Category: Economics

Small business aid through Fintech?

Consumers open up Facebook, Instagram, Snap, and WhatsApp dozens of times a day. Businesses, on the other hand, are checking Square, Stripe, QuickBooks, Netsuite, Brex, FreshBooks, Xero, Gusto, DoorDash, Mindbody, Toast and other tools that show them sales, orders, customers, and expenses. Almost every one of these platforms has been granted permission to access—read and write—bank accounts, and helps run the business.

The stimulus bill is going to direct funds through the Small Business Administration, but the SBA doesn’t really make loans. It simply guarantees loans made by banks. For many banks, the way you apply for an SBA 7a loan is to prepare tons of documents, go to your local branch, and then wait as long as 90 days. Wells Fargo has a fancy website, but for SBA loans it directs you to your local branch for a process that takes dozens of hours of form collections and physical signatures followed by months of waiting. Many private lenders approve loans in hours, so the SBA process has historically been an adverse selection lending trap.

It’s March of 2020, the world is under quarantine, all financial data exists in digital form, and billions of people use the internet—we can and should do better. Here’s how this can work, and Silicon Valley is standing by to build this, open source it, and get it out in days so that these small businesses can weather this storm.

Each and every financial services company can place a button on their website or in their app that sucks in relevant data from each business—much of it unforgeable, like credit card receipts as validated by the credit card processor—and spits out an instant machine readable package for aid. If Federal assistance needs to go through an SBA-approved bank (an odd construct, since most of these loans are meant to be forgiven) then this machine readable package can go out to whatever bank out of the 3000+ active SBA lenders can authorize it the quickest. To prevent fraud, that bank can be granted permission to the same set of financials—without loan officers, in person visits, scans and faxes. And if it comes back clean, route the money to the financial service that has already performed the Know Your Customer check on that merchant. A very complex problem is reduced to several hundred lines of code, aided by tools that nearly every small merchant in the United States uses.

That is by Alex Rampell, there is more at the link.  More generally, we need to be honest with ourselves about who is capable of generating rapid response and who is not.  Here is a Reason piece on the successes of the tech community.

Why is Physician Pay Being Cut In a Crisis?

One of the craziest unforeseen consequences of the crisis is that many people are delaying medical care but in places without a lot of coronavirus cases that’s creating a big hit on revenues.

ProPublica: Most ER providers in the U.S. work for staffing companies that have contracts with hospitals. Those staffing companies are losing revenue as hospitals postpone elective procedures and non-coronavirus patients avoid emergency rooms. Health insurers are processing claims more slowly as they adapt to a remote workforce.

“Despite the risks our providers are facing, and the great work being done by our teams, the economic challenges brought forth by COVID-19 have not spared our industry,” Steve Holtzclaw, the CEO of Alteon Health, one of the largest staffing companies, wrote in a memo to employees on Monday.

The memo announced that the company would be reducing hours for clinicians, cutting pay for administrative employees by 20%, and suspending 401(k) matches, bonuses and paid time off. Holtzclaw indicated that the measures were temporary but didn’t know how long they would last.

…Tenet Healthcare, a Dallas-based publicly traded company that runs 65 hospitals, said it would postpone 401(k) matches and tighten spending on contractors and vendors. Emergency room doctors at Boston’s Beth Israel Deaconess Medical Center have been told some of their accrued pay is being held back, according to The Boston Globe. More than 1,100 staffers at Atrius Health in Massachusetts are facing reduced paychecks or unpaid furloughs, and raises for medical staff at South Shore Health, another health system in Massachusetts, are being delayed. Several other hospitals have also announced furloughs.

The CARES bill has billions for hospitals but there seems to be a gap between funding sources that hasn’t been bridged. It’s peculiar that ER physicians often don’t work for the hospitals where they work.

Special hat tip: the excellent Kevin Lewis.

Did unconventional interventions unfreeze the credit market?

By Hui Tong and Shang-Jin Wei, newly relevant!

This paper investigates whether and how unconventional interventions in 2008–2010 unfroze the credit market. We construct a dataset of 198 interventions for 16 countries during 2008–2010 and examine heterogeneous responses in stock prices to the interventions across 7,873 nonfinancial firms in those countries. Stock prices increase when the interventions are announced, particularly for firms with greater intrinsic need for external capital. This pattern is corroborated by subsequent expansions in firm investment, R&D expenditure, and employment. Among various forms of interventions, recapitalization of banks appears particularly effective in channeling the intervention effects from financial to nonfinancial sectors.

