Category: Law

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.

The optimal duration of lockdown

Here is a new AEI paper by Anna Scherbina.  I have not read it and am not endorsing (or criticizing) its conclusions, here goes:

We investigate the optimal duration of the COVID-19 suppression policy. We find that absent extensive suppression measures, the economic cost of the virus will total over $9 trillion, which represents 43% of annual GDP. The optimal duration of the suppression policy crucially depends on the policy’s effectiveness in reducing the rate of the virus transmission. We use three different assumptions for the suppression policy effectiveness, measured by the R0 that it can achieve (R0 indicates the number of people an infected person infects on average at the start of the outbreak). Using the assumption that the suppression policy can achieve R0 = 1, we assess that it should be kept in place between 30 and 34 weeks. If suppression can achieve a lower R0 = 0.7, the policy should be in place between 11 and 12 weeks. Finally, for the most optimistic assumption that the suppression policy can achieve an even lower R0 of 0.5, we estimate that it should last between seven and eight weeks. We further show that stopping the suppression policy before six weeks does not produce any meaningful improvements in the pandemic outcome.

I hope there is a variable in the analysis for “risk of extreme societal pressures,” though I am not sure if those are higher for extreme lockdown scenarios or for extreme “let it rip” scenarios.  In any case, such risks are a significant factor in how I view these questions.

And now I must teach! (on-line, of course).  But I wanted to get this up for your attention before the evening closes.

The biggest supply chain risk right now?

Trump administration officials are asking India to lift restrictions to give the U.S. access to pharmaceutical ingredients needed to produce a range of drugs, amid fears of a potential U.S. drug supply shortage prompted by the coronavirus outbreak, three sources familiar with the matter told NBC News.

The two governments are holding discussions aimed at easing newly imposed restrictions on pharmaceutical exports from India, which Delhi introduced to ensure the country would have medicine needed to handle the pandemic inside of its borders, the sources said.

With coronavirus potentially disrupting the global supply chain for medicine, India earlier this month restricted the export of 26 pharmaceutical ingredients and the medicines made from them, including acetaminophen — a common pain reliever. India is the world’s leading supplier of generic drugs and is a key source for active pharmaceutical ingredients, or APIs, used to produce a range of medicines.

We need to get on this one right away, I have heard similar worries from very reliable sources.  Here is one article.

A new NBER paper on the Wuhan lockdown

We quantify the causal impact of human mobility restrictions, particularly the lockdown of the city of Wuhan on January 23, 2020, on the containment and delay of the spread of the Novel Coronavirus (2019-nCoV). We employ a set of difference-in-differences (DID) estimations to disentangle the lockdown effect on human mobility reductions from other confounding effects including panic effect, virus effect, and the Spring Festival effect. We find that the lockdown of Wuhan reduced inflow into Wuhan by 76.64%, outflows from Wuhan by 56.35%, and within-Wuhan movements by 54.15%. We also estimate the dynamic effects of up to 22 lagged population inflows from Wuhan and other Hubei cities, the epicenter of the 2019-nCoV outbreak, on the destination cities’ new infection cases. We find, using simulations with these estimates, that the lockdown of the city of Wuhan on January 23, 2020 contributed significantly to reducing the total infection cases outside of Wuhan, even with the social distancing measures later imposed by other cities. We find that the COVID-19 cases would be 64.81% higher in the 347 Chinese cities outside Hubei province, and 52.64% higher in the 16 non-Wuhan cities inside Hubei, in the counterfactual world in which the city of Wuhan were not locked down from January 23, 2020. We also find that there were substantial undocumented infection cases in the early days of the 2019-nCoV outbreak in Wuhan and other cities of Hubei province, but over time, the gap between the officially reported cases and our estimated “actual” cases narrows significantly. We also find evidence that enhanced social distancing policies in the 63 Chinese cities outside Hubei province are effective in reducing the impact of population inflows from the epicenter cities in Hubei province on the spread of 2019-nCoV virus in the destination cities elsewhere.

That is by Hanming Fang, Long Wang, and Yang Yang, of course do beware data quality issues.

My 2009 health care policy recommendations

8. Invest more in pandemic preparation.  By now it should be obvious how critical this is.  It’s fine to say “Obama is already working on this issue” but the fiscal constraint apparently binds and at the margin this should get more attention than jerry rigging all the subsidies and mandates and the like.

Here is the full post, much broader and mainly about best alternatives to Obamacare.  Also in 2009 I wrote this (pointer via Dave Pote):

I say think probabilistically…A one percent chance of one hundred million deaths is, in expected value terms, one million deaths and that is a big deal.  Probably the United States is less vulnerable than it was in 1918, but how many people would die in China, India and many other locales?  How much disruption to trade, travel, and the world economy would take place?  Even in the United States, our public health systems would break down quickly and render many modern medical advances useless (e.g., when would the Tamiflu run out?).  Having lots of living space is wonderful, but it pays off only if people stay home from work and that means dealing with massive absenteeism.  Not pretty.  Better safe than sorry.

Oddly Stephens never mentions that we are living in a raging epidemic now, namely AIDS, which has run for several decades.  For all the virtues of retrovirals, the modern world was quite slow in combating or even checking the disease and still many people, including U.S. citizens, engage in very risky behavior.  Our collective response was not terribly impressive.  Greater wealth does help, but greater wealth also means we should spend more to limit the problem…

The main thing we should do — invest in public health infrastructure — is in any case a good idea with many possible payoffs, whether a pandemic comes or not.  It is a better investment of money than pursuing the ideal of universal health insurance coverage.  I might add that one of the better arguments for universal coverage is simply that it could lead to better monitoring of some public health issues.

See also my text with Alex.  And here is me on pandemics and local public health infrastructure, November 2018.  And here are my earlier writings on avian flu.

Safety Protocols and Zones of Quarantine

Carl Danner writes me:

“Essential activities” has no objective definition.  It implies some blanket degree of risk acceptance that can’t be accurate by any underlying calculus, i.e. as if someone has specifically weighed whether we can tolerate these particular activities because they provide enough value to offset the incremental risk of conducting them.  But the reality is more likely that those conducting most activities (including “essential” ones) are now undertaking risk mitigation measures intended to reduce the chance of virus transmission to very low or nonexistent levels.

What we need instead — and the logical place for governments to go in unwinding these blanket restrictions — is a recognition that any beneficial economic activity should be allowed if undertaken using a protection protocol appropriate to its particulars and sufficient to prevent virus transmission.  This would get government out of the business of choosing which businesses or occupations are essential, vital, important or whatever — including all the problems attendant to making such discretionary determinations across the entire economy for a sustained period.  Without that revised approach, we could start to develop occupational licensing/certificate of need type problems as a general feature of the economy.

In other words, this part of the virus response should transition to a health and safety regulatory concern that is important, but handled like most of the others.  For example, poor food hygiene can also kill you, but governments generally don’t respond by deciding which cuisines are essential and which are not.  Rather, anyone willing to follow the safety rules can put up any menu they want.  So it should be for economic activities of all kinds.

We should not lift restrictions until the number of new cases is declining and low and we have enough testing capacity to squash new outbreaks. But we should start to think about what safety protocols may be reasonable in the future. For example, I think we could allow any firm to reopen that does not deal with the public and where all the employees wear masks. Any workplace that disinfects twice a day and checks worker temperatures might be another appropriate allowance. Another possibility is quarantining at work. I don’t see the latter as useful for most workplaces but for say a nuclear energy plant or air traffic controllers it might be appropriate to bring in mobile homes, as they do for fracking workers in North Dakota. Going somewhat farther afield we might use cellphone data to decide on zones of quarantine, e.g. home or work or driving in between. Obviously such systems can be spoofed but the point would be to offer this as a temporary and voluntary system to move towards normalcy.

Hat tip: Michael Higgins.

German Federalism

NPR: “We have a culture here in Germany that is actually not supporting a centralized diagnostic system,” said Drosten, “so Germany does not have a public health laboratory that would restrict other labs from doing the tests. So we had an open market from the beginning.”

In other words, Germany’s equivalent to the U.S. Centers for Disease Control and Prevention — the Robert Koch Institute — makes recommendations but does not call the shots on testing for the entire country. Germany’s 16 federal states make their own decisions on coronavirus testing because each of them is responsible for their own health care systems.

If only America had a federal system we might have had earlier and faster testing.

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.

