Introducing the Novelty-Narrative Hypothesis

Historically novel events cause the processes driving stock market returns to change in unforeseeable ways. This kind of instability famously eludes representation in terms of standard probability theory, which relies on past data. To deal with so-called “radical” or “Knightian” uncertainty, market participants rely on narrative dynamics to help give shape and contextual meaning to novel events as relationships change in real-time.

This is the essence of the Novelty-Narrative Hypothesis (NNH) that I assess in my new book, How Novelty and Narratives Drive the Stock Market: Black Swans, Animal Spirits and Scapegoats published as part of INET’s book series with Cambridge University Press. This new approach enables researchers, policy-makers, and investors alike to better understand stock market outcomes and confront unforeseeable change and the Knightian uncertainty it engenders with real-world observations and scientific scrutiny. Standard economics relies on probabilistic rules which presume that the future is an exact replica of the past and, as such, is unable to deal with “true” uncertainty. NNH offers a way forward.

Why is change in stock market relationships unforeseeable? Frank Knight famously traced the answer to events that are to some extent historically unique. The last two years perfectly illustrate Knight’s point. Financial markets have had to grapple with an unprecedented pandemic, historic US Congressional stimulus, dramatic supply chain disruptions, and sharp pivots toward more remote forms of both labor and commerce. Simultaneously, there has been an oil war between Saudi Arabia and Russia, the arrival of a new US presidential administration, shifting geopolitical conflicts in the Middle East, and, now, substantive talk of Federal Reserve tapering in the face of creeping inflation. Such events catalyze change in business processes and in the economy’s overall structure. Yet, true uncertainty implies that no one can foresee when such events would occur or, more importantly, how their impacts on future returns are interpreted by market participants at a given point in time.

My book offers the first comprehensive analysis of the role that stories play when novel events cause instability in the stock market. Stories are visceral, contagious, and ever-evolving. Stories share a living symbiotic relationship with the people and communities that tell them. Stories reflect a society’s culture, values, institutions, experiences, diversity, and politics. Stories are the consequence of uncertainty, but also serve as a source of uncertainty themselves. Stories are the currency of uncertainty. People tell stories that others have told them and major events are often the catalysts for many of the most popular story threads coursing through our minds, discussions, news reports, business communications, and social media feeds.

Macro shocks, however, do not occur in isolation. Rather, large-scale non-repetitive events often spill over into a churning stream of novelty at the firm level, think bankruptcies, management shake-ups, legal issues, M&As, new production processes, and so on. What’s more, the interpreted impacts of macro shocks on firm outcomes may be quite ambiguous; often, the distinction lies with short- versus longer-run return forecasts and the accompanying narrative links versus established story threads, respectively.

My book relies on a novel dataset based on millions of identified unscheduled corporate events across the universe of Dow Jones, Wall Street Journal, MarketWatch, and Barron’s financial news reports over the last two decades. I assess the intensity of narrative dynamics through big data analysis of event novelty, inertia, sentiment, and relevance. These metrics are then interacted to show how narrative intensity aligns with formal structural breaks in posited relationships driving returns, volatility, and fund flows. Interestingly, the narrative dynamics of firm-level events correspond rather closely with macro event narratives. But the empirical evidence shows that macro unscheduled events spill over onto future corporate novelty triggering different forms of stock market instability.

Narrative economics is a popular and growing field of research. Unlike other treatments of narrative dynamics in the stock market, my book places psychology in a rational setting of cognitive decision-making under uncertainty. Evidence from other social sciences supporting a rational view of sentiment is overwhelming. What’s more, my book does not trace the source of narrative dynamics to random chance, evolutionary biology, or psychological disorders, as others have contended. Rather, NNH implies that narrative dynamics stem from historically unique events and the unforeseeable structural change they engender in stock market relationships. Put differently, my book advances the view that the role of novelty and narratives reflects the normal state of affairs in inherently unstable asset markets. Consequently, my book breaks away from mechanistic models of contagion used to describe narratives’ impact on market outcomes.

The missing link to deal with inherent instability and uncertainty is narrative dynamics. Story threads are the primary source of soft information for researchers, policy-makers, regulators, and market participants alike. This year, we are witnessing an evolving interplay between the narratives of inflation pressures and narratives following Chair Powell and the Federal Open Market Committee. Yields on 10-year Treasury Notes increased from 1% in February 2021 to over 1.5% through June. Google Trends searches for “Jerome Powell” spiked in March as yields increased. Google Trends searches for “inflation” began to rise in April 2021 and peaked in May. There appears a connection between the stories individuals are participating in and the outcomes observed in financial markets.

In March of 2021, billionaire investor Ray Dalio claimed that “investing in bonds has become stupid.” He has publicly reiterated this view on September 21 which prompted the following Bloomberg News interview query posed to Michelle Seitz, CEO of Russell Investments: “A very common theme here has been 'don’t buy bonds’ ever since Ray Dalio said it (again this morning) and you have said the same. So where do you go?” Are narrative dynamics at play here? Was there an underlying market event that aligned with the timing of the comments? Was Dalio or Seitz providing a narrative link that extends an established story thread or were they cultivating a new narrative angle? Narrative analytics would explore the emotional intensity of the surrounding linguistic context. It would track the stories’ visibility and mileage observed by the general public and by financial institutions. Narrative analytics would investigate the possible contagion and propagation of the view by other major investment figures and personalities. And, narrative analytics would always keep in mind the time-series behaviors of these metrics and their interaction as many other events unfold simultaneously.

The toolkit under NNH can be used in myriad ways by researchers and policy-makers for informing financial market decisions under uncertainty. For example, investigators might consider tracking the narrative attributes surrounding unscheduled events mentioned in 10-K and 8-K corporate statements, IPO prospecti, or in the SEC disclosures of Venture Capital firms. By tracking the way CEOs and other executives discuss particular issues on their shareholder calls or through other investor relations, dynamics of firm-level and industry narratives could be revealed. Which subsets of soft information are they emphasizing? How are they framing the soft information? NNH offers an empirical, pragmatic framework for addressing these questions and many more.

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Models of Temperature and Economic Growth: Some Cautionary Remarks

Several major papers have been published over the last ten years claiming to have detected the impact of either annual variations in weather or climate change on the Gross Domestic Products of most countries in the world. At least seven major papers have been published in this vein, including some that rely primarily rely on the results of previous papers. The results have gotten a fair amount of attention in both the news media and in climate change newsletters.

Many of these papers go on to argue that as average annual temperatures increase in countries in the coming decades the changes in temperature will have a very large impact on GDP growth rates. This literature suggests that cooler countries will tend to have increases in their GDP growth rates while warmer countries will experience decreases in their growth rates.

Unfortunately, because the statistical methodologies relied on by these studies are not scientifically justified, their quantitative and qualitative results are wrong. My new INET Working Paper argues that they seriously mislead the climate change research community, policymakers, and the general public. The key point about these statistical methodologies is that they violate basic principles for the correct use of multivariate regression analysis for scientific research. They do not include any of the appropriate and usual economic factors or variables which are likely to be able to explain changes in GDP or economic growth whether or not climate change has already impacted each country’s economy. The work in these papers, accordingly, suffers from “omitted variable bias,” to use statistical terminology.

Some of these studies also claim that the likely impact on the GDPs of various countries and regions can be calculated for the long-range future well beyond the time period covered by their database – sometimes as far into the future as the year 2100. Climate change is a fact, but my paper also cautions against such sweeping extrapolations.

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Remembering Geoffrey Harcourt (1931 - 2021)

Geoffrey Colin Harcourt passed away in Sydney, Australia on the 7th of December 2021. He was born in Melbourne on the 27th of June 1931.

His signature G.C. Harcourt became a familiar name for the many people the world over who followed his always insightful writings for more than six decades. Harcourt was, with Luigi Pasinetti, a principal heir of the Cambridge Post-Keynesian school of economics. He studied accountancy and economics at the University of Melbourne where – as he himself stated – the famous names of the Cambridge University Economics department were very much part of the academic life there.

In 1955 he went to Cambridge University where he gained his Ph.D. In 1957 the University of Adelaide appointed Harcourt to a Lecturer position and in 1967 he was promoted to a Professor’s Chair. Harcourt rapidly became an important contributor to the Cambridge school of thought. At the University of Adelaide he was among the founders and editor of the Australian Economic Papers in 1963, a journal that became a reference point for heterodox scholars throughout the world. In 1964-66 Geoff Harcourt returned to lecture at the University of Cambridge as a Fellow of Trinity Hall, followed by other lecturing stints in 1972-73 and in 1980. In 1982 he moved permanently to the Economics Department of University of Cambridge where he became Reader. He was Fellow of Jesus College, and its President for most of the time from 1988 to 1992. Harcourt also served for eight years on the Council of the University of Cambridge. Upon retirement in 1998 he was nominated Reader Emeritus in the History of Economic Theory at the University of Cambridge as well as Emeritus Fellow at Jesus. Harcourt returned to Australia where he was appointed Honorary Professor of Economics at the University of New South Wales in Sydney. In 2018 he was made a Companion in the General Division of the Order of Australia for "for eminent service to higher education as an academic economist and author, particularly in the fields of Post-Keynesian economics, capital theory and economic thought."

Harcourt gave a particularly nuanced, refined, and wide-ranging contribution to the famous capital debates, publishing in 1969 what has become a well known article in the Journal of Economic Literature: "Some Cambridge Controversies in the Theory of Capital." That was followed in 1972 by a monograph with the same title published by Cambridge University Press, which is among the most widely read on the subject. The debates were revisited in depth in a joint paper with Avi Cohen titled “Retrospectives: Whatever Happened to the Cambridge Capital Theory Controversies?” published in the 2003 volume of The Journal of Economic Perspectives. Over the decades Harcourt’s essays have been collected in many books. In 2006, with Cambridge University Press, he published The Structure of Post-Keynesian Economics: The Core Contributions of the Pioneers. The volume constitutes a fundamental piece of work as it discusses the whole development of the different strands of the Cambridge School. In 2009, co-authored with Prue Kerr, Harcourt published with Palgrave-Macmillan the definitive book on Joan Robinson. Intellectually and humanly Geoff Harcourt was an exceptional person.

The INET community mourns his passing and extends its deepest condolences to his wife Joan, to their daughters Rebecca and Wendy and their sons Robert and Tim.

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Should Central Bank Liquidity Provision Be a Vehicle for Fiscal Discipline?

Unconventional monetary policies after the financial crisis have been extensively discussed and analyzed, with the notable exception of the collateral policies at their core. The work by Kjell Nyborg is a rare exception. On the basis of an in-depth analysis of the collateral policies pursued by the European Central Bank in the wake of the financial crisis, he argues that those policies aggravated the sovereign debt crisis and put the survival of the euro at risk. Nyborg’s analysis of collateral policy is an important contribution to the literature, but his critique of the ECB’s crisis response is misguided. Moreover, his proposal to retailor haircuts on central bank liquidity in a manner that would deepen the ECB's role in the fiscal disciplining of member states is dangerous: if adopted, it would be profoundly procyclical and destabilizing. Our new INET Working Paper analyses Kjell Nyborg’s work to identify a set of collateral policy principles that likely will ameliorate impending market liquidity crises as opposed to exacerbating them.

What is the role of collateral policy?

Central banking is widely seen as first and foremost a matter of using interest rates to achieve monetary policy goals. Central banks lend not merely at a cost, however, but always against securities. Borrowers pledge assets to access central bank funding. In this sense, the lending is secured. While secured lending exists in many forms, one feature is a constant: what is accepted as collateral varies significantly over time.

What the European Central Bank (ECB) accepted as collateral before and after the financial crisis were two altogether different things. When money and credit markets are liquid and well-functioning, central banks take a conservative approach, accepting only high-quality assets as collateral. In periods of market stress, on the other hand, they usually respond by accepting a wider range of assets as eligible collateral.

