Category: Economics

Adam Smith: Libertarian in a Foxhole

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.

or

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

Should Amazon and eBay allow price gouging?

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.

Stopping Time: An Approach to Pandemics?

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.

Bullshit Patents

I wrote last year:

Despite never having built a working product, Theranos accumulated hundreds of patents. These patents are now the only thing of value left but the patents aren’t valuable because of breakthrough science, the patents are valuable because they can be used to force people who do breakthrough science to cough up part of their return.

Now, just as I predicted, some of these bullshit patents are being used to prevent a company that is working on Covid-19 tests. The logic is evil but impeccable. Sue a firm when time is of the essence. Moreover, you won’t be surprised that just about everyone involved is scraped from the bottom of the barrel. Theranos sold the patents which were bought by a patent troll owned by Softbank, the firm bankrolling the notorious WeWork disaster, and the law firm involved, Irell & Manella, once took a monkey for a client (literally, although PETA paid) in an infamously stupid copyright infringement dispute.

Mike Masnick who broke the story names the guilty and writes:

Honestly, I’m used to all sorts of awfulness, but this one piles awfulness upon awfulness, and takes it to a level of pure evil….I wonder how they sleep at night.

….I understand the need for zealous representation of a client in court, but this seems even more despicable than your every day patent trolling, and people should associate these lawyers names with the truly despicable behavior on display here. Similarly, it should be a reminder of why its a good thing that the Supreme Court decided a decade and a half ago that injunctions are often inappropriate in patent cases.

I do hope a sensible judge punishes this abuse.

Hat tip; Michael Pettengill.

The *Love Letter* has a P.S.

As people start reacting to Covid-19, they are looking mostly to the larger businesses for assistance. Costco and Walmart are packed. Amazon and UPS are delivering our packages. For entertainment at home, Americans are relying on Netflix and the cable companies. For information on Covid-19, Twitter is a very useful stop. As hospitals become overcrowded, CVS and Rite Aid may become important as local health centers and sources of community information.

It turns out that the larger, more profitable businesses are the ones that have the talent, the command of public attention and the financial resources to adjust to these changing conditions.

Big business also has been ahead of the curve when it comes to prediction and adjustment. The NBA postponed its season before most politicians, including the president, realized the gravity of the situation.

Only a month ago, there were headlines mocking Silicon Valley for being overly concerned with Covid-19 and for avoiding handshakes. The tech community had a high degree of advance awareness of Covid-19 problems, and it was ready with telework and other adjustments when the time came. The tech world’s penchant for carrying what seemed to be absurdly large surpluses of cash — last year Apple had over $100 billion in cash reserves — now also seems prescient. Apple’s stores are currently closed in most parts of the world.

And this:

Larger businesses are also easier to assist if necessary. Whatever you think of the forthcoming bailout of the major U.S. airlines, logistically it will not be very difficult to pull off, since the targets are large and obvious and relatively easy to monitor. Banks are willing to lend to them, because they know the government does not contemplate a world without major airlines.

It is much more difficult to bail out the millions of small and medium-sized enterprises around the world that will demand assistance. How do you find and track them? How can you tell which have no chance of bouncing back? Government bureaucracies cannot easily deal with those problems, and in turn private banks do not perceive governments to be making credible commitments to these small businesses. By contrast, there are numerous precedents for governmental aid or loans to airlines or other major businesses.

That is all from my latest Bloomberg column, much more at the link.  One problem Italy has, of course, is a fairly high reliance on small business.

Bill Dupor of the St. Louis Fed on fiscal remedies

The entire piece is interesting, here are two highlights:

Subsidize COBRA Continuation Coverage Employer -provided health insurance is commonplacein the United States. Laid off (or furloughed) workers, even if they receive higher UI replacement rates, would (or at least could) lose their health insurance. The federal government already has the COBRA program to allow for continuation of coverage for workers losing their jobs. This program, however, requires worker-paid premiums. These premiums increase the relative cost of engaging in nonmarket activities. To reduce that cost, the federal government might temporarily cover 70 percent of the COBRA premiums for the unemployed or furloughed. Calculating an appropriate size of such a program, even in a rough sense, is difficult at this stage. For a baseline, suppose the allocation were $25 billion, which was the value of a similar program implemented under the 2009 Recovery Act.

