Category: Economics

America’s reopening will depend on trust

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

The first wave of the Covid-19 pandemic brought serious economic damage for thinly capitalized face-to-face retailers, such as small family-owned restaurants. But many of those same institutions will lead the recovery — that is, if they have built up trust among their patrons. If they ask me to sit outside to eat my meal, I will trust that their kitchen procedures are “clean enough,” because I believe that the boss is watching [there I am referring to two of my favorite local places].

It is also worth asking whom I do not trust. When it comes to providing a fully clean and safe store, I do not trust most of the big-box retailers. I trust them just fine in ordinary times, but no single manager can oversee the entire cleaning and disinfectant operation. And can they monitor Covid-19 in the air? If they tell me that “all possible precautions have been taken,” I might believe their words, but I won’t believe that is enough.

And:

The NBA is wondering if it can resurrect its playoffs at a dedicated location with television coverage but no audience in the stands. So far the teams are hesitant, in part because they are afraid of public resentment if the league’s millionaire players have access to Covid-19 tests while the general public does not.

The reality is that if the NBA announced it was buying up a lot of tests, it would boost the supply of tests. That could provide testing with valuable positive publicity, with the NBA serving as a role model for what other businesses might do. Yet the NBA does not yet trust its fans to see things in such a positive light, and so reopening is delayed. There might be some danger to playoffs games without fans, but surely less than in, say, collegiate or professional football, where injuries and concussions are built into the very nature of the competition.

Which are the businesses that you really trust in matters pandemic?

Labor market restructuring and its possible permanence

We find 3 new hires for every 10 layoffs caused by the shock and estimate that 42 percent of recent layoffs will result in permanent job loss.

That is from a new paper by Jose Maria Barrero, Nick Bloom, and Steven J. Davis, top experts on this and related topics.  As for policy:

Unemployment benefit levels that exceed worker earnings, policies that subsidize employee retention, occupational licensing restrictions, and regulatory barriers to business formation will impede reallocation responses to the COVID-19 shock.

Should South Africa lock down?

The lockdown will lead to 29 times more lives lost than the harm it seeks to prevent from Covid-19 in SA, according to a conservative estimate contained in a new model developed by local actuaries.

The model, which will be made public today for debate, was developed by a consortium calling itself Panda (Pandemic ~ Data Analysis), which includes four actuaries, an economist and a doctor, while the work was checked by lawyers and mathematicians. The process was led by two fellows at the Actuarial Society of SA, Peter Castleden and Nick Hudson.

They have sent a letter, explaining its model, to President Cyril Ramaphosa. In the letter, headed “Lockdown is a humanitarian disaster to dwarf Covid-19”, they call for an end to the lockdown, a focus on isolating the elderly and allowing children to go back to school, while ensuring the economy restarts so that lives can be saved.

The paper also is at the link, and it is perhaps more of a rough and ready calculation than a formal model per se.  Nonetheless South Africa has a relatively young population and the core points are well taken:

In SA, they estimate that 5.4 years of life have been lost per Covid-19 death. They then multiply this by the range of deaths which they predict – 20,000 – as well as the actuarial society’s prediction of 88,000 fatalities. They factor in that the lockdown will have reduced some deaths, but not all. In the end, their model translated into a minimum of 26,800 “years of lives lost” due to Covid-19, and a maximum of 473,500 years. (This, critically, shouldn’t be confused with the actual number of fatalities expected from Covid-19.)

The actuaries then used the figures predicted by the National Treasury to model the impact on poverty. On Friday, the Treasury estimated that between 3-million and 7-million jobs will be lost due to the measures taken to combat the virus. The actuaries then work out that, conservatively, 10% of South Africans will become poorer, and as a result, will lose a few months of their lives.

It is a good question how many of the models used for the West have taken into account the “demonstration effect,” namely that poorer (and much younger) countries will be tempted to follow the same policies.  I’ve yet to see a good discussion of this.

My Conversation with Adam Tooze

Tinges of Covid-19, doses on financial crises, but mostly about economic history.  Here is the audio and transcript.  Here is the summary:

Adam joined Tyler to discuss the historically unusual decision to have a high-cost lockdown during a pandemic, why he believes in a swoosh-shaped recovery, portents of financial crises in China and the West, which emerging economies are currently most at risk, what Keynes got wrong about the Treaty of Versailles, why the Weimar Republic failed, whether Hitler was a Keynesian, the political and economic prospects of various EU members, his trick to writing a lot, how Twitter encourages him to read more, what he taught executives at BP, his advice for visiting Germany, and more.

Here is one excerpt:

And:

Tooze’s discussion of his own career and interests, toward the end, is hard to excerpt but for me the highlight of the conversation.  He also provided the best defense of Twitter I have heard.

Definitely recommended.

Online Education is Better

The COVID-19 crisis is accelerating a long-term trend, the shift to online education. I’ve long argued that online education is superior to traditional models. In an excellent essay in the New York Times, Veronique Mintz, an eighth-grade NYC student agrees:

Talking out of turn. Destroying classroom materials. Disrespecting teachers. Blurting out answers during tests. Students pushing, kicking, hitting one another and even rolling on the ground. This is what happens in my school every single day.

You may think I’m joking, but I swear I’m not…during my three years of middle school, these sorts of disruptions occurred repeatedly in any given 42-minute class period.

That’s why I’m in favor of the distance learning the New York City school system instituted when the coronavirus pandemic hit.

…Distance learning gives me more control of my studies. I can focus more time on subjects that require greater effort and study. I don’t have to sit through a teacher fielding questions that have already been answered.

…This year I have struggled with math. The teacher rarely had the patience for questions as he spent at least a third of class time trying to maintain order. Often, when I scheduled time to meet with him before school, there would be a pileup at his door of students who also had questions. He couldn’t help us all in 20 minutes before first period. Other times he just wouldn’t show up….With distance learning, all of that wasted time is eliminated. I stop, start and even rewind the teacher’s recording when I need to and am able to understand the lesson on the day it’s taught.

Veronique’s online courses were put together in a rush. Imagine how much more she will learn when we invest millions in online classes and teach at scale. The online classes that Tyler and I teach, using Modern Principles and the Sapling/Achieve online course management system, took years to produce and feature high quality videos and sophisticated assessment tools including curve shifting (not just multiple-choice), empirical questions based on FRED, and adaptive practice–plus the videos are all subtitled in multiple languages, they can be sped up or slowed down, watched at different times of the day in different time zones and so forth. Moreover, technology is increasing the advantages of online education over time.

Did non-pharmaceutical interventions actually help against the Spanish flu?

From three economics Ph.D students at Harvard, namely Andrew Lilley, Matthew Lilley, and Gianluca Rinaldi:

Using data from 43 US cities, Correia, Luck, and Verner (2020) find that the 1918 Flu pandemic had strong negative effects on economic growth, but that Non Pharmaceutical Interventions (NPIs) mitigated these adverse economic effects. Their starting point is a striking positive correlation between 1914-1919 economic growth and the extent of NPIs adopted at the city level. We collect additional data which shows that those results are driven by population growth between 1910 to 1917, before the pandemic. We also extend their difference in differences analysis to earlier periods, and find that once we account for pre-existing differential trends, the estimated effect of NPIs on economic growth are a noisy zero; we can neither rule out substantial positive nor negative effects of NPIs on employment growth.

I am very willing to publish a response from the original authors on this one.

Seller Reputation and Price Gouging

That is a new paper by Luís Cabral and Lei Xu, here is the abstract:

We test the theory that seller reputation moderates the effect of demand shocks on a seller’s propensity to price gouge. From mid January to mid March 2020, 3M masks were priced 2.72 times higher than Amazon sold them in 2019. However, the difference (in price ratios) between a post-COVID-19entrant and an established seller is estimated to be about 1.6 at times of maximum scarcity, that is, post-COVID-19entrants price at approximately twice the level of established sellers. Similar results are obtained for Purell hand sanitizer. We also consider cumulative reviews as a measure of what a seller has to lose from damaging its reputation and, again, obtain similar results. Finally, we explore policy implications of our results.

In other words, Amazon is afraid to raise its prices, presumably for a mix of reputational and regulatory reasons.

A multi-risk SIR model with optimally targeted lockdown

Or you could say “all-star economists write Covid-19 paper.”  Daron Acemoglu, Victor Chernozhukov, Iván Werning, and Michael D. Whinston have a new NBER working paper.  Here is part of the abstract:

For baseline parameter values for the COVID-19 pandemic applied to the US, we find that optimal policies differentially
targeting risk/age groups significantly outperform optimal uniform policies and most of the gains can be realized by having stricter lockdown policies on the oldest group. For example, for the same economic cost (24.3% decline in GDP), optimal semi–targeted or fully-targeted policies reduce mortality from 1.83% to 0.71% (thus, saving 2.7 million lives) relative to optimal uniform policies. Intuitively, a strict and long lockdown for the most vulnerable group both reduces infections and enables less strict lockdowns for the lower-risk groups.

Note the paper is much broader-ranging than that, though I won’t cover all of its points.  Note this sentence:

Such network versions of the SIR model may behave very differently from a basic homogeneous-agent version of the framework.

And:

…we find that semi-targeted policies that simply apply a strict lockdown on the oldest group can achieve the majority of the gains from fully-targeted policies.

Here is a related Twitter thread.  I also take the authors’ model to imply that isolating infected individuals will yield high social returns, though that is presented in a more oblique manner.

Again, I would say we are finally making progress.  One question I have is whether the age-specific lockdown in fact collapses into some other policy, once you remove paternalism as an underlying assumption.  The paper focuses on deaths and gdp, not welfare per se.  But what if older people wish to go gallivanting out and about?  Most of the lockdown in this paper is for reasons of “protective custody,” and not because the older people are super-spreaders.  Must we lock them up (down?), so that we do not feel too bad about our own private consumption and its second-order consequences?  What if they ask to be released, in full knowledge of the relevant risks?

In the Race for a Coronavirus Vaccine, We Must Go Big

Today in the New York Times I have an op-ed with Susan Athey, Michael Kremer and Christopher Snyder. We argue for a big program to invest in vaccine capacity before any vaccine is tested and approved. We agree with Bill Gates that we want the vaccine factories to be warmed up by the time a vaccine is approved. We can’t leave it all to Gates, however. The US economy is hemorrhaging $150-$350 billion a month so the benefits of a vaccine to society are huge and we should go big.

Today, the U.S. government could go big and create a Covid-19 vaccine A.M.C., guaranteeing to spend about $70 billion on new vaccines — enough to make direct investments to support capacity installation or to repurpose capacity and to pay, say, $100 per person for the first 300 million people vaccinated.

An investment of that size can anticipate and overcome several challenges typical of vaccine development. If we want to achieve a 90 percent probability of success, we must take into account historical rates of success from publicly available data; doing that suggests that we need to actively pursue not two or three vaccine candidates, but 15 to 20.

…Usually, to avoid the risk of investing in capacity that eventually proves worthless, firms invest in large-scale capacity only after the vaccine has proved effective. But in the middle of a pandemic, there are huge social and economic advantages to having vaccines ready to use as soon as they have been approved. If we leave it entirely to the market, we will get too little vaccine too late.

An advance market commitment for Covid-19 should combine “push” and “pull” incentives. The “pull” incentive is the commitment to buy 300 million courses of vaccine at a per-person price of $100, for vaccines produced within a specified time frame. If multiple vaccines are developed, the A.M.C. fund will have authority to choose products to purchase based on efficacy, the availability of sufficient vaccine for timely vaccination or suitability for different population groups. So firms compete to serve the first 300 million people with the most attractive vaccines, and the “pull” component provides strong incentives for both speed and quality.

The “push” incentive guarantees firms partial reimbursement for production capacity built or repurposed at risk and partial reimbursement as they achieve milestones. The partial reimbursement ensures that manufacturers have “skin in the game,” while inducing them to build large-scale capacity before approval is certain.

More than usual, read the whole thing and please do help to circulate the ideas by posting and tweeting.

The op-ed draws on the work of a large team of economists and statisticians who have been working days and nights for weeks. You can find out more at AcceleratingHT where we will soon be posting additional analysis and tools.

It’s a great privilege for me to be working with this group. One day I will write the story but for now let me just say that I have never seen such a brilliant and dedicated group come together to apply their skills to a problem of such importance and urgency.

A Pandemic Trust Fund

The Coronavirus Pandemic may be the most warned about event in human history. Surprisingly, we even did something about it. President George W. Bush started a pandemic preparation plan and so did Governor Arnold Schwarzenegger in CA but in both cases when a pandemic didn’t happen in the next several years those plans withered away. We ignored the important in favor of the urgent.

It is evident that the US government finds it difficult to invest in long-term projects, perhaps especially in preparing for small probability events with very large costs. Pandemic preparation is exactly one such project. How can we improve the chances that we are better prepared next time?

In a short paper for the Center for Growth and Opportunity I offer a different funding mechanism to address the problem:

…we would like organizations tasked with protecting the public from low-probability, high-cost events to be funded on a permanent basis that is not subject to budgetary discretion or degradation. Instead of yearly appropriations, it’s preferable to have a one-time appropriation to finance a stream of investments. The financial means of doing this is to buy a bond with an earmarked revenue stream. That is, instead of selling bonds the government buys long-term safe bonds which pay out dividends that are earmarked to a program, in this case to pandemic preparation.

There is a well-known example of such a financing scheme, the social security trust fund. The social security trust fund was established in 1937. It buys long-term safe bonds that pay dividends that are used to finance social security payments. Unlike the pandemic trust fund I propose, the Social Security Trust Fund buys bonds on an ongoing basis but that is a relatively unimportant difference.

The Social Security Trust Fund buys the safest form of government bonds, which has given rise to a long-standing controversy over whether the trust fund is a “fiction.”10Of course, the trust fund is a kind of fiction but so are federalism, checks and balances, and the Constitution. Fictions can be powerful because they create shared understandings that govern behavior and determine equilibrium action. The trust fund does what it says—it increases trust by indicating that Social Security payments are higher in creditor priority than other spending. Just as Section 507 of the Bankruptcy Code increases trust by indicating that secured bondholders get paid before unsecured creditors such as a company’s suppliers. Since 1937, the Social Security Trust Fund has always held net assets, and when it briefly ran deficits in the 1970s and early 1980s, the Greenspan commission was established to shore up the system.11 That is, the simple existence of the Trust Fund as an accounting entity created an awareness, which made it easier to act to maintain the Fund.

A Pandemic Trust Fund would begin with a $250 billion investment in bonds earmarked to pandemic preparations. At current effective rates of interest of about 3%, this is enough to support spending of $7.5 billion annually.12 Note that $7.5 billion is nowhere near enough to address the current pandemic, but that is because we did not invest enough in pandemic preparation. Had we invested $7.5 billion in pandemic preparation every year for the last two decades, for example, we would be in much better shape today. The $7.5 billion is for annual ongoing preparation.

…A Pandemic Trust Fund invested in $250 billion of government bonds is an accounting fiction that may be readily agreed upon today at the height of the crisis because it has few current costs. Yet, as we have discussed, accounting fictions can have real power in changing the future allocation of resources.

Read the whole thing, it is also includes some interesting info on clever DOD contracts that have advanced pandemic preparations.

Blood Money

NYTimes: Around the world, scientists are racing to develop and mass produce reliable antibody tests that public health experts say are a crucial element in ending the coronavirus lockdowns that are causing economic devastation. But that effort is being hamstrung, scientists say, by a shortage of the blood samples containing antibodies to Covid-19, the disease caused by the virus, that are needed to validate the tests.

Recognizing a rare opportunity, some companies are seeking to cash in on the shortages, soliciting blood donations and selling samples at rich markups in a practice that has been condemned by medical professionals as, at the very least, unethical.

“I’ve never seen these prices before,” said Dr. Joe Fitchett, the medical director of Mologic, one of the British test manufacturers that was offered the blood samples. “It’s money being made from people’s suffering.”

I am reminded of Walter Williams who asks his students whether it is wrong to profit from the misfortune of others:

But I caution them with some examples. An orthopedist profits from your misfortune of having broken your leg skiing. When there’s news of a pending ice storm, I doubt whether it saddens the hearts of those in the collision repair business. I also tell my students that I profit from their misfortune — their ignorance of economic theory.

A price is a signal wrapped up in an incentive so if you want a strong signal and a strong incentive you need to let prices rise. The prices in this case don’t even seem that high:

From March 31 to April 22, prices asked by Cantor BioConnect for its cheapest samples — always sold by the milliliter, the equivalent of less than a quarter of a teaspoon — rose more than 40 percent, to $500 from $350.

Bear in mind the costs of collecting the sample, including nurse time and PPE. Some samples which are especially rich in antibodies, do sell for prices that are well above cost which is not surprising as those samples are in high demand as they may offer a cure.

Do the firms willing and able to pay the highest prices necessarily have the best science? No, not necessarily, but on balance the decentralized allocation process offered by markets and civil society will likely be far more effective than centralized, political allocation. We also know from field experiments around the world that higher prices for blood increase supply, a key consideration.