That is from the new issue of AEJ: Macroeconomics.

Failure to Prepare is Endemic

LA Times: They were ready to roll whenever disaster struck California: three 200-bed mobile hospitals that could be deployed to the scene of a crisis on flatbed trucks and provide advanced medical care to the injured and sick within 72 hours.

Each hospital would be the size of a football field, with a surgery ward, intensive care unit and X-ray equipment. Medical response teams would also have access to a massive stockpile of emergency supplies: 50 million N95 respirators, 2,400 portable ventilators and kits to set up 21,000 additional patient beds wherever they were needed.

In 2006, citing the threat of avian flu, then-Gov. Arnold Schwarzenegger announced the state would invest hundreds of millions of dollars in a powerful set of medical weapons to deploy in the case of large-scale emergencies and natural disasters such as earthquakes, fires and pandemics.

…But the ambitious effort, which would have been vital as the state confronts the new coronavirus today, hit a wall: a brutal recession, a free fall in state revenues — and in 2011, the administration of a fiscally minded Democratic governor, Jerry Brown, who came into office facing a $26-billion deficit.

And so, that year, the state cut off the money to store and maintain the stockpile of supplies and the mobile hospitals. The hospitals were defunded before they’d ever been used.

…Together, these two programs would have positioned California to more rapidly respond as its COVID-19 cases exploded. The annual savings for eliminating both programs? No more than $5.8 million per year, according to state budget records, a tiny fraction of the 2011 budget, which totaled $129 billion.

…Now, many California hospitals are being forced to ration their inadequate supply of N95 masks, and hospitals are rushing to rent ventilators in anticipation of a severe shortage as COVID-19 caseloads grow.

A useful reminder that failure to prepare for low probability but high cost events spans the political spectrum.

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.

Oregon Closes Online Schools!!!

Well this has got to be the dumbest thing I have read all week:

WW: The Oregon Department of Education has closed the state’s online charter schools under Gov. Kate Brown’s order to close public schools to halt the spread of COVID-19, according to a document obtained by WW.

…Marc Siegel, a spokesman for the Oregon Department of Education, confirms that although Brown’s order did not explicitly call for the closure of online charters, state education officials believe that is the intent of the governor’s order.

I have to think this is an oversight soon to be corrected but maybe there is a method behind the madness. Some are worried that students will switch into online charter schools reducing other public school funding:

“Enrollment of new students to virtual public charter schools during the closure would impact school funding for districts across Oregon and therefore may impact the distribution of state school funds and delivery of services as directed under the executive order,” the department said in its guidance to districts.


Hat tip: Raghu Parthasarathy.

Price dispersion and pandemics

Price dispersion is an excellent indicator of transactional frictions. It isn’t that absent price dispersion, we can confidently say that frictions are negligible. Frictions can be substantial even when price dispersion is zero. For instance, if the search costs are high enough that it makes it irrational to search, all the sellers will price the good at the buyer’s Willingness To Pay (WTP). Third world tourist markets, which are full of hawkers selling the same thing at the same price, are good examples of that. But when price dispersion exists, we can be reasonably sure that there are frictions in transacting. This is what makes the existence of substantial price dispersion on Amazon compelling.

Amazon makes price discovery easy, controls some aspects of quality by kicking out sellers who don’t adhere to its policies and provides reasonable indicators of quality of service with its user ratings. But still, on nearly all items that I looked at, there was substantial price dispersion. Take, for instance, the market for a bottle of Nature Made B12 vitamins. 

Prices go from $8.40 to nearly $30. It is not immediately clear why sellers selling the product at $30 are in the market. It could be that the expected service quality for the $30 seller is higher except that between the most expensive and the next lowest price seller, the ratings of the next highest seller are lower. And I would imagine that the ratings (and implied quality) of Amazon, which comes in with the lowest price, are the highest.

p.s. Sales of the boxed set of Harry Potter show a similar pattern.

That is all from Gaurav Sood.

