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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

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The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

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In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt

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A century ago, the Spanish flu killed 100 million people. Is a new pandemic on the way?

Our leaders need to act like the outbreak has already started – because for all we know it may have.

It is hard not to have a sneaking envy of the virus. As complex creatures, we are distracted by myriad demands on our attention; we will never know the dead-eyed focus of the viral world. It is akin to the psychopath: a cold, purposeful drive to achieve its own agenda, coupled with the skills and resourcefulness to succeed. In a world threatened by nuclear war and devastating climate change, it may actually be the virus that we should fear most.

This is the centenary year of the Spanish flu outbreak, when a virus killed between 50 and 100 million people in a matter of months. The devastation was worldwide; it is only known as Spanish flu because Spain, neutral in the ongoing hostilities of World War One, was the only country without press restrictions. Across Europe, people assumed their own outbreaks originated in the only place reporting on the disaster.

A number of authors have lined up with a kind of grim celebration of influenza’s annus mirabilis. As well as chronicling the fatal reach of this organism, they all offer a warning about a follow-up pandemic that is overdue – and for which, it seems, we are largely unprepared. “Somewhere out there a dangerous virus is boiling up in the bloodstream of a bird, bat, monkey, or pig, preparing to jump to a human being,” says Jonathan Quick in The End of Epidemics. “It has the potential to wipe out millions of us, including my family and yours, over a matter of weeks or months.”

If that seems a little shlocky, you should know that Quick is no quack. He is a former director at the WHO, the current chair of the Global Health Council and a faculty member at Harvard Medical School. The book’s blurb includes endorsements from the director of the London School of Hygiene and Tropical Medicine, the president of Médicins Sans Frontières, and the president of the Rockefeller Foundation.

The numbers Quick serves up are stupefying. Bill Gates, for instance, has said it is more likely than not that he will live to see a viral outbreak kill over 10 million people in a year. In Gates’s nightmare scenario, outlined by computer simulations created with disease-modelling experts, 33 million people die within 200 days of the first human infection. The potential for exponential spread means a death toll of 300 million is possible in the first year. “We would be in a world where scrappy, ravaged survivors struggle for life in a zombie-movie wasteland,” Quick tells us in his informed, cogent and – honestly – frightening book.

If you can’t imagine what that is like, you could try asking the Yupik people of Alaska, who were devastated by the 1918 Spanish flu. You might not get an answer, however, because they remain traumatised, and have made a pact not to speak about the pandemic that shattered their ancient culture.  (A pandemic is a disease that spreads across continents; an epidemic is usually contained within a country or continent.)They aren’t the only long-term sufferers. The Vanuatu archipelago suffered 90 per cent mortality and 20 of its local languages went extinct. Those in the womb in 1918 were also affected. A baby born in 1919 “was less likely to graduate and earn a reasonable wage, and more likely to go to prison, claim disability benefit, and suffer from heart disease,” reports Laura Spinney in Pale Rider.

Such arresting snippets of the flu’s legacy abound in Spinney’s thoughtful, coherent take on the 1918 outbreak. The book’s subtitle suggests that the Spanish flu changed the world, and Spinney certainly backs this up. Societies broke down and had to be rebuilt; recovering populations were reinvigorated by the simple calculus of Darwin’s “survival of the fittest”; public health provisions were first imagined and then brought into reality; artists and writers responded to a new global mood by establishing new movements.

Not every outcome could be spun as a positive. Scientists, for instance, were humiliated by their inability to halt the flu’s progress, creating an opportunity for quack medicines to arise and establish themselves. Some of our greatest writers lived through the trauma, but could never bring themselves to discuss it in their stories. Virginia Woolf noted that it was “strange indeed that illness has not taken its place with love and battle and jealousy among the prime themes of literature”.

Spinney’s background as a science writer shines through: her handling of the workings of the flu is detailed and deft. She brings both the influenza A virus (the only type responsible for pandemics) and the human immune system to life, laying out the biochemical processes that kill and cure with clarity and care. She exposes the chilling roots of often-used but seldom-explained viral names such as “H1N1” (Spanish flu) or “H5N1” (bird flu). H is for haemagglutinin, the lollipop-shaped appendage that allows a virus to break into a cell and take over the means of production. N is for neuraminidase, the “glass-cutter” structure that allows replicated viruses to break out again and unleash hell upon the host. So far, we know of 18 H’s and 11 N’s and they all have ever-evolving sub-types that make a long-lasting general vaccine against the flu an elusive dream: “Every flu pandemic of the 20th century was triggered by the emergence of a new H in influenza A,” says Spinney.

For all her technical expertise, Spinney has a light touch and a keen eye for the comic. She relates how a ferret sneezing in the face of a British researcher in 1933 exposed influenza’s ability to travel between biological species, for instance. She also excels with the bigger picture, detailing the century of scientific detective work that has allowed us to piece together the genetic elements of the 1918 virus and gain insights into its creation. It seems to have jumped to humans on a farm in Kansas, via domestic and wild birds indigenous to North America. There may also have been some ingredients from pigs, too, but that’s not settled.

Spinney’s afterword questions whether our collective memory for such events ever reflects the truth of the moment. “When the story of the Spanish flu was told, it was told by those who got off most lightly: the white and well off,” she tells us. “With very few exceptions, the ones who bore the brunt of it, those living in ghettoes or at the rim, have yet to tell their tale. Some, such as the minorities whose languages died with them, never will.”

That said, Catharine Arnold has done a remarkable job of relating the tales of a diverse set of sufferers, crafting an arresting and intimate narrative of the 1918 pandemic. She pulls the accounts of hundreds of victims into a gripping tale that swoops down into the grisly detail, then soars up to give a broad view over the landscape of this calamitous moment in human history.

Arnold’s remembrances come from the unknown and from celebrities. A Margery Porter from south London emphasised that “we just couldn’t stand up. Your legs actually gave way, I can’t exaggerate that too much.” John Steinbeck described the experience of infection as almost spiritual. “I went down and down,” he said, “until the wingtips of angels brushed my eyes.”

The reality was, inevitably, less poetic. A local surgeon removed one of Steinbeck’s ribs so that he could gain access to the author’s infected lung. Most victims’ bodies turned blue-black as they died. Healthcare workers reported appalling scenes, with delirious patients suffering horrific nosebleeds. “Sometimes the blood would just shoot across the room,” a navy nurse recalled. If their lungs punctured, the patients’ bodies would fill with air. “You would feel somebody and he would be bubbles… When their lungs collapsed, air was trapped beneath their skin. As we rolled the dead in winding sheets, their bodies crackled – an awful crackling noise with sounded like Rice Krispies when you pour milk over them.”

The killer in 1918 was often not the flu virus itself but the “cytokine storm” of an immune system overreacting to the infection. Strong, fit young people, with their efficient immune systems, were thus particularly at risk, their bodies effectively shutting themselves down. Then there were the ravages of opportunistic bacteria that would lodge in the devastated tissue, causing pneumonia and other fatal complications. Arnold paints a grim but vivid picture of exhausted gravediggers and opportunistic funeral directors cannily upping their prices. The morgues were overflowing, and morticians worked day and night. In the end, mass graves were the only answer for the poverty-stricken workers attempting to bury their loved ones before they, too, succumbed.

No one was spared from grief or suffering at the hands of the “Spanish Lady”, as the flu came to be known. Louis Brownlow, the city commissioner for Washington DC, reported nursing his stricken wife while answering telephone calls from desperate citizens. One woman called to say that of the three girls she shared a room with, two had died, and the third was on her way out. Brownlow sent a police officer to the house. A few hours later, the sergeant reported back from the scene: “Four girls dead.”

Some of the other stories Arnold has unearthed are equally heartbreaking. A Brooklyn boy called Michael Wind wrote of the moment his mother died after less than a day of being ill. He and his five siblings were at her bedside, as was their father, “head in hands, sobbing bitterly”. The following morning, knowing that he was soon to die too, their father took the three youngest children to the orphanage.

Arnold writes beautifully, and starkly, of the tragedy that unfolded in the autumn months of 1918: “the Spanish Lady played out her death march, killing without compunction. She did not discriminate between statesmen, painters, soldiers, poets, writers or brides.” She chronicles the Lady’s path from the United States and Canada through Europe, Africa and Asia, culminating in New Zealand’s “Black November”. The book is utterly absorbing. But how do we respond to its horrors and tragedies? What are we to do with our collective memories of such visceral, world-shattering events? Learn from them – and fast, argues Jonathan Quick.

Unlike Arnold and Spinney, Quick is not content to be a chronicler or a bystander. He is, he says, both terrified at the looming disaster and furious at the lack of high-level reaction to its threat. He is determined to create a movement that will instigate change, mimicking the way activists forced change from governments paralysed by, and pharmaceutical companies profiteering from, the Aids pandemic. Quick has channelled his fury: The End of Epidemics is, at heart, a call to arms against influenza, Ebola, Zika and the many other threats before us.

 

So what are we to do? First, our leaders need to act like the outbreak has already started – because for all we know it may have. We must strengthen our public health systems, and create robust agencies and NGOs ready to monitor and deal with the threat. We must educate citizens and implement surveillance, prevention and response mechanisms, while fighting misinformation and scaremongering. Governments must step up (and fund) research.

We can’t develop a vaccine until the threat is manifest, but we can prepare technology for fast large-scale production. We can also invest in methods of early diagnoses and virus identification. Invest $1 per person per year for 20 years and the threat will be largely neutralised, Quick suggests. Finally – and most importantly – there is an urgent need to create grass-roots support for these measures: citizen groups and other organisations that will hold their leaders to account and prevent death on a scale that no one alive has ever experienced. Is this achievable? Traumatised readers of Quick’s book will be left hoping that it is.

For all the advances of the last century, there are many unknowns. Scientists don’t know, for instance, which microbe will bring the next pandemic, where it will come from, or whether it will be transmitted through the air, by touch, through body fluids or through a combination of routes.

While there is considerable attention focused on communities in West Africa, East Asia or South America as the most likely source of the next outbreak, it’s worth remembering that most scientists now believe the 1918 influenza outbreak began on a farm in Kansas. Quick suggests the
next pandemic might have a similar geographical origin, thanks to the industrialised livestock facilities beloved by American food giants.

Viruses naturally mutate and evolve rapidly, taking up stray bits of genetic material wherever they can be found. But it’s the various flu strains that live inside animals that bring sleepless nights to those in the know. They can exist inside a pig, bat or chicken without provoking symptoms, but prove devastating if (when) they make the jump to humans. As more and more humans live in close proximity to domesticated animals, encroach on the territories inhabited by wild animals, and grow their food on unprecedented scales, our chance of an uncontrollable epidemic increase.

The meat factories known as “Concentrated Animal Feeding Operations” (CAFOs) are particularly problematic. They provide cheap meat, poultry, dairy and
eggs from animals kept in what Quick terms “concentration camp conditions”, simultaneously creating the perfect breeding ground for new and dangerous pathogens. Pigs, he points out, eat almost everything, so their guts are the perfect mixing bowls for a new and deadly influenza strain. “CAFOs were the birthplace of swine flu, and they could very likely be the birthplace of the next killer pandemic,” Quick warns.

There are other possibilities, though – bioterror, for instance. Bill Gates is among
those who have warned that terrorist groups are looking into the possibility of releasing the smallpox virus in a crowded market, or on a plane. Then there is the possibility of a scientist’s mistake. In 1978 a woman died after smallpox was released from a laboratory at the University of Birmingham, UK. In 2004 two Chinese researchers accidentally infected themselves with the SARS virus and spread it to seven other people, one of whom died. In 2014, a cardboard box full of forgotten vials of smallpox was found in a National Institutes of Health facility in Bethesda, Maryland. A year later, the US military accidentally shipped live anthrax spores to labs in the US and a military base in South Korea. It’s not impossible that human error could strike again – with catastrophic results.

Such possibilities lie behind our discomfort with what scientists have to do to further our understanding. Researchers in Rotterdam, for instance, wanted to know whether the deadly H5N1 bird flu could develop a capacity for airborne transmission like the common cold virus. Having failed to modify its genetics to achieve this, they began to pass an infection between ferrets, the animals whose response to the virus most mimics that of humans. Ten ferrets later, healthy animals were catching the virus from the cage next door. Knowing how easily H5N1 can become airborne is exactly the kind of discovery that will bolster our vigilance. It is, after all, many times more fatal than the H1N1 strain that caused the Spanish flu. At the same time, there was a huge – but understandable –
furore over whether the research should
be published, and thus be available to potential bioterrorists.

We might have to live with such dilemmas, because it is important to be ready to challenge the killer virus when it arrives. As we have seen with Aids and the common cold, developing vaccines takes time, and there is no guarantee of success, even with a concerted research effort.

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Will we be ready? Quick suggests that our best chance lies in the world’s business leaders realising what’s at stake: economies would be devastated by the next pandemic. In 1918, Arnold points out, the British government was telling citizens it was their patriotic duty to “carry on” and make sure the wheels of industry kept turning. The result was a perfect environment for mass infection. Political leaders made similar mistakes across the Atlantic: on 12 October President Wilson led a gathering of 25,000 New Yorkers down the “Avenue of the Allies”. “That same week,” Arnold reports, “2,100 New Yorkers died of influenza.”

It’s worth noting that Spanish flu did not abate because we outsmarted it. The pandemic ended because the virus ran out of people it could infect. Of those who didn’t die, some survived through a chance natural immunity, and some were lucky enough to have maintained a physical separation from those carrying the invisible threat. The virus simply failed to kill the rest, enabling their bodies to develop the antibodies required to repel a further attack. A generation or two later, when the antibody-equipped immune systems were in the grave, and humans were immunologically vulnerable (and complacent) once again, H1N1 virus re-emerged, causing the 2009 swine flu outbreak.

As these books make clear, this is a history that could repeat all too easily in our time. Of the three, Pale Rider is perhaps the most satisfying. It has greater complexity and nuance than Arnold’s collection of harrowing tales, fascinating though they are. Spinney’s analysis is more circumspect and thus less paralysing than Quick’s masterful exposition of our precarious situation. But the truth is we need all these perspectives, and probably more, if we are to avoid sleepwalking into the next pandemic. Unlike our nemesis, humans lack focus – and it could be our undoing. 

Michael Brooks’s most recent book is “The Quantum Astrologer’s Handbook” (Scribe)

Pale Rider: The Spanish Flu of 1918 and How it Changed the World
Laura Spinney
Vintage, 352pp, £25

Pandemic 1918: The Story of the Deadliest Influenza in History
Catharine Arnold
Michael O’Mara, 368pp, £20

The End of Epidemics
Jonathan D Quick with Bronwyn Fryer
Scribe, 288pp, £14.99

Michael Brooks holds a PhD in quantum physics. He writes a weekly science column for the New Statesman, and his most recent book is At the Edge of Uncertainty: 11 Discoveries Taking Science by Surprise.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt