Month: March 2020
From Arnold Kling, excerpt:
In the long run, I don’t expect normal either. Pre-crisis, our patterns of specialization and trade were optimized for efficiency at the expense of fragility. Expect supply chains in the future to have a lot more redundancy and to be less driven by cost minimization. The Chief Risk Officer’s approval will now be needed before the CEO will approve a major new supply contract.
We will develop a lot of what you might call social-distancing capital, including the ability to make use of remote meetings and distance learning. Last night, some folks attempted a virtual session of dancing. Most of the time was spent getting a bunch of old people up to speed on using Zoom. Next time, we might be able to dance. People will get accustomed to new forms of entertaintment.
Many sectors were way too levered–households with too little savings and too much debt, businesses with too little cash reserves and too much debt, and governments with too much debt and unfunded liabilities. Behavior is likely to change going forward. I expect to see a major reduction in financial intermediation. Financial intermediaries, such as banks, are in the business of issuing riskless, short-term liabilities backed by risky, long-term assets. This allows the nonfinancial sector to do the opposite. I don’t think that we will be able to sustain as much financial intermediation as we did before, and the result will have to be individuals and firms undertaking fewer risky, long-term projects.
The challenges for other countries will be much more difficult. De-globalization is taking place, and that will produce losers and bigger losers (it won’t produce many winners). Become familiar with Peter Zeihan’s way of viewing the world. Don’t take the international order for granted. Zeihan emphasizes that the U.S. is one of the few countries that produces enough food and energy for itself. China, on the other hand, needs to import both. That would lead one to predict that China will be in the “bigger loser” category.
And NASDAQ is in the green today!
Here is a relevant tweet thread started by Moritz Kuhn, many interesting comments. For instance Moritz writes: “What is more, it may provide a warning sign for those countries where the elderly and the young live close together, how important it is to contain the virus there early on. These countries are within Europe in particular such as Serbia, Poland Bulgaria, Croatia, or Slovenia.”
Also on Italy, Dan Klein writes to me:
- They kiss, hug more, converse longer.
- Young people live with their parents, family more.
- They smoke somewhat more (packs smoked per capita twice that of Sweden). Smoking weakens the lungs. But also we smokers finger and thumb our cigs and then put them into our mouth. Wash hands first!
- For these and whatever adventitious reasons, Italy was early to the problem, and it spread before people learned to adjust behavior.
We will learn more soon.
What is the scenario for going back to work? Testing and tracing. In fact, two types of tests. First, the test for COVID-19 which says if an individual is infected. After deadly delays caused by the FDA and CDC we unleashed the private labs and the states and are now ramping up the number of tests. As of today, we have run about 80 thousand but we need many more and with every positive test we need to isolate and contact trace. Test, isolate, and trace. Health care workers need daily testing. We don’t need to test everyone but we do need to test enough to get the number of new cases down to a level that people feel comfortable returning to work, to shop, to eat. In China yesterday there were no new local infections. We can get there.
The second test is for COVID-19 antibodies which indicate that the person was infected and recovered and may thus have some immunity. An antibody test was just announced. The test looks only at one antibody and this doesn’t guarantee immunity. Nevertheless, people who have been infected and recovered are valuable. The blood of recovered individuals may be useful as a treatment. (N.B. The NIH Vaccine Research Center is looking for otherwise healthy recovered COVID-19 patients who are willing to donate their blood for study. Please contact.) In addition, recovered individuals have a kind of superpower and would be highly desirable workers. Recovered individuals are better able to help the sick at lower risk, for example (David Balan made this point in an unpublished piece). Moreover, a non-infected person would be very willing to work with a recovered person so the effect on labor supply is amplified.
As with the financial crisis, there are some bad risks out there but no one knows where and so every borrower/worker is suspect and no one is lending/working. With more information we can separate out the bad risks and get the majority of people working again.
To be clear, things are going to get worse but there is a reasonable scenario for recovery. Social distancing, including all the shutdowns, will start to show an effect in a week or two. With luck and effort we may stop SFO, Seattle and NYC from going critical and we can then start to bend the curve nationally. If we greatly expand testing, it’s possible that we can get people back to work in one or two months. That will not end the crisis–a fall rebound is possible and we can expect outbreaks. But if we test quickly and widely at the first sign of an outbreak, outbreaks can be contained. A vaccine is also possible and perhaps faster than most people think. Treatments will also improve. Testing and tracing buys us time.
