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.

Think of the economy as being in the state that it was on December 7, 1941. The problem we faced then was not sustaining aggregate demand. It was the problem of converting from peacetime production to wartime production. We also had to anticipate a later problem of converting from wartime to peacetime, but note that the latter problem took care of itself quite easily. The Depression that Samuelson and others anticipated would follow the reduction in government spending in 1945 never materialized.

Right now, we don’t need TSA screeners, if we ever did. But Amazon and Wal-mart need people in order to ramp up their logistical capabilities. Jobs maintaining our infrastructure in health, electrical power production and distribution, and Internet capacity are essential. Jobs at amusement parks and casinos are not.

Production of more face masks and coronavirus test kits is essential. Some other production is less essential.

We are acting as if our biggest worry is how to get back to our “normal,” pre-war economy. Our biggest challenge instead is to win the war, after which we will transition to an economy that looks considerably different, just as the post-WWII economy was quite different from the pre-war economy.

For conversion, the government should spend where it is needed–on the health care supply chain, testing and development of treatments and vaccines, improving the logistical infrastructure for a social-distance economy (pay to ramp up 5G? Develop policies and systems to rapidly increase the use of drone delivery?), etc. It needs to cut spending on inessential services, such as TSA.

By worrying about the conversion back to peacetime now, we are getting ahead of ourselves. Once we get back to peacetime, there will be pent-up demand for. . .we don’t know exactly what right now. In the 1950s, we built Levittowns and Holiday Inns and K-Marts, none of which were anticipated in 1941.

When a war breaks out, one of the things you have to do is fire many of the peacetime generals and replace them with officers from lower down in the ranks. The problem can be explained using the Game One, Game Two framework.

Game 1 is figuring out a winning strategy and executing it.

Game 2 is figuring out what you need to do to get a promotion.

In peacetime, the generals who rise to the top are the ones who play Game 2. In wartime, you need to find the Game 1 players.

The peacetime bureaucrats seem to be causing a lot of difficulty for the folks who are trying to play Game 1 against the virus. You need to find a way to route around them. There should be a Game 1 player to head up each of the following:

1. Hospital Logistics. Their job is to get hospitals the equipment they need, whatever it takes to do it. Presumably someone with a military background, although there is some expertise at places like Amazon.

2. Treatment Protocols. They should issue a “default protocol” for doctors to use if they want to use it. But they should encourage doctors who want to try different protocols to try them and document the results. You want to revise the “default protocol” as new information comes in.

3. Testing Strategy. Their job is to see that testing yields useful overall information in addition to information that is useful for individual treatment decisions.

4. Vaccine R&D. Eliminate roadblocks, direct funding.

5. International liason. Ensure that we learn from other countries and help them as much as we reasonably can.

6. Public Communications. Make sure that communication is clear and credible.

7. Financial Maintenance. Make sure that the priority is forbearance that works its way through to individuals and businesses. Not following the standard rule book.

Etc.

1. Tyler Cowen on the Grand Princess data (not quite the complete sample you thought it was). UPDATE from a commenter: Diamond Princess was the complete sample. Grand Princess is the cruise in SF Bay.

2. Scott Alexander’s take.

Most of my rationalist friends self-isolated really early, before it was socially acceptable to do so

I cannot resist joking that nerds on the spectrum look for any excuse to self-isolate. But seriously, the people who are complaining about “panic” and “you’re trashing the economy for nothing” and “the flu is worse” strike me as less facile with math and data than those of us on the other side. Almost three weeks ago, Tyler Cowen talked about the debate between “growthers” and “base-raters.”

There are still base-raters out there. In a podcast interview with Nick Gillespie, Richard Epstein insists that outbreaks look geometric when they start, but then people adjust and they slow down. But I cannot think of a country where a slowdown occurred without strong government action. We’ve had effective government action in a few countries, and not-yet-effective government action in many others.

3. John Cochrane laments that economists are using old playbooks to deal with the current situation. I would say that there is a divide between the “stimulus” approaches and the “forbearance” approaches. He points out that the forbearance approach has not been carefully worked out. But that is not a good reason to prefer the stimulus approach. Doing the wrong thing because you know how to do it strikes me as the policy equivalent of looking for for the lost keys under the lamppost because that is where the light is.

Commenter Education Realist supplied interesting numbers on the cumulative path of deaths in Italy and the U.S. Let’s work with those.

Call the date at which there were 12 cumulative deaths in each country Day 0. The next number for Italy is 17, meaning that there were 5 deaths on Day 1. For the U.S. it is 15, meaning that we had 3 deaths on Day 1. So Italy is +2 on Day 1. Going forward, we have the following numbers for Italy minus the U.S.

0, 5, 8, 7, 19, 25, 33, 43

This is some combination of faster spread in Italy (starting from the same base in terms of total deaths) plus a breakdown in the ability to deliver care in Italy. Assuming it is mostly the latter, you want to take strong social-distancing measures sooner rather than later.

Yesterday, Tuesday, March 18 at 10 AM, the JHU web site said that there were 6519 cases in the U.S. Today, Wednesday, March 19, at 4 AM, it was showing 9415 cases. That is an increase of roughly 50 percent. That increase in known cases is a combination of two factors: increased testing (an artificial factor), which raises the number of known cases to the number of actual cases; and spreading of actual cases. I don’t know how much is due to each, but if you are looking for evidence that the virus is not spreading exponentially, an increase of 50 percent per day is not a good sign.

