I'm gonna go out on a limb and make a guess. Please note that I am not a vet or otherwise professionally trained in the handling and care of pets, so I might be wrong.
This sounds a lot like OCD.
Your dog is anxious and nervous, therefore easily stressed. Stress is the natural reaction of a creature to threats like predators or natural hazards and activates a fight-or-flight response in the body. If the surplus energy released by the stress isn't used up in physical activity like fighting or running or if the constant stress constantly releases energy, the creature develops alternate behaviors like excessive washing of hands (in humans) or excessive licking and biting (in dogs). Those are just examples, the range of OCD behavior is enormous.
What your dog probably needs most is:
- Strict order
- A better alternate behavior
- Relief from the acute skin rash
Our modern world is extremely complicated, especially for a dog who cannot comprehend it. Structuring and ordering his daily life gives him security and assurance. This starts with simple things like timing. You should feed him every day at the same time and always walk the same route with him.
Another extremely important thing is to do obedience training with him. Just 5 minutes each day is enough. What seems tedious to us can actually be fun and reassuring to him because he knows exactly that if he does the right thing on command he'll get a reward. It also shows him that you understand this complicated world enough to give him commands, so he can look to you for guidance if he doesn't comprehend something that's stressing him.
You should start teaching him alternate behavior to his licking. It could be something like playing fetch, shredding a stuffed toy or aborting a food bag or something else that's fun for him. It should always involve some physical activity to burn the excessive energy released by his bodies stress reaction. We have collected some ideas in this post.
Now whenever you notice him licking and biting excessively you initiate the alternate behavior to distract him from his compulsion. It's your responsibility to watch his actions and engage him in play whenever he relapses into his compulsion. It will probably take several weeks to months until his compulsive episodes are notably reduced.
Such red skin is usually dried out and itchy and constantly drawing his attention back to his compulsion. You should regularly apply a food-safe oil to any red and hairless spots to moisturize them. You can also feed him one raw egg twice a week as a natural food supplement that helps the hair regrow.
Please be aware that this alone will only treat the symptom, not the underlying cause.
OCD is an actual mental illness and hard to cure, especially for an untrained person. Please research the issue and different approaches and treatments. Maybe you realize that the symptoms don't fit your dog at all and it has to be something else.
Some helpful references are: