Category: History

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.

That was then, this is now — Pushkin under lockdown

In autumn 1830, Pushkin was confined by a cholera outbreak to the village of Boldino, his father’s remote country estate in southeastern Russia. Desperate to return to Moscow to marry, he wrote to his fiancée: “There are five quarantine zones between here and Moscow, and I would have to spend fourteen days in each. Do the maths and imagine what a foul mood I am in.”

Pushkin went on complaining bitterly but, with nothing else to do, he produced an astonishing number of masterpieces — short stories, short plays, lyric and narrative poems, and the last two chapters of his verse novel Eugene Onegin — in a mere three months.

Here is the full FT piece by Robert Chandler.

World 2.0 — “There are decades where nothing happens, and weeks where decades happen”

This is from a very able and perceptive correspondent:

World 1.0 World 2.0
110 successive months of job growth 10 million jobless claims in 2 weeks
10 year bull market across sectors Winners and losers with extreme outcome inequality
Full employment 30% unemployment
Base rate thinking First principles thinking
Physical Digital
Office by default Remote by default
Office for work Office for connection, community, ecosystem, makerspaces
Suit, tie, wristwatch, business card Good lighting, microphone, webcam, home office background
Commute + traffic jams Home + family
Last mile Only mile
Restaurants Groceries + delivery
$4 toast Sourdough starter
Walkscore Speedtest
Cities Internet
$100k for college Not paying $100k for a webinar
City Countryside
YIMBY NIMBY
Internal issues Exogenous shock
Lots of little problems One big problem
Stupid bullshit Actual issues
Too much technology Too little technology
Complacency Action
Years Days
Policy Capacity
Ideology Competence
Assume some government competence Assume zero government competence
Institutions Ghost ships
WHO Who?
Trusted institutions Trusted people
Globalization Decoupling
Just-in-time Stockpile
Tail risk is kooky Tail risk is mainstream
NATO Asia
Boomers most powerful Boomers most vulnerable
Productivity growth collapse Economic collapse
Social services Democrat UBI Communist
Propaganda Propaganda
Deficit hawks MMT
Corporate debt Government debt
Techlash Tech a pillar of civilization and lifeline to billions
Break up Amazon Don’t break up Amazon!!!
Avoiding social issues Avoiding layoffs
Sports Esports
Phone is a cigarette Phone is oxygen
Resource depletion $20 oil, $0.75 watt solar, <$100/kwh batteries
Stasis Change
Low volatility High volatility
Design Logistics
Extrovert Introvert
Open Closed
20th century 21st century

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.

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.

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

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

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

Via Jason Furman.

Longer-run economic consequences of pandemics

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

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

Via Evan Soltas.

My Conversation with Ross Douthat

We do another CWT, here is the audio and transcript (link corrected), a very good installment in the series.  Here is part of the summary:

Ross joined Tyler to discuss why he sees Kanye as a force for anti-decadence, the innovative antiquarianism of the late Sir Roger Scruton, the mediocrity of modern architecture, why it’s no coincidence that Michel Houellebecq comes from France, his predictions for the future trajectory of American decadence — and what could throw us off of it, the question of men’s role in modernity, why he feels Christianity must embrace a kind of futurist optimism, what he sees as the influence of the “Thielian ethos” on conservatism, the plausibility of ghosts and alien UFOs, and more.

A welcome relief from Covid-19 talk, though we did cover Lyme disease.  Here is one excerpt:

COWEN: Does the Vatican have too few employees? There’s a Slate article — it claimed in 2012, the Roman Curia has fewer than 3,000 employees. Walmart headquarters at the time had 12,000. If the Church is a quite significant global operation, can it be argued, in fact, that it’s not bureaucratic enough? They don’t actually have state capacity in the sense that state capacity libertarianism might approve of.

