Category Archives: PSST and Macro

ASK vs. EYI

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I do not like the way that the experts are dealing with this crisis. I am at the point where I don’t care about being charitable toward them. Nassim Taleb, who is never charitable to those who disagree with him, has a shorthand that I will modify for this purpose. Expert Yet Idiot, or EYI.

  1. What should we rely on to make decisions?
    • ASK: rigorous studies and experiments
    • EYI: noisy data and models
  2. What should we use to reduce the spread rate of the virus?
    • ASK: masks and scarves
    • EYI: lockdowns
  3. What should government do to relieve individuals and small businesses?
    • ASK: provide backing for credit lines from banks
    • EYI: Massive intervention by the Fed and deficit spending

Regarding (1), we need to have an idea of the prevalence of the virus in the population. It is impossible to do this by following the data on reported cases. The amount of testing varies day by day. Different tests are used, with different rates of false positives and false negatives. The lag in reporting results can be anywhere from less than an hour to more than a week. Tests are done on non-representative samples of the population. A rigorous study would use a proper sample design and strive for uniformity in the time and method in which tests are done.

Also, there is no definitive view of how this spreads from one person to another. Experiments would be getter than guesswork.

Models do more harm than good. They rely on data and assumptions that propagate through the model, giving precise-seeming results that are in fact unreliable by orders of magnitude. UPDATE: Peter Attia has a great 8 minute YouTube on this.

For now, the only forecasting method I trust is to extrapolate the growth rate in the number of deaths for a few more weeks. Until today, deaths were doubling very steadily every three days. Today, the ratio of deaths to the total three days ago dropped to 1.86. That is the best number to track until we get something more rigorous to use.

Regarding (2), it seems intuitively plausible that lockdowns will reduce the spread rate. But it also seems intuitively plausible that having everyone use masks and scarves would lower the spread rate. Neither approach will drive the spread rate to zero, but perhaps either approach would stop the phenomenon of the superspreader–one person whose case is such that it infects many people.
The difference between masks/scarves and lockdown is that maybe I could get a haircut. That is if everyone in the barber shop had masks and scarves, and if the barber took unusual measures to clean the chair and his tools.

Regarding (3), if you have not been following this blog, scroll back through previous posts.

General update

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1. My proposal for credit lines is looking better, because the existing approaches are starting out fouled up in red tape and confusion. See the WSJ on mortgage relief. See The American Banker on paycheck protection loans (pointer from Tyler Cowen).

2. Last night, it seemed as though the Administration was considering a masks and scarves approach. But this morning. . .crickets. I guess the opposition is still strong. [UPDATE: this evening, a recommendation to wear face covering when we go out, e.g. to grocery stores.]

3. There are stories that Asian countries that have had success with their initial approaches, including masks, are now worried that they need more social distancing, because virus spread is starting to accelerate. Pointer from a reader.

4. Maybe we are practicing Hansonian medicine* in treating the virus. Tyler Cowen passes along a disturbing letter.

The letter passes along the claim that of patients put on ventilators, 80 percent or more never recover. My guess is that doctors know the characteristics of patients with an extremely low probability of recovery. Putting such patients on ventilators and caring for those patients puts health care workers at risk. At the margin, we may be costing lives.

The letter points out that if other hospital treatments are not working well, then the whole issue of keeping the hospital system from becoming overwhelmed is moot. I suspect that we get some trial-and-error learning value from hospital treatment. Maybe that trial-and-error learning value can produce a triage approach that uses hospital resources effectively. One way to achieve the goal of getting medical resources above “the curve” is to get better at figuring out who doesn’t need treatment and who cannot be treated successfully, so that resources only are used on treatment-worthy patients.

*For those of you new to this blog, Hansonian medicine refers to a meta-analysis by Robin Hanson that finds that when two populations with different intensity of use of medical care are compared, average outcomes do not differ. Hanson’s interpretation (which I am not totally on board with) is that in a population the cases where medical intervention causes harm cancel out the cases where medical intervention helps.

The childish view of government

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When you are eight years old and you want something, you ask your parents. When they give it to you, it seems that they are being nice and nurturing. When they don’t, it seems that they are being strict and tough.

That is the way most people think about government, and the way that journalists encourage us to treat government. When Congress gives us something we want, they are being nice. And when it doesn’t they are being mean.

Thinking about economics should allow you to see a difference. Your parents have something to give you because they worked to create something of value and earned a paycheck. The government only has something to give you because it takes it from someone else. The government cannot be “nice” to everyone at the same time.

It may be a good idea right now to raise taxes on the more fortunate people to give money to the newly unemployed. But instead, government is catering to our childish notions by giving away the money without explicitly taxing anyone. When nothing more is being produced, but we all think we have more money, the result is more money chasing the same goods. Prices will go up.

Why didn’t the 2008 stimulus cause the inflation virus to break out?* First, it was less than half as large as the recent bill. Second, the dislocation to the patterns of specialization in trade was less widespread in 2008 than what is taking place now. Third, in the years subsequent to 2008, there was downward pressure on prices from the ongoing gains to efficiency from globalization. As of now, it appears that globalization will stop moving forward, and it could in fact move backward.

*Note that I did not predict an inflation virus back then; what I did think, I believe correctly, is that the 2008 stimulus would be ineffectual, in that it would not hasten the process of creating new patterns of sustainable specialization and trade.

The government is taking, not giving

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The logic of what I have to say is simple. Getting people to accept is not. People want to believe that government is their rich uncle. Uncle Sam just walks up to the attic, dusts off some of his fabulous wealth, and gives it to us. Try to erase that notion from your mind and pay attention.

A friend of mine does marketing for major events at Capital One Arena. Well, there is not much demand for that these days. Meanwhile, there is excess demand for Personal Protective Equipment (PPE). The economy’s job is to shift resources from producing events at Capital One Arena to producing PPE. Maybe we’ll reach a point in a year or two where resources should shift back.

Meanwhile, we have the government supposedly giving us $2 trillion. Let us see how that works in three scenarios. In the first scenario, the government can neither borrow nor print money. In the second scenario, it can borrow but not print money. In the third scenario, it can print money.

1. Must use real resources

Suppose we feel sorry for the folks who used to work for Capital One Arena, and we want to make sure that they can eat. We could form a charity, and the charity could collect food donations from other people, perhaps people who are earning income producing PPE. We could redistribute these food donations to the ex-workers from Capital One Arena.

With no ability to borrow or print money, Congress would have to act like a sort of forced version of this charity. Congress cannot create more food by magic. If it wants to feed the unemployed, it has to take food from the employed.

Apart from being nice to the unemployed, how would this help the overall economy? The Keynesian way to think about it is that the PPE producers will just hoard their incomes and not spend it on anything that would create jobs. But the unemployed workers would spend income on stuff that would create jobs. So if you take food from the employed and give it to the unemployed, their will be more spending and less unemployment.

But this Keynesian view is not necessarily correct. Even if the employed workers are savers, their saving can be put to work by firms to obtain machinery, by households to buy houses, and by students to invest in their human capital. The Keynesian world is one in which savings just disappear down a black hole. They call this the Paradox of Thrift. I call it a far-fetched story.

2. Government Borrowing

Suppose that the government does not have to take food from the PPE workers to give to the unemployed. The government can instead borrow from the PPE workers and pay them for food to give to the unemployed. This works out the same as the first case, except that some of the savings of the PPE workers now goes into government bonds. Maybe they continue to put as much as they did before into the market for machinery, houses, and human capital, or maybe they decide to put in less. If they decide that they don’t want to raise saving by the amount that the government is borrowing, then they will try to buy some of their food back. This will cause prices to rise.

3. Printing money

Suppose that the government prints money to buy food from the PPE workers to give to the unemployed. But there is nothing more being produced than before. If there is 10 percent more money for the same amount of stuff, prices will go up 10 percent.

