The macroeconomic costs of Covid-19

Our illustrative exercise implies a year-on-year contraction in U.S. real GDP of nearly 11 percent as of 2020 Q4, with a 90 percent confidence interval extending to a nearly 20 percent contraction. The exercise says that about 60 percent of the forecasted output contraction reflects a negative effect of COVID-induced uncertainty.

Here is much more, a full paper from Scott R. Baker, Nicholas Bloom, Steven J. Davis, and Stephen J. Terry, an all-star team for this project.


Only 11%? Boy, did we dodge that bullet!

The bigger the Planck's uncertainty the reduction in exchanges. Pricing is separated by units of known uncertainty. The larger the uncertainty, the less granular your pricing. The value nets contract, they will only be as layered as pricing is accurate.. That means we all go to the same soup kitchen.

The Fed cannot operate with that uncertainty and we will be writing a new Fed contract soon, and updating its technology. It is not a big deal, we done it many times and we get to default on some government debt.

The decline in measured GDP is far more than the decline in quality of life. I'm cooking at home and doing my own haircut. My coworkers have fired their nannies and gardeners. That sucks for low skill service workers but it really reflects an internalization of work into the household, where it is unpaid and not captured by GDP.

There's always a reason we hire specialists for something, though, and being forced to do it ourselves is a form of deadweight loss. Put another way, we certainly could all grow our own food, but no one's going to say that a return to subsistence farming is just an internalization of work into the household and not a downturn for society.

"There's always a reason we hire specialists for something, though, and being forced to do it ourselves is a form of deadweight loss. "

No, that's not correct. Being stuck at home because of coronavirus is a deadweight loss. Doing your own child care and lawn care is just recooping some of that loss. Since the alternate in many cases would be watching TV or surfing the web.


Given the stimulus packages, is there not a really strong chance that when lock down ends, people come out of it with money in their back pockets?

I struggle to understand what people need money for if they are stuck at home, and was the best I could find, of spending in USA as a percentage of incom.

15.94% is spent on transportation, and food is 12.94%, made up of Food away from home at 5.65%. Entertainment is 5.27%.

So that's ~25% of people's budget that is likely gone, or reduced significantly, before we get to housing.

Is it not reasonable to think a cashed up populous let loose in a consumer society with hundreds of wants and desires won't lead to a massive post lock down boom? It is not likely this will be entertainment based, as people are going to be skittish about being around others, making retail therapy my best guess for where that cash goes.

Something missing i your family budget, namely the amount they already expected to get from government in the next regularly scheduled recession. Bailouts are not a moral hazard, they are a repeatable, predictable institutional payment. You are way late to the game, some 30 years late.

I think most people are still eating food....

"So that's ~25% of people's budget that is likely gone, or reduced significantly, before we get to housing."

A good chunk of hourly workers in the service industry are trying to get unemployment checks, which are far behind in processing. Even when they get unemployment it probably won't cover their normal wages.

The worst year of economic contraction during the Great Depression was 1932 with a rate of -12.9% GDP growth.

God help us.

"The COVID-19 pandemic has created an enormous uncertainty shock"
Yes, the uncertainty is most awful . The future ain't what it used to be.
We need good leadership to reduce this uncertainty and provide a path to recovery, not just financial interventions but calm and effective leaders to get us back to the promised land.

My ER nurse friend went on unemployment last week.

At the same time, I saw this job offer:
Short term travel nurse for Brooklyn ER
$10000 per week, 4x12 hour shifts
Free lodging at Four Seasons
Free flights
Free food
Free rental car
Bring your own PPE

Solve for the equilibrium?

According to this study by two Virginia Tech economists ( ) , the stay-at-home measures across the US has caused about 28% output loss monthly. This doesn't include the effect of the demand fall, due to like wealth effect, but just about how much labor can't work.

Assuming the estimate is close to correct, we can achieve 11% GDP loss annually only if we can contain the containment measures within one quarter. Otherwise, I think we are closer to 20%.

*No, this is no an endorsement to rush the reopening

Per the Maddison Project, per capita product in this country during 1921 was about 6% lower than it had been in 1918. That's after the pandemic, reconversion to civilian production, and a tremendous bout of deflation. If we had a pandemic proportionately similar to that of 1918-19 today, we'd lose 2 million people of working age. As is, it looks like we'll lose about 40,000 people in the first phase of this, drawn largely from retirement age cohorts. For the 2d phase, we can be as prepared as Japan was for this phase. About 140 people have died of this in Japan to date.

'And besides, the first-term Republican told reporters at a briefing this month, “South Dakota is not New York City.”

But now South Dakota is home to one of the largest single coronavirus clusters anywhere in the United States, with more than 300 workers at a giant ­pork-processing plant falling ill. With the case numbers continuing to spike, the company was forced to announce the indefinite closure of the facility Sunday, threatening the U.S. food supply.'

What is more interesting than that fact is this anecdote concerning an utterly predictable reaction by humans to a pandemic. “There is no social distance,” said Lily, a 30-year-old Mexican immigrant who had worked at the plant for nearly 13 years but quit because she feared bringing the coronavirus home to her husband and young daughter.

Lily, who spoke on the condition that her last name not be published for fear of retribution, said it is not only at work where she feared the virus. “Many people are sick. Not only in the plant — in the whole city,” she said.

The plant employs 3700. What happens if a quarter quit their jobs, especially if that quarter includes those in charge of floor operations as foreman/supervisors?

The economic costs of a pandemic are independent of policy decisions. Whether doing nothing like in SD or as tight as a lockdown as Wuhan, a pandemic comes with unavoidable costs regardless of the chosen policy at any point of time. Such as the fact that a plant that provides 18 million servings of pork product per day has now been closed because of a virus.