DOUTHAT: Right. State capacity libertarianism would disapprove of the Vatican model. And it reflects the reality that media coverage of the Catholic Church doesn’t always reflect, which is that in Catholic ecclesiology and the theory of the institution, bishops are really supposed to be pretty autonomous in governance. And the purpose of Rome is the promotion of missionary work and the protection of doctrine, and it’s not supposed to be micromanaging the governance of the world Church.

Now, I think what we’ve seen over the last 30 years — and it’s been thrown into sharp relief by the sex abuse crisis — is that the modern world may not allow that model to exist; that if you have this global institution that has a celebrity figure at the center of it, who is the focus of endless media attention, you can’t, in effect, get away with saying, “Well, the pope is the pope, but sex abuse is an American problem.”

And to that extent, there is a case that the Church needs more employees and a more efficient and centralized bureaucracy. But then that also coexists with the problem that the model of Catholicism is still a model that was modern in the 16th century. It’s still much more of a court model than a bureaucratic model, and pope after pope has theoretically tried to change this and has not succeeded.

Part of the reality is, as you well know, as a world traveler, the Italians are very good at running courts that exclude outsiders and prevent them from changing the way things are done. Time and again, some Anglo-Saxon or German blunderer gets put in charge of some Vatican dicastery and discovers that, in fact, the reforms he intends are just not quite possible. And you know, in certain ways, that’s a side of decadence that you can bemoan, but in certain ways, you have to respect, too.

Definitely recommended, a very fun CWT with lots of content.  And again, here is Ross’s (recommended) book The Decadent Society: How We Became a Victim of Our Own Success.

Lessons from the “Spanish Flu” for the Coronavirus’s Potential Effects on Mortality and Economic Activity

That is the subtitle of a new paper by Robert J. Barro, José F. Ursúa,  and Joanna Weng, here is the abstract:

Mortality and economic contraction during the 1918-1920 Great Influenza Pandemic provide plausible upper bounds for outcomes under the coronavirus (COVID-19). Data for 43 countries imply flu-related deaths in 1918-1920 of 39 million, 2.0 percent of world population, implying 150 million deaths when applied to current population. Regressions with annual information on flu deaths 1918-1920 and war deaths during WWI imply flu-generated economic declines for GDP and consumption in the typical country of 6 and 8 percent, respectively. There is also some evidence that higher flu death rates decreased realized real returns on stocks and, especially, on short-term government bills.

I wonder if the economic cost isn’t higher today because we know more about how to limit pandemic spread and we also value human lives more, relative to economic output?

Kudos to the authors for such swift work.

Also from NBER here is Andrew Atkeson on the dynamics of disease progression, depending on the percentage of the population with the disease.  Here is an excerpt from the paper:

Even under severe social distancing scenarios, it is likely that the health system will be overwhelmed, which is indicated to happen when the portion of the U.S. population actively infected and suffering from the disease reaches 1% (about 3.3 million current cases).7 More severe mitigation efforts do push the date at which this happens back from 6 months from now to 12 months from now or more, perhaps allowing time to invest heavily in the resources needed to care for the sick. It is clear that to avoid a health care catastrophe as is currently being experienced in Italy, prolonged severe social distancing measures will need to be combined with a massive investment in health care capacity.

Under almost all of the scenarios considered, at the peak of the disease progression, between 10% and 20% of the population (33 – 66 million people) suffers from an active infection at the same time.

A not entirely cheery prognosis.

That was then, this is now

In 1957, when flu swept through Hong Kong, Mr [Maurice] Hilleman identified the virus as a new form to which people had no natural immunity and passed on his findings to vaccine-makers. When the virus reached the United States a few months later 40m doses of vaccine were ready to limit its damage.

Here is more from The Economist, circa 2005, via Brian LaRocca.  How many of you have heard of Maurice Hilleman? He has other accomplishments, and according to Wikipedia “He is credited with saving more lives than any other medical scientist of the 20th century.”  I say he is underrated!

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

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.

America is historically slow to mobilize, but eventually quite effective

That is the theme of my latest Bloomberg column, and Pearl Harbor, terrorism risk, and the financial crisis stand among the notable examples.  Here is one excerpt:

It is no accident that America is so often so slow out of the starting gate. The federal government is large and complex, and the American people do not always elect the most intellectual or science-minded of leaders. Federalism means American politics has many moving parts, and the government tends to work closely with the private sector, heightening coordination problems and slowing response times. For all America’s reputation as the land of laissez-faire, it is in fact highly bureaucratized, with the health-care sector an especially bad offender.

And:

As time passes, the number of discrete decision points in the U.S. system goes from being a drawback to a strength. For instance, it turns out that the University of Washington had been developing an effective testing kit several months ago, for fear that Covid-19 would spread widely. Washington State is now in the testing lead, and virologists there are working very hard to collect and interpret data, setting an example for others. Commercial companies such as Quest Diagnostics and LabCorp are now developing tests as well, with further interest likely to follow. American institutions are some of the most productive and flexible in the world, at least once they are allowed to operate.

America also has one of the strongest traditions of civil society and volunteerism, and those resources too will be mobilized to help fight the coronavirus as appropriate. The Gates Foundation will soon fund free home-testing kits, initially in the Seattle area.

There is much more at the link.  Of course it is indeed time we got our act together, starting at the very top but by no means limited to that position.

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.

My Conversation with Garett Jones

Here is the transcript and audio, here is part of the opening summary:

Garett joined Tyler to discuss his book 10% Less Democracy, including why America shouldn’t be run by bondholders, what single reform would most effectively achieve more limited democracy, how markets shape cognitive skills, the three important P’s of the repeated prisoner’s dilemma, why French cuisine is still underrated, Buchanan vs. Tullock, Larry David vs. Seinfeld, the biggest mistake in Twitter macroeconomics, the biggest challenges facing the Mormon church, what studying to be a sommelier taught him about economics, the Garett Jones vision of America, and more.

Here is one bit:

COWEN: But let’s say it’s the early 1990s. Eastern European countries are suddenly becoming free, and they ask you, “Garett, what electoral system should we have?” What do you say?

JONES: What I really would go for is presidential systems, if you can handle it, something like a first-past-the-post system, where those people elected from local districts focused on local problems — which have less of a free-rider problem involved — go up to the parliament and actually argue their case. The presidential element is less important than the parliamentary idea of the single-district voting. I tend to think that creates more accountability on the part of the government.

And more:

COWEN: For the United States, what is the most effective way, in your view, that you would want us to have 10 percent less democracy? What’s the one thing you would change?

JONES: I would change the House of Representatives to a six-year term. I picked that because it’s not outside the range of plausibility, and because I think people would instantly understand what it accomplishes — not because it has the highest payoff, but because it balances payoff with plausibility in a democracy.

And on boosting IQ:

COWEN: But what’s the key environmental lever? Whatever Ireland did [to have induced an IQ rise], it’s not that people were starving, right? That we understand.

JONES: No, true.

COWEN: So why don’t we do more of whatever they did, whatever was done to the East Germans, everywhere?

JONES: Exactly.

COWEN: But what is that lever? Why don’t we know?

JONES: I would say that thing is the thing we call capitalism.

COWEN: Capitalism is a big, huge thing. Not all of capitalism makes us smarter.

JONES: Yeah, that’s the thing — figuring out which things within capitalism — what is it about living in a free society with competitive markets where, at least in our youth and middle age, we feel a need to sell ourselves as valuable creators. There’s something about that that probably is what’s most valuable for boosting cognitive skills. It’s a sort of demand-side desire to try to use our minds in socially productive ways. And I think in communism, we can —

COWEN: So marketing makes us smarter?

JONES: That’s what I would say, yeah.

There is much more at the link, an excellent Conversation.  Here you can order Garett’s book 10% Less Democracy: Why You Should Trust the Elites a Little More and the Masses a Little Less.  You can read the introduction to the book on-line.