romer consume

A Solution if We Act

Many simulations have been run in recent weeks using standard epidemiological models and the emerging consensus, as I read it, is that test, trace and isolate can be very effective. Paul Romer’s simulations are here and he notes that a COVID-19 test does not have to be especially accurate for the test, trace and isolate strategy to work. Indeed, you don’t even need to trace, if you test enough people. Linnarsson and Taipale agree writing:

We propose an additional intervention that would contribute to the control of the COVID-19 pandemic and facilitate reopening of society, based on: (1) testing every individual (2) repeatedly, and (3) self-quarantine of infected individuals. By identification and isolation of the majority of infectious individuals, including the estimated 86% who are asymptomatic or undocumented, the reproduction number R0 of SARS-CoV-2 would be reduced well below 1.0, and the epidemic would collapse….Unlike sampling-based tests, population-scale testing does not need to be very accurate: false negative rates up to 15% could be tolerated if 80% comply with testing, and false positives can be almost arbitrarily high when a high fraction of the population is already effectively quarantined.

Similarly, Berger, Herkenhoff and Mongey conclude:

Testing at a higher rate in conjunction with targeted quarantine policies can (i) dampen the economic impact of the coronavirus and (ii) reduce peak symptomatic infections—relevant for hospital capacity constraints.

This is exactly the strategy I discussed in, Mass Testing to Fix the Labor Market, where I wrote “Testing, isolating and tracing will [get the economy back on track] much faster and cheaper than dealing with a prolonged recession.”

I want to expand on the costs because it’s clear that a mass testing regime will require millions of tests. Is that cost-effective? Yes. The two types of tests we have are a RT-PCR test for COVID-19 (there are several versions) which costs something like $100 but could probably be much less as we ramp up. (We can cut costs and greatly increase throughput, for example, by pooled testing.) The second test, a blood test for antibodies, is, as best as I can tell, in the realm of $10. Both types are useful. I am going to be very conservative and say that we use a combination of tests at $75 per test. To test the entire US population, therefore, it would cost on the order of $25 billion dollars. Coincidentally, $25 billion is about what we spent on the Manhattan Project in current dollars. Thus, I am proposing a Manhattan Project for testing.

Twenty five billion dollars to test the entire US population. Now suppose the pandemic knocks 5% off US GDP over the next year or two, that’s roughly a trillion dollars lost. Or to put it differently, $3 billion a day. Thus, if mass testing reduces the number of days we are away from work by 9, it pays for itself. Let’s again be conservative and say that testing will also require a $25 billion fixed cost to build the enzyme factories and so forth, for a total cost of $50 billion. 18 days and it’s worth it.

We would also save medical costs by suppressing the virus. (The focus on ventilators has perhaps been overdone given that ventilators in no way guarantee survival–better to stop people needing ventilators.) We would also save lives. Thus, a program of mass testing seems like a no-brainer. Yet, there is no direct funding for anything like this in the $2.2 trillion CARES bill which is stunning. Here’s Austan Goolsbee:

We literally put in a tax break for retailers and restaurants to expand their capacity but not money for production of more COVID tests.

Here’s Paul Romer:

We have an economic crisis because it is not safe for people to work or consume. Our Congress just passed a bill that will spend $2.2 trillion to deal with the crisis. Can anyone identify any spending in this bill devoted to making it safe for people to work and consume?

As I wrote:

We need to attack the virus with test, isolate, and trace. More money for counter-attack!

Objections will no doubt be raised. Isn’t there a shortage of reagents? Do we have the personnel to test everyone? To which I answer, $50 billion solves a lot of problems. We won’t know how many till we try. We don’t need all of final testing capacity at once and even poor tests like simple temperature checks will help but we need to move rapidly in the right direction. The main constraint is time. Social distancing and lock downs are starting to have an effect. I expect the emergency will peak in mid-April and then things will slowly start to get improve. Even when the worst of the emergency passes, however, we will still need lots of testing. This virus will be with us and the world for some time. Let’s get on it.

What ended the Great Depression?