We can get the economy back on track. Testing, isolating and tracing will do it much faster and cheaper than dealing with a prolonged recession.
Under the America COMPETES Reauthorization Act of 2010, US agencies have the authority and significant funds (up to $50 million, which may be pooled) to create prizes. Section 24 permits any agency head to “carry out a program to award prizes competitively to stimulate innovation that has the potential to advance the mission of the respective agency.” The European Commission has also used prizes to combat antimicrobial resistance and to pursue other goals. Thus, there is significant authority and knowledge in place to implement prizes quickly. A billion-dollar prize or series of prizes is also well within the capabilities of a number of individuals and private organizations throughout the world.
I suggest some best practices and write about implementation issues. This point is somewhat under recognized:
A prize need not be lump sum but could be tied to usage. For example, a $1 billion prize for a vaccine plus a $5 payment for every person vaccinated would tie innovation incentives even more closely to social incentives. The Advance Market Commitment for vaccines is a successful example. A prize tied to usage combines the best aspects of a prize and a patent. The prize helps to align incentives with public good production; the usage (patent-like) aspect helps to align incentives with market demand. A related advantage of tying the prize to usage is that less needs to be done up front in specifying the characteristics of the solution. For example, in the Advance Market Commitment, the vaccine had to satisfy certain properties, such as being shelf stable and administrable in developing countries. These details can be key in deciding what satisfies the prize conditions but are less necessary to the extent that the prize is tied to usage.
Here are the Emergent Venture Prizes to Combat COVID-19.
2. “A junior high school girl has handcrafted 612 masks from materials bought with some 80,000 yen of her own savings to help out the elderly, orphans and others facing shortages due to the spread of the novel coronavirus.”
3. Which states are prepared for the drone revolution? A Mercatus report card.
6. The 1957 flu.
7. Todd and Victoria Buchholz: “Send every U.S. household a $500 prepaid debit card to spend later this year in the ‘experience economy.’” (WSJ)
11. jstor now open to the public, better than the NBA Finals.
12. U.S. Digital Response to Covid-19: “We are seeing that COVID-19 is already overwhelming the data and digital capacities of government in a myriad of ways, and we are calling on technology, data, and government professionals to step up and help.”
14. The impact of coronavirus on foot traffic, from SafeGraph.
We recorded this two days ago on the spur of the moment, the discussion is still current, here is the transcript and audio, here is the CWT summary:
Tyler and Russ Roberts joined forces for a special livestreamed conversation on COVID-19, including how both are adjusting to social isolation, private versus public responses to the pandemic, the challenge of reforming scrambled organization capital, the implications for Trump’s reelection, appropriate fiscal and monetary responses, bailouts, innovation prizes, and more.
Russ is more optimistic than I am, here is one excerpt on the economic side:
COWEN: Well, two to four weeks [of shutdown], those are easy cases. If you think of many service sectors as having to shut down say until August, which is quite a possible scenario in some cases even later. That to me is greatly concerning and it may vary across sectors. So if you think about the NBA, whenever the NBA is ready to play games again, I mean the players will show up the next day and there’ll be ready, right? That will come back very quickly. But if you think of small businesses, say restaurants, the big chains aside, they’re typically thinly capitalized.
Let’s say a significant portion of those are gone forever. And then when things are somewhat normal again, how does the economy re-scramble and re-constitute the organizational capital that was in those ongoing enterprises? That to me is a hugely difficult problem and whatever you think the government should or should not do, just spending a lot on fiscal stimulus will not ease that problem. That’s the actual destruction going on is the relationships, the organizational capital, the intangibles that will decay. Not over two weeks, probably not over four weeks but over four or five months or longer. Then I think that’s a matter really of great concern…
But even in China where the number of new cases is really in most parts of the country, genuinely very low, they are not returning with live sporting events. Keep in mind we will have a pool of never infected people, which will be fairly large in absolute numbers and what risks we will be willing to take. Insurance companies would allow, our liability system and corporate lawyers would be willing to allow. When you think through all of that stickiness, I think we’re really not so close to resuming many of these shutdown activities.
