Author Archives: Arnold Kling

Economic reality and illusion

Posted on by

On the one hand, you have reality. Over 20 million jobs were lost in April, or more than 13 percent of employment. The other day I linked to a study suggesting that over 40 percent of these job losses are permanent. And there are more layoffs pending.

On the other hand, you have illusion.

The technology-heavy Nasdaq Composite Index entered positive territory for the year, erasing much of its losses from the coronavirus-fueled rout. Other major U.S. indexes also notched strong gains for the week. The S&P 500 rose 3.5%, while the Dow Jones Industrial Average advanced 608 points, or 2.6%. The Nasdaq Composite added 6% for the week.

I am going to offer a view of the economy. Feel free to disagree with it.

You don’t have to tell me that financial markets are saying something different. I already know that. The markets believe that today’s economic slowdown is temporary and that today’s low inflation and interest rates will last a decade. My way of looking at the economy implies something close to the opposite.

And you don’t have to tell me that typical macroeconomists disagree with me. I know that, too. Continue reading →

General update, May 10

Posted on by

1. In Connecticut,

Between April 22 and April 29, the state’s death total rose from 1,544 to 2,089, or 545 new deaths, according to data released by the state Department of Public Health. In that same seven-day period nursing home deaths rose from 768 to 1,249, meaning 481 among the 545 new deaths — about 88% — were nursing home patients.

We have a friend who lives in the highest-end elder-care facility in the St. Louis area. She is truly locked down. The front door is guarded, and the residents are not allowed out. They can outside into the back courtyard, but they cannot leave the facility. They can receive grocery deliveries. Meals are not eaten in the cafeteria, but instead are placed in front of the door, wrapped in plastic.

The nation’s governors are fighting on the beaches, they’re fighting in the fields, . . .and the real battle is in the nursing homes. Not our finest hour.

2. I recommend this Heying-Weinstein podcast from yesterday. I listened at 1.25x speed, because he talks slowly for my taste. From about minute 30 to minute 47 they discuss the issue of whether the virus likely originated in nature, came from a lab intentionally, or came from a lab by accident. I think they would put their money on “came from a lab by accident,” and their arguments make sense to me.

On another topic, they are not “openers.” Of course, they raise concerns about deaths from the virus, as do all “closers.” My responses are two fold. One is that it is not fair to assume that everyone will immediately revert to gathering in closed spaces and traveling as much as they were before. The other is that with so many of the deaths in nursing homes, I am not convinced that the marginal saving of life from locking down the rest of us is all that high.

One argument that they make as evolutionary biologists is that the more that we expose humans to the virus, the more chances we give the virus to evolve in ways that make it more adept at infecting people.

My problem with that argument is that it seems to me that a lockdown only stops the virus from adapting if we eradicate the virus. But the lockdowns we have are not going to eradicate the virus. Those of us who shelter in place need to eat, which means that there are people out there who need to move around to get food to us.

It seems to me that these two people for whom I have great respect have allowed themselves to fall into the “moving goal posts” fallacy. The lockdown that was originally sold as delaying the spread of the virus is now being defended as if it could eradicate the virus.

As a thought experiment, a total worldwide lockdown that is militarily enforced might be sufficient to eradicate the virus. But the partial, flatten-the-curve lockdown does nothing in the long run to deprive the virus of opportunities to explore mutation space.

3. Clare Malone and Kyle Bourassa write,

Almost uniformly across these states, people started staying home beginning on March 14. The percentage of people staying home rose rapidly over the following nine days and tended to plateau by March 23.

The Cuebiq data suggests that behavioral changes were largely driven by people making a voluntary choice to stay home rather than being forced to do so by a state-sanctioned stay-at-home order. One need only look at the behavior of residents in North Carolina and their neighbors in South Carolina: While North Carolina issued a stay-at-home order eight days before South Carolina, a stabilized number of people in both states started staying at home about a week before North Carolina’s order.

Pointer from Tyler Cowen. In mid-March, people were making decisions to restrict activity independently of what political leaders were telling them to do. I don’t think that has changed.

General update, May 9

Posted on by

1. Erin Bromage writes,

We know most people get infected in their own home. A household member contracts the virus in the community and brings it into the house where sustained contact between household members leads to infection.

But where are people contracting the infection in the community? I regularly hear people worrying about grocery stores, bike rides, inconsiderate runners who are not wearing masks…. are these places of concern? Well, not really. Let me explain.