Describing an economy in which there is a fixed amount of stuff that can be produced makes Keynesian economics seem really stupid, which I believe it is. But I can be more charitable. The Keynesian idea is that borrowing or printing will actually lead to more production. The belief is that demand creates its own supply, as it were. When the unemployed get their food (or their money), they go out and buy stuff, and other unemployed people get hired to make that stuff, giving them incomes to buy other stuff, and so on, absorbing more and more unemployed resources.

But remember how I see the economic problem here. We have resources that are in the wrong place, like workers waiting to get jobs back at Capital One Arena when what we need is help producing PPE. More borrowing or money-printing isn’t going to make the Capital One Arena jobs come back–that depends on what happens with the virus. To the extent that more stuff isn’t produced, the borrowing or printing is just going to raise demand for what is produced.

My main point is that it is more accurate to think of government spending as taking, not as giving. You can only give if you have something to give in the first place. The government does not have valuable production to give. What the government does is take.

This cannot hurt

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According to various reports,

On Thursday, the White House said that it will likely soon adjust previous guidelines that discouraged non-health workers from wearing face masks. The change would be issued as “guidance” from the CDC, but according to the president—who continues to hesitate at exerting federal power during the COVID-19 crisis—it will not be made mandatory.

1. State and local officials could make it mandatory.

2. It is considered a supplement to lockdowns, not a replacement.

3. But my guess is that after we get through the next couple of grim weeks, maybe some locations will experiment with masks as a substitute.

4. I am sure that a lot depends on how well people follow instructions for hygienic use of face coverings. I can understand why one might not be optimistic about that.

5. But face covering doesn’t have to be perfect. It just has to work well enough to slow the spread rate.

A general update

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I still want to participate in a movement to change the direction of the policy response to the virus crisis. The health policy leadership strikes me as inflexible and unscientific in its approach. And the macroeconomics profession is even worse. Our peacetime bureaucrats are losing the war on all fronts.

I decided after experimenting the other day that I don’t have a comparative advantage in audio-visual media. Others in the movement may prove better at that. I am thinking in terms of a different blog-like format, but more polished than this one. I do want to involve well-known thinkers I respect. I want to hear from the audience and involve them, not just talk (write) at them. Stay tuned.

Here are some comments on analysis that has recently come to my attention.

We are still nowhere on mass public face covering, but at least one country’s leader thinks it’s worth a try. And if it works there, maybe all the flak the idea gets from the health policy experts won’t stop us from trying it here.

Listening to Peter Attia and Michael Osterholm, it seems likely that our hospital system is going to run into shortages of many supplies, including medicines, masks, and chemicals necessary to carry out tests. Thanks to Tyler Cowen for the pointer.

Listening to Jay Bhattacharya and Peter Robinson, it sounds like Jay understands the principles of science. I wish somewhat like him had more power to oversee the allocation of resources for testing.

Robin Hanson found a serious error in every so-called model to predict spreading. That is, treating the spread rate, or R0, as if it were a single, physical parameter is misleading. In fact, we know that most people with the disease have R0’s well below 1, and a remarkably large fraction of cases are caused by a tiny number of super-spreaders. Robin shows that this makes it much harder to contain the virus. I trust his model more than the fancier ones out there.

I think this argues for a policy of limiting the number of people any one person can be in contact with per 10-day period. But “in contact with” may have to include doorknob effects. Of course, we still have not done the experiment to see how strong doorknob effects are.

William Galston is among at least a few people promoting the idea of a commission to investigate the government’s response to the virus crisis. I think that is a terrible idea. A commission is a symbolic gesture–an alternative to really cleaning house.

What I want to see instead is a really effective effort to lower the status of the public health experts and economic experts who created the response. Meanwhile, raise the status of outside thinkers who have been more insightful. The real commission will be what is embedded in the movement that I pray will form and in which I plan to participate.

