Category: Economics

There’s No Such Things as a Free L̶u̶n̶c̶h Test

In a short-sighted blunder, India’s Supreme Court has ruled that private labs cannot charge for coronavirus tests:

NDTV: “The private hospitals including laboratories have an important role to play in containing the scale of pandemic by extending philanthropic services in the hour of national crisis…We thus are satisfied that the petitioner has made out a case…to issue necessary direction to accredited private labs to conduct free of cost COVID-19 test,” the court said.

Whether the private labs should be reimbursed by the government, will be decided later, Justices Ashok Bhushan and S Ravindra Bhat said in a hearing conducted via video conferencing.

The Supreme Court’s ruling will reduce the number of tests and dissuade firms from rushing to develop and field new drugs and devices to fight the coronavirus. A price is a signal wrapped up in an incentive. Instead of incentivizing investment, this order incentives firms to invest resources elsewhere.

Nor do private labs have a special obligation that mandates their conscription–an obligation to fund testing for all, falls on all.

The ruling is especially unfortunate because as Rajagopalan and Choutagunta document, India’s health care sector is predominantly private:

…India must rely primarily on the private sector and civil society to lead the response to COVID-19,…the role of the government should be financing and subsidizing testing and treatment for those who cannot afford to pay. India’s private healthcare system is better funded and better staffed than the government healthcare system, and it serves more people. It is estimated to be four times bigger in overall healthcare capacity, and it has 55 percent of the total hospital bed capacity, 90 percent of the doctors, and 80 percent of the ventilators.

The temptation to requisition private resources for state use in an emergency is ever present—but Indian policymakers must resist that temptation because it will compromise instead of increase capacity.

Benevolence is laudatory but even in a pandemic we should not rely on the benevolence of the butcher, brewer or baker for our dinner nor on the lab for our coronavirus tests. If we want results, never talk to suppliers of our own necessities, but only of their advantages.

Safety Protocols for Getting Back to Work

China bent the curve, Italy bent the curve and I believe that the curve is bending in the United States. Suppression is working and the second part of the strategy of test, trace and isolate will start to come into play in a few weeks. The states are gearing up to test, trace and isolate and several large serological surveys are already underway which will gives us a much better idea of how widely the virus has spread. Ideally, we will move from test, trace and isolate to a situation where we can conduct millions of tests weekly which will take us into the vaccine time.

Before testing is fully operational, however, we will need to follow safety protocols. We can learn about what works from what essential workers are doing now. Green Circuits in CA, for example, redesigned the shift schedule:

His first move was to redesign the plant’s work schedule. The company, owned by the Dallas-based private equity firm Evolve Capital, always had the first and second shifts overlap for a half-hour. That allowed workers arriving in the afternoon to confer with colleagues as they handed off duties.

But O’Neil said they realized that would risk their whole workforce getting quarantined for 14 days, if someone got infected by the coronavirus and spent time at the factory as part of this larger group.

The solution was to create three separate teams of 40 workers each. The first shift now ends at 2 p.m., and then there’s an hour when the workspaces, tools, and breakrooms are sanitized. The third team does not work at all, but rather is held in reserve and available to jump in if an illness hampers one of the two other teams of workers.

Other safety protocols include:

  • Shift work for white collar workers as well as for blue collar workers. Including spreading work over the weekends.
  • Senior shopping hours.
  • Temperature checks, perhaps via passive fever cameras at work and public transport.
  • Mandatory masks for public transportation.
  • Masks for workers.
  • Sanitation breaks for mandatory hand washing.
  • Quarantining at work for essential workers, as the MLB is thinking of doing despite not being essential.
  • Reducing touch surfaces (even with simple things like propping up bathroom doors) and copper tape for hi-touch surfaces that cannot be eliminated.

It will take longer to reopen restaurants, clubs and sports stadiums but I believe that applying these protocols will allow many of us to work safely. We aren’t ready yet but now is the time to plan for our return.

Do better incentives limit cognitive biases?

There is a new paper by Benjamin Enke, Uri Gneezy, Brian Hall, David Martin, Vadim Nelidov, Theo Offerman, and Jeroen van de Ven:

Despite decades of research on heuristics and biases, empirical evidence on the effect of large incentives – as present in relevant economic decisions – on cognitive biases is scant. This paper tests the effect of incentives on four widely documented biases: base rate neglect, anchoring, failure of contingent thinking, and intuitive reasoning in the Cognitive Reflection Test. In preregistered laboratory experiments with 1,236 college students in Nairobi, we implement three incentive levels: no incentives, standard lab payments, and very high incentives that increase the stakes by a factor of 100 to more than a monthly income. We find that cognitive effort as measured by response times increases by 40% with very high stakes. Performance, on the other hand, improves very mildly or not at all as incentives increase, with the largest improvements due to a reduced reliance on intuitions. In none of the tasks are very high stakes sufficient to debias participants, or come even close to doing so. These results contrast with expert predictions that forecast larger performance improvements.

Via Kadeem Noray (EV winner, btw).  This is perhaps related to behavior during and leading up to the lockdown…

Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?

There is a new NBER paper by Veronica GuerrieriGuido LorenzoniLudwig StraubIván Werning:

We present a theory of Keynesian supply shocks: supply shocks that trigger changes in aggregate demand larger than the shocks themselves. We argue that the economic shocks associated to the COVID-19 epidemic—shutdowns, layoffs, and firm exits—may have this feature. In one-sector economies supply shocks are never Keynesian. We show that this is a general result that extend to economies with incomplete markets and liquidity constrained consumers. In economies with multiple sectors Keynesian supply shocks are possible, under some conditions. A 50% shock that hits all sectors is not the same as a 100% shock that hits half the economy. Incomplete markets make the conditions for Keynesian supply shocks more likely to be met. Firm exit and job destruction can amplify the initial effect, aggravating the recession. We discuss the effects of various policies. Standard fiscal stimulus can be less effective than usual because the fact that some sectors are shut down mutes the Keynesian multiplier feedback. Monetary policy, as long as it is unimpeded by the zero lower bound, can have magnified effects, by preventing firm exits. Turning to optimal policy, closing down contact-intensive sectors and providing full insurance payments to affected workers can achieve the first-best allocation, despite the lower per-dollar potency of fiscal policy.

All NBER papers on Covid-19 are open access, by the way.

Crisis Innovation

That is the title of a new working paper by Tania Babina, Asaf Bernstein, and Filippo Mezzanotti, here is the abstract:

The effect of financial crises on innovative activity is an unsettled and important question for economic growth, but one difficult to answer with modern data. Using a differences-in-differences design surrounding the Great Depression, we are able to obtain plausible variation in local shocks to innovative ecosystems and examine the long-run impact of their inventions. We document a sudden and persistent decline in patenting by the largest organizational form of innovation at this time—independent inventors. Parallel trends prior to the shock, evidence of a drop within every major technology class, and consistent results using distress driven by commodity shocks all suggest a causal effect of local distress. Despite this negative effect, our evidence shows that innovation during crises can be more resilient than it may appear at a first glance. First, the average quality of surviving patents rises so much that there is no observable change in the aggregate future citations of these patents, in spite of the decline in the quantity of patents. Second, the shock is in part absorbed through a reallocation of inventors into established firms, which overall were less affected by the shock. Over the long run, firms in more affected areas compensate for the decline in entrepreneurial innovation and produce patents with greater impact. Third, the results reveal no significant brain drain of inventors from the affected areas. Overall, our findings suggest that financial crises are both destructive and creative forces for innovation, and we provide the first systematic evidence of the role that distress from the Great Depression played in the long-run innovative activity and the organization of innovation in the U.S. economy.

Further data coming your way…

The Economic Consequences of the Virus?

The inhabitant of New York could order by computer, sipping his morning coffee in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate with passport or other formality and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing just a credit card upon his person, and would consider himself greatly aggrieved by the TSA but otherwise much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, exclusion and of pandemics which were to play the serpent to this paradise, were little more than the amusements of his daily twitter feed, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.

Only slightly modified.

Immunity Passes Must Be Combined With Variolation

I wrote earlier that “recovered individuals have a kind of superpower and would be highly desirable workers.” Antibody tests will soon be able to identify these workers and that will help to reopen the economy because not only can these workers go back to work relatively safely they can also work relatively safely with those who are not immune, thus a kind of multiplier-effect for the workplace. Hence, Italy and the UK are talking about “Immunity Passes” that would allow (we hope) immune workers to go back to work.

One factor, however, which hasn’t been taken into account is that the demand to go back to work may be so strong that some people will want to become deliberately infected. If not done carefully, however, these people will be a threat to others, especially in their asymptomatic phase. Thus, if we use Immunity Passes they will need to be combined with variolation, infecting people with small doses of the virus to create immunity under controlled conditions, as suggested by Robin Hanson.

Hat tip for discussion: Rafael Yglesias.

Stopping time plus hazard pay?

You’ve previously publicized the clever solution to the Corona-crisis of “stopping time.”  As others have pointed out, a drawback is that we can’t stop time for everyone.  In particular, we need essential services to continue.

Separately, there is a significant case for hazard pay.  In principle we could let the market sort this out.  But in practice, we don’t want to spend the next month getting to the equilibrium with health care workers.

The current round of government interventions entail mounting distortions.

So perhaps a more efficient solution to all of this would be:
–stop time, but
–government sends everyone checks that can be used for food and gas and directly pays for essential services (public safety, medical, utilities)

The net effect is hazard pay for essential workers—they continue to draw income, but their rent/mortgage/loan/utility obligations are frozen just like everyone else’s.

As a ballpark cost: if 25% of the economy is essential, this is about $400B/month.

Expensive, but much cheaper than alternatives.

That is from an email from Philip Bond, University of Washington.

The Strategy: Suppress then Test, Trace, Isolate

From internet comments I’ve seen some confusion on the suppress then “test, trace, isolate” strategy. The “flattening the curve” metaphor suggested that lockdown was all about spreading infections over time to keep the medical system operational. But more importantly, the purpose of lockdown is to reduce the infection rate, R, below 1. A virus needs hosts. Take away the hosts and it fades away. We can take away hosts by making people immune, either with a vaccine or through surviving exposure. We can also take away hosts by hiding–that’s what lockdown is for. If enough people hide, then the virus burns out and fades away.

Of course, hiding leaves us vulnerable to multiple rounds of infection. That’s where the second part of the strategy, test, trace and isolate comes into play. When the infection is running wild, as it is now, we don’t have enough tests to keep up with the virus. But after suppression we can put test, trace and isolate into effect very quickly as outbreaks flare up but before the virus runs out of control again. Increasing our test capacity dramatically makes this strategy even more viable. Thus, as V.V. Chari and Christopher Phelan write in a good op-ed:

…A wise use of the breathing room provided by mass quarantines would be to put in place the infrastructure to allow us to mimic the policies of countries such as South Korea, Taiwan, Singapore and Hong Kong. These countries have thus far controlled the pandemic at much lower economic cost…[using] aggressive but targeted quarantine policies. They quarantine people displaying symptoms, aggressively trace the people they have contacted, test their contacts, and then quarantine those who have the virus (and sometimes those who have just had contact with those who test positive), regardless of whether they are symptomatic or not.

It is a test, trace and isolate policy. These countries have not generally engaged in mass quarantines or shut down factories, shopping malls or restaurants.

After suppression, we can combine “test, trace and isolate” with mask wearing and other safety protocols and move towards reopening the economy.

Thank You Bill Gates

Bill Gates, who warned us–The Next Outbreak, We’re not ready–is getting ready for a vaccine, in fact for seven of them.

Business Insider: Gates said he was picking the top seven vaccine candidates and building manufacturing capacity for them. “Even though we’ll end up picking at most two of them, we’re going to fund factories for all seven, just so that we don’t waste time in serially saying, ‘OK, which vaccine works?’ and then building the factory,” he said.

Gates said that simultaneously testing and building manufacturing capacity is essential to the quick development of a vaccine, which Gates thinks could take about 18 months.

…”It’ll be a few billion dollars we’ll waste on manufacturing for the constructs that don’t get picked because something else is better,” Gates said in the clip. “But a few billion in this, the situation we’re in, where there’s trillions of dollars … being lost economically, it is worth it.”

This is exactly the type of planning and spending on attacking the virus that governments should be doing.

See also my post, A Solution if We Act.

Tethered pairs and locational extremes

Let us assume that you, for reasons of choice or necessity, are spending time in close quarters with another person.  You are then less inclined to visit corona-dangerous locations.  In part you are altruistic toward the other person, and in part for selfish reasons you do not wish to lower the common standard of care.  If you go to a dangerous location, the other person might decide to do the same, if only out of retaliation or frustration.

In essence, by accepting such a tethered pair relationship, you end up much closer (physically, most of all) to one person and much more distant from the others.  You are boosting your locational extremes.

The physically closer you are to the other person, the more easily you can tell if he or she is breaking the basic agreement of minimal risk.  That tends to make the tethered pairs relatively stable.  Monitoring is face-to-face!

Tethered pairs also limit your mobility, because each of the two parties must agree that the new proposed location is safe enough.

People who live alone, and do not know each other initially, might benefit from accepting a tethered pair relationship.  The other person can help them with chores, problems, advice, etc., and furthermore the other person may induce safer behavior.  (Choose a carpenter, not a specialist!)  Many people will take risks if they are the only loser, but not if someone else might suffer as well.

A tethered triplet is harder to maintain than a tethered pair.  For one thing, the larger the group the harder it is to monitor the behavior of the others.  Furthermore, having a third person around helps you less than having a second person around (diminishing marginal utility, plus Sartre).  Finally, as the group grows large there are so many veto points on what is a safe location ( a larger tethered pair might work better with a clear leader).

Yet over time the larger groups might prove more stable, even if they are riskier.  As more things break down, or the risk of boredom and frustration rises, the larger groups may offer some practical advantages and furthermore the entertainments of the larger group might prevent group members from making dangerous trips to “the outside world.”

There is an external benefit to choosing a tethered pair (or triplet, or more), because you pull that person out of potential circulation, thus easing congestion and in turn contagion risk.  Public spaces become safer.

As you choose a tethered pair initially, the risk is relatively high.  The other member of the pair might already be contagious, and you do not yet have much information about what that person has been up to.  As the tethered pair relationship proceeds, however, it seems safer and safer (“well, I’m not sick yet!”), and after two weeks of enforced confinement it might be pretty safe indeed.

Very often married couples will start out as natural tethered pairs.  At the margin, should public policy be trying to encourage additional tethered pairs?  Or only in the early stages of pandemics, when “formation risk” tends to be relatively low?  Do tethered pairs become safer again (but also less beneficial?), as a society approaches herd immunity?

It may be easier for societies with less sexual segregation to create stable tethered pairs, since couple status is more likely to overlap with “best friend” status.

One advantage of good, frequent, and common testing is that it encourage the formation of more tethered pairs.

You can modify this analysis by introducing children (or parents) more explicitly, or by considering the varying ages of group members.  You might, for instance, prefer to be a tethered pair with a younger person, but not everyone can achieve that.

Measuring the Cost of Regulation: A Text-Based Approach

We derive a measure of firm-level regulatory costs from the text of corporate earnings calls. We then use this measure to study the effect of regulation on companies’ operating fundamentals and cost of capital. We find that higher regulatory cost results in slower sales growth, an effect which is mitigated for large firms. Furthermore, we find a one-standard deviation increase in our preferred measure of regulatory cost is associated with an increase in firms’ cost of capital of close to 3% per year. These findings suggest that regulatory risk is a major cost to firms, but the largest firms are able to manage that risk better.

That is the abstract of a new NBER paper by Charles W. Calomiris, Harry Mamaysky, Ruoke Yang, a piece written in pre-Covid-19 times.  It has never been more relevant, except that the estimates for regulatory costs turn out to be far too low (no criticism of the authors is intended here).  To repeat my earlier point, America’s regulatory state is failing us.

