Reacting to a post by Peirre Lemieux on the coronavirus, Alberto Mingardi writes,
Will people learn the lesson, and realize that a closed economy is poorer, as Pierre hopes? I fear not. Though the emergency measures somehow provide us with a preview of the kind of country the economic nationalists would like us to live in, they will quickly turn the tables, blaming the virus on globalization, and making trade with China the villain of the story. Italy’s reaction to coronavirus is convincing other countries to treat Italians as we treat ourselves – limiting direct flights, imposing quarantines, etc. This will also increase the perception that reliance on international trade is a weakness, thereby fueling a renewed rhetoric of the marvels of autarky. Sure enough, when people travel they carry their diseases with them: this is not news. Prepare for a new nationalist narrative built around this idea.
I agree. I don’t think that this will make people appreciate globalization–quite the opposite.
Incidentally, I think that this makes it unlikely that President Trump will suffer a political setback because of the coronavirus. Closing the border is his signature issue, and the Democrats have staked out a position as the “resistance” to that. I know that they think they can benefit from this crisis, but I would be surprised if they do.
As for the economics of the crisis, I see it in terms of a PSST story. Many patterns of specialization and trade depend on globalization. The conventional wisdom seems to be that the central banks will be prominent actors, but I could not disagree more. I would suggest that instead of monitoring the Fed, one should watch the transportation hubs–especially ports–and manufacturing centers. To the extent that the attempts to contain the virus cause those places to be shut down, patterns of specialization and trade will be broken, and there won’t be anything that the Fed can do about it.
In my view, Scott Sumner and Jason Furman and other macroeconomists who apply a monetarist or Keynesian “model” are simply not capable of interpreting the world as it really exists. That is a harsh judgment, but I cannot be more gentle.
Modern manufacturing is a logistical marvel that taps hundreds of facilities in dozens of countries, but that system is based on frictionless international trade. Break just a few links and the entire network collapses. A modern car has about 2000 parts. If you are missing ten, you’ve got a large paperweight.
I suspect that for the economy, the best-case scenario is that authorities gradually decide that it’s not such a crisis, they let everyone go about their business, and whoever gets the virus, gets it. The worst-case scenario is that clusters of cases continue appearing, and each appearance leads authorities to strangle more transportation and production centers. If the latter happens, then I am pretty sure you will find the PSST paradigm more useful in explaining and predicting outcomes.
Paula Bolyard draws an interesting analogy with the Y2K computer scare. If that analogy proves correct, then we should be closer to the best-case scenario. But one thing about the Y2K scare is that it had a definite endpoint–by mid-January of 2000, doomsday was a dud. I only see the coronavirus panic ending when the media can no longer attract eyeballs to the story.
As to the outlook for the virus itself, consider three scenarios:
1) the proportion of people exposed to the virus approaches 100 percent
2) the proportion of people exposed to the virus approaches 0.
3) the proportion of people exposed to the virus approaches some middle number.
I am not a virologist, but this virus seems optimized for spreading. So wouldn’t you bet on 1)?
Suppose that the virologists in the media successfully convince us to become OCD handwashers and germophobes. Will that actually be able to stop the virus? What other consequences, good and bad, might accompany such a change in culture?
Note that I wrote this at the end of February, adding the Bolyard paragraph on March 2 and the references to Peter Zeihan and Jason Furman on March 6. By the time this post appears, I may have to correct some of my claims in light of developments.
UPDATE: John Cochrane has thoughts. Also, Scott Alexander. And Tyler Cowen.
The proportion of people who are exposed to this virus will go to basically 100% because children don’t get serious infections and they are spread globally (ie not restricted geographically). The only real question is whether it will spread fast enough that people are being infected while health care is overwhelmed and before treatments are available, or whether healthcare will stay functional, or so slowly that treatments become available before many people are exposed. So far, travel restrictions aren’t sufficient to slow it to the couple years needed for novel therapies.
It doesn’t have to be all or nothing; complete globalism or autarky. Economic efficiency is not the only human value, though it is an important one. Being self-sufficient in certain critical areas is important. Being highly dependent upon foreign countries for antibiotics, for example, seems imprudent.
+1
Autarky? “Closing the border.” I thought that you were better than this.
For thee, thou need’st no such deceit,
For thou thyself art thine own bait:
That fish, that is not catch’d thereby,
Alas, is wiser far than I.
-John Donne
Globalization has a bad name as it exacerbates income stratification, and that aggravates religious, class, and ethnic tensions. There is the curious reality that globalization marches around the globe arm-and-arm with increasing political repression and populism. Capitals everywhere become alienated from their own populations. The world is Beijing, Santiago, and Moscow—oh, there’s a nice place called Riyadh, too.
Can anyone say that Japan is not the best-run large developed nation on the planet? The government is heavily involved in import-export and trade, and immigration is limited. Japan is an island of social stability.
I can make that claim without hesitation and doing so is independent of its cultural isolation strategy.
Well obviously everyone knows that Switzerland is the best run country in the world all stemming from its embrace of decentralized authority, democratic authority, and adherence to the principle of subsidiarity (anathema to libertarians and as such sneered at by the likes of Tyler Cowen who much prefers Singapore-style strong man rule). Australia would have been a good challenger to Japan as well, up until a few years ago when they lost their minds to catastrophic anthropogenic climate warming hysteria.