There is much more at the link, we start off on the personal side and then move into the larger issues.
The EU has called on streaming services such as Netflix and YouTube to limit their services in order to prevent the continent’s broadband networks from crashing as tens of millions of people start working from home.
Until now, telecoms companies have been bullish that internet infrastructure can withstand the drastic change in online behaviour brought about by the coronavirus outbreak.
But on Wednesday evening, Thierry Breton, one of the European commissioners in charge of digital policy, said streaming platforms and telecoms companies had a “joint responsibility to take steps to ensure the smooth functioning of the internet” during the crisis.
Here is the full FT piece, possibly not gated these days?
In order to support those affected by the virus, Nicaragua’s government has organized massive public rallies across the country under the slogan “Love Walk in the Time of Covid-19,” resembling the title of the novel by Gabriel Garcia Marquez, “Love in the Time of Cholera.”
Here is the link, via William V.
I’ve been working on an N95 mask production project with a team for about a week now. We just got off the phone with NIOSH. They told us that approval for a new mask production facility in the US will take at minimum 45 days, but more likely 90. A lot of people are gonna die.
That is from Matt Parlmer. How can we let this persist?
They solved for the equilibrium:
Despite assurances from Vice President Mike Pence that all Grand Princess cruise ship passengers quarantined at Travis Air Force Base would be tested for COVID-19, The Chronicle has learned that two-thirds of them have declined, often at the encouragement of federal health officials.
As of Wednesday, 568 of the 858 passengers screened while confined turned down the test, a federal official familiar with the Travis quarantine and testing told The Chronicle. The low testing numbers align with what passengers were told by officials during a Tuesday afternoon teleconference, citing a 30% acceptance rate for the novel coronavirus test, several passengers told The Chronicle.
“These folks know they are in a 14-day quarantine, if they test positive they are further delayed until they test negative,” said the official, who The Chronicle agreed not to name because they were not authorized to speak to the media, in accordance with the paper’s ethics policy. “They don’t want to stay. They want to be released.”
In a piece on conservative liberalism, Dan Klein looks at the response of conservatives like Smith, Hume and Burke to crises. For example, when the harvest was poor it was common for England to adopt free trade to import grain. Adam Smith argued that what was good in bad times was good in good times:
The distress which, in years of scarcity, the strict execution of those laws might have brought upon the people, would probably have been very great. But, upon such occasions, its execution was generally suspended by temporary statutes, which permitted, for a limited time, the importation of foreign corn. The necessity of these temporary statutes sufficiently demonstrates the impropriety of this general one. (WN 536.34)
I was reminded of some modern examples:
MedEcon: The federal government will now allow all physicians and other medical personnel to practice across state lines in order to battle the coronavirus (COVID-19) outbreak.
KXXV: Governor Greg Abbott has waived state laws that prohibit trucks from the alcohol industry from delivering supplies to grocery stores.
He says this will provide grocers with another private-sector option to keep their shelves stocked during the coronavirus pandemic.
Or how about this “hilarious” headline from the FDA
FDA: FDA Provides More Regulatory Relief During Outbreak, Continues to Help Expedite Availability of Diagnostics
5. Bohemian Rhapsody, but about the coronavirus. Recommended, for those who care.
9. Five books on plagues and pandemics. By Sarah Skwire.
11. What is up with coronavirus in Japan? Why so little? Or is it about to strike?
This one has been a big story (NYT):
Matt Colvin stayed home near Chattanooga, preparing for pallets of even more wipes and sanitizer he had ordered, and starting to list them on Amazon. Mr. Colvin said he had posted 300 bottles of hand sanitizer and immediately sold them all for between $8 and $70 each, multiples higher than what he had bought them for. To him, “it was crazy money.” To many others, it was profiteering from a pandemic.
The next day, Amazon pulled his items and thousands of other listings for sanitizer, wipes and face masks.
Colvin ended up giving them away to charity (NYT). More analytically, here are three factors that matter when we consider whether a market-clearing price is better:
1. The traditional maximization of consumer + producer surplus that results from market-clearing prices.
2. People getting pissed off when they see the inequities and supposed inequities of price gouging. That is a real economic loss too, though you have to wonder how much they actually would pay to make the gouging go away (and they might consider such a payment a “price gouge” too!).