In order to get infected you need to get exposed to an infectious dose of the virus; the estimate is that you need about ~1000 SARS-CoV2 viral particles for an infection to take hold, but this still needs to be determined experimentally. That could be 1000 viral particles you receive in one breath or from one eye-rub, or 100 viral particles inhaled with each breath over 10 breaths, or 10 viral particles with 100 breaths. Each of these situations can lead to an infection.

2. Here is the paper on vitamin D.

we show that the risk of severe COVID-19 cases among patients with severe Vit D deficiency is 17.3% while the equivalent figure for patients with normal Vit D levels is 14.6%

3. Annette Alstadsæter and others write,

First, layoffs started in sectors of the economy directly affected by the policy measures but then quickly spilled over to the rest of the economy so that after 4 weeks 2/3 of layoffs are accounted for by businesses that were not directly targeted. Second, close to 90% of layoffs are temporary rather than permanent and while this classification may change as the crisis progresses, that is one glimmer of hope in the data. Third, while permanent layoffs are a minority, they still correspond to a 1.5 percentage point increase in unemployment — an unprecedented monthly change. Fourth, the layoffs have a strong socio-economic gradient and hit financially vulnerable populations. Fifth, there are hints of the important role of childcare—within firms, layoffs appear to be skewed toward workers with younger children, in particular toward women. Finally, layoffs are more common in less productive and financially weaker firms so that the employment loss may be overstating total output loss

Pointer from John Alcorn.

4. David Beckworth writes,

This existing demand for safe assets is one reason why interest rates on long-term U.S. treasury bonds remain very low despite the large runup in public debt this year. It also helps explain low inflation, since the increased demand for safe assets means less spending. A new generation of more risk-averse investors will add to this already elevated demand for safe assets and create additional disinflationary pressure that will be with us for some time.

…The use and expansion of the Fed facilities to backstop markets sends another strong signal to foreign investors that the U.S. financial system will not fail. This will encourage them to hold more dollar-denominated assets issued in America. Put differently, the biggest kid on the financial block just got stronger.

This is another case of linking to a point of view with which I disagree. Vehemently.

The demand for low-interest U.S. paper is sufficient for now. But as Herbert Stein said, things that can’t go on forever stop. And in this case, the stop will be sudden and will catch markets by surprise. It will surprise David Beckworth and others who think it can go on forever.

Also, contrary to Beckworth and others, I believe that the additional issuance of government paper does nothing to solve the main problem for the economy, which is to discover new patterns of sustainable specialization and trade.

5. For speculation on the outlook that is closer to mine, consider a paper by Victoria Gregory and others.

We find that the recession has an L-shape. The finding is easy to explain. First, even when the cost of maintaining and reactivating a suspended employment relationship is fairly small—in the order of less than a month of the worker’s value added—the fraction of workers whose employment relationship is permanently terminated is about 35%. This is consistent with survey evidence, which finds that between 40 and 50% of the workers who have entered unemployment during the first month of the lockdown have no expectation of being recalled to their previous job (see, Adams-Prassl et al. 2020 and Bick and Blandin 2020). Second, the workers who are permanently laid-off are
disproportionately of the ”fickle” type, who need to search for several years in order to find a long-lasting job.

Pointer from JA. Note that the depiction of unemployment as a search/matching problem is not to my taste, because it makes it sound as if the job opportunities are given, rather than emerging from entrepreneurial trial and error. And simulation models are not to my taste. So I cannot endorse the methods, as much as I agree with the conclusion.

6. Leonidas Palaiodimos and others write,

Patients were classified in three groups based on the BMI: BMI<25 kg/m2, BMI 25-34 kg/m2, and BMI≥35 kg/m2 as per the most recent BMI assessment prior to or during the index admission. Severe obesity was defined as BMI≥35 kg/m2.

Pointer from JA. It might be somewhat counterintuitive, but this kind of piecewise linear specification is a more robust way of dealing with possibly nonlinear relationships than is imposing a particular nonlinear functional form, such as log or exponential. These investigators find a significant role for severe obesity along with the usual role for age.

7. Doc Searls writes,

Now, haul Arnold’s template over to The U.S. Labor Market During the Beginning of the Pandemic Recession, by Tomaz Cajner. . .

The highest employment drop, in Arts, Entertainment and Recreation, leans toward inessential + fragile. The second, in Accommodation and Food Services is more on the essential + fragile side. The lowest employment changes, from Construction on down to Utilities, all tending toward essential + robust.

8. Joseph Sternberg writes,

We all know people on social media who enjoy decrying lockdown violators and protesters as “covidiots.” Project Fear works by appealing to believers’ sense that they are smarter than their peers, better able to read the tea leaves to see the impending disaster and also better able to protect society from its more benighted members. And don’t discount the joy in the sense of moral superiority when one’s position allows one to value “lives” when one’s opponents care only about “the economy.”