Now for some grim math. Let C be the number of known cases, H be the ratio of hospitalizations to known cases, and D be the ratio of deaths to hospitalizations. Then we have:

(1) total deaths = DxHxC

For example, if there are 1000 known cases (C=1000), 5 percent of these are hospitalized, and 20 percent of those who are hospitalized die, then deaths = 1000x.05x.20 = 10. Note that in this particular example, I assumed that no one dies who is not hospitalized. In reality some people will die without being hospitalized, and they will count in D.

Note that in this equation, HxC is the case mortality rate. In the numerical example, it is .05x.20 = .01, or one percent.

Next, we can do a logarithmic derivative approximation to write

(2) g = d + h + c

where g is the growth rate of deaths, d is the growth rate of D, h is the growth rate of H, and c is the growth rate of C. Note that this approximation only works for SMALL values of d, h, and c, not for big numbers like 50.

Suppose that cases grow at a rate of 4 percent (c = .04). Then if the hospitalization rate falls by 4 percent (h = -.04), that would offset the growth rate in cases.

Assume that soon the growth rate of cases will reflect true spreading, and the bump from increased testing will be behind us. Then going forward, there is reason for optimism in all three components of (2). The rate of death of hospitalized patients should fall as we get better treatment protocols and find useful drugs. The rate of hospitalization should fall as we get better at triage and we also find more effective treatment protocols that reduce time in hospital. It also could fall if we get better at protecting high-risk populations, so that more of the people who get the virus do not experience severe symptoms. Finally, the rate of growth of cases should fall as the effects of social distancing kick in.

If the rate of hospitalization does not fall fast enough (h turns sufficiently negative), then as long as c, the growth rate of cases, remains positive, we may at some point run out of facilities to treat seriously ill patients. The limiting factor in facilities might not be space and equipment–it could be the supply of health care workers. In any case, once we exceed capacity, that would cause a spike in d, the growth rate of deaths relative to hospitalizations. The growth rate in deaths would be high in such a scenario.

There are web sites that track total cases, C, and total deaths. What would help in this framework is to have H, the proportion of known cases that are hospitalized. As I searched for that data, at first I found what appears to be misinformation:

Up to 1 in 5 younger adults in the U.S. infected with coronavirus wind up in the hospital, according to a new analysis by the Centers for Disease Control and Prevention.

Baloney sandwich. What the report says is

Among 508 (12%) patients known to have been hospitalized, 9% were aged ≥85 years, 26% were aged 65–84 years, 17% were aged 55–64 years, 18% were 45–54 years, and 20% were aged 20–44 years. Less than 1% of hospitalizations were among persons aged ≤19 years

That is, 20 percent of those hospitalized were in the 20-44 year age group, not that 20 percent of the cases in that age group are hospitalized. Since 508 were hospitalized, that means that about 102 in the 20-44 age group were hospitalized.

As I understand it, at the time the report was run, there were 4226 cases, and 29 percent of these were in the 20-44 age group. That means that there were about 845 cases in that age group. So the rate of hospitalization within that age group was 102/845, or a bit under 12 percent. Still a big number, and an indication that letting this “low-risk” population all get infected soon may not be a good strategy. But see my final note.

Overall, dividing 508/4226 gives a value for H of just over 12 percent. With cases having more than doubled since the report was run, in order to hold steady we would need H to have fallen below 6 percent.

Final note: the value of H in the report is greatly overstated to the extent that people without severe symptoms did not get tested, and hence did not show up as cases. That could be a lot of 20-44 year-olds, which would make their H much lower.

I wish we had a dashboard that provided reliable numbers for H. I wish we were testing a random sample of the population so that we could estimate key numbers with more confidence.

There are a lot of people who are calling the social-distancing movement a “panic” that is needlessly wrecking the economy. But I thin we can all agree that it buys us some time by slowing the spread of the virus. Here is a list of advantages that I see from this.

1. We can produce more ventilators before the demand peaks.

2. We can keep our health care workers healthier longer.

3. We can evaluate treatment protocols.

4. We can test many more people, and we can analyze the data we obtain from doing so, before making further course corrections.

5. It is possible that the course correction that we need is even stronger quarantines. But we could never do that without first finding out that the milder social-distancing measures have been tried first and failed.

I listened to Russ Roberts and Tyler Cowen discuss the coronavirus. If you missed it, maybe you can find it at the Mercatus video archive at some point. Here is rough paraphrase (caricature?) of part of the dialogue.

Russ: Think of this as a three-week vacation. Why can’t the economy recover from a 3-week vacation?

Tyler: A lot of organizational capital will be lost.

Russ: Wha???

Tyler: Employers and employees know how to work together. When those relationships need to change, it takes a lot of time for matching and training to work out.

Russ: You seem to think that the virus will be a factor for a long time. Why?

Tyler: Suppose that in the very short run we get it under control through social distancing. That means that a lot of people will not have had it yet. What is likely to happen is that there will be a series of outbreaks, and that means a series of shutdowns. It means that it will be a long time before people feel comfortable going to locations where they will encounter crowds.

Think of this as the problem of herd non-immunity. It means that we could go a long time during which people change their behavior to avoid catching/spreading the virus.

To me, this makes two things important. One is the process of testing and approving a treatment. If a treatment can be shown to work, then we can be much more relaxed about allowing people to get the virus.

The other is having a random testing program. John Iaoannidis is getting a lot of flak, some of it deserved, for what he wrote yesterday. But I very much agree with this:

The most valuable piece of information for answering those questions would be to know the current prevalence of the infection in a random sample of a population and to repeat this exercise at regular time intervals to estimate the incidence of new infections. Sadly, that’s information we don’t have.

If the government won’t do this (and I have little confidence that they will), then I hope some corporation or non-profit will take it on.