Overall, three core factors define the contours of central bank collateral policies. First, eligibility criteria set out what assets are eligible as collateral when banks seek access to central bank money; second, haircuts determine how much central bank money a bank will receive (as a percentage of the market value of the collateral) for different types of eligible collateral; and third, stipulations on counterparty access define what types of financial institutions the central bank is willing to provide lending to.

The haircut can be seen as the central banks’ insurance against liquidity risk. Should the borrower be unable to pay back the loan, the central bank can avoid a net loss, even if it has to sell the collateral at a price below the original market value. In this sense, haircuts are a risk management technique for central banks. Since the global financial crisis, it has become apparent, however, that haircuts have important implications for liquidity in the markets where collateral trades.

Since most collateral in the Eurozone is issued by Member States, the ECB’s collateral policy has significant impacts on liquidity and price in sovereign bond markets – that is, ECB’s collateral policy has significant, if deeply underappreciated, fiscal spillovers. In the early stages of the crisis, spreads between German bonds and ‘periphery’ Eurozone countries were amplified by the ECB’s collateral policy.

What is wrong with Nyborg’s critique of the ECB’s collateral policy?

The main message of Nyborg’s book is that the terms on which ECB supplied money for collateral during the crisis were “overly generous.” We argue that Nyborg’s characterization of the ECB's collateral policy is highly misleading, however. In fact, haircuts were increased several times for assets with low credit ratings. Moreover, haircut differentials – the spread between haircuts on collateral assets with a high and a low credit rating – widened, hence producing a contractionary rather than an expansionary effect on collateral space.

Before October 2008, the ECB applied identical haircuts to all European government debt. There was no distinction between high- and low-quality collateral in this asset class. After the collapse of Lehman, the haircuts on highly-rated government debt remained at the same level, while all lower-rated government debt was assigned haircuts 5 percentage points higher.

Overall, three observations about changes made by the ECB to its haircut schedule stand out. First, haircuts for high-quality collateral were kept low throughout the crisis (and even declining for longer residual maturities). Second, for government bonds with a low credit rating, the opposite trend prevailed. Assets with a low rating faced a dramatic increase in haircuts, in the range of 550 to 850 basis points (depending on residual maturities), seen over the full period. Third, the haircut spread – between assets with a low (B to BBB-) and a high credit rating (A to AAA) – jumped 500 basis points in October 2008, was unaffected by the January 2011 revision, but increased again in October 2013, with 50 to 400 basis points (depending on residual maturities). For short residual maturities, the haircut spread jumped by 50 basis points (from 500 to 550), while for long residual maturities it increased by 400 basis points (from 500 to 900).

Over the full period, haircuts on government bonds with a low credit rating and residual maturity of less than one year were increased 12-fold, from 0.5% to 6%, whereas haircuts for the same class of government bonds with a residual maturity of 7-10 years nearly tripled, from 4.5 % to 13 %. These are hardly trivial increases.

We suggest that the haircut changes do not match their depiction by Nyborg as “overly generous”. On the contrary, it is difficult to imagine that haircut increases at this scale did not add to the already severe liquidity strains of troubled banks and governments in distressed countries.

What’s the way forward for collateral policy?

In Nyborg’s view, future instances of over-borrowing by banks and sovereigns ought to be prevented by using haircuts in a punitive manner. “The idea is simple,” he says, “if a debt-to-GDP ratio of no more than 60 percent is desired,” all you need to do is “increase haircuts progressively in the debt-to-GDP ratio beyond this.” The same mechanism can be established for fiscal deficits, such that haircuts are increased progressively as fiscal deficits exceed agreed thresholds. “My proposal works,” explains Nyborg, “by reducing the liquidity and value of a highly indebted country’s bonds.” By increasing borrowing costs, the “appetite” for borrowing in excess of agreed thresholds should recede.

We strongly oppose Nyborg’s proposal. If haircuts were proportional to fiscal deficits and public debt to GDP, collateral policies would exert a pro-cyclical and destabilizing influence not just on collateral markets, but on the financial systems they anchor. For a central bank to combat a market liquidity crisis effectively, it must decrease haircuts, not increase them – and more so for assets with low ratings, such that haircut differentials narrow rather than widen. This is essential to market liquidity. Incidentally, it is also by far the best risk management strategy, because the need for liquidity injections and asset purchases will be much more speedily satisfied with this policy mix.

Our Working paper argues that the ECB's ambivalent strategy – of providing liquidity but raising haircuts on distressed assets – did not amount to “lending freely, against any and all collateral that is good in normal times”, as we believe Bagehot’s rule advises. By expanding collateral eligibility but raising haircuts and haircut differentials, the ECB was undermining the market liquidity it was trying to restore. To stop collateral valuation spirals, central banks must lower haircuts and haircut differentials – and suspend rather than follow the collateral valuation practices of financial markets.

Should we hold back for fears of moral hazard?

Countercyclical collateral policies are likely to be subjected to a standard criticism against measures that ease access to central bank liquidity. Such policies cause a moral hazard for both governments and banks, who would get access to funding on “subsidized” terms. Notably, lowering haircuts on central bank liquidity would amount to encouragement of “overborrowing” by banks that might in fact be insolvent and hence should not receive central bank funding.

Against such objections, we suggest that one must first acknowledge that liquidity provision and moral hazard are best dealt with separately. In much the same way as it would be “a terrible mistake”, in the words of Paul de Grauwe, if a central bank were to “abandon its role of lender of last resort in the banking sector because there is a risk of moral hazard”, we suggest that compromising collateral expansion by raising haircuts is a highly unfortunate conflation of strategies. The point is not that moral hazard problems should be ignored; only that they should be addressed differently. The solvency of individual banks is a task for micro-prudential regulation and supervision, not a concern that should be held against collateral policies designed to ease a market liquidity crisis.

Research has established that the moral hazard effects of liquidity provision are less detrimental than those resulting from direct recapitalizations of banks, the dominant response to bank insolvencies. The upshot is, we argue, that even if the main objective is to reduce moral hazard issues in banks to the largest possible extent, lowering haircuts likely will in fact contribute positively. By helping abate the liquidity crisis, incidences of banks becoming insolvent are reduced, and hence moral hazard in its severest form is minimized.

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Looking for a Libertarian Who’s Not Afraid of History

The Wall Street Journal opinion section is nothing if not persistent. It rushed to print a critique of my detailed, primary source-based study of how Milton Friedman exploited southern resistance to desegregation to promote his ideas for privatizing public education by Phillip W. Magness. But obviously that wasn’t enough. When another scholar and I answered point by point, including in a longer version on INET’s site, the Journal came back with yet another screed of his.

The latest response is as insubstantial and factually incorrect as the first one. Let’s begin with his claim that “Rather than engage the economist at his word, Ms. MacLean imputes opportunistic motives to the date of Friedman’s 1955 article on the economic theory of school choice—one year after Brown v. Board of Education.”

What my piece actually did was to document how, from 1951 forward, the national press was reporting threats from segregationist officials to turn to private schools if faced with a mandate to desegregate public schools. This renders irrelevant Magness’s suggestion that the pre-Brown timing of Friedman’s drafting of his pro-voucher manifesto is exculpatory on its face. At the same time I was clear that “Whether or not Friedman had Dixie in mind as he drafted his article, he indisputably did all he could to take advantage of the opening created in early 1956 when southern states began ‘massive resistance’ to Brown.”

Friedman’s unpublished correspondence, which I quoted from in the original piece, leaves no doubt about his determination to use the emerging southern white resistance to promote his theory. When Friedman submitted his draft piece in October of 1954, Robert A. Solo, the economist who was editing the collection in which it was to appear, challenged him to consider how it could abet the segregationist cause. Friedman persisted. In answer to Solo’s challenge, Friedman responded that he opposed not only “forced segregation” but also “forced nonsegregation.” That is, he opposed the Supreme Court mandate to integrate southern schools.

Why is that so hard for Magness to admit? After all, Friedman went on to oppose the Civil Rights Act, as did his fellow libertarians. Do their heirs think they can keep such ongoing opposition to anti-discrimination measures a palace secret?

My essay also showed how Friedman found an ally in Leon Dure, a former newspaperman who was then fundraising for two Charlottesville segregation academies and advising southern states on strategy to defy Brown with a better chance of surviving court review. Friedman supplied Dure with ideas he used to win allies to his approach, as well as contacts for his outreach. What does Magness make of those strategy discussions? He doesn’t say; he just ignores them.

Magness then doubles down on his fanciful story of the roots of the strategy of “massive resistance” to the Supreme Court order that another researcher had already written to rebut.

The only difference between Virginia’s 1959 tuition grant plan and what Magness refers to as “the arch-segregationist ‘Massive Resistance’ laws of 1956-57” is that the segregationist backers of both—ultimately the same individuals in key cases--learned they needed to adopt formal color blindness to survive court review. I documented this learning process, aided by Friedman’s economic arguments and Dure’s evangelizing, but Magness, like the proverbial “see no evil” monkey, simply puts his hands over his eyes so he can hold on to his dogma undisturbed.

The NAACP, whose Legal Defense and Education Fund led the fight in the courts, consistently opposed the vouchers that Magness speciously claims were “a tool to achieve” integration. If Magness is right about their purpose, why would those in the best position to know fail to see this? And why did the courts come to agree that the vouchers promoted racial segregation and denied equal protection of the law to African American citizens? Magness never even addresses these points, much less explains why anyone should trust him rather than NAACP attorneys such as Virginia’s Oliver Hill and federal judges.

Milton Friedman himself ignored six years of mounting evidence of the segregationist impact of vouchers between 1956 and the 1962 publication of Capitalism and Freedom, in which he recommended the Virginia Plan, acknowledging that the state government aimed “to avoid racial integration” (p. 100, n. 5; also 118). So, why does Magness call me “brazen” and “conspiratorial” and engaged in “smearing” for sharing this indisputable history?

It’s time that Friedman’s admirers, the Journal’s opinion page, and the many supporters of diverting tax revenues from public education to private schools come to terms with the real history of their cause. They seem to imagine that sound defense requires belligerent denial of the factual record. Is any cause served by such blind faith?

Again, I ask Mr. Magness’s fellow libertarians: is even one of you willing to examine this history without defensiveness but instead with due recognition of the need for honest reckoning?

The disastrous consequences of segregation and the many efforts to revive it for political gain are, I hope, obvious. It’s time libertarians give up disinformation as a strategy of dealing with troubling matters. They could start by grappling seriously with their history in regard to race and education.[1]

Note

[1] See Nancy MacLean, “'Since We Are Greatly Outnumbered’”: Why and How the Koch Network Uses Disinformation to Thwart Democracy,” for The Disinformation Age, eds. Lance Bennett and Steven Livingston (Cambridge University Press and the Social Science Research Council, 2020). Free for downloading here.

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Warning: COVID-Fueled Mental Health Crisis Will Be a Costly Second Pandemic

Devastating conditions like major depression, bipolar disorder, schizophrenia, and obsessive-compulsive disorder are among the leading causes of disability in established market economies, according to Johns Hopkins Medicine. In the U.S., more than one in four adults was suffering from a diagnosable mental disorder even before the pandemic.

For too long, cost and access barriers to mental health care have caused incalculable suffering.

Covid has now blown the lid off a crisis building for decades. So why isn’t there a plan to deal with it?

A Runaway Train Accelerating

The Lancet reports that cases of mental disorders have skyrocketed during the pandemic, including 53 million new cases of major depressive disorder and 76 million new cases of anxiety disorders. In the U.S., since spring of 2020, the National Center for Health Statistics has partnered with the Census Bureau on a new, rapid-turnaround data system to monitor depression and anxiety, finding that just over half of adults between the ages of 18 and 44 surveyed have reported symptoms, as have 38% of adults living with children.

