I am trying not to let my emotions influence my analysis of the virus crisis. I am trying to stick close to what I know, which is economics and basic probability theory. As I look back on my posts, on this topic, I see quite a bit to be proud of and very little that I would want to walk back. With that as background, below are a few thoughts about anger. Continue reading →

I am going to elaborate on the idea I first proposed as nationwide overdraft protection. Here I will offer more arguments in favor of the proposal and add some more details. I think I will take a suggestion from a commenter and call it a credit line instead of overdraft protection. The credit line is something that is clearly limited.

1. We face a liquidity crisis, but it is in some ways the opposite of the 2008 financial crisis. 2008 was what I would call an “inside” financial crisis–the center of the crisis was the financial sector. The 2020 liquidity crisis is an “outside” financial crisis. The center of this crisis is the nonfinancial sector, including small business and individuals who are missing out on paychecks.

2. So if we focus on banks now, we are not putting relief where it is most directly needed.

3. Even forbearance, which is an idea that I have endorsed, is an inside-out approach to trying to solve the problem. But we need outside-in liquidity. We should guarantee liquidity for the nonfinancial sector, and trust that this will take care of the banks, rather than try to do it the other way around. The other way around would consist of backstopping banks and hoping that they relieve the nonfinancial sector. That would at best be fighting the last war.

4. Implement the idea for every bank account in the country. For each account, add up all the money deposited into that account in January and February of this year. We are not referring to the bank balance at any one time. Instead, we are measuring the revenue stream going into the account as deposits. For an ordinary worker, it might be $10,000, consisting of four paychecks for $2500 each. For a small business, it might be $200,000, consisting of receipts deposited. Have the government guarantee a credit line for each account’s revenue stream.

5. People and businesses that need to draw on the credit line can do so. Make the incentive to repay the loan very strong. For example, an individual would lose rights to some future government benefits if the individual does not repay the loan.

6. There would be a self-triage with using the credit line. People and businesses with no need for it will not use it. People and businesses that cannot hope to repay a loan if they use it will not draw on it, either. They will have to raise money from other sources, which might be charity or investors or outright grants from the government. The users of the credit line will be temporarily strapped individuals and businesses who expect to get back on their feet once things return to normal.

7. Use of the credit line will limit the adverse feedback effects of a few weeks of reduced economic activity. In theory, you might add to the credit line if economic activity is going to be curtailed for a longer period. But honestly, I don’t think anyone has a good policy for the scenario in which we keep the economy in a coma for months. So focus on this as an approach for dealing with a short period of sharply curtailed economic activity.

8. One advantage of this approach is that the government won’t have to write regulations for forbearance for all types of contracts. The government doesn’t have to impose mortgage forgiveness, utility bill forgiveness, car payment forgiveness, and so on. People can use their credit lines to pay their bills.

9. Another advantage is that the cost to the future taxpayers will be low. Taxpayers only have to make good on defaulted loans. The government is not obligated to bail out every single person or every single business.

10. Another advantage is that there will be less incentive for individual sectors to lobby for more. In this case, “more” would be a larger credit line. Since you have to pay back what you borrow using the credit line, it is not like you want to spend a fortune on K street lawyers trying to get it, the way you would if there were government grants up for grabs.

I am going to keep pushing this idea, because I think that we have an outside-in liquidity problem, and so far this seems like the best solution for it.

If you and I are not coughing, do we need to socially distance from one another? That is a $64 trillion question. So I propose an experiment.

Take 300 volunteers who all test negative for the virus. Repeat the test, if necessary to be reasonably confident that they begin the experiment virus-free. I’ll explain where to get the volunteers shortly.

Put 100 of the volunteers in a room with someone who has the virus but is asymptomatic. Make sure that they all get a chance to get close to the infected person. Put 100 of them in a room with someone who is symptomatic. Make sure they get a chance to get close to the infected person. Next, have a symptomatic victim cough on his hand and touch a doorknob 100 times, meaning 100 different doorknobs. Then have the last 100 volunteers each touch one of the doorknobs and then touch their faces.

Over the next few days, measure the difference in infection rates. The goal is to compare two strategies.

1) Isolate people who cough
2) Encourage broad-based social distancing

If the infection rate is zero except among the group that meets in the room with the symptomatic sufferer, then you know that (2) has no marginal social benefit over (1). Instead, just focus on executing (1).

Even if a few people in the other rooms do get infected, if the number is much smaller than the infection rate in the symptomatic sufferer’s room, you might calculate that the costs of (2) exceed the benefits, and you prefer (1).

As for the volunteers, I suggest that they come from the upper ranks of the FDA, who seem to be the ones most responsible for resisting testing or trying out drug treatments for the virus. Make them “volunteer.”

Actually, don’t let that snarky comment mislead you. I seriously think that this would be a valuable experiment.

In fact, while we wait for the results we can do it as a thought experiment. If I could, I would ask leading epidemiologists to predict the outcome of the experiment. One could use their estimates to make better assessments of policy.

[UPDATE: The Ginn article was taken down by Medium, and it was “taken down” by someone on twitter, using lots of snark and 4-letter words, as Twitter users are wont to do. I am not going to change any of the post below, in which I warned that Ginn’s views go against my own. The way I see it, Ginn threw a lot of different stuff against the lockdown policy, and certainly some of what he threw at it didn’t stick. But if he made 9 criticisms that are invalid, if there is a 10th one that might be valid, it is worth exploring that 10th one, rather than go beserk. Hence, my charitable approach, which you can judge for yourself.]

I am going to provide a link to a contrarian article on the virus, by one Aaron Ginn, who is roughly on my level–not an officially certified expert, but somebody who thinks about data and what they mean. If you go to the page and click on the comments, you will find some that are extremely hostile. You can also see that the author’s point of view differs from mine. But he at least gives us a lot to think about, and I believe I can give a succinct, charitable interpretation of his analysis. My conclusion, below the fold, is that we need to scientifically evaluate the key question that I take away from his analysis.

To stimulate your interest, an excerpt from his conclusion:

Does stopping air travel have a greater impact than closing all restaurants? Does closing schools reduce the infection rate by 10%? Not one policymaker has offered evidence of any of these approaches. Typically, the argument given is “out of an abundance of caution”. I didn’t know there was such a law. Let’s be frank, these acts are emotionally driven by fear, not evidence-based thinking in the process of destroying people’s lives overnight. While all of these decisions are made by elites isolated in their castles of power and ego, the shock is utterly devastating Main Street.

Continue reading →

Suppose that we think that many otherwise economically-viable households and businesses will not be able to pay their bills over the next few weeks, and this will produce a domino effect. Could we stem this liquidity crisis by allowing folks to overdraw their checking accounts temporarily, with the government promising the banks to make up any losses that result?

My thinking is to have the government provide overdraft protection for any individual or business. You can write a check, and if you don’t have the funds to cover it, you pay no penalty while the policy is in place.

The overdraft protection would last from the date that it is announced to, say, six months after the government declares that it is safe and acceptable for people to resume normal economic activities. Six months after normal economic activity is allowed, your checking account has to be back in the black or else you pay a penalty.

The goal is to enable individuals and firms to pay their routine bills. If an individual or business uses overdraft protection frivolously and cannot pay back the loan, then when the protection ends they will face a penalty. Perhaps the penalty needs to be severe in the case of flagrant abuse of the overdraft protection.

If we have a lockdown that lasts only a few weeks and then gets lifted, then overdraft protection might be sufficient for the vast majority of individuals and businesses. No need for the government to give everyone a check. If the lockdown lasts longer, or subsequent lockdowns are needed, then we have something much more than a liquidity crisis. In that case, you have to go about figuring out who needs/deserves a subsidy.

I am sure that this idea is not perfect, but what are the big holes that you see in it?

Created 3/21/20. Latest update 3/21/20 8:45 PM. Formatting changes (which are coming) and minor editorial corrections will not be counted as updates. Suggestions for sources and for other questions welcome. At least for now, the answers here are predominantly my own opinions, downplaying other points of view.

1. Why are we so concerned about this virus, which so far (as of mid-March) has killed many fewer people than an ordinary flu?
2. How do differences in testing frequency and reporting practices affect reported spread rates and death rates?
3. What factors affect actual death rates?
4. What policies have worked best in reducing the spread rate?
5. How is government enforcement of social distancing justified by a difference between private costs and social costs?
6. How can a short, unpaid vacation for some sectors of the economy have such large ramifications?
7. What are the long-term economic consequences of this crisis?
8. Why aren’t policymakers taking into account the economic cost of closing restaurants and shutting down other forms of economic activity?
9. What about fiscal and monetary stimulus?

1. Why are we so concerned about this virus, which so far (as of mid-March) has killed many fewer people than an ordinary flu?

