Sunday, March 29, 2020

Beyond testing -- The central question for pandemic policy.

Two weeks of California lockdown have gone by and I do not see signs of plans being made for virus-safe reopening. The fight seems to be between lockdown and reopen -- with little thought to the only possible answer: reopen smart.

Today, my latest thoughts about how to reopen smart.

There is one goal to public health policy right now: Reducing the transmission rate, aka  reproduction number.

If one person gets it, how many does he or she pass it on to? If the transmission rate is over one, the virus grows exponentially. For example, if the transmission rate is 2, then we have 1000 cases this week, 2000 next week, 4000 the week after that, and so on. If the transmission rate under one, the pandemic ends. If the rate  is 0.5, then we have 1000 this week, 500 next week, 250 the week after that and so on.

(The second goal of health policy is to keep hospitals going so that those who do get it stay alive. That's what ventilators, masks and so on are about. As an economist, I'll focus on the first goal.)

So, the entire question is how to reduce the transmission rate at the least -- or at least reasonable, non-disastrous -- economic cost.

This simple framing could, I think, guide lots of policy.

We don't have to talk about lives vs. money. The lockdown is so disastrously inefficient, we can talk about more lives and less money.

We talk about the reproduction rate as if it is just a biological feature of the virus. That helps -- viruses that spread by airborne droplets pass on more easily. But most of the reproduction rate depends on human behavior -- and government policy.

Lockdown, quarantine, etc.  The point of a lockdown is to reduce the transmission rate. If you're at home, you can't get or give the virus. But as we are seeing a lockdown is an immensely costly policy. Lots of people are stuck at home and businesses failing that would not have spread the virus much had they been allowed out. We have to do better.

Fat tails. The reproduction rate is the average reproduction rate. But not everyone is average. Every interesting distribution has a fat tail.  In this lies a great danger and a great opportunity.

Suppose there are 100 people with a 0.5 reproduction rate, and 1 super-spreader with a 100 replication rate. The average reproduction rate is 1.5. Clearly, locking everyone down is wildly inefficient. It's much more important to find the 1 super-spreader and lock him or her down, or change the business or behavior that's causing the super-spreading.

This is exaggerated, but not far off the mark. I have not seen numbers on the distribution of reproduction rates across people, but it is a fair bet that it has an extremely fat tail. Most of us are washing our hands, social distancing, work in businesses that are shut down or are taking great steps to limit contact. And a few people and activities contribute to most of the spread.

This wide and fat-tailed dispersion is ignored in a lot of simulations I've seen. They take the average reproduction rate as the same for everyone. That's a big mistake.

The danger: we waste a huge amount of time and money moving you and me from a 0.5 reproduction rate to an 0.4 reproduction rate.

The opportunity: focus on the super-spreaders, and the super-spreading activities, and you bring