After the 2008 financial crisis, the elites raised the status of Ben Bernanke and the Obama team without critically examining whether what they did was helpful or harmful. Not surprisingly the current Fed and the Trump economic team are pulling out the same playbook, expecting to reap the same glory.

But what have they accomplished? They have taken us much farther down the road to serfdom. We need to turn this vehicle around.

The Higgsian moment

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Donald Boudreaux agrees with me that this is the right time to dust off Crisis and Leviathan.

Typically, the quantum of additional powers granted to – or seized by – government during each crisis shrinks somewhat when the crisis passes. Normal times, after all, aren’t crisis times. But never do such additions to state power fully disappear. Government’s exercise of these powers is perceived as having been key to escaping the crisis – so such powers become more widely regarded as being beneficial. Fear of such powers is lessened.

The fact that this happy perception of the consequences of such powers is, at least to some degree, always an illusion conjured by the propaganda that government officials inevitably deploy to justify their exercise of their new powers is irrelevant. If people believe that this new grant of power and that new expansion of authority as used by government officials were both effective and necessary to the nation’s escape from Armageddon, people naturally lose some of the skepticism they had, pre-crisis, about such power and authority.

A sad possibility is that the process consists of government becoming stronger, people becoming more sheep-like, government becoming stronger, etc.

Peter Zeihan’s latest

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He writes,

Without decent epidemiological data any public health policy with an eye on containment or mitigation is simply a shot in the dark. Unfortunately, materials, equipment and lab bottlenecks have made testing numbers plateau at this level. Multi-day delays in receiving test results are widespread.

. . .The United States will be the country that has suffered the greatest recorded deaths from coronavirus within two weeks, and the death toll certainly will not peak within a week of that dire landmark.

Yesterday, the White House briefing gave out a forecast for a range of deaths between 100,000 and 240,000. With a population of 330 million, this works out to a death rate per million of 300 to 720. Just for benchmarks, Italy and Spain are currently at 200 deaths per million. New York state is at 80. All other U.S. states and major countries are below those numbers. But to be clear, I don’t find those benchmarks helpful in forecasting going forward.

Currently, for our nation as a whole the number of deaths per million stands at 12. To stay within the White House range, the number of deaths must double either 5 or 6 more times. If it only doubles 4 times, then we fall below the range. More than 6 times, and deaths will exceed the upper end of that range.

Most recently, the rate has been doubling every three days. How much would you want to bet on a forecast that between now and the end of the year it will double no less than 5 times and no more than 6 times? The people who are trying to issue forecasts, including the sainted Dr. Fauci, come across to me as fools. He may get lucky. But if you held a gun to my head and made me forecast, then I would give a wider range, particularly at the upper end.

Models vs. Experiments

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John Hinderaker writes,

I am particularly interested in the IHME project because it includes state-by-state forecasts. For Minnesota, it currently projects 1,039 deaths. This is in marked contrast with the model on which Minnesota’s governor claims to have relied when he issued the state’s shutdown order. That model, according to the governor, projected more than 70,000 deaths in the state unless people were ordered to stay home and businesses were closed. He hasn’t said, to my knowledge, how much good his stay-home order will do, according to the same model.

I have a distrust of computer models that goes back a long time. Coincidentally, today the latest issue of EconJournalWatch is out, including my piece on why Edward Leamer, a skeptic of econometric models, deserves the Nobel Prize. I’ll say more about that in a post later this week.

It amazes me that people trust computer models as much as they do. Have they forgotten how computer models performed in rating mortgage securities prior to the financial crisis of 2008?

I would prefer to base decisions on experiments, not on models. For example, on the utility of masks, I think that the best evidence we have is the quasi-experiment of Hong Kong and Taiwan vs. Europe and the U.S. But I would be happy to see an experiment in which similar communities adopt different approaches, with one of approach being the lockdown and another approach being allowing people to go to work and school wearing masks.

As you know, I would like to see experiments performed to see how the virus spreads (testing the “doorknob effect,” for example), And a careful study of a random sample of the population to try to get a handle of how many people have the virus currently and how many people have had the virus.