3. There are significant social externalities to consumption during a pandemic. So do the market-clearing prices or the rationing algorithms do a better job getting the relevant protective commodities to the most likely super-spreaders? You might think poorer individuals are the most likely super-spreaders, but low prices and queue don’t seem to place the scarce commodities in their hands anyway. Marginal allocation will be by privilege (e.g., do you have friends in China who can send you masks? etc.) if not by income. So I do not see that this factor is going to favor rationing algorithms.
On net, the market-clearing prices are likely to be the better solutions. I also am reluctant to eschew better solutions simply because some people do not like them from a distance, consider Sen on Paretian liberalism.
One interesting feature of this problem is that it points to a potential disadvantage from conglomerates such as Amazon. Masks for instance are a tiny part of Amazon’s revenue. Yet price-gouging on masks can hurt Amazon’s public image a lot. So a fearful Amazon is unlikely to allow the welfare-improving price gouging to continue. The company is too much an agent and too easy a target on social media. That keeps them away from welfare-maximizing, politically incorrect decisions.
Alternatively, imagine you bought masks at a shop that sold nothing else — The Mask Store. Perhaps their reputation rests on having masks always available, but in any case they are not afraid that bad PR will destroy their profits in other lines of business, as there are no other lines of business. So The Mask Shop is more likely to allow prices to reach their market-clearing level.
From Scott Ellison:
Sometimes, the best solutions to big problems are very simple. Regarding the current outbreak of COVID-19, I propose a solution that—on the surface—might seem preposterous, but if one manages to stay with it and really think through the potential benefits, then it emerges as a much more credible course of action.
I propose temporarily stopping time. This means that today’s date, Tuesday, March 17th, 2020, will remain the current date until further notice. This also means that everything that happens in time (e.g. mortgage due dates, payrolls, travel bookings, stock market trading, contractor gigs, concerts, sporting events) will be paused. It also means that all of these events remain on the books, and will continue as planned once time is resumed.
Before reacting to this crazy idea, let’s start with a very simple example of how manipulating time is already both commonplace and effective. I’m talking about daylight savings time, a practice that everyone in the US is already accustomed to where we set our clocks forward one hour every Spring. This simple, small action instantly changes the behavior of all 330 million US citizens. Suddenly, every single one of us shows up to work a little earlier than we did the week before, and this massive collective action occurs seamlessly and with only minor need for rectifications (e.g. some over night shift workers must be compensated differently for that paycheck).
It’s the impressive unity of action that is significant about this idea of manipulating time, and this feature is key in responding to a global pandemic. Right now, we’re dealing with all the fallout from this outbreak piecemeal, which isn’t sustainable nor very effective—both from the standpoint of stopping the spread of the outbreak and from the standpoint of preserving our society and economy. We’re spending trillions of dollars to keep time going (e.g. sending every American $1,000 so they can pay their rent, sending airlines $50 billion so they can pay their jet notes, providing billions to banks to cover distressed assets), but none of this really relieves the need to keep going out and working and thus further spreading the virus. What’s worse is that, in spending all this money to keep time going, there’s no guarantee that the economy will be there to take back up the baton once government payments stop. How many travel plans, conferences, sports leagues, and other plans have already been cancelled along the way?
We should be targeting this massive government money for mission-critical items like expanding hospital capacity, ensuring the food supply, and maintaining distribution networks. These are the mission critical activities that must continue even if the date is frozen. It will be readily apparent which of these activities is mission critical, and the trillions of dollars flowing from the government can be directed toward footing these bills.
In my opinion, the most important feature of this solution is that it can be easily implemented again in the future. Right now, we’re using all of our energy to keep time going. Imagine a scenario in which—a few months after this current outbreak subsides—this virus mutates and strikes again. After all the work (and money) we’ve already put into keeping things on track, I sincerely doubt we will be ready to meet any follow up challenge.
“The White House considered issuing an executive order greatly expanding the use of investigational drugs against the new coronavirus, but met with objections from Food and Drug Administration scientists who warned it could pose unneeded risks to patients, according to a senior government official.
The idea to expand testing of drugs and other medical therapies was strongly opposed by the FDA’s senior scientists this week, the official said, and represented the most notable conflict between the FDA and the White House in recent memory.”
Ahem. Here is the full WSJ piece.