The key to the answer lies in the words “so far.” The virus seems to spread at a phenomenal rate, with cases doubling more than once a week. If the number of deaths were to double once a week, then starting from about 200 deaths on March 15, by the end of May the total would be 200,000 deaths, which is about ten times the number that we get from ordinary flu.

The Imperial College paper made an extrapolation that warned of the possibility hundreds of thousands of deaths if social distancing were not encouraged.

2. How do differences in testing frequency and reporting practices affect reported spread rates and death rates?

The reported spread rate depends on the actual spread rate and the trend in testing frequency. For example, in the United States, testing ramped up the week of March 16, and the reported spread rate rose above 50 percent per day on some days, but that is probably well above the actual spread rate. It is very difficult to estimate the actual spread rate as long as testing protocols are changing.

Death rates are also very unreliable. Some people have died of the disease without being tested for it, so that they do not count in the virus death statistics.

Deaths occur with a lag, so that if the number of cases is increasing, the reported death rate will understate the true death rate. To see this, assume that the true death rate is 1 percent, and death occurs 5 days after someone becomes a “case” by testing positively for the disease. Suppose that on day one there are 100 cases and on day five there are 1000 cases. As of day five, there will be one death (out of the original 100 cases), but dividing this by the number of current cases (1000), we would compute a death rate of 0.1 percent, which is far below the true number.

Other factors will cause the reported death rate to be overstated. Most important, many people who have the disease in mild forms will never be tested and thus will not count as cases. So the death rate relative to the number of reported cases will be high relative to the true death rate.

3. What factors affect actual death rates (not the reported death rates)?

An important factor is the quality of care. There was a relatively low death rate on the Diamond Princess cruise ship, and it is likely because the sick passengers and crew were well cared for. In Italy, the death rate from the virus was modest for a while, but it soared once the health care system became overwhelmed. The countries with the highest death rates appear to be those with the weakest health care systems and/or those whose systems are most overwhelmed by a large case load. But it is hard to be certain, given the challenges with reporting and calculating death rates accurately.

Age and existing health conditions are other important factors. Death rates for the very young are minimal, and death rates for the very old are high.

Although death rates among otherwise healthy people under age 60 and are low, they are not zero. Deaths of health care workers are particularly worrisome.

We should not treat the death rate as if it is some natural constant. When a large share of the cases is in the elderly population, as in the state of Washington in early March, the death rate will be high. When there are ample human and physical resources to treat patients, the death rate will be lower than otherwise. If new treatment protocols, including pharmaceuticals, prove to be effective, the death rate could plummet.

4. What policies have worked best in reducing the spread rates?

Policies to completely isolate those who have or might have the disease appear to have worked in China and South Korea. This seems to require strict quarantine and extensive surveillance. In South Korea, testing was widespread, as was “tracing and tracking.” When someone is sick, you try to trace back to see who might have made them sick, and you try to track down anyone else who might have come into contact with a sick individual. To do this, the authorities can use data on people’s phones to plot their movements. Presumably, this is not something that Americans are ready to allow.

If only sick people can spread the disease, then isolation of people with obvious symptoms can be effective. But if people who experience no symptoms or mild symptoms can spread the disease, then more general social distancing is required. Apparently, many experts believe that the disease can be spread by people who are not yet severely symptomatic.

5. How is government enforcement of social distancing justified by a difference between private costs and social costs?

The personal cost to me of risking infection is relatively low. Suppose I go to a crowded restaurant. Even if I get infected, I am unlikely to die, particularly if I get good treatment should my case be severe.

But the cumulative social cost of many people deciding to risk infection is high. First, they may infect others who have high risk. Second, as the number of people requiring treatment rises, the capacity of the health care system becomes strained, the quality of treatment falls, and the death rate rises.

Front-line health care workers are particularly inclined to stress the social cost of people risking infection. They see cases of young people requiring ventilators. They see fellow health care workers become sick and even die. They see the limits on supplies of equipment needed to treat patients.

6. How can a short, unpaid vacation for some sectors of the economy have such large ramifications?

Financial obligations don’t sleep. The small business that is temporarily closed and wants to keep its workers still has to make payroll. The individual who is temporarily laid off still has to pay rent and make car payments. The airline whose planes are grounded still has to pay the bank for the loans that it took out to purchase the planes.

Our society is highly levered. Many households have not saved enough to go even a few weeks without a paycheck. Many businesses make heavy use of debt financing and have little cash reserves. Banks deposits are supposed to be riskless and available on demand, even though the assets backing those deposits are risky, long-term loans.

When economic activity is running smoothly, this leverage is efficient. Households can enjoy goods sooner than otherwise by obtaining them on credit. Businesses can expand more by using borrowing than they could if they had to rely on cash flow from profits. Banks and other financial institutions allow households to buy homes, operate small businesses, and start new ventures.

But all this leverage increases fragility and interdependence. When households don’t have cash reserves, a short unpaid vacation means that they cannot pay rent. Then the owner of the apartment building cannot make the payment on its loans. Then the bank does not have the money to pay its depositors, unless it forecloses on the apartment building and sells it at a loss. Etc.

In a crisis, everyone tries to reduce their leverage. Households cut back on spending. Banks cut back on lending. Economic activity collapses.

7. What are the long-term economic consequences of this crisis?

Behavior will change, and economic activity will alter as a result. People who are considering going on a cruise or flying overseas will be more aware of the risk of contracting illness, and this will reduce demand. People involved in health care systems will be more aware of the risk of running into a surge in demand, and they will try to expand capacity.

People will become more facile at undertaking work, education, and conferences remotely. Businesses that help foster remote interaction will expand. Businesses that are built around large conferences and meetings will shrink.

As businesses develop supply chains, they may become less concerned with maximizing efficiency and a bit more concerned with ensuring robustness. They may prefer sources with more redundancy rather than sources that minimize cost.

An open question concerns what will happen with leverage. The financial crisis of 2008 caused some de-leveraging in the short term. But households and businesses soon got back to operating with high levels of debt and low margins of safety. Perhaps this time people will be more traumatized than they were in 2008. Perhaps this time government authorities will not be as sanguine about rising dependence on credit in the economy.

8. Why aren’t policymakers taking into account the economic cost of closing restaurants and shutting down other forms of economic activity?

This question implicitly assumes that the alternative of allowing all businesses to operate would be costless. That is, it assumes that we could avoid most of the cost of this crisis if we did not “panic.”

In fact, even if the government does nothing, many individuals and businesses will curtail their activities, based on what they know about the virus. Many private actors were ahead of the government in canceling travel and conferences. The economic costs were already going to be significant, even without government advice or mandates.

More important, an alternative strategy of allowing or encouraging ordinary economic activity could prove even more costly in the long run. One can imagine a scenario in which the health care system gets overwhelmed, causing many people to die who otherwise would not, both from the virus and from other treatable illnesses. There could emerge a social climate in which people fear and suspect strangers. This low-trust social climate would itself hinder ordinary economic transactions.

There is no way to avoid having the economy take a major hit from the crisis. Without a doubt, some of the policy responses will make things worse than would be the case otherwise, and others will make things better. It will be difficult to determine which is which, both in real time and in hindsight.

9. What about fiscal and monetary stimulus?

I am skeptical about both. Conventional monetary stimulus involves the Fed paying for financial instruments with money that it creates at the stroke of a pen. It’s a subtle way of manipulating rates of return in financial markets. That tool now seems to me beside the point, sort of like the steering mechanism on the Titanic after it already hit the iceberg.

Instead, I think we need a lender of last resort. I have suggested giving households and firms government-backed overdraft protection. Here is further elaboration.

Fiscal stimulus means the government taking money out of someone else’s pocket to give it to you. By someone else I mean a future taxpayer. The future taxpayer may face an explicit tax bill, or that taxpayer may end up paying via the “inflation tax:” giving up some real resource in exchange for government-issued money that is going to shrink in purchasing power.

Fiscal stimulus works because you need to pay your bills today. You don’t care about the future taxpayer. The politicians sure don’t.

As the recipient of the government payment, it looks like you are getting a gift, as opposed to the overdraft privilege or credit line. If you borrow using a credit line, you know you’re supposed to pay it back. But it doesn’t look like you have to pay back your gift. Instead, the person who pays back your gift is the future taxpayer. That future taxpayer could turn out to be you, but you won’t think about it that way.

The political lobbying for these gifts will be intense. I am cynical enough to believe that whatever you and I receive will be but a fig leaf to cover up more extravagant gifts for special-interest constituents. One of the big reasons I prefer the credit-line approach is that interest groups won’t fight as hard for money if they know they will have to pay it back.

Matt Ridley writes,

There are no good outcomes from here. Many people will die prematurely. Many will lose their jobs. Many businesses will go under. Many people will suffer bereavement, loneliness and despair, even if they dodge the virus. The only question is how many in each case. We are about to find out how robust civilisation is. The hardships ahead are like nothing we’ve known.

As difficult as it is to accept this, I think we have to. As a disruptive event, the virus crisis will not be as bad as World War II. But it will be worse than pretty much everything since.

Consider the Arab oil embargo that began late in 1973, which might be the most relevant precedent. It disrupted the economy by raising energy costs. The government’s attempt to reduce the disruption by using price controls probably made matters worse, because rationing by government bureaucracy was less efficient than rationing by price.

As I recall, gasoline rationing made the most significant impact. People drove a lot less, so that businesses that depended on automobile travel were hit hard. The American automobile industry went into a long period of decline, as demand for its low-quality gas guzzlers fell off and Japanese car manufacturers captured a large share of the market.

The virus crisis affects more activities and more industries. The adjustment problems may prove to be more challenging.

The 9/11 terrorist attack was a punch that knocked us down for a little while, but we got up from it quickly.

The financial crisis of 2008 was centered on financial institutions that had taken on too much mortgage risk. That sector now seems narrow and limited compared with all of the financial exposures that we have today. All sorts of companies are way over-levered, and no one knows what sort of cascading bankruptcies might be looming. The financial triage operation that is about to occur will dwarf the one that the government undertook in 2008.

Do you remember when the government took over Freddie Mac and Fannie Mae? It was getting ready to re-privatize them only recently, and now that may be in doubt. This time around, will we see airlines nationalized? Hotel chains? How about Uber, Lyft and airbnb? Won’t they need government assistance to survive?

Some people wish that the government would stop telling people to stay home. Would it help to encourage people to go back to restaurants and bars? This WSJ story, looking at health care providers on the front lines, should raise doubts about that idea. Notably,

several coronavirus patients under 40, including a few in their 20s, were on ventilators in the intensive-care unit as of Thursday. All were healthy before getting the virus

People keep talking about the “trade-off” between fighting the virus and preserving economic activity. They want to see “cost-benefit analysis” of this “trade-off.”

But maybe there is no trade-off, and there is not economic benefit to trying to go easy on lockdowns. Perhaps the worst economic outcome would result from encouraging people to go about their normal business. A society filled with sick people who cannot be treated is not going to orderly and well-behaved. Allow trust and social cohesion to break down, and you will see economic devastation that goes beyond what we will suffer from lockdowns.

I believe that we have to resist the temptation to benchmark the economic outlook against “normal,” where normal means what would have happened had the virus never appeared. Normal is not an option, either in the short run or the long run. You cannot use GDP to measure of well-being when there is a discontinuous shift in what people value.

In the short run, if you let everyone go about their business, you would not get normal. Even if the government were to say it’s ok to do whatever you want, how many people would book cruise ships or foreign trips? And if the government were to de-emphasize social distancing and instead do everything to try encourage or even “stimulate” normal economic activity, the likely result would be an overwhelmed health care system, triage, and so much fear and distrust that the economic disruption might exceed what we would see with a long-term lockdown.

In the long run, I don’t expect normal either. Pre-crisis, our patterns of specialization and trade were optimized for efficiency at the expense of fragility. Expect supply chains in the future to have a lot more redundancy and to be less driven by cost minimization. The Chief Risk Officer’s approval will now be needed before the CEO will approve a major new supply contract.

We will develop a lot of what you might call social-distancing capital, including the ability to make use of remote meetings and distance learning. Last night, some folks attempted a virtual session of dancing. Most of the time was spent getting a bunch of old people up to speed on using Zoom. Next time, we might be able to dance. People will get accustomed to new forms of entertaintment.

Many sectors were way too levered–households with too little savings and too much debt, businesses with too little cash reserves and too much debt, and governments with too much debt and unfunded liabilities. Behavior is likely to change going forward. I expect to see a major reduction in financial intermediation. Financial intermediaries, such as banks, are in the business of issuing riskless, short-term liabilities backed by risky, long-term assets. This allows the nonfinancial sector to do the opposite. I don’t think that we will be able to sustain as much financial intermediation as we did before, and the result will have to be individuals and firms undertaking fewer risky, long-term projects.

The challenges for other countries will be much more difficult. De-globalization is taking place, and that will produce losers and bigger losers (it won’t produce many winners). Become familiar with Peter Zeihan’s way of viewing the world. Don’t take the international order for granted. Zeihan emphasizes that the U.S. is one of the few countries that produces enough food and energy for itself. China, on the other hand, needs to import both. That would lead one to predict that China will be in the “bigger loser” category.