Researchers find that younger adults, racial and ethnic minorities, essential workers, and unpaid adult caregivers (most of them women), have been especially hard-hit by mental distress and increased substance use. Growing alcohol use is particularly worrisome among stretched-to-the-breaking-point young women juggling children under the age of five and work responsibilities. Feedback loops within families mean that distressed parents transfer their anxiety and depression to children and vice versa. Three top U.S. organizations specializing in child and adolescent mental health, including the American Academy of Pediatrics, recently declared a state of emergency for the country’s youth, noting that Covid-19 and the ongoing struggle for racial justice have compounded trends of declining mental health among kids observed prior to 2020.

Many people find themselves in so much pain, they think about dying. Suicide attempts by young girls are notably on the rise. Young people unable to obtain mental health care are being sent to hospital emergency rooms, where the staff are under their own intense stress due to private equity takeovers of health care and the spillovers of an inadequate care system.

We can’t go on like this. Yet as alarming as it all sounds, signs indicate the crisis may only intensify. Covid-19 case rates may be falling in some areas, but the stresses associated with the pandemic are far from over – particularly as new variants spread, causing further disruption.

In the U.S., those needing help face a serious shortage of mental health specialists (themselves often suffering from burnout and stress), a reduced number of psychiatric hospital beds, and a loss of job-based health insurance. Even for those who have insurance, a lack of in-network counselors and therapists means that care is frequently out of reach. And if you don’t live in a city, you may be out of luck: In some states, 80% of the population lives in an area where mental health professionals are scarce.

The upshot is that millions are going without the treatment they require. People are unable to sleep, gaining weight, and turning to potentially harmful strategies as they struggle to cope with grief, loss, isolation, family and workplace stress, and economic woes, including the latest worries about inflation.

A Neurotoxic Virus

The coronavirus itself attacks the mind. The infected may experience psychological symptoms like brain fog, and for some, the virus is nowhere near done with them after the initial infection. Long-haulers face a nasty list of potential psychiatric disorders, from phobias to anxiety. Some estimates suggest that as many as one in five people infected with Covid experience such disorders within three months. They get better, then they get worse, then they get better – up and down on a hellish rollercoaster.

That’s not all -- research has shown that those recently diagnosed with a mental disorder were significantly more likely to contract Covid -- and they tended to have worse outcomes than people infected who don't have a mental disorder. Researchers now suspect that having schizophrenia is second only to advanced age as the highest risk factor for dying of Covid. Nobody knows exactly why.

Viruses have long been linked to mental illness, though just how they relate is not well-understood. As early as 1732, clinicians noted that the flu often came with symptoms like neurasthenia, melancholy, hysteria, mental prostration, and insanity. When Covid hit, researchers looked back at the impact of the Spanish flu and other pandemics on mental health. Available data was scant, but demographer Svenn-Erik Mamelund had studied an increase in asylum hospitalizations from 1872 to 1929, finding that the number of first-time hospitalized patients with mental disorders attributed to influenza rose by an average annual factor of 7.2 in the 6 years following the Spanish flu pandemic. He also found that Spanish flu survivors reported sleep disturbances, depression, mental distraction, dizziness, and difficulties coping at work, and that influenza death rates in the U.S. during the years 1918-1920 were significantly and positively related to suicide rates.

Researchers in Great Britain reported an uptick in various nervous symptoms in patients recovering from Spanish flu infections, including neurasthenia, depression, nerve cell damage, and visual problems. Cases of encephalitis lethargica, an inflammatory central nervous system condition featuring psychotic and catatonic symptoms, also became common – 1 million cases were reported from the beginning of the Spanish flu pandemic in 1916 until the early 1930s. Clinicians surmised a link between the two, though causality is not established.

The Spanish flu, and other types of flu, have been linked to psychosis. Early observers of influenza, including Karl Menninger in 1919, noted that people who contracted flu showed a variety of psychotic symptoms, particularly schizophrenia, and theorized that the viruses were neurotoxins. They were onto something. Evidence indicates that Covid is indeed a neurotoxin.

Over the course of the current pandemic, doctors have seen infected teens suffer sudden psychosis, and researchers are wondering if brain inflammation or immune reactions may account for psychotic symptoms in Covid patients with no history of psychiatric complaints.

The coronavirus highlights the insufficiency of an outdated medical perspective separating the mind from the body. Viruses and other things that harm our bodies frequently affect our mental well-being, and vice-versa.

Social Toxins Spreading

Like wars and other devastating events, pandemics produce a wide range of mental health issues that hit poor and vulnerable groups especially hard. Covid is no exception.

Researchers Anne Case and Angus Deaton brought the term “deaths of despair” into public awareness with their studies of how mortality rates had risen sharply among certain populations since the 1990s. Their work has highlighted how the impact of stressors tends to widen the gulf between haves and have-nots already affecting the U.S and other countries.

Shannon Monnat of the Institute for New Economic Thinking and researchers at the Brookings Institute point to increased stress from Covid-19 on populations already facing rising deaths of despair, particularly those in rural areas. Monnat, who tracked deaths of despair related to the opioid crisis prior to the pandemic, has been studying how the coronavirus has been affecting populations of drug users in New York state. She has found that drug supply chain disruptions, including the increased appearance of deadly fentanyl as filler, along with other Covid-related factors like increased loneliness and isolation, appear to have helped fuel an increase in overdoses. She sees a breakdown in trust as an added stressor in areas where overdoses are high: “Trust in government, trust in media, trust in science, even trust in your own family have been strained…Families have been torn apart because of different willingness to accept facts.”

The pandemic, Monnat notes, has “accelerated a disruption in the social fabric of communities.”

People are feeling lonelier than ever. Even before the pandemics, researchers had begun to focus on the links between social isolation and loneliness and declining mental health, along with reduced lifespans and heightened risk for disease. Harvard researchers find that older teens and young adults are especially vulnerable to loneliness and isolation. They observe that people this age are particularly in need of a “robust social infrastructure,” which includes supportive connections with schools, doctors, and employers. Since many do not have such infrastructure, the reliance on social media to find a sense of connection increases. Yet studies show links between social media use and even more feelings of loneliness, particularly when online interactions replace face-to-face connecting. Recent revelations about Facebook (now changing its name to “Meta”) from whistleblower Frances Haugen, a former employee of the company, show that Facebook was aware of its negative impact on teen mental health – especially girls -- but did nothing about it.

The Cost of Ignoring Mental Health

The costs of mental illness are staggering, in human suffering and in dollars. In the U.S., 10% of insured people make up 70% of the total spending on health care. Of that high-cost group, more than half are seeking treatment for behavioral health. Mental health spending is rising twice as fast as overall medical spending. Shockingly, nearly half of people seeking treatment for mental distress get the wrong diagnosis.

In 2016, data from the National Health Expenditure Accounts showed that mental disorders were already the most expensive conditions in the U.S. in terms of health care spending—costing $201 billion. Heart disease, by way of comparison, cost $147 billion, and cancer, $122 billion. Of course, mental health issues and physical ailments like heart disease are often intimately related, so the cost of mental distress is likely even higher when vulnerability to disease is factored in.

People in mental distress can’t work at optimum levels. The loss of productivity as a result of two of the most common mental disorders, anxiety and depression, costs the global economy US$ 1 trillion each year. Affected employees quit, leading to replacement costs.

It should be clear by now that mental well-being will have to be a higher priority in plans for national and global recovery. It’s encouraging to see positive steps taken in the two stimulus packages, such as increased funds for mental health and substance abuse services, and the push to increase the use of telehealth for mental health services, such as expansions of coverage for such, will be helpful to some sufferers.

Going forward, some of the provisions in the Build Back Better Act (BBB), including investments in public health, child care, Medicaid expansions, and paid leave (a paltry 4 weeks, but better than nothing) will help to ease the strain on some – if they are enacted. The Act allocates $165 million to mental well-being, including $75 million for improving the National Suicide Prevention Line; $50 million for the mental health and substance abuse workforce in addressing the needs of communities of color; $25 million for peer-based programs to support substance abuse treatment; and $15 million for a program to educate school-aged youth about mental health issues. This is good, but it’s not nearly enough. And Thomas Ferguson, Director of Research at the Institute for New Economic Thinking, warns that rapid withdrawal of most Covid support spending, especially for health care, is likely to make things worse in the near term.

We need to think in terms of more transformative changes to address what is making us so unwell in the first place. Extreme inequalities and the wide range of pathologies generated by an economic model and political system that favors the interests of the wealthy and corporations are not yet being addressed. The priority of wealth for the few over health for the many is upside down. As our anxiety and depression increase, politicians can manipulate us into directing our frustration at various bogeymen, from immigrants to the unemployed. When we feel we have little power in our lives, many turn to guns for an illusory sense of control, creating more dangerous and tense conditions. When we feel disconnected, we may sink further into the unreal worlds of social media and gaming. The coming metaverse looks like a virtual world that could swallow us entirely. Mark Zuckerberg gushes that “creation, avatars, and digital objects are going to be central to how we express ourselves,” but others call it a “dystopian nightmare.” It will certainly have profound implications for mental health.

Mental distress is not just personal. It’s collective and political. An inadequate social safety produces mental illness. Income that can’t keep up with inflation causes it. So does a lack of child care and care for the elderly. And feeling like your kids will be worse off than you. Environmental damage and unregulated companies create mental illness. Misguided policies traumatize individuals, families, communities, and ultimately, our entire society.

The pandemic’s impact on mental health was predictable. In October 2020, the American Psychological Association released a report warning of a second pandemic, one of plummeting mental health, that would outlast the virus. What is also predictable is that recovery requires a comprehensive approach to support our mental well-being, individually and collectively.

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The Pandemic Triggered the Questioning of Current Governance Systems in Africa

In this interview for INET’s COVID-19 and Africa series, Camilla Toulmin and Folashadé Soulé discuss with Dr Ibrahim Mayaki, CEO of the African Union Development Agency (AUDA-NEPAD) about how the effectiveness of State responses to COVID-19 in Africa have been very visible, and are leading to far greater public scrutiny of the public sector and prospects for better governance.

Dr. Mayaki of the Republic of Niger has been the Chief Executive Officer of the African Union Development Agency (AUDA-NEPAD) since January 2009. A former Prime Minister of Niger, from 1997 to 2000, Dr. Mayaki set up the Analysis Centre for Public Policy in Senegal in 2000. He was a guest Professor at the University of Paris XI (2000-2004). He went on to serve as Executive Director of the Rural Hub, based in Dakar, Senegal, before taking up his current position.

In our discussions with African leaders and thinkers so far, many see the COVID pandemic as laying bare the weaknesses in current economic structures and relationships, and that Africa’s COVID recovery offers a starting point for doing things differently. Do you agree, and what lessons do you take from the COVID crisis for changes in Africa’s future economic direction? What has to change?

My first point is that such views have a certain truth. However, it also has to be put in perspective. It is true that, due to COVID-19, Africa has known its first economic recession in the last 25 years. It is recognised by multilateral institutions that generally, we had good economic growth rates and well-designed macro-economic policies in most cases. We were doing quite well and sustainability of debt in the pre-COVID period was fundamentally not an issue. However, there were some red flags for certain countries to be more careful, but overall, the situation was not alarming.

The second point is that the economic model we have been following is a consequence of structural adjustment programmes of the 1980s and 90s, and which was not sufficiently inclusive. We still are the most unequal region in the world. Inequality and youth unemployment are very important issues. The median age in Africa is 19 years and every year we have about 20 million young people coming onto the job market, but only 12 million jobs are created, and these are mainly in the informal sector. So, inclusivity was not the characteristic of that growth but nevertheless, we did grow. The COVID-19 pandemic accentuated existing fragilities, which you can see mostly in the social sectors – education, health, etc. - and we hadn’t invested sufficiently in primary health care. Evidently our capacity to respond to the pandemic was weakened by this limitation. We really need to take primary health care more seriously. Before COVID-19, we had 34-35 million children out of school and evidently this has increased with the pandemic. Pre-existing fragilities have been worsened during the COVID period.

The third point, to which we don’t give sufficient importance, which is happening as a consequence of the pandemic, is a questioning of the governance systems we have had till now. Why? The pandemic created a situation where governments face public opinion and public scrutiny directly, and the effectiveness of the solutions they are promoting can be gauged immediately. If you supplied sufficient masks or not, it was seen. If you had sufficient diagnostic tests, it could be seen. This immediate visibility of the efficiency of the State was immediately sensed by the population. It created a dynamic evolution where trust in public institutions has been reinforced in places where the response has been positive, or severely damaged because the response was not there. This is the most important facet from which will come a new economic model. Till now, governments and States had the monopoly of designing public policies. COVID-19 has led to communities becoming more pre-eminent, so we will likely see more co-creation of public policies. If it happens well, it will allow a reform of the economic model. If it doesn’t happen, we may see violent changes in certain parts of the continent.

The pandemic has shown the many advantages of coordinated collective action by African institutions, international institutions like the WHO, the World Bank and African governments, in addressing the health crisis early on and looking for financing. What are the key preliminary lessons that can be derived from this collective action and exercise of African agency for the future?

The first important point is that Africans could give concrete substance to the concept of regional integration. We have been promoting, discussing and reflecting on African integration through investment in physical infrastructure, but in this particular situation and in response to the pandemic, we could see an immediate reaction based on regional integration. You will remember that all the Ministers of Health met in Addis Ababa as soon as the pandemic started in February 2020. We had an organised and structured African Centre for Disease Control (CDC) and they drafted a roadmap which was immediately implemented in all countries, with the CDC outlining what needed to be done; for example, how to collect and report data et cetera. At the African Union level, we started putting in place mechanisms for the procurement of personal protective equipment, and diagnostics, and began thinking about a vaccine even before the COVAX system started. So, the content and purpose of regional integration in that domain was clearly understood by Africans and that has been one of the big lessons of the crisis. We realised we could use the same kind of approach in other domains beyond the immediate health issues. It also opened new reflections for African institutions. The World Bank, IMF, and EU have been helpful by accompanying us, without getting into the detailed discussions and decisions that were led by Africans.

The second lesson is this - most of the time when we design public policy, we bring our ideas and co-construct with donors and partners. However, this time we didn’t co-construct in this way but moved out on our own path which gave a real, tangible sense to what regional integration could do. At the same time, it opened new pathways for reflection in a very concrete manner. Access to vaccines was a real issue so we quickly started talking about vaccine manufacturing and that raised the question about broader manufacturing capacities on the continent. This concrete example has pushed us to reflect on the way we had been proceeding with regional integration. It is true that the African Continental Free Trade Agreement (AfCFTA), which was looked at rather theoretically by most Africans, even though it was a huge step forward, suddenly made sense. This is because it could enhance the creation of regional value chains, sharing lessons learned about manufacturing, especially from specific countries like South Africa which could produce and link to the other parts of the continent. Regional integration became even more real, once we started looking at the global scene. What we saw was vaccine nationalism, and we saw that global solidarity always starts with national solidarity. That meant that we as a continent really had to count on ourselves. If we look at the numbers of vaccinated people today, we see that in many countries there is a surplus of vaccines and people are talking about boosters. In contrast, in our countries, most people have not even had their first shot. So, there are economic questions about manufacturing, but there are also moral questions that need to be asked.

My other point is around vaccines and government behaviour. Some governments succeeded very quickly in getting vaccines accepted, while others couldn’t convince their populations to get vaccinated, despite having access to various media sources and much more information than in the past. It is therefore interesting to ask why some governments succeeded and others did not succeed in this domain. We have a list of countries where there is a surplus and people are not queuing to get the vaccine, and other places where there is a deficit and people are very keen to be vaccinated. Communities have played a big role here. Generally, the ordinary citizen believes much more in their community and on the views of local groups than what the state and governments are saying.

African countries will not be able to achieve their ambitions for economic growth and structural change without access to energy. COP26 has been an important moment to discuss climate and the constraints this places on Africa’s energy choices, but this is at a time when many countries are also discovering new reserves of oil and gas. How should fossil-fuel-rich countries navigate their future, given huge needs for energy on the one hand, and risks from stranded assets and climate change on the other?

Most western countries industrialised using fossil fuels and have benefitted enormously from them over the last 200 years, an era of explosive growth. Historically, Africa has been the least emitter of greenhouse gases, the principal drivers of climate change. This is nothing new. However, African countries have still made strong commitments to the Paris Agreement, in order to do their bit and contribute their part to the global goal of reducing warming to 1.5C above pre-industrial levels. There is, on the one hand, a commitment to an international accord, but there is also, on the other hand, the sense that as we industrialise, we shouldn’t make the same errors that others have made. We need “green industrialisation”. But the problem is no one in the history of economics has gone through a process of green industrialisation, there is no model. It will need the construction of a fundamentally innovative process, which requires transfer of technology. When African countries want to use gas to be able to industrialise quickly, there are some global institutions that are critical of this use of gas. But look at California, where their renewable energy supplies rely on gas for base-load power. Within our new economic model, we must think about what kind of transition we want to take. We should not be blinded by severe commitments because we still have 50% of our population who do not have access to energy. Our transition cannot be one that increases extreme poverty. It must not increase the burden on the most vulnerable. We should think of a green energy mix that can allow us to have a reasonable implementation of commitments and at the same time reduce extreme poverty, which has been rising during the pandemic. That’s the way we should think about energy. We cannot reject coal. If you reject coal in South Africa today, you will significantly reduce people’s access to energy, since coal remains central to the grid. Nonetheless, we should have a mix of energy sources, and think about the use of renewables in an intelligent manner, following a learning curve in coherence with reducing extreme poverty and achieving more inclusive growth. Otherwise, we will be doubly penalised because we fully implement commitments, which doesn’t make sense. We need incentives to move towards green industrialisation.

Some initiatives associating with the private sector were launched during the pandemic, such as the mVacciNation digital toolbox with Vodacom, Mezzanine and NEPAD. How do you assess the impact of such joint initiatives? Do you think the African private sector has been involved enough during the crisis? What lessons can be derived for the future?