Sicken Thy Neighbor Trade Policy

A number of countries have imposed export bans on medical equipment. This is a natural, knee-jerk, reaction but a mistake for two reasons. First, no country in the world produces everything it needs. An export ban imposed by one country benefits that country but when all countries ban exports, it’s likely that no country is better off and all are worse off. A prisoner’s dilemma.

The prisoner’s dilemma is even worse than the basic analysis indicates because supply chains are globalized so it’s not even that one country produces ventilators and another produces masks and they are better off trading. Rather, it’s that both ventilator and mask production rely on inputs from other countries. What this means is that export bans make it more difficult for anyone to produce anything. Reuters gives an example:

Swissinfo has reported that production in Hamilton Medical, a major Swiss manufacturer of hospital ventilators, has slowed because Romania banned exports of a critical input that Hamilton was sourcing. The lesson is that any EU export restriction puts at risk other EU imports also needed to fight COVID-19. If the product definitions covered by the EU policy are so broad that they also restrict exports of parts and components, the EU may end up losing access to other supplies of equipment it seeks to import.

And here is Stefan Dräger, head of German ventilator manufacturer Drägerwerk:

DER SPIEGEL: When will a shortage begin developing for filters, tubes and other components for the ventilators?

Dräger: It already has….The parts come from all over the world, including from Turkey. I very much hope that the supply chains remain intact despite the protectionism. If someone decides to disrupt them, there will no longer be any ventilators, for anyone.

Disrupting sophisticated global supply chains is likely to create dis-coordination.

For want of a nail the shoe was lost;
For want of a shoe the horse was lost;
For want of a horse the battle was lost;
For the failure of battle the kingdom was lost—
All for the want of a horse-shoe nail.

For want of a ventilator part the life was lost.

The second reason why export bans are a mistake is that when there are economies of scale banning exports can decrease local consumption. A company that knows that it cannot export will be less willing to invest in building new plant and infrastructure, for example. We see exactly this phenomena in the brain drain “paradox”. Brain drain proponents argue that developing countries need to ban exports of human capital (i.e. don’t let people leave) to keep skilled workers at home. But in fact places like the Philippines, which export a lot of nurses, also have more domestic nurses. As Clemens and McKenzie write:

Enormous numbers of skilled workers from developing countries have been induced to acquire their skills by the opportunity of high earnings abroad. This is why the Philippines, which sends more nurses abroad than any other developing country, still has more nurses per capita at home than Britain does. Recent research has also shown that a sudden, large increase in skilled emigration from a developing country to a skill-selective destination can cause a corresponding sudden increase in skill acquisition in the source country.

The premise of export bans–in this time of need, we need to keep our resources at home–is natural but the virus is a worldwide challenge that needs a worldwide response. We is everyone in the world. We have a lot to gain by cooperation, especially as some countries are being hit at different points in time. Germany, for example, sold ventilators to China as the crisis hit China and China can (re)sell to Germany as China recovers. Our best strategy is a united front where we learn from other countries and reallocate resources around the world.

Beggar thy neighbor trade policy, such as the infamous Smoot-Hawley tariff, lengthened the Great Depression. We don’t want sicken thy neighbor trade policy to length the great pandemic.

Hat tip: anonymous.

Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu

That is a new paper by Sergio Correia, Stephan Luck, and Emil Verner, I have not read it, here is the abstract:

What are the economic consequences of an influenza pandemic? And given the pandemic, what are the economic costs and benefits of non-pharmaceutical interventions (NPI)? Using geographic variation in mortality during the 1918 Flu Pandemic in the U.S., we find that more exposed areas experience a sharp and persistent decline in economic activity. The estimates imply that the pandemic reduced manufacturing output by 18%. The downturn is driven by both supply and demand-side channels. Further, building on findings from the epidemiology literature establishing that NPIs decrease influenza mortality, we use variation in the timing and intensity of NPIs across U.S. cities to study their economic effects. We find that cities that intervened earlier and more aggressively do not perform worse and, if anything, grow faster after the pandemic is over. Our findings thus indicate that NPIs not only lower mortality; they also mitigate the adverse economic consequences of a pandemic.

Via Jason Furman.

The Defense Production Act

In my post, Let the Markets Work, I argued that the Defense Production Act was “neither especially useful nor necessary.” The earlier post focused on how markets were working to address the crisis. Today, we can see the flip side, how the government is working to address the crisis.