And here is another way to get cash into people’s hands quickly:

Penalty-Free Withdrawals from Individual Retirement Accounts

Many Americans hold tax-deferred individual retirement accounts. Individuals can withdraw funds on retirement (and a few other special situations) or any time they wish if they pay a 10 percent penalty. This 10 percent penalty is in addition to the taxes that are due on the withdrawal. In the event of a severe viral outbreak, the federal government could temporarily remove this 10 percent penalty up to a certain dollar amount and for a preset length of time. Since the initial contribution to the retirement fund was tax deferred, taxes would need to be paid on the withdrawal even if the additional penalty was waived.

Recommended.

The best economic plan against the coronavirus

I have produced a 7 pp. document, mostly micro- rather than macroeconomics, leaving the pure health and health care issues aside, you will find it here (link is now corrected).  Intended for policymakers.  Here is the opening bit:

“We need a series of policies to achieve some rather complex ends, and in conjunction. Other than the obvious goals (“minimize human suffering”), these ends are:

  1. Scale down economic activity in a rapid way to keep people at home, but without devastating the physical, cultural, or organizational capital that will be needed to restore growth and normality.

  2. Boost the confidence of markets — both retail and financial markets — by showing progress in limiting the spread of the disease. (But note that merely slowing the spread of the disease may not help the economy, as uncertainty would linger for longer periods of time.)

  3. Keep business in a position to rebound.

  4. Create incentives for production to bounce back once that is appropriate.

You will notice a tension between #1 and #2-4, which is what makes this policy issue so difficult. The ideal policy mix should both lower and raise output, and at just the right speed. No one ever taught us how to do that.

Furthermore, policymakers need to figure out which sectors a) we wish to keep up and running (food, health care), b) which sectors we want to contract rapidly but bounce back rapidly as well (education), and c) which sectors we do not want to protect at all and would be willing to see perish (e.g., cruise ships, note that most operate under foreign flags and employ mainly non-Americans). 

Those classes of sector may require very different economic policies, most of all we should not waste aid on the latter class of sectors. Be nervous of general proposals for “the economy.”

Again, here is the link, please do leave your suggestions in the comments section of this blog post.  I thank Patrick Collison for some writing and editing assistance with this document, though of course he is not liable for its final contents or conclusions.

Mercatus call for short papers

Today, the Mercatus Center put out a call for policy briefs related to the COVID-19 pandemic. We hope to gather short, actionable analyses for decision makers in the public, civil society, and private sectors regarding both immediate response (what’s working or could be done immediately), as well as in the medium term (what do we need to be thinking about now so that we’re prepared in six to twelve months).

More information can be found here.

Papers will be published quickly (within 24 hours in most cases), and authors will receive a $1,000 honorarium.

The list of possible topics is advisory and by no means comprehensive; our goal is to assemble the smartest actionable analyses as quickly as possible.

Hedgehogs in particular: what do you know here that the foxes should hear?

Note that research need not directly relate to public policy, but also how the business sector and civil society can and should respond.

Pay people to quarantine

Once a pool of money has been allocated to a city or region, the people who are paid to quarantine would be determined by auction. There are many options around how to design pricing mechanisms to incentivize consecutive days of quarantine and other types of health improving behaviors. Based on the committed payments for a city, the price of remaining quarantined would be set on a daily basis.

Consider what the cost might be to pay to place 10% of a city’s population into quarantine. I believe that it costs significantly less than minimum wage for those people. The population that would be quarantining would be the young, elderly, the sick, and those for whom working at home is possible. Quarantining a sizable portion of a population dramatically slows the progression of a virus. Even at 30% of the population, I expect the price would remain well below minimum wage. This would have a dramatic impact on the pace of spreading.

That is from Nate Baker, enforcement would be by cyber-surveillance.

A 21st Century Jobs Program

Sick pay pays sick people to stay home but to defeat the virus we also want lots of healthy people to stay home. We also want to support people who are at home because they can’t find work. We can accomplish these goals by subsidizing work using services like Upwork or Mechanical Turk. Jobs on platforms like Upwork are the shovel-ready work of the 21st century. A 21st century jobs program would pay people to stay home and isolate, support people without work, and produce some useful output all at the same time.

Instead of paying people to dig and then fill ditches we could pay people to help train machine-learning apps, enter data, subtitle videos. take surveys, maybe even fold proteins to disrupt viruses.

More generally, how about paying people to take online courses? i.e. an income support program and a human capital investment program at the same time. Of course, not everyone would do well and people would cheat but think of these programs as a combination of paying people to isolate, maintaining aggregate demand and providing a source of income when low-wage restaurant and other service-jobs are declining but with a work requirement.

Hat tip: Discussion with Nate Baker. See also John Horton and Arindrajit Dube.

Should we ration coronavirus testing by price?

This is making the rounds on Twitter:

Just went to Seattle’s UW Medical Center to ask how much patients are being charged for a coronavirus test. $100-$500 if they have insurance. $1,600 if they don’t.

Put your emotions aside and ask the logical question: since the number of tests falls short of current demand, how should we ration those tests?  I would think we most wish to test potential super-spreaders, so they can self-quarantine or otherwise be isolated or avoided.  A priori, I would expect potential super-spreaders to be those who work in service jobs connected to many other people.  Individuals who suspect they already have the disease are also more likely to be super-spreaders, if only because there is a decent chance they actually do carry the disease.

Now at a price say of $500, you will rule out some of the poor, some of the “frivolous testers” (there are people who will try anything that is new), but you don’t rule out many of the middle class people — or wealthier people — who think they might have the coronavirus.

You end up targeting potential superspreaders by “those who think they have it,” but not by “those who work in service jobs where they come in contact with a lot of people.”

An imperfect solution, but not an entirely bad one either.  It is probably better than random allocation.  And still all of the available tests get used.

How about a government price of zero, combined with rationing?  Of course it depends what the principle of rationing would be.  From other countries, “I came into contact with a traced person” seems to be one standard, noting that the United States has nothing close to Singapore’s surveillance mechanism in this regard.  So you would get a very loose version of that standard, with many flu-laden nervous nellies taking the test, claiming they came in contact with a sick person.

That could perform either better or worse than the market solution.  In Singapore it is probably better than the market solution, but I am not sure for the United States.  My intuition would opt for the market prices, but I admit that is not verified by either model or data.

A separate issue, hard to judge from current information, is whether there is any positive supply elasticity at the higher price.  Of course if there is, that will make the higher price look better, but perhaps other regulatory and pipeline restrictions on testing will mean the higher price won’t matter.

And note that as the supply of tests becomes much greater, as is happening right now, the case for those high market prices becomes much, much weaker.  Zero price and no rationing is where we would like to end up, and I think we will.

I find that this problem, and how you tackle it, is a good test for whether or not you think like an economist consistently.

What is the inflation rate these days?

Airline tickets are dirt cheap, masks and test kits are super-expensive (have to marry a Prime Minister or qualify for the Utah Jazz), and demand is collapsing for commodities.  Gas should be cheaper too.  A museum visit soon may be infinite in price.

So what will the new overall rate of price inflation be?  What is the quality-adjusted value of “buy a new Toyota plus ??? chance of coronavirus from the floor visit”?

What is the new quality-adjusted value of health care?  It is (one hopes) more likely to save your life, but ?? percent of the staff are carriers themselves.

The new quality-adjusted value of on-line higher education?

How should we think about your rent payment, given how many of the urban amenities are shutting down?  Has living next door to a park and walking trails suddenly escalated in value?

And a lot of the goods out there — if you can buy them — are option values.  I don’t need more toilet paper, but I would pay a few dollars for the continued right to keep on buying toilet paper, which usually I take for granted.  Our stocks of various commodities vary in value much more than they used to — now I treasure those Goya small red beans in the basement.

Is it still meaningful to just take the old price basket averages?  Somehow I don’t think so.

If there is no well-defined rate of price inflation (finally Scott Sumner wins on that one), can there be a well-defined real interest rate?  Is it very high or very low?  Or just “a high variance real interest rate”?  Or is the nominal interest rate the new real interest rate?

Was the nominal interest rate all along the interest rate that mattered and made sense?

Is any of this built into the macro models people are applying to this crisis?  No.

A new proposal for coronavirus rebound

The $8 billion emergency spending bill to deal with coronavirus includes $3 billion that can be used for the research and development of a coronavirus vaccine or treatment. There’s a better way: The U.S. government should take advantage of the recent stock market plunge to incentivize firms to develop a coronavirus cure, vaccine, or other approaches.

We call this proposal the Epidemic Market Solution or EMS. The government should offer each of 10 firms stock options worth ten billion dollars if the Dow Jones increases by 15 percent over the next six months, and maintains that average increase over a month.

A coronavirus cure or vaccine would generate such an increase. For example, if a firm has $10 billion in options based on index funds, and a new cure or progress towards a cure causes the stock market to rise by 15 percent, the firm would make a profit of $1.5 billion. An even better response might be an increase in the market by 20 percent; in this case, the firm would make a profit of $2 billion.

That is from my old colleagues Linda Cohen and Ami Glazer at UC Irvine, and yes that is the Ami Glazer of Glazer’s Law.  Here is the full proposal.