Pointer from Alberto Mingardi. Fear of the virus has been transformed into Fear Of Others’ Liberty. So even though Vitamin D is protective, many people applaud the California governor for closing the beaches.

9. Finally, if Tyler can link to an A-WA music video, I can link to a video of an A-WA song with me dancing to it. I need to study the video to remember the last section before the very end.

The four political types, a follow-up

Posted on by

Yesterday’s post drew a variety of comments and criticisms.

I think I need to clarify my view of how conservatism relates to Mr. Trump. I see Mr. Trump in populist terms, exemplifying the honor culture. A pure conservative recoils from Mr. Trump. But conservatives live in a world in which he represents the main alternative to progressives, to which they also recoil.

The Saldin and Teles book, NeverTrump, captures the anguish that conservatives felt as they chose how to resolve this issue. You can think of them as adopting one of three positions.

1. Nevertrump. Do not reconcile with him. He is bad for conservatism and bad for the country.
2. Accept Mr. Trump as the best current alternative to progressivism.
3. Fully endorse Mr. Trump as spokesman for a future conservatism that is done with free-market ideology and globalization.

I myself feel most comfortable with those who chose (2), next most comfortable with those who chose (1), and least comfortable with those who chose (3). But all three positions have problems.

A big problem with (2) is that it goes in the direction of making conservatism a group identity, defined by its opposition to progressivism. The main problem with (1) is that it does not offer a constructive way forward. And I cannot go along with (3) because I still favor free markets and globalization.

The way I see it, Mr. Trump took some voters away from progressives, but he took many more voters–and most Republican elected officials–away from conservatives. Now conservatives are in the same place as libertarians, on the outside of the political process looking in.

General update, May 8

Posted on by

1. Greg Mankiw writes,

Job losses during the Great Recession of 2008-2009 were largely permanent job losses. Job losses during the Great Shutdown of 2020 are largely temporary layoffs. The future course of the economy will, of course, depend on the microbiology. But the economy seems well situated for a rapid recovery if testing, treatment, and vaccine development allows it.

This is one of those links I provide in order to give you access to opinions with which I disagree.

I disagree in part because I see no realistic scenario in which fears of the virus go away the rest of this year. But mostly I disagree about the ability to recover easily. One can imagine a society in which households and businesses could bounce back from a two-month shutdown, because they had plenty of cash reserves to ride it out. But back in the real world we encouraged a gigantic debt buildup. Over the past fifty years, we have told the financial sector that by acquiring debt from consumers and businesses, they could enjoy privatized profits and socialized risks. We have created an economy that runs very well in good times but is highly fragile otherwise. If my assessment is correct, then short-term dislocations will have long-term consequences.

2. In a difficult-to-understand paper about mutation patterns of the virus, Zhi-wei Chen and others write,

we classed the SARS-CoV-2 into four main groups and 10 subgroups based on different mutation patterns for the first time. The distribution of the 10 subgroups was varied in geography, time and age, but not in gender. After two apparent expansion stages, most of groups are rapidly expanding, especially group D. Therefore, we should pay attention to these genetic diversity patterns of SARS-CoV-2 and take more targeted measures to control its spread

Pointer of course from John Alcorn.

3. Michelle Barton and others write,

Children accounted for 1.9% of confirmed cases. The true incidence of pediatric infection and disease will only be known once testing is expanded to individuals with less severe or no symptoms. Admission rates vary from 0.3 to 10% of confirmed cases (presumably varying with the threshold for testing) with about 7% of admitted children requiring ICU care. Death is rare in middle and high income countries..

Another Alcorn pointer.

4. Matt Ridley writes,

There has long been evidence that a sufficiency of vitamin D protects against viruses, especially respiratory ones, including the common cold. Vitamin D increases the production of antiviral proteins and decreases cytokines, the immune molecules that can cause a “storm” of dangerous inflammation. It has long been suspected that most people’s low vitamin D levels in late winter partly explain the seasonal peaking of flu epidemics, and rising vitamin D levels in spring partly explain their sudden ending. Vitamin D is made by ultraviolet light falling on the skin, so many people in northern climates have a deficiency by the end of winter. Eating fish and eggs helps, but it is hard to get enough of it in the diet.