The NYTimes reported on Thursday that the government was balking on a deal to buy ventilators

The White House had been preparing to reveal on Wednesday a joint venture between General Motors and Ventec Life Systems that would allow for the production of as many as 80,000 desperately needed ventilators to respond to an escalating pandemic when word suddenly came down that the announcement was off.

The decision to cancel the announcement, government officials say, came after the Federal Emergency Management Agency said it needed more time to assess whether the estimated cost was prohibitive. That price tag was more than $1 billion, with several hundred million dollars to be paid upfront to General Motors to retool a car parts plant in Kokomo, Ind., where the ventilators would be made with Ventec’s technology.

At $1.2-$1.5 billion that’s $15,000-$18,750 per ventilator which is well below the standard price of $25,000-$50,000 (maybe these ventilators would be simpler or less fancy.) Seems like a bargain to me but maybe GM wasn’t the best producer. I think we could buy more pretty quickly from China, as Elon Musk did. In anycase, I’ll give the government the benefit of the doubt on the bargaining. Note that even as they were haggling over the price, GM and Ventec were continuing to work towards production. The market for ventilators is growing.

The President, however, then went on Hannity to say that he didn’t think we needed 30-40 thousand ventilators and also insulted GM CEO Mary Barra in a series of tweets. This was clearly some kind of clever bargaining strategy. Surprise! It failed. Yesterday in a pique, the President invoked the DPA.

CNN: President Donald Trump invoked the Defense Production Act on Friday to require General Motors to produce more ventilators to deal with increased hospitalizations due to the spread of the novel coronavirus in the United States.

But it’s unclear what practical, immediate effect the order will have.

…Trump also named Peter Navarro as the national Defense Production Act policy coordinator for the federal government. Trump said Navarro has been doing that job over the past few weeks but announced him as the coordinator for the first time on Friday.

Trump decided to invoke the act because he was irked by news reports that an agreement between GM and the administration had stalled, a person familiar told CNN.

So what have we gained by using the DPA? Will the ventilators be produced any faster? Will the ventilators be any cheaper? Will other companies be so quick to enter into negotiations with the government? Will Peter Navarro direct production more efficiently and fairly than market prices? No.

Real wages are flexible now

The restaurant used to pay you $13 an hour, now they pay you “$13 an hour plus p = ?? of Covid-19.”  That new wage is a lower real wage.

Of course some workers are quitting, others are trying to shift back to disability, and so on.  Those are movements along labor supply curves, not proof of sticky wages.

Plus other employers are taking unprecedented latitude in shifting around work hours, demanding new levels of commitment, asking workers to scrub down surfaces more and wear masks, and above all offering weaker promotion ladders, etc. — all cuts in the real wage.

I expect unemployment levels to rise to new and scary heights, and yes I do think the government should do something about that.  But if you are analyzing the status quo with “a sticky wage model,” that assumption is probably wrong.  Even though it is usually correct.

Of course at some point in the future I expect wages to become sticky again.  Perhaps that is how we will know things have stabilized.

“Flexible wages on the downside, sticky wages on the upside” is perhaps the best assumption at the moment.

A further lesson is that sticky wages are not the only driver of unemployment, and the “fixed cost of working” models of Richard Rogerson and others have been underrated for a long time (to oversimplify a bit, given fixed costs it is not worth everyone coming in to work at some levels of demand/productivity).

Minimum wage hikes are a much worse idea now

For one thing, the marginal product of labor is much lower, at least for a good while.  But there is a deeper problem.  Under the status quo ex ante, minimum hike proponents argued that the highest wages would be taken out of, say, the economic rents of restaurants.

But now those rents are largely gone!  Especially for the small restaurants.  The result will be that, if the minimum wage is raised, more laborers are laid off.  At the very least there should be no minimum wage, or a much lower minimum wage, for small businesses.

A further effect is that higher contagion risk (extending into the future too, now that pandemics are salient) may encourage more employers to automate, including in kitchens, theme parks, etc.  A higher elasticity of automation also militates against a minimum wage increase, because capital-for-labor substitution is now more likely, again indicating larger negative employment effects.

In essence, most of the previous empirical literature on this topic has to be significantly downgraded in relevance.  Whatever you thought of them to begin with, the pieces by Dube and the like just don’t apply any more.