State-capitalism in Japan is pretty much the same thing as what is peddled as “free markets” by libertarians in the USA. Protecting fragile supply chains and extirpating any competitive advantage from resilience is the over-riding ambition in both countries. South Korea is similar and may be an even better run country because a much greater percentage of its population has access to middling or better quality higher education. Not surprisingly South Korea has quickly turned the corner on its caronavirus outbreak with strict border control measures and traveler screening procedures.
Over long term history, Japan felt like the best run nation in 1990 by a long shot. No government, huge stock market, stable families, low crime (for 1990) and a decade of a manufacturing boom.
But have you seen the size of Japanese government debt? They don’t appear to be on the same trail of greatness today.
That the Japanese have some atypical level of national debt is a recurring meme, but it seems to be false to me.
The reason it’s false is because the state also owns a lot of foreign debt and domestic assets – at a much higher percentage of their GDP than is typical of other countries – which in a proper accounting of national liabilities would offset the headline “net public debt” figure a lot more, and, I think, more in the direction of a typical developed country.
For example, Japan remains the #1 major foreign holder of US Treasury bonds, at around $1,200 Billion. With China, those two countries own more than the rest of the world put together. The Japanese government is also guessed to hold even more EU-area debt, though it’s not as transparent as with US debt, and estimates vary.
Also, most of Japan’s debt is owned by the central bank, and since the real interest rate is zero or negative and can probably be kept that way, the burden is more manageable at much higher levels, especially if the trajectory doesn’t seem like indefinite, out-of-control, huge deficits as far as the eye can see.
Speaking of America, my guess is that the US will get a debt crisis before the Japanese will.
It takes three degrees of separation to find it but the truth is contained in the final paragraph of the full Economist article Li Wenliang died on February 7th: The doctor who was one of the first to warn of a new coronavirus was 33
Imperfect understanding and execution is forgivable when the lessons learned are later shared. Perfectly incorrect responses, such as those applied to Li Wenliang, tend to be the comical contortions of opaque authority or single-minded protectionists.
With respect to COVID-19, we are in a learning phase, or a re-calculation phase to use one of Kling’s past metaphors. The learning will soon be over and we will need to decide on a strategy and a set of tactics based on what we learned, imperfect as it will be. COVID-19 is similar to both the flu and SARS yet it is unique. History offers us a guide but we will need a new playbook.
Singapore and Taiwan have severely limited the spread of the virus. If you have an area without too many cases at the moment, it seems that widespread testing and then isolation of individuals diagnosed and their close contacts is enough to keep numbers of infected pretty low.
Add Canada to the list of countries with a good response. The way the Canadian system works helps identify and isolate American outbreaks with subpar testing and isolation. The question will be what Canadians do if they manage to isolate the virus while the Americans allow the virus to reach a permanent equilibrium in their population. Europe faces the same dilemma with Italy.
The S&T (PSST) response wÚprimnú sústrasťill be faster if the Fed lowers interest rates. It would be a good time for another tax cut of maybe $1000 for all taxpayers — damn the (debt) torpedoes. Full speed ahead!
Thanks to Trump’s excellent “diversify away from China” tariffs, many companies have been planning to set up mfg outside of China, including Vietnam, India, and the USA. Those companies most able to increase USA mfg will likely have significant market share capture opportunities, including at price points higher than during prior Chinese trade scenarios.
On the virus exposure, the time scales are very important, but not included. 1 month? 1 quarter, year, decade, century? With kids and young people getting it, spreading it, and not dying, or even having symptoms, the 1) 100% exposure seems likely in a couple of decades. Not this year.
But lots more deaths. 100 000 — 10 mil in the upcoming year. Big supply chain re-adjustments.
I think you’re mischaraterizing Sumner’s positions. He wrote pretty clearly that monetary policy can’t alleviate the effects of the epidemic, the best it can do is fail to make it worse. As I understand it, the claim is that the optimal money supply does not simply stay the same in response to a real shock. The wrong response can lead to unemployment becoming worse than it otherwise would.
This strikes me as pretty clearly true, whatever one thinks the optimal response is. The alternative position is that the central bank does is just irrelevant to the economy.
The alternative position is that the central bank does is just irrelevant to the economy.
That is my position, which I know makes me an outlier.
So Trump wanting lower rates shouldn’t bother you?
(What the CB does is just irrelevant)
I think lower rates actually help banks lend more out, so provide more opportunities to make the market adjustments to any imbalance.
Pliny the Elder complained about the drain of specie [money] to India:
— Pliny, Historia Naturae 12.41.84
Your (1) is correct. The chances are that eventually everyone will be exposed to Covid-19. However, that’s truly not the important question. Instead, the issue is to control the rate at which that happens, to “flatten the curve.” If cases grow at high exponential rate, our healthcare system and that of any other country will be overwhelmed quickly. If the cases grow more slowly (much more slowly, one hopes) then the same number of people will still get the disease but at a rate that can be handled by our hospitals, doctors, nurses, etc.