Here is a list of people who are more likely to be vitamin D deficient than the average: dark-skinned people (pigment blocks sunlight); obese people (the vitamin gets sequestered in fat cells); type-2 diabetics (vitamin D improves the body’s sensitivity to insulin); the elderly (they tend to avoid the sun and eat more frugally); city dwellers (they see less sunlight). Does that list ring any bells? All appear to be more likely to hospitalised with severe cases of Covid-19.

I have suspected that an outdoor lifestyle is protective against the virus.

But I can’t believe that Ridley would bring up skin color. Another Alcorn pointer leads to Gregorio Millett and others, who write,

Social conditions, structural racism, and other factors elevate risk for COVID-19 diagnoses and deaths in black communities.

So there. Vitamin D has nothing to do with it.

5. Another Matt Ridley insight.

If COVID-19 is at least partly a ‘nosocomial’ (hospital-acquired) disease, then the pandemic might burn itself out quicker than expected. The death rate here peaked on April 8, just two weeks after lockdown began, which is surprisingly early given that it is usually at least four weeks after infection that people die if they die. But it makes sense if this was the fading of the initial, hospital-acquired wave.

His thinking is that if frail people in February and March were going to hospitals for any reason, they might have picked up the virus.

The new minimum wage

Posted on by

Two headlines from this morning’s WSJ.

1. April Jobs Report to Show Record Unemployment.

2. Businesses Struggle to Lure Workers from Unemployment.

Remember Fight for Fifteen? It passed without a fight. The Federal supplemental unemployment benefit is $600 a week. Notice that for a 40-hour week that works out to $15 an hour. And that is on top of state unemployment benefits.

The new minimum wage is a tax on small business that in many cases more than offsets the benefits from the main form of assistance they were offered, the Paycheck Protection Program.

The CARES act is creating the world that the left wants. It certainly is not the world that I wanted.

I wanted banks to offer credit lines to individuals and businesses. Instead, lending has been nationalized and concentrated at the Fed, where the highest priority is buying Treasury debt and other priorities are the municipal bond market and corporate debt markets.

I wanted states to cut back on extravagant public sector pay, benefits, and featherbedding, because the private sector is suffering enough already. Instead, the Federal government is giving huge handouts to the states, which will ultimately be paid for by taxes and inflation that hurt the private sector.

I see a secure future for Big Tech, Big Finance, and Big Government. The CARES act turns everything else into rubble.

The CARES act passed with one dissenting vote. At the time, I called it the worst legislation in history. I stand by that call.

Philosophy, disposition, honor culture, group identity

Posted on by

Here is a generalization that you are going to argue with, but eventually you may grudgingly find it helpful.

Libertarianism is a philosophy. Libertarians start with principles. They may disagree with one another about how to apply those principles, but they approach social issues as philosophical arguments. Think of Walter Russell Mead’s Jeffersonians.

Conservatism is a disposition. It worries about the bad inclinations of human beings. Conservatives believe that in order to overcome these bad inclinations, we must be formed by traditional institutions. Think of Walter Russell Mead’s Hamiltonians.

Populism is an honor culture. It demands personal respect. It reacts combatively to anyone who who appears to insult its honor. Think of Walter Russell Mead’s Jacksonians, or David Hackett Fischer’s borderers.

Progressivism is a group identity. Progressives are convinced above all that they are the good people. Their goodness is amplified by the evils that they oppose. Think of Walter Russell Mead’s Wilsonians or David Hackett Fischer’s Puritans.

Progressives value group solidarity over intellectual consistency. They are able to deny or forgive allegations of sexual assaults by Bill Clinton or Joe Biden, who are members of the good team, but they believe that allegations against Clarence Thomas or Bret Kavanaugh should have been disqualifying. They know that they have science and facts on their side, even as they insist that GMOs are dangerous, that women and men are equally disposed to pursue STEM careers, and that the “1619 project” deserves the highest award in journalism. In January, they knew that they were morally superior to anyone who feared the virus, because such fears were racist. Now, they know that they are morally superior to anyone who opposes the lockdowns.

The most basic rule of group survival is to reward people who obey the group’s norms and punish people who defect from the group’s norms. This rule is embedded in group identity and in honor culture. It is not embedded in conservatism or libertarianism, which puts those adherents at a disadvantage.

General update, May 7

Posted on by

1. Tina Lu and Ben Y. Reis write,

We found that Internet search patterns reveal a robust temporal pattern of disease progression for COVID-19: Initial symptoms of fever, dry cough, sore throat and chills are followed by shortness of breath an average of 5.22 days [95% CI 3.30-7.14] after symptom onset, matching the precise clinical course reported in the medical literature. Furthermore, we found that increases in COVID-19-symptom-related searches predict increases in reported COVID-19 cases and deaths 18.53 days [95% CI 15.98-21.08] and 22.16 days [95% CI 20.33-23.99] in advance, respectively. This is the first study to show that Internet search patterns can be used to reveal the detailed clinical course of a disease. These data can be used to track and predict the local spread of COVID-19 before widespread laboratory testing becomes available in each country, helping to guide the current public health response.

Pointer from John Alcorn.

2. In another Alcorn pointer, Elizabeth Williamson and others conducted a large cohort analysis of British patients. My sense of these studies is that we always see a very strong relationship between age and death rates and higher mortality for men than women. Which co-morbidities show up as significant varies, and I suspect this is due to the way that these tend to correlate with age. If you specify the age variable in a sophisticated, non-linear way, its explanatory power will be such that co-morbidities may not show much independent effect.

I would like to see some of these explanatory models run with no age variable at all, to see how much variation you can explain with co-morbidities alone. My guess is that such equations will explain a smaller share of the variance, but they may offer better insight into the relative importance of different co-morbidities.

Here is a press release for the study.

3. A software engineer criticizes the Imperial model.

It’s clear from reading the code that in 2014 Imperial tried to make the code use multiple CPUs to speed it up, but never made it work reliably. This sort of programming is known to be difficult and usually requires senior, experienced engineers to get good results. Results that randomly change from run to run are a common consequence of thread-safety bugs.

Pointer from Tyler Cowen.

4. From a correspondent:

I am a small business owner, and I see a big problem with the PPP Loans that is not discussed in the media.

PPP loan forgiveness is planned as a percentage of payroll costs over the eight weeks following loan distribution. Therefore, businesses that continue to operate, with normal payroll costs, expect to receive large loan forgiveness. However, those aren’t the businesses that need forgiveness; they have continued to operate. The businesses who need the money are shut down, don’t have any payroll costs, and will therefore receive little forgiveness.

My business has continued to operate with a modest decline in sales. On my application, I could honestly certify, “current economic uncertainty makes [the] loan request necessary to support the ongoing operations of the Applicant”; I am certainly facing plenty of uncertainty. However, I am unlikely to actually need the money.

I accepted the loan and will ask for forgiveness, because if the government is handing out free money, I am going to accept; the government takes plenty of my money without asking. While there might be a few angels who don’t apply for the PPP loan, most self-interested owners will accept forgiveness. As one of my industry colleagues said to another, “Time to PPParty!”

The solution? Make the PPP loans non-forgivable LOANS, with a long (5 years?) repayment period at 0-1% interest.

PPP was rushed out – rightly in my opinion — because of the immediate nature of the problem, but Congress has time to change the program in the six months before forgiveness and repayment start.

Nobody who already accepted loans will be hurt. They can simply repay the loan.

If PPP is changed from grants to loans, owners facing huge losses from closure can at least amortize that loss over a period of years to enable them to remain in business. Furthermore, there remains the possibility to forgive some loans in the future, after more careful analysis of actual losses incurred.

5. Tomaz Cajner and others write,

Using weekly, anonymized administrative payroll data from the largest U.S. payroll processing company, we measure the deterioration of the U.S. labor market during the first two months of the global COVID-19 pandemic. We find that U.S. private-sector employment contracted by about 22 percent between mid-February and mid-April. Businesses suspending operations—perhaps temporarily—account for a significant share of employment losses, particularly among smaller businesses. Hours worked for continuing workers fell by 4.5 percent. We highlight large differences in employment declines by industry, business size, state of residence, and demographic group. Workers in the bottom quintile of the wage distribution experienced a 35 percent employment decline while those in the top quintile experienced only a 9 percent decline.

Miscellaneous bitter thoughts

Posted on by

1. Many people believe that it is quite moral not to pay rent. Hardly anyone believes that it is moral not to pay taxes. I think that the intuition is that taxes are fair, but rent is not fair. If I owned rental property, I would not think it fair to pay taxes to a government that tells people they do not have to pay rent.

2. Here is a nursing home in which many patients got the virus but as of the date of the story only one had died. But it is not a feel-good story, at least as far as half the country is concerned.

3. In 2009, when we had the stimulus, the models forecast that unemployment would rise to 8 percent without the stimulus. The stimulus passed, and unemployment hit 10 percent. But the conventional wisdom is that the stimulus worked, and unemployment would have been worse without it. How do we know this? Model simulations.

In 2020, suppose that, contrary to model forecasts, the death rate drifts down after lockdowns are lifted. We will be told that there would have been many fewer deaths had the lockdowns stayed in place. How will we know this? Model simulations.