The fiscal multiplier during World War II

WWII is viewed as the quintessential example of fiscal stimulus and exerts an outsized influence on fiscal multiplier estimates, but the wartime economy was highly unusual. I use newly-digitized contract data to construct a state-level panel on U.S. spending in WWII. I estimate a relative fiscal multiplier of 0.25, implying an aggregate multiplier of roughly 0.3. Conversion from civilian manufacturing to war production reduced the initial shock to economic activity because war production directly displaced civilian manufacturing. Saving and taxes account for 75% of the income generated by war spending, implying that the add-on effects from increased consumption were minimal.

That is from a 2018 paper by Gillian Brunet, and you will note that it reflects the consensus of the literature as a whole.  I do favor the federal government borrowing and spending a great deal of money right now on things that we need.  If you think we are in a traditional Keynesian scenario, or are pulling out a traditional AS-AD model, you are going to be very badly disappointed.  Most of all, we need to be spending more on public health and remedies for Covid-19.  Here is my earlier Bloomberg column on analogies and disanalogies between Covid-19 and World War II.  And again, see Garett Jones and Dan Rothschild on the 2009 stimulus.

FDA Prevents Import of Masks

The KN95 mask is China’s version of the N95 mask. 3M, America’s largest manufacturer of N95 masks, said in January that the masks are equivalent. But the FDA is not allowing KN95s into the country.

Buzzfeed: The KN95 mask is a Chinese alternative to the scarce N95 mask, but the FDA refuses to allow it into the country.

…By law, masks, along with most medical devices, can’t be imported or sold in the United States without the Food and Drug Administration’s say-so. Last week, to ease the national shortfall of protective gear, the FDA issued an emergency authorization for non-N95 respirators that had been certified by five foreign countries as well as the European Union. It conspicuously left the KN95 masks out of the emergency authorization.

The omission was all the more startling because in late February the Centers for Disease Control and Prevention said that KN95 masks were one of numerous “suitable alternatives” to N95 masks “when supplies are short.”

…Allowing the importation and use of KN95 could help to greatly alleviate the scarcity.

“The KN95 masks are far more readily available,” said Bob Tilton, who owns a New Jersey–based cosmetics packaging importer and earlier this month decided to use his familiarity with Chinese supply chains to bring in masks and other personal protective equipment to sell to hospitals. “The N95s are much harder to grab.”

Yet without the FDA’s seal of approval, importers are hesitant to order KN95 masks because they worry they’ll get held up at customs.

It’s not just the FDA that is to blame, however. America’s legal system is also to blame:

Many hospitals are refusing to accept them, even as free donations, because they fear legal liability should a health care worker get ill while using a nonpermitted device…Although some hospitals flat-out reject KN95 masks at any price on advice of their lawyers, people rounding up masks to give to hospitals have found that individual doctors or nurses will often accept the donations, given the dire need.

Consider that last bit of insanity. The ethical and common-law type rule is very simple: Do everything reasonable to protect your hospital workers. But what some feckless hospital administrators are actually doing is following “the law” even if it conflicts with the ethical rule.

Running ahead of Pandemics: Achieving In-Advance Antiviral Drugs

From Jaspreet Pannu (an EV winner, by the way, Jassi Pannu), here is a new, short Mercatus policy brief.  Excerpt:

I propose adopting innovation prizes with awards large enough to justify investments in broad-spectrum antiviral drugs developed up to phase III clinical trials in the FDA drug approval process. I also emphasize the importance of starting this effort with pathogen families of known pandemic potential, such as respiratory viruses.

…the medical community needs—and currently lacks—a class of drugs designed for emerging viruses of pandemic potential. These broad-spectrum drugs that target entire viral families can be developed as individual drugs or platform technologies.

Just before the outbreak of COVID-19, researchers at the Johns Hopkins Center for Health Security stated that “broad-spectrum [antiviral] therapeutics should be pursued given their potential value.”

There is much more at the link.