New York Will Try Convalescent Blood Therapy

On March 17 I wrote:  “A simple and medically feasible strategy is available now for treating COVID-19 patients, transfuse blood plasma from recovered patients.” New York, with other states following closely behind, is now trying the idea.

NBC News: Hoping to stem the toll of the state’s surging coronavirus outbreak, New York health officials plan to begin collecting plasma from people who have recovered and injecting the antibody-rich fluid into patients still fighting the virus.

Gov. Andrew Cuomo announced the plans during a news briefing Monday. The treatment, known as convalescent plasma, dates back centuries and was used during the flu epidemic of 1918 — in an era before modern vaccines and antiviral drugs.

Some experts say the treatment, although somewhat primitive, might be the best hope for combating the coronavirus until more sophisticated therapies can be developed, which could take several months.

The FDA acted quickly to approve the therapy on an emergency case-by-case basis, although it’s not clear to me that legally they should be involved at all given the therapy seems more like an off-label use of blood plasma than a new drug.

Suggest regulatory pauses

Suggest Regulatory Pauses

Is there some government regulation or rule that is keeping you from helping manage the COVID-19 crisis?

Maybe you’re a frontline healthcare worker, an administrator, or work in manufacturing, and believe you could make medical supplies. Whatever your position or industry, perhaps you have ideas that could help.

We want to hear from you. Please fill out the form below.

An initiative from the Booth School of Business at the University of Chicago.

FDA Stops At-Home Tests

TechCrunch…the U.S. Food and Drug Administration (FDA) has updated its Emergency Use Authorization guidelines to private labs that specifically bar the use of at-home sample collection. This means startups, including Everlywell, Carbon Health and Nurx, will have to immediately discontinue their testing programs in light of the clarified rules.

The FDA issued the updated guidance on March 21, and though some of the companies had already begun to ship their sample collection kits to people, and even begun to receive samples back to their diagnostic laboratory partners, even any samples in-hand will not be tested, and will instead be destroyed in order to comply with the FDA’s request

The tests are collected at home but the tests themselves are done in certified labs under quality-control standards (CLIA). It is of course possible, even likely, that tests collected at home are not as accurate as those collected by a trained nurse. But we don’t want trained nurses to be testing everyone–they have other things to do right now. Furthermore, some of these errors will be detected at the lab and can be fixed with a retest. False negatives are possible but going to a hospital or standing in line to get a test also comes with risk. False negatives will also become apparent to the extent that symptoms worsen at which time patients can seek medical assistance. Yes, of course, delay and false reassurance are also not without risk. Welcome to the world of tradeoffs. But at this point in time we need to unleash American ingenuity and enterprise and evolve our way to the frontier as conditions improve.

We need to learn now, regulate later.

Zachary Booker on bridge loans and bankruptcy

This is an email, all from him, I won’t add in any other formatting:

“Like you, I have an extraordinarily deep concern about the capacity for businesses – not only SMBs, but also larger, capital-intensive firms – to weather this path of suppression. I was quite surprised to hear Russ take a lighter note.

…I am deeply sceptical of the efficacy of bridge loans that you spoke about early this morning. While Brunnermeier, Landau, Pagano, and Reis have laid out the best transmission mechanism, I can not possibly envision it will move the needle enough for the majority of those businesses while also not leaving a wake of loss provisions for future generations. I suppose you could say I am partial to point two in your piece.

I also simply can’t understand the legal logistics of bridge loans in this scenario. Most companies will have a capital structure of some kind (perhaps without the most sophisticated lenders). How are you cramming down those who you are priming in the capital structure? You need consent. Who will be managing this incredibly laborious process of gaining consent and creating the terms? Cash grants are one thing, but bridge loans that aren’t unsecured at the bottom of the capital structure are an entirely different matter.”

“While the benefit of hindsight can be a hindrance to pontificating on novel circumstances, it strikes me as unequivocally true that the GFC had a much simpler – intellectually, if not politically – solution. Namely a solution that at its core involved taking known, marketable securities out of the system at haircuts or depressed valuations to abate panic, settle markets, and of course eventually sell at a profit.