Most likely, we should lower current minimum wages.  And that is all the more true, the more you have been worrying about coronavirus risk and Trump’s poor performance in response.

These are all very simple points, I am tempted to say they are “not even Econ 101.”

And note that in the very early stages of a lock down you might want a much higher minimum wage, precisely to keep people away from work, if somehow you cannot keep the customers away.  The much higher minimum wage would force the employer to decide which are the truly important workers, and send the other into non-infectious activities, as Brian Slesinsky suggested to me.

This is all related to my earlier post The Meaning of Death, from an economist’s point of view.

Longer-run economic consequences of pandemics

How do major pandemics affect economic activity in the medium to longer term? Is it consistent with what economic theory prescribes? Since these are rare events, historical evidence over many centuries is required. We study rates of return on assets using a dataset stretching back to the 14th century, focusing on 12 major pandemics where more than 100,000 people died. In addition, we include major armed conflicts resulting in a similarly large death toll. Significant macroeconomic after-effects of the pandemics persist for about 40 years, with real rates of return substantially depressed. In contrast, we find that wars have no such effect, indeed the opposite. This is consistent with the destruction of capital that happens in wars, but not in pandemics. Using more sparse data, we find real wages somewhat elevated following pandemics. The findings are consistent with pandemics inducing labor scarcity and/or a shift to greater
precautionary savings.

That is a new paper by Òscar Jordà, Sanjay R. Singh, and Alan M. Taylor.  And here is the tweet storm.  It should be noted, of course, that the Spanish flu did not give rise to a comparable economic stagnation.

Via Evan Soltas.

Safety Protocols and Zones of Quarantine

Carl Danner writes me:

“Essential activities” has no objective definition.  It implies some blanket degree of risk acceptance that can’t be accurate by any underlying calculus, i.e. as if someone has specifically weighed whether we can tolerate these particular activities because they provide enough value to offset the incremental risk of conducting them.  But the reality is more likely that those conducting most activities (including “essential” ones) are now undertaking risk mitigation measures intended to reduce the chance of virus transmission to very low or nonexistent levels.

What we need instead — and the logical place for governments to go in unwinding these blanket restrictions — is a recognition that any beneficial economic activity should be allowed if undertaken using a protection protocol appropriate to its particulars and sufficient to prevent virus transmission.  This would get government out of the business of choosing which businesses or occupations are essential, vital, important or whatever — including all the problems attendant to making such discretionary determinations across the entire economy for a sustained period.  Without that revised approach, we could start to develop occupational licensing/certificate of need type problems as a general feature of the economy.

In other words, this part of the virus response should transition to a health and safety regulatory concern that is important, but handled like most of the others.  For example, poor food hygiene can also kill you, but governments generally don’t respond by deciding which cuisines are essential and which are not.  Rather, anyone willing to follow the safety rules can put up any menu they want.  So it should be for economic activities of all kinds.

We should not lift restrictions until the number of new cases is declining and low and we have enough testing capacity to squash new outbreaks. But we should start to think about what safety protocols may be reasonable in the future. For example, I think we could allow any firm to reopen that does not deal with the public and where all the employees wear masks. Any workplace that disinfects twice a day and checks worker temperatures might be another appropriate allowance. Another possibility is quarantining at work. I don’t see the latter as useful for most workplaces but for say a nuclear energy plant or air traffic controllers it might be appropriate to bring in mobile homes, as they do for fracking workers in North Dakota. Going somewhat farther afield we might use cellphone data to decide on zones of quarantine, e.g. home or work or driving in between. Obviously such systems can be spoofed but the point would be to offer this as a temporary and voluntary system to move towards normalcy.

Hat tip: Michael Higgins.

Stock Buybacks are Fine

Ted Frank writes:

Let’s start with what a buyback is, since even many financial journalists do not understand this: A corporation purchases stock from its shareholders. It’s economically indistinguishable from a special dividend, where a corporation pays out money to every shareholder, except it permits shareholders to elect their own tax consequences, unlike a dividend that creates a tax event immediately.

…Proposals to ban buybacks are effectively proposals to demand corporations hold such huge stockpiles of cash, depriving shareholders of investment choices. Such proposals will backfire by slowing down the economic recovery when money that could be invested is instead held in corporate bank accounts, doing nothing.

I agree. Buybacks are just not a big deal.