Category: Economics

MRU and the Coronavirus

Many universities are moving rapidly to teach online. Tyler and I and the entire team at MRU want to do everything we can to help make the process as successful as possible not just to improve education but to help to reduce the threat from COVID-19.

First, we have created a Resources Page on Teaching Online at that page you can also find a Facebook Community Page where educators are providing lots of tips and resources not just on videos but on how to use Zoom and other tools. Here, for example, is an excellent twitter thread on teaching online from Luke Stein that covers hardware, software, and techniques.

Second, If you are using Modern Principles, our textbook, and want to move online, Macmillan will do that for you for free, very rapidly, and including online tests, homework etc. If you want to move online from a different book, send Tyler or myself an email and we can discuss the best ways to do that.

Third, MRU has hundreds of videos which are free for anyone to use. Most notably our courses on Principles of Microeconomics and Principles of Macroeconomics but a lot more as well. You can search for MRU videos here. Here is a “greatest hits” list.

MRU is, of course, not the only source of excellent teaching material. Here are some others:

One place to begin might be to explain to your students the mathematics of why universities and schools are closing despite relatively few deaths to date in the United States. As always, this 3Blue1Brown video is excellent.

Addendum: See also Tyler’s important announcement on EV Prizes.

If I believed in Austrian business cycle theory, 2020 edition

If I believed in Austrian business cycle theory, I would think that the Fed lowering interest rates and flooding the system with liquidity, post-2008, was a disastrous decision, associated with a cascade of corporate debt, an equity bubble, and massive indirect subsidies to inefficient, now-doomed-to-fail smaller companies.

The restructuring or bankruptcies of inefficient retail, high production cost energy companies, and bad European banks were postponed, but now the bloodbath will come.  The coronavirus will be seen as the immediate cause, but it also will turn out to have been the mere messenger of inevitable structural changes.

This will become clear as, post-coronavirus, so many of the companies from those sectors simply do not come back, nor will they birth more liquid replacements or counterparts.  We will end up with much more “big business,” and much more on-line commerce, and the status quo ex ante will have been revealed to be full of malinvestment.

Fortunately, I do not believe in Austrian business cycle theory.  And for those relatively new to MR, here is my 2005 post If I Believed in Austrian Business Cycle Theory.

Massive US Government Failure

NPR: Ashish Jha, who runs the Harvard Global Health Institute, says the response to the coronavirus has varied dramatically around the world.

…So how has the United States’ response been?

“Our response is much, much worse than almost any other country that’s been affected,” Jha says.

He uses the words “stunning,” “fiasco” and “mind-blowing” to describe how bad it is.

“And I don’t understand it,” he says incredulously. “I still don’t understand why we don’t have extensive testing. Vietnam! Vietnam has tested more people than America has.” (He’s citing data from earlier this week. The U.S. has since started testing more widely, although exact figures still aren’t available at a national level.)

…Jha believes that the weekslong delay in deploying tests — at a time when numerous other tests were available around the world — has completely hampered the U.S. response to this crisis.

“Without testing, you have no idea how extensive the infection is. You can’t isolate people. You can’t do anything,” he says. “And so then we’re left with a completely different set of choices. We have to shut schools, events and everything down, because that’s the only tool available to us until we get testing back up. It’s been stunning to me how bad the federal response has been.”

I too am stunned .

Michael Strain and Scott Gottlieb have policy proposals for coronavirus

Congress should make direct cash payments—mailed checks or direct deposits—to low-income households in places with severe outbreaks. Hourly wage workers should not feel compelled to show up to work sick because they need to pay bills. Congress can help these Americans recover and keep other people healthy by financing their time away from work.

In states experiencing severe outbreaks, Congress should waive the requirement that people receiving unemployment insurance payments look for work. Better that such unemployed workers receive financial assistance for rent, mortgages and groceries than to risk spreading the virus by applying and interviewing for jobs. Congress should also waive work requirements in the food-stamp program.

Children in low-income families will miss subsidized meals if schools are closed. Federal subsidies to those households should be increased to account for lost breakfasts and lunches. This might help relieve some of the pressure on low-income parents, who might otherwise feel the need to go to work even if ill.

Cash-strapped states may be reluctant to divert spending from other priorities toward health care, especially as more people use services. States that experience outbreaks may also lose tax revenue. Congress should increase the share of Medicaid spending financed by the federal government to alleviate the budget pressure.

So far the best proposals I have seen, here is more from the WSJ.  Note that paid sick leave can place a high burden on small and medium-sized businesses, here is a Yelowitz and Saltsman critique of paid sick leave, also WSJ.

What signal are low interest rates sending?

Obviously lower interest rates — ceteris paribus — do indicate the government should borrow more, but as Scott Sumner frequently reminds us: “Never reason from a price change.”

Most of all, it seems that rates, including long rates, have declined because of a flight to safety.  The price change itself is ambiguous, but if you buy that interpretation we should be spending more, and borrowing more, to invest in safety.

Does infrastructure make us safer?  Well, it depends.  Public health infrastructure does, and that is where we should be spending more at the margin.  I would expect that a lot of traditional physical infrastructure does not make us safer at all, and if you think its economic value covaries positively with gdp, it can make us less safe in the relevant portfolio sense.

Also keep in mind that a lot of marginal borrowing we do short-term and then refinance by borrowing short repeatedly, thus incurring ongoing interest rate risk.  That is yet another reason to focus on actual safety rather than on outputs whose values rise sharply with gdp.

Many professional economists are getting this point wrong and thinking we should go longer on those bridges and tunnels.

(Coronavirus) arbitrage

A teenager was sent home from school after being caught selling shots of hand sanitiser to his fellow pupils at 50p a go.

His mother, Jenny Tompkins, from Leeds, posted a picture of him arriving home earlier after his entrepreneurial exploits at Dixons Unity Academy.

In a post on Facebook, she said it was hard to discipline her son when his “dad called to say he was a legend”.

He plans to use the £9 he made to buy a kebab, she added.

Some respondents to the post, which was shared nearly 130,000 times, praised his efforts.

One said “can’t fault his logic”.

Others reminisced about selling cigarettes for £1 a go.

Someone else said: “Bet he gets an A in economics.”

Here is the link, via the under-followed Fergus.

What is the proper fiscal response to the coronavirus?

A number of you have been asking me this question, and unfortunately I still do not know.  Here is why:

1. I still am not sure how much we want to keep people on the job, as opposed to keeping them away from the workplace (but still being paid?).

2. I am not sure if this will be a rapid, bounce-back recovery, or a tortuous supply-bottlenecked, high risk premium non-recovery.  It matters a good deal for our policy choices and also for their timing.

3. Will aggregate supply or aggregate demand end up being the binding constraint, after the two have interacted for a while?  Or is that the wrong framework altogether?

3b. Can you build tunnels and bridges with quarantined workers?

4. I see a good chance that the coronavirus will affect regions of the country differently, with climate, temperature, humidity, and population density being possible factors.  (Where are the overloaded hospitals in Jakarta?  Surely at this point it is not just a data collection issue.)  So where exactly should the aid and the fiscal stimulus go?  And for what exactly?  It seems we will know much more soon, but we don’t know it yet.

5. Do you want to give people cash if they will just go out and spend it on entertainment or in large, crowded stores?  Is that what you are hoping they will do?  To what extent do we want the “transmitting sectors” to be contracting right now?  Does it do much good to send consumers money they will spend on Amazon or pizza deliveries, two sectors that may do fine or even prosper during the tough times?

I do not think we should bail out shale oil producers or cruise lines.  Presumably we wish to support businesses with an income gap for coronavirus reasons, but what exactly should we do?  I am puzzled by the degree of certainty people seem to exhibit about this issue.  I am not arguing we should do nothing, but simply noting I am not yet sure what to recommend.  My intuition is to opt for well-targeted federal aid for the most heavily affected regions — Washington state, the Bay Area, and parts of New York — and then take another bite at the apple soon as the numbers develop.

In the meantime, let’s do everything we can on the public health front.  Much of that will end up being fiscal policy as well.

How big a hit will the U.S. economy take?: two scenarios

That is the topic of my latest Bloomberg column, here is one pastiche:

First, consider the relatively optimistic view: Covid-19 will have affects akin to what economists call a seasonal business cycle — which is to say, it will be over quickly and without much lasting damage.

…in this scenario there is also a rapid path back to recovery. At some point the terror of Covid-19 will lift, just as cases in many parts of China now seem to be declining. Once public health conditions improve, retail, entertainment and services can gear back up. Both production and purchasing power will bounce back, similar to how they normally do after the first-quarter doldrums.


But there is a much more worrying scenario. Rather than drawing an analogy with temporary seasonal cycles, an alternative model draws a parallel with cascading disruptions. Have you ever tried building a sand pile and noticed that, at some point, adding a few more handfuls of sand causes a kind of avalanche, leaving just an amorphous heap?

This less sanguine option might look like this: The Chinese economic slowdown leads to a permanent loss of momentum and a global recession. At the same time, with Lombardy closed down, the Italian government defaults, but the European Union is unable to resolve the matter (and the associated bank failures) in a timely and resolute manner. Governments vacillate between policies that make it easier for people to stay at home to limit the spread of the disease and policies designed to get them back in the workplace.

The U.S. would be caught up in the general loss of confidence, as well as the contagion from European banks. But that is only the beginning. As schools close to limit the spread of Covid-19, single parents would have to stay home, and the resulting production bottlenecks would plague the U.S. economy. Maybe New York City would have to cut back on the number of subway trains it runs, and much of the city’s economy would grind to a halt. Supply chain problems from China would persist, hitting everything from medicines to the ordinary goods found in a Walmart.

The problems of missing goods in the supply chain, workplace absenteeism, family health emergencies, and investor uncertainty would compound each other. Any individual act of spending or production, rather than jump-starting further economic activity, would run up against another bottleneck and fade to insignificance. The confidence boost would fail to materialize. Untangling this mess of problems is much harder than just getting people to go back out to dinner and the movies again, and could take years. Traditional demand-side stimulation from the Fed or from the fiscal side would not itself reverse the stagnation.


The Lasting Effects of the 1918 Influenza Pandemic

[I’ve never put a trigger warning on a post before but given the current situation the information here is potential upsetting to anyone expecting a child. I do not think that the current pandemic will be as bad as the 1918. I am also hopeful that the weather will work in our favor and that, as Tyler argued, America will start to work. Do also read my post, What Worked in 1918-1919 for a more positive message.]

The 1918 influenza pandemic struck the United States with most ferocity in October of 1918 and then over the next four months killed more people than all the US combat deaths of the 20th century. The sudden nature of the pandemic meant that children born just months apart experienced very different conditions in utero. In particular, children born in 1919 were much more exposed to influenza in utero than children born in 1918 or 1920. The sudden differential to the 1918 flu lets Douglas Almond test for long-term effects in Is the 1918 Influenza Pandemic Over?

Almond finds large effects many decades after exposure.

Fetal health is found to affect nearly every socioeconomic outcome recorded in the 1960, 1970, and 1980 Censuses. Men and women show large and discontinuous reductions in educational attainment if they had been in utero during the pandemic. The children of infected mothers were up to 15 percent less likely to graduate from high school. Wages of men were 5–9 percent lower because of infection. Socioeconomic status…was substantially reduced, and the likelihood of being poor rose as much as 15 percent compared with other cohorts. Public entitlement spending was also increased.

At right, for example, are male disability rates in 1980, i.e. for males around the age of 60, by year and quarter of birth. Cohorts born between January and September of 1919 “were in utero at the height of the pandemic and are estimated to have 20 percent higher disability rates at age 61…”.

Figure 3 at right shows average years of schooling in 1960; once again the decline is clear for those born in 1918 and note that not all pregnant women contracted influenza so the actual effects of influenza exposure are larger, about a 5 month decline in education, mostly coming through lower graduate rates.

Higher disability and lower education translate into greater government payments as show in the final figure below. Almond labels these welfare payments which might be slightly misleading–these are Social Security Disability payments in 1970. Here’s Almond:

Average payments to women and nonwhites in 1970 are plotted in figure 8. The average welfare payment was 12 percent higher for both women and nonwhites born in 1919, or approximately one-third higher for children of mothers who contracted influenza. When we focus on quarter of birth, it is apparent that these increased payments are generated by high payments to those born between April and June of 1919.

Note that men and women who were especially disabled could have died before 1970 and so these are lower bounds on the disability impact.

Fetal exposure seems to be the key as Almond tests for and rejects other possibilities. The 1918 kids, for example, seem about the same as the 1920 kids so it’s not that the flu killed off the weak kids in 1918.

Almond was interested in the 1918 pandemic not simply as a historical episode but to make the case that infant health and infant health programs have high benefit to cost ratios, a still relevant lesson.

Hat tip: Wojtek Kopczuk.

The FDA and Coronavirus

The failure of the FDA/CDC to adequately prepare for coronavirus, despite weeks of advance notice from China is one of the most shocking and serious examples of government failure that I have seen in my lifetime. After being prevented from doing so, private laboratories are now allowed to offer coronavirus tests and Bill and Melinda Gates’s Foundation is working on an at home swab and test.

But what happens when people get sick? What drugs will patients be allowed to try given that there is no standard treatment available? One experimental antiviral, Remdesivir, was given to the first US patient who was on a downward spiral but seemed to recover after receiving the drug. Gilead, the manufacturer says:

Remdesivir is not yet licensed or approved anywhere globally and has not been demonstrated to be safe or effective for any use. At the request of treating physicians, and with the support of local regulatory agencies, who have weighed the risks and benefits of providing an experimental drug with no data in 2019-nCoV, Gilead has provided remdesivir for use in a small number of patients with 2019-nCoV for emergency treatment in the absence of any approved treatment options.

If Gilead is willing to supply, should patients have a right to try? This seems like a good case for the dual tracking approach proposed by Bartley Madden–let patients try unapproved drugs but collect all information in a public database for analysis. Clinical trials for Remdesivir and other potential drugs are currently underway in China.

Chloroquine, might also be useful against Covid-19. Chloroquine was approved long ago to treat malaria and physicians are allowed to prescribe old drugs for new uses. New uses for old drugs are discovered all the time and they do not have to go through long and costly FDA approval procedures before being prescribed for the new uses. Since chloroquine has never been tested for efficacy against coronovirus, allowing physicians to prescribe it is similar to allowing physicians to prescribe an unapproved drug like Remdesivir. The difference in how new drugs and old drugs for new uses are treated is something of a regulatory anomaly but a fortunate one as I argue in my paper on off-label prescribing.

I suspect that my arguments for less FDA regulation will be relatively well received during the current climate of fear. Bear in mind, however, that for the patient who is dying it’s always an emergency.

Hat tip: Balaji Srinivasan, who really would make a great FDA commissioner.

What Worked in 1918-1919?

The influenza pandemic of 1918 was the most contagious calamity in human history. Approximately 40 million individuals died worldwide, including 550 000 individuals in the United States...[C]an lessons from the 1918-1919 pandemic be applied to contemporary pandemic planning efforts to maximize public health benefit while minimizing the disruptive social consequences of the pandemic as well as those accompanying public health response measures?

That’s the question Markel et al. analyzed in 2007 by gathering historical data on outcomes and what 43 US cities, covering about 20% of the US population, did to combat influenza in 1918-1919.

Nonpharmaceutical interventions were considered either activated (“on”) or deactivated (“off”), according to data culled from the historical record and daily newspaper accounts. Specifically, these nonpharmaceutical interventions were legally enforced and affected large segments of the city’s population. [1] Isolation of ill persons and quarantine of those suspected of having contact with ill persons refers only to mandatory orders as opposed to voluntary quarantines being discussed in our present era. [2] School closure was considered activated when the city officials closed public schools (grade school through high school); in most, but not all cases, private and parochial schools followed suit. [3] Public gathering bans typically meant the closure of saloons, public entertainment venues, sporting events, and indoor gatherings were banned or moved outdoors; outdoor gatherings were not always canceled during this period (eg, Liberty bond parades); there were no recorded bans on shopping in grocery and drug stores.

The authors define “public health response time” as the number of days from the day the excess death rate was double baseline to the day that at least one of their three key public health measures was implemented. Cities that responded very early have a negative public health response time. The basic result is shown in the figure below. The longer the public health response time the greater the total excess deaths (the arrow is my least squares eyeball).

Moreover, although it’s difficult to control for other factors, cities that combined school closures, isolation and quarantining, and public gathering bans tended to do better. Some cities let up on their public health interventions and these cities seem to correlate well with bi-modal distributions in excess death rates, i.e. the death rate increased. Denver was an example where the public gathering ban was dropped and the school ban was lifted temporarily and the excess death rate rose after having fallen.

The authors conclude:

…the US urban experience with nonpharmaceutical interventions during the 1918-1919 pandemic constitutes one of the largest data sets of its kind ever assembled in the modern, post germ theory era.

…Although these urban communities had neither effective vaccines nor antivirals, cities that were able to organize and execute a suite of classic public health interventions before the pandemic swept fully through the city appeared to have an associated mitigated epidemic experience. Our study suggests that nonpharmaceutical interventions can play a critical role in mitigating the consequences of future severe influenza pandemics (category 4 and 5) and should be considered for inclusion in contemporary planning efforts as companion measures to developing effective vaccines and medications for prophylaxis and treatment. The history of US epidemics also cautions that the public’s acceptance of these health measures is enhanced when guided by ethical and humane principles.

Addendum: Another way of putting this is that China has largely followed the US model. Can the US do the same?

Facts about Starbucks against free bathrooms charge them all

In May 2018, in response to protests, Starbucks changed its policies nationwide to allow anybody to sit in their stores and use the bathroom without making a purchase. Using a large panel of anonymized cellphone location data, we estimate that the policy led to a 7.3% decline in store attendance at Starbucks locations relative to other nearby coffee shops and restaurants. This decline cannot be calculated from Starbucks’ public disclosures, which lack the comparison group of other coffee shops. The decline in visits is around 84% larger for stores located near homeless shelters. The policy also affected the intensive margin of demand: remaining customers spent 4.1% less time in Starbucks relative to nearby coffee shops after the policy enactment. Wealthier customers reduced their visits more, but black and white customers were equally deterred. The policy led to fewer citations for public urination near Starbucks locations, but had no effect on other similar public order crimes. These results show the difficulties of companies attempting to provide public goods, as potential customers are crowded out by non-paying members of the public.

That is from a new paper by Umit Gurun, Jordan Nickerson, and David H. Solomon.  Can there be any doubt about the excellence of Kevin Lewis?

Revisiting Latino economic assimilation

Here is a new paper by Giovanni Peri and Zachariah Rutledge

Using data from the United States spanning the period between 1970 and 2017, we analyze the economic assimilation of subsequent arrival cohorts of Mexican and Central American immigrants, the more economically disadvantaged group of immigrants. We compare their wage and employment probability to that of similarly aged and educated natives across various cohorts of entry. We find that all cohorts started with a disadvantage of 40-45 percent relative to the average US native, and eliminated about half of it in the 20 years after entry. They also started with no employment probability disadvantage at arrival and they overtook natives in employment rates so that they were 5-10 percent more likely to be employed 20 years after arrival. We also find that recent cohorts, arriving after 1995, did better than earlier cohorts both in initial gap and convergence. We show that Mexicans and Central Americans working in the construction sector and in urban areas did better in terms of gap and convergence than others. Finally, also for other immigrant groups, such as Chinese and Indians, recent cohorts did better than previous ones.

Via the excellent Kevin Lewis.

Women in Economics: Janet Yellen

Here’s a great new video on Janet Yellen from our team at MRU. In addition to Yellen, the video features Ben Bernanke and Christina Romer, who is tremendous. Other videos in the series are on Anna Schwartz and Elinor Ostrom with more on the way. The video is excellent but my favorite MRU video with Yellen has her in superhero mode.

Instructors, feel free to use these videos in any of your classes. Of course, you can also find these videos integrated with our textbook.

By the way, here is Adams and Yellen’s classic paper on bundling (ungated) and you can find an introduction to bundling in this video.

Transcript of my Stanford talk on *Stubborn Attachments*

You will find it here, along with the video link, previously covered on MR without the transcript.  Recommended, this was an almost entirely fresh talk.  Here is my beginning paragraph:

I’d like to do something a little different in this talk from what is usually done. Typically, someone comes and they present their book. My book here, Stubborn Attachments. But rather than present it or argue for it, I’d like to try to give you all of the arguments against my thesis. I want to invite you into my internal monologue of how I think about what are the problems. It’s an unusual talk. I mean, I think talks are quite inefficient. Most of them I go to, I’m bored. Why are you all here? I wonder. I feel we should experiment more with how talks are presented, and this is one of my attempts to do that.

In the Q&A I also discuss how to eat well in the Bay Area.