There has been recent circulation of the older view that it is World War II, as a kind of giant public works project, which ended the Great Depression.  This claim is not consistent with our best knowledge of the subject.  To survey the cutting edge of the literature briefly:

Christina Romer writes:

This paper examines the role of aggregate demand stimulus in ending the
Great Depression. A simple calculation indicates that nearly all of the
observed recovery of the U.S. economy prior to 1942 was due to monetary
expansion. Huge gold inflows in the mid- and late-1930s swelled the
U.S. money stock and appear to have stimulated the economy by lowering
real interest rates and encouraging investment spending and purchases
of durable goods. The finding that monetary developments were crucial
to the recovery implies that self-correction played little role in the
growth of real output between 1933 and 1942.

Here is another interesting paper on the topic; it focuses on productivity issues and mean reversion.  Here is from a paper by Cullen and Fishback:

We examine whether local economies that were the centers of federal
spending on military mobilization experienced more rapid growth in
consumer economic activity than other areas.  We have combined
information from a wide variety of sources into a data set that allows
us to estimate a reduced-form relationship between retail sales per
capita growth (1939-1948, 1939-1954, 1939-1958) and federal war
spending per capita from 1940 through 1945.  The results show that the
World War II spending had virtually no effect on the growth rates in
consumption that we examined.

Further debunking of the WWII idea can be found in this paper by Robert Higgs, who stresses the difference between standard gdp measures and actual economic welfare.

I also find the experience of the Latin American economies convincing.  The economic recovery of Argentina, for instance, clearly was due to monetary policy, not fiscal policy, which remained tight throughout the period of recovery.  Mexico recovered from the Great Depression relatively quickly and this history also does not fit the fiscal policy view.  Later on, most of the Latin economies experienced commodity booms because of wartime demands and again this was not fiscal policy and of course they were not fighting the war themselves.  The two countries where fiscal policy played a significant role in recovery are, not surprisingly, Germany and Japan and here I am referring to their prewar spending.

Can the earth support 9 billion wealthy people?

As China and India continue to grow, we must ask whether the earth could support several billion more people at European levels of wealth. Michael Lind says yes:

…there seems to be no insuperable physical or ecological reason why 9bn people should not achieve something like the lifestyle of today’s rich, with technology only slightly more advanced than that which we now possess.

Here is part of the argument:

As machines get ever cheaper, more people will be able to afford more of them. Today the combined mass of all machines, at more than a gigaton (Gt), exceeds the combined mass of human beings, about 1 megaton. The total amount of carbon, 5Gt, required to power and construct machines and electric utilities greatly exceeds the 1.3Gt global consumption of carbon by human beings, mostly in the form of food. As affluence grows, the amount of energy and raw materials “consumed” by machinery will escalate even more rapidly than human consumption. But this need not mean an end to the machine age. If manufacturing processes were to imitate the recycling that takes place in the biosphere, then most machine materials might be recycled to make new machines, rather than thrown away. And long before all fossil fuels were exhausted, their rising prices would compel industrial society not only to become more energy efficient but also to find alternative energy sources sufficient for the demands of an advanced technological civilisation – nuclear fission, nuclear fusion, solar energy, chemical photosynthesis, geothermal, biomass or some yet unknown source of energy.

Here is more:

…agriculture, including logging, accounts for about 21m square miles, or ten times as much land as that occupied by urban areas and reservoirs.

Cutting urban land use by half would free only 1m square miles or 2 per cent of the ice-free land surface, while cutting agricultural land use by half would free ten times as much land – 10.6m square miles, or 21 per cent of the earth’s non-glaciated surface.

In Lind’s view, producing enough meat for nine billion wealthy people is likely to be the biggest problem. In my view, the biggest problems are ones of transition, rather than the end-state. China could get much richer before it moves close to environmental “best practices”; right now per capita income is just approaching that of Guatemala.

A fun tidbit:

Lind quotes Paul Romer: “[if America continues growing] in 50 years we can get extra income per person equal to what in 1984 it had taken us all of human history to achieve.”

Addendum: Here is the working link.