As Hayek said the moral rules of the tribe which appear natural to us–like don’t profit from misery–cannot maintain a civilization so we struggle between what we think is right and what actually works to prevent misery.

There can be no doubt that our innate moral emotions and instincts were acquired in the hundreds of thousand years—probably half a million years—in which Homo sapiens lived in small hunting and gathering groups and developed a physiological constitution which governed his innate instincts. These instincts are still very strong in us. Yet civilization developed by our gradually learning cultural rules which were trans­mitted by teaching and which served largely to restrain and suppress some of those natural instincts.

Earnings expectations in the COVID crisis

That is a new paper by Augustin Landier and David Thesmar, here is the abstract:

We analyze firm-level analyst forecasts during the COVID crisis. First, we describe expectations dynamics about future corporate earnings. Downward revisions have been sharp, especially for 2020 and 2021, but much less drastic than the lower bound estimated by Koijen et al. (2020). Analysts’ consensus forecast does not exhibit evidence of over-reaction: Forecasts over 2020 earnings have slowly decreased by 10.2% over the course of March and April 2020 before stabilizing. Long-run forecasts, as well as expected “Long-Term Growth” have reacted less than short-run forecasts, and feature less disagreement. However, even the 2024 forecasts are revised down. Second, we ask how much forecast revisions explain market dynamics. Without change in discount rates, mean forecast-implied cumulative returns from mid-February to mid-April should be around -9%, while they were actually -20%. The difference between forecast-implied returns and actual returns implies a rise in the average discount rate of about 1\%. This increase is decomposed into three factors: increased risk premium (+1\%)), increased leverage (+1\%) and interest rate reduction (-1\%). In other words, analyst forecast revisions explain most of the downward revision in equity values.

This is perhaps the best stock market analysis I have seen so far…?

Universities with Hospitals and Labs

Mitch Daniels, the President of Purdue, has outlined a preliminary plan to reopen involving test, trace and supported isolation on campus.

We intend to know as much as possible about the viral health status of our community. This could include pre-testing of students and staff before arrival in August, for both infection and post-infection immunity through antibodies. It will include a robust testing system during the school year, using Purdue’s own BSL-2 level laboratory for fast results. Anyone showing symptoms will be tested promptly, and quarantined if positive, in space we will set aside for that purpose.

We expect to be able to trace proximate and/or frequent contacts of those who test positive. Contacts in the vulnerable categories will be asked to self-quarantine for the recommended period, currently 14 days. Those in the young, least vulnerable group will be tested, quarantined if positive, or checked regularly for symptoms if negative for both antibodies and the virus.

This paper provides details on transforming a university lab into a testing center. In essence, a major university with a hospital (which Purdue doesn’t have) should be able to do it technically but to work to reopen for students it probably has to be a university located outside of a major urban area. Here are a few possibilities:

  • Baylor University
  • Vanderbilt University
  • University of Michigan, Ann Arbor
  • University of Virginia
  • University of Iowa
  • University of Utah
  • University of Alabama

Mitch Daniel also notes:

Our campus community, a “city” of 50,000+ people, is highly unusual in its makeup. At least 80% of our population is made up of young people, say, 35 and under. All data to date tell us that the COVID-19 virus, while it transmits rapidly in this age group, poses close to zero lethal threat to them.

which does seem to miss (ahem) an important group necessary for reopening.

My Conversation with Glen Weyl

I found it interesting throughout, the first half was on Covid-19 testing, and the second half on everything else.  Here is the audio and transcript.  Here is the summary:

Tyler invited Glen to discuss the plan, including how it’d overcome obstacles to scaling up testing and tracing, what other countries got right and wrong in their responses, the unusual reason why he’s bothered by price gouging on PPE supplies, where his plan differs with Paul Romer’s, and more. They also discuss academia’s responsibility to inform public discourse, how he’d apply his ideas on mechanism design to reform tenure and admissions, his unique intellectual journey from socialism to libertarianism and beyond, the common element that attracts him to both the movie Memento and Don McLean’s “American Pie,” what talent he looks for in young economists, the struggle to straddle the divide between academia and politics, the benefits and drawbacks of rollerblading to class, and more.

Here is one excerpt:

And:

And:

For me the most instructive part was this:

COWEN: What do you view yourself as rebelling against? At the foundational level.

But you will have to read or listen to hear Glen’s very good answer.

Definitely recommended.