In short, I’m partial to the view that mark-to-market accounting was both a central impetus for why the crisis was so severe and why action could be taken so decisively without burdening tax payers for generations to come (see Ball’s very good book here and Fragile by Design, both of which you’re likely familiar with). This crisis provides no such “simple” solutions that can be concentrated against a singular sector of the economy by taking decisive action.

I, of course, have no grand unified theory to share with you. However, I did want to pass along some thoughts I had upon reading your bridge loan piece that came to mind.

Like you, I am also worried about how broad the demand shock is currently and will be moving forward. Affecting not only every industry severely, but also every locality in the economy (e.g. leaving no state or municipality without deep, painful bruises). This raises the question of how the economy – when this is all said and done – reconstitutes itself in an orderly, efficient fashion.

While I’m partial…I believe one of the incredible strengths of the United States is its bankruptcy code. In particular, the out-of-court and Chapter 11 processes.

I would perhaps mull over how the United States can leverage the bankruptcy code to provide support, both out-of-court (e.g. before filing) and to expedite the process while in-court (e.g. by utilizing pre-packs, which are very popular, very quick, and incredibly effective at providing sustainable balance sheets).

The United States could explore offering – or backstopping – DIP Financing for firms that file Chapter 11 (see explainer on DIP financing from Davis Polk here). DIP Financing has been around for many decades, is incredibly safe, and deeply effective.

  1. The US could offer DIP Financing at favourable terms directly and automatically under preset conditions (e.g. a firm that was FCF positive in 2018 with EBITDA +$[10]mln, but needing to file Chapter 11 in 2020, would immediately get a facility at L+[100]). This would also give the US the highest seniority in the cap stack with very favourable terms upon a potential future Chapter 11 (Chapter 22) or a future Chapter 7 (liquidation). For firms that have not been in distress prior to the crisis, this would have the US assuming very little real credit risk. 
  2. The US could backstop private DIP providers – to get credit rolling again – by guaranteeing [95] cents on the dollar for any facility extended within the next [X] months. Historically, DIPs have returned much more than this so this is reasonably safe from a credit perspective. Note: this could also be done for TL1s or revolvers out-of-court. Same principle applies regarding seniority, lessened credit risk, etc. although you’d need consent down the capital structure.
    1. The United States could explore offering participation in pre-packs whereby:
      1. The US would inject $[X]mln in senior secured notes if;
      2. Existing Senior Secured take a [5]% haircut
      3. Unsecured take a [15]% haircut
      4. Equity take a [50]% haircut
      5. Again, the idea would be for pre-packs to be, well, pre-done. The idea would be that if your business is hurling towards bankruptcy, it may be best to bite the bullet and recapitalize (via the US notes) while re-working your balance sheet right now. If your firm meets the FCF, EBITDA, or whatever criteria is determined then the US would offer this package automatically. Contingent only on those within the capital structure consenting to taking at least [X]% haircuts (as consent is required by law). Note: you may want to say that any financing put in – or backstopped by – the US will not be additive to the covenant ratios underpinning the rest of the capital structure (or these covenants can just be amended, if necessary, to allow for this new capital injection as is commonplace anyway).

One would hope that if The United States does something like this it could serve three useful functions:

  1. Providing confidence to market participants that there will be a financing backstop – for otherwise healthy firms blindsided by COVID-19 – by the United States, which will likely have the paradoxical affect of freeing up credit from private participants and stopping the explosion in credit spreads and the halting of credit extension we’re currently seeing.
  2. Allowing firms, without much relative credit risk to the United States, to obtain a runway through the fresh injection of capital along with a modest restructuring that will help them weather the storm if it is to be prolonged.
  3. Providing an automatic, guaranteed solution that is widely accessible to firms as all qualifications and terms would be preset and thus remove any uncertainty as to what firms would be able to qualify for or ultimately obtain.

Using the bankruptcy code in this way would allow the United States to help firms (albeit, likely slightly larger ones than mom-and-pops) in a predictable, known, guaranteed way while also protecting tax payers from taking significant downside risk positions in an ad-hoc and convoluted matter via bridge loans (if they are feasible at all, which I doubt). In short, the United States would leverage the incredibly strong institutional and intellectual framework of its existing bankruptcy code.

I believe – as I believe you do as well – that we are in for a much lengthier protraction than many anticipate…I do not believe Goldman’s forecast…that we’ll see 13% GDP growth in Q3. I do not believe demand will return so quickly or in such force, because I do not believe we will return to normalcy as quickly as we have just departed it.

As I said previously, I have no grand unified theory to get American business through this crisis. However, we both agree in the general goodness of Big Business as a driver of America. What I’ve just laid out is perhaps the most politically palpable solution (because it involves bankruptcy, even if only in name only) that can give a strong life line to those currently in need while not exposing taxpayers to absurd (albeit still large) credit risk. This solution also can be worked to protect pension liabilities and other essential worker benefits.

I think it’s inevitable that we have mass insolvencies, dislocations, and mismatches moving forward. For small businesses, there are solutions around the edges, but I simply cannot comprehend how the United States would be able to figure out and then extend the appropriate levels of credit via bridge loans en masse to these folks. It is surreal to imagine it possibly working and I worry deeply about what such a program – if tried, almost certainly with less dollars than would be required – would do to the social fabric and psyche of the American people when firms inevitably still buckle and break.

I haven’t given much thought to how to leverage the institutional framework of America to best ameliorate this crisis, but I’ve seen no one speak much about how out-of-court or in-court restructuring could be a partial solution. So I figured I’d pass this along as something to keep in the back of your mind and mull over.”

Zachary tells me you can reach him at Zachary.Booker@mail.McGill.ca.

The Internal Contradictions of Segregating the Elderly

There are two problems, even internal contradictions, with segregating the elderly and letting others return to work. The first is fairly well known. When you run the numbers, as the British did, you find that a lot of young people would die. If we return to work too quickly it could easily happen that 20-40% of the US population gets COVID-19. Suppose 20% of the population gets it–that’s 66 million people. And let’s suppose the death rate is on the low end because healthy, young people get it rather than the elderly, say half of one percent, .005, then we have 330,000 deaths of healthy, young people.

Moreover, the numbers I just gave are conservative and don’t make a lot of sense because if 330,000 die then the hospital system is going to be overwhelmed and the death rate will be higher than .005. An internal contradiction.

The second internal contradiction is less well known. We probably can’t segregate the elderly because the more young people get COVID-19 the less realistic protecting a subset of the population becomes. In other words, the premise of the segregation argument is that we can protect the elderly but that premise becomes less plausible the more COVID-19 spreads but allowing it to spread is why we were locking down the elderly. An internal contradiction.

Are there some scenarios where all this works out? Probably but I wouldn’t bet on hitting the trifecta. The lesson of COVID-19 is that like it or not we are all in this together.

Arguments Against International Trade in Modern Principles of Economics

In our textbook, Modern Principles of Economics, Tyler and I explain the benefits of free trade and show why some common arguments against free trade are mistaken. Our goal, however, is to teach students how to think like economists and so we also explain the costs of free trade. In particular, we indicate the strongest arguments against free trade and explore when those arguments best apply. Here’s one of the better arguments against free trade, straight from the book:

If a good is vital for national security but domestic producers have higher costs than foreign producers, it can make sense for the government to tax imports or subsidize the production of the domestic industry. It may make sense, for example, to support a domestic vaccine industry. In 1918, more than a quarter of the U.S. population got sick with the flu and more than 500,000 died, sometimes within hours of being infected. The young were especially hard-hit and, as a result, life expectancy in the United States dropped by 10 years. No place in the world was safe, as between 2.5% and 5% of the entire world population died from the flu between 1918 and 1920. Producing flu vaccine requires an elaborate process in which robots inject hundreds of millions of eggs with flu viruses. In an ordinary year, there are few problems with buying vaccine produced in another country, but if something like the 1918 flu swept the world again, it would be wise to have significant vaccine production capacity in the United States.

If I may be permitted to advertise a bit (more). In Modern Principles, we explain the concept of externalities using flu shots. In macroeconomics, we deal with both real shocks and demand shocks and we list pandemics as one example of a real shock. We also explain how shocks are amplified and can create dis-coordination. These relevant, real world examples in Modern Principles are not an accident. There are different styles of textbooks. Some are written in a vanilla style so they don’t need to be updated or revised very often. In contrast, we wanted Modern Principles to have modern examples and to be relevant to the times. Sometimes, however, we’d like it to be a little less relevant.