Viruses are utterly indifferent to politics while infecting people.

Such as the fact that a plant that provides 18 million servings of pork product per day has now been closed because of a virus.

The viruses in the plant will degrade after three days.

The workers need protective equipment and they need to amend their production process to keep people from breathing on each other. That's what industrial engineers get paid to do.

Who knows, they might even be more willing to listen now than back in February, when they would have plenty of lead time to implement the necessary changes to avoid an expensive plant shutdown. The costs of doing it February might have even been less than doing it now, but the company will not be able to avoid that expense at this point, even though South Dakota has not implemented any lockdown procedures at all.

A pandemic extracts an economic toll regardless of government policy, as Smithfield, a Chinese owned company, should have already been fully aware of.

Notice that the troll says in one breath that the virus is indifferent to politics but then in the next paragraph admits that the company is Chinese-owned -- and this presumably under orders to minimize precautions for political reasons. That's why he stopped using a single name for commenting; this way it's harder for the casual observer to pick up on the fact that there isn't actually any continuing coherence to what he's saying.

'and this presumably under orders to minimize precautions for political reasons'

I read that to mean that by being Chinese owned, the company has even more information about the pandemic's effects than those yet to be exposed to it. It would never even occur to me to think that Smithfield would be under Chinese orders to minimize precautions.

But if you believe something else, no wonder you have a problem finding any coherence in comments that you consider to be connected. Maybe it might be time to reflect that what you read is not simply clay to be shaped to fit into your own beliefs. The Chinese are more familiar with the economic fallout of a total pandemic lockdown than the U.S..

"The economic costs of a pandemic are independent of policy decisions."
A fact much overlooked or ignored right now. In spite of the argument about who has the 'power' to 're-open America', nobody can tell people to take airline flights, attend football games or even go back to work. Those are individual, personal decisions. They will be made based on personal situations and perceptions.

Coincidentally, I heard a story about a 20 year old anonymous immigrant pork factory worker who said there's no problem at all.
Thank God for that, there might be a shortage of pork sausage scarcity.

"A Smithfield Foods pork processing plant in South Dakota will temporarily close for cleaning after more than 80 employees were confirmed to have the coronavirus, the company announced Thursday.

Smithfield Foods plans to suspend operations in a large section of the Sioux Falls plant on Saturday, then completely close on Sunday and Monday. The Virginia-based company said it will sanitize the plant and install physical barriers to “enhance social distancing.”

Oops - that story is from April 9th. This is current reporting - "Smithfield Foods will close its Sioux Falls facility until further notice, the company announced Sunday in a news release.

The closure comes after the South Dakota Department of Health said 238 of Minnehaha County's 438 COVID-19 cases involve "individuals who work at Smithfield Foods." The plant, one of the nation's largest pork processing plants, was identified as the state's largest hot spot accounting for about 38% of its cases. Those numbers were last updated Saturday." Care to guess what the numbers will look like using data updated on Monday?

Or when the plant will actually reopen? Because it handles a bit more than just sausage. "The Sioux Falls facility is one of the largest pork processing plants in the U.S., Smithfield said. It supplies nearly 130 million servings of food per week, or about 18 million servings per day."

Oh look prior is up to his normal concern trolling.

It is difficult to think that such a disastrous outcome will not have negative political repercussions compounding it. The mob will ask for its pound of flesh.

I can think of a few. Radical clamp-down on legal and illegal immigration. Even more trade restrictions. A lot of government ownership in failing business. More taxes on the rich and the business. Regulations and disincentives to productivity-enhancing process innovation. Another 10 trillions of funny money that might create a massive flight from the dollar and structural increases in long-term real rates.

This is only the beginning. Wait for the medieval torture the new FDR (Trump or Biden is the same) will inflict on the American society.

The Roosevelt Administration made a number of policy mistakes but was on balance quite successful during the years running from 1933 to 1941.

You don't think they did a good job in WWII?

The degree of GDP contraction will depend in large part on the degree of asset price declines. That's a reflection of the degree to which we have come to rely on rising asset prices for prosperity, and also explains why the Fed is willing to go to such lengths (such as buying private company stocks and bonds) to maintain asset prices. Sure, Congress passed measures designed to partially maintain some incomes, but will a one-time payment of $1200 per person of modest means and a couple of months (partially) paid leave offset the enormous drop in incomes caused by the coronavirus? Germany, on the other hand, decided that maintaining incomes is the way to minimize the economic fallout from the coronavirus: Germany sends everyone a monthly check while they aren't working. Why does America believe the first priority in this crisis is to protect investors (owners of assets), while some other countries believe the first priority is to protect workers (incomes)?

$1,200 is just the beginning. $600/wk for 4 months in federal unemployment benefits, on top of state benefits, is a huge number. This equates to $20-$25/hr. For a very large portion of the unemployed, this is quite a bit more than they were making while working. This is a significant stimulus. $1,200 is a drop in the bucket

"Germany sends everyone a monthly check while they aren't working"

No, Germany doesn't. There is Kurzarbeit. which means employees are paid 2/3 of their wages from unemployment funds (which are paid to the company, thus avoiding a lot of paperwork/disruption), but that only applies to those working a normal job. If you simply work what the Germans call a mini-job, the government isn't paying you a cent. There are unemployment benefits, which are distinct from Kurzarbeit, but far from everyone who was currently working is actually entitled to unemployment benefits, in much the same fashion that not every wage employee in the U.S. is entitled to unemployment benefits if they lose their job.

The degree of GDP contraction will depend in large part on the degree of asset price declines.

It won't. Wealth effects are minor.

Anyone know what the GREs of these folks were?

To be clear, these are the costs of the shutdown, not the costs of the Wuhan flu.

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