for 11 per cent of the deaths from Covid-19.
Of course, it is premature to draw lessons from global comparisons. And, as in 1992, the outcome might have been the same whoever was in charge.
As the latest data shows, death rates and infections are on a clear downward path. But because of the vaccine gap, the public must behave sensibly. If they do, the worst of this health crisis may be behind us.
We are, however, already in the midst of a serious economic crisis. The Government has two exit strategies that it must get right: exit from the lockdown, followed by its exit from a recession that will see UK government debt reaching more than 100 per cent of GDP. Austerity or tax hikes are not the answer. After the Second World War, this ratio was much higher, at around 250 per cent. Now, like then, a pro-growth economic strategy, plus modest inflation and low rates, can bring it back under control.
First, the Government must ensure a successful route out of lockdown. Based on our research, which combines the analytical framework of epidemiological models with the behavioural economics of social science, there is much that is reassuring in the Government's approach. It is gradual, being in three phases, allowing monitoring of the virus before progressing to the next stage. It is also sensible to unlock based on economic activity and, despite criticism, to move from a "stay at home" to a "stay alert" message.
Prolonging a rigorous lockdown is neither risk nor cost-free. Recessions destroy lives and well-being. A clear and controlled strategy is needed to ensure that behaviours stay sensible. Individuals, through their actions, and firms, through how they care for their staff and customers, must be alert. Success will be gauged by our ability to keep the virus under control while allowing the economy to recover.
In mid-March, the public faced considerable uncertainty and a very limited information set. A new virus was spreading. Death rates in China seemed high and Italian hospitals were overwhelmed. It was rational for people to change behaviour in the face of government encouragement.
Voluntary lockdown began in the week of March 16 as traffic fell, offices closed, and restaurants and bar visits declined sharply.
We now have a lot more information about Covid-19, though there is still much we do not understand. Those in decent health are not risk-free, but their risk is very low. The vast bulk of deaths are of those with a pre-existing health condition. Yet people have not yet internalised this information. A high level of uncertainty pervades. Thus, behaviour deviates from rationality.
This is the Government's biggest challenge. While it wants people to carry out more activities, if behaviour reverts to what it was before the crisis, then a second wave will occur. If behaviours differ, there is no reason to expect a major second wave. Instead, as we are seeing elsewhere, localised outbreaks will be the greatest challenge.
The Government has not conveyed the fundamental way in which its strategy is based on "the science" – unlocking less risky activities first and minimising harm. Until people have confidence, they cannot reduce the level of uncertainty – "radical uncertainty" – which they possess.
They cannot act rationally, and their irrationality can be exploited, such as by public sector unions.
This will impact on their spending decisions and activities, even as lockdown unfolds. It was Keynes who coined the phrase "animal spirits", expressing the fact that the psychological state of companies is integral to ending recessions.
This time, and very unusually, it is the psychological state of individuals that will be most key to a recovery. But getting the economy right can help avoid a Black Wednesday moment.
Co-authored with Paul Ormerod, a visiting professor at University College, London.