I believe that the best macroeconomic response to the virus crisis would be what I call forbearance. Bank regulators would tell banks that they will be allowed to fall below minimum capital requirements. They will be allowed to write down the value of loans without having to raise capital as a result. They will be encouraged to in turn offer forbearance to borrowers, provided that there is a reasonable prospect that borrowers will be able to get repayments back on track once the crisis has passed.
Under this policy, it will be up to banks to decide which borrowers are in short-term difficulty and which borrowers are never going to recover. If I were at a bank, I would bet on airlines coming back. I would not bet on cruise ships coming back.
You can think of forbearance as a selective soft bailout. When it comes to bailing out industries, you can think of a type I and type II error. Type I error is where you let a business collapse when it could survive with some help to tide it over. A type II error is where you save a business that is really not viable.
Ordinarily, you just let the market operate, and accept the errors that it makes. But the virus crisis threatens to become a financial crisis, and in a financial crisis there will be a lot of Type I errors. These in turn will cause economic activity to fall. But if you provide indiscriminate bailouts, you will make too many Type II errors.
If you provide funds to a troubled firm, then you may commit a Type II error without realizing it. If you only provide forbearance, then you discover your Type II error when even after the crisis passes the firm cannot get back on track. So that limits the duration of the error that you make.
If you just use generic macroeconomic instruments, such as fiscal and monetary stimulus, you end up with a lot of both types of errors. That is how I judge the response to the crisis of 2008. On top of that, there was all sorts of economically useless graft, such as the “green energy” programs included in the fiscal stimulus.
I am skeptical that either quantitative easing or the stimulus actually helped. That is because I think that the “aggregate demand” paradigm is flawed. Economic activity declined because particular patterns of specialization and trade were disrupted. This will also be the case with the virus crisis. More government spending or more expansion of the Fed’s balance sheet will just socialize more of the economy. That will be of little benefit in the short run, and it will cause harm in the long run.
My working assumption continues to be that the elites are two weeks behind in dealing with this crisis. That is, what President Trump did yesterday was probably what he should have done two weeks ago. What I would like to see the top leadership do is ask the Centers for Disease Control to come up with a plan for what to do if three weeks from now the number of cases continues to double every few days with no sign of stopping. Take that plan and execute it now.
Forget Trump and Justin Trudeau (in self-quarantine, wife confirmed COVID-19 from UK travel in self-isolation), Boris Johnson and the UK NHS are the best example of common sense and good leadership. The link is to a YouTube video that starts at 23m30s with Boris Johnson giving a surprisingly excellent overview of the situation followed by two NHS (National Health Service) scientists/leaders giving excellent details.
The UK has move from a Containment phase to a Delay phase (to be followed by Mitigation). The advice is Self-Isolation for 7 days of people with mild symptoms and not (yet) people in the same household. Peak transmission occurs simultaneously with first symptoms and infectiousness drops off significantly after 3 days. Overall death rate is 1%, less than 1% for healthy people. Speculation is that 80% of the population being Infected/Recovered is the worst-case scenario and no areas have experienced anything near that level to date.
NEW INFO: the worst reactions that require intervention occur after 5 days.
The U.S. and Canada are in still in Containment phase as far as I can tell. Canada has been successful in fully containing the spread (no sustained community spread) but went fully irrational yesterday (perhaps March Break Maddness) with the closing of Toronto services and Ontario schools for 3-weeks (March Break + 2 weeks) despite the futility and fatigue enhancing effects these will cause (as described nicely by the Brits). Ontario also announced that they will be restricting testing because of supply constraints on Italian made swabs used in the test kits. Testing is a nice feature, not a necessary one.
Stop listening to Steve Sailer and his model-happy buddies. The UK NHS is the voice of reason.
I don’t think so — Sailer is a smart guy who has a track record of being right. Besides, if you don’t want to listen to Sailer, then listen to Greg Cochran who is even smarter:
https://westhunt.wordpress.com/2020/03/12/what-is-to-be-done/
Greg Cochrane is wrong, Steve Sailer is wrong, anyone that clings to an incorrect model is wrong. COVID-19 primarily spreads by respiratory droplets. It is not airborne. I keep watching the carefully monitored areas for examples of rapid spread and, other than South Korean Case 31 which probably has a good explanation, COVID-19 doesn’t seem to spread easily.
Smart people are only as good as their next bad idea and the real test of smartness is being humble enough to recognize a your own flawed thinking. The UK NHS explanation fits all the data I’ve seen. When I see any evidence of rapid spread I’ll gladly and loudly change my mind.
The apparent rapid spread early in the epidemic was due to underreaction and there is a real danger in overreaction making things worse.
Appeals to authority of credentialism hold no away with me. These are not complicated scenarios. Cough droplets spread the virus and the symptoms are flu like but about 1% die (vs 0.1 for flu).
Perhaps an appeal to data would help. The number of cases in Europe and the U.S. seems to double every few days. That seems to go against the thesis that it “doesn’t seem to spread easily.”
Look, you could be right, and I hope you are. But at this point it’s hard to know.
I gather the alternative hypothesis is that a lot of these are people who already had the virus but hadn’t been tested or hadn’t gotten a test result back. For a virus that could affect hundreds of millions of people, an amazingly small number of people have test results.
Arnold, I keep watching the Canadian cases and the local press keeps publishing the Contact Tracing details. Each time something looks like the beginning of community spread there are just very few resulting Close Contact cases. An international miners conference with 20k attendees over four days, one confirmed infection, and still nothing else 10 to 15 days later. An infected person takes public transit for two days, there is a long list of the routes and times taken, notta. Flight numbers with specific rows, notta. The cases are mostly travel related and many are U.S. travel but I keep expecting to see growing clusters, especially close contacts, but the growing numbers seem to match travel from the international hot spots rather than home grown spread.
The world is doing a very poor job publishing Contact Tracing data. Self-isolation with first symptoms appears to work very well where such cases are carefully tracked. Taiwan and Singapore did quite well despite their proximity to Wuhan. I think the UK data is bang on and we should trust it.
You note that “the virus crisis threatens to become a financial crisis,” which might call for extraordinary measures (“forbearance”). But the Fed should act earlier, with loose monetary policy that will forestall any financial crisis; then we could leave it to the market to predict which businesses are still viable.
Against this, you write: “If you just use generic macroeconomic instruments, such as fiscal and monetary stimulus, you end up with a lot of both types of errors [Type I and Type II].” True, fiscal stimulus will give you “green-energy”-type graft, but *that is not true of monetary stimulus*. I say: use monetary stimulus, and otherwise let the market work.