Category: Economics

The Economic Consequences of the Virus?

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

Only slightly modified.

Immunity Passes Must Be Combined With Variolation

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

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

Hat tip for discussion: Rafael Yglesias.

Stopping time plus hazard pay?

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

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

The current round of government interventions entail mounting distortions.

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

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

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

Expensive, but much cheaper than alternatives.

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

The Strategy: Suppress then Test, Trace, Isolate

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

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

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

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

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

Thank You Bill Gates

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

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

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

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

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

See also my post, A Solution if We Act.

Tethered pairs and locational extremes

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

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

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

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

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

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

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

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

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

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

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

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

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

Measuring the Cost of Regulation: A Text-Based Approach

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

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

The fiscal multiplier during World War II

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

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

FDA Prevents Import of Masks

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

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

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

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

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

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

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

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

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

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

Running ahead of Pandemics: Achieving In-Advance Antiviral Drugs

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

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

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

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

There is much more at the link.

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.