There are some critical issues here. First, if you look at indicators of innovation and levels of expenditure in R&D in Africa, it is mostly driven by the private sector. Sometimes governments create an ecosystem that allows the private sector to be much more innovative. It happens in Kenya and some other countries. Innovation comes from the private sector, and if governments want to implement innovative solutions, they have to partner with the private sector. That’s the spirit with which we went into our partnership with Vodacom, MTN and now Orange for the mVacciNation solution so we could tap into the innovative capacity of the private sector through these partnerships. We found a very receptive private sector to engage with, not only the big ones like Vodacom but also a full range of start-ups that are emerging from countries across the continent and have enormous energy in terms of innovation. So, this is the context in which the governments are working. Some have pushed in a resolute manner in the creation of an ecosystem that can let these innovative institutions emerge. Some haven’t done it at all, but this hasn’t prevented these actors to rise up.

We realised that we could as a development agency of the African Union create very concrete partnerships with private entities. The receptivity of many governments has been very high because they realise they need to facilitate quicker, accelerated vaccination programmes, get the data on how vaccination is going, and then correct and adapt it based on feedback. So this is also one of the lessons which can be drawn from the pandemic. The behaviour of central governments has been shaken because they have discovered two things: they recognised their weaknesses and two, they have at the same time understood that there are many innovative ideas happening, structures, products and systems from which they can benefit. But in order to do so, they need to partner with business, which demands a fundamental mental shift. Most civil servants in African countries do not have a private sector culture, so their ability to link with them is somehow limited.

We need to create a space where there can be intercultural interaction between government and business, which allows this partnership with the private sector to flourish. We also have decided to promote this, and we have an initiative called 100,000 micro, small and medium-sized enterprises. We know most employment in Africa is in the informal sector - 80% of those employed in Africa are in the MSMEs, and the pandemic hit them very seriously. Our idea was to create a digital platform supported by financial institutions – we have a partnership with ECOBANK and accompany them in managing the financial and institutional stresses which the pandemic has brought. We created a Digital Academy and a digital platform to allow them better access to finance. Why a Digital Academy? To allow them to move from informal to more formal structures. This partnership with the private sector helps shape and change the behaviour of our states and governments culturally and structurally too. I like the work of Mariana Mazzucato very much, and her book The Entrepreneurial State, which describes an approach that is greatly needed in many of our countries.

As a former Prime Minister of your country Niger, and President of the Sahel and West Africa Club of OECD, we must ask you how you see the future of the region. Ten years on from the overthrow of President Gadhafi of Libya, terrorist and jihadist groups have embedded themselves very firmly in much of Mali, and parts of Niger and Burkina Faso. Neighbouring countries, like Cote d’Ivoire and Senegal, are increasingly concerned with spill-over. Military solutions don’t seem to be working. What political and economic measures could bring a better result?

The first thing the political elite in the Sahel must do is to recognise that they are the principal people responsible for this situation with the jihadists. That’s absolutely fundamental. If you think that jihadism is just an import from elsewhere, and the consequence of the extremely negative NATO intervention in Libya - while this does play a role, it is not the main cause of jihadism. If you say it’s the acceleration of the influence of particular religious figures, or Middle Eastern countries which have established radical religious education networks, if you believe this you are way off the mark. You are not facing reality. The reality is that our governments in the Sahel have completely neglected the territorial dimensions of planning and implementation of development. If you put two maps of the Sahel one on top of the other, you see those areas where the government has been active to improve health and education, and compare with those areas where jihadism is rife, you realise they have grown in those locations where the government has been absent. We need to recognise this as the elite.

Moreover, our response cannot be based exclusively on military intervention. The response must be the presence of the State in those zones that feel they have been completely abandoned. Evidently, the presence of the State currently demands a military presence, but the military by themselves are clearly not enough. The fundamental question for the Sahel is the re-establishment and re-founding of the State. There is a lot of writing and literature on this subject, but the re-foundation cannot be done by elites based in ministries in capital cities. Let me give you an example. When I was Prime Minister, we launched a survey before an exercise in national planning to see what the population really wanted. We asked the population of Niger about priorities for health, water, roads, education, health, and so on. Astonishingly, what came to the top of the list as the priority across the country, was not water, health or education, it was justice. It was a system of justice that was equitable, accessible, and not corrupt. They needed this to live their lives with dignity. In this context, you see that a military solution cannot provide all the answers. Clearly, if you have people with Kalashnikovs, you need people on the other side who also have Kalashnikovs. Given the evolution of the conflict, there are people who are now drawing a livelihood from these criminal activities, which have nothing to do with jihadism. It is easy to recruit young people at US$2 to $3 per day who become kings and lords in their own right when they hold a Kalashnikov.

We need to rethink the presence of the State. The army cannot sort out the problem. What we need is the State to be present in a decentralised, locally rooted form. This demands the presence of public services, and engagement with local communities in deciding what is to be done. The State has to be decentralised. It is a new way of thinking. If we don’t go in this direction, we will follow the route of Afghanistan – many billions spent and nothing to show for it. States must be present and make difficult but necessary choices in budget expenses. They should no longer prioritize the functioning of ministries that have no capacity to deliver anything in practice. We must help to construct local communities themselves who can then become a rampart and defence against the jihadists. Unfortunately, this essential shift in approach is not well enough recognised and understood. Instead, we see the multiplication of military actions and the corresponding spread of jihadist and terrorist groups. Too many international actors also participate in the illusion that this is the way to make progress.

Changing course won’t be easy. It will be slow and long, but we must follow the right road. We must renew the State, decentralise our budgets, and reinforce community-based actions so that people can judge for themselves that they are better off under the aegis of the State than jihadist groups. This should be our aim for the medium and longer-term. At the OECD Sahel and West Africa Club, we are trying to create space where people from a wide variety of backgrounds can meet, in what we call the Concertations sahéliennes to ask the real questions and co-construct policies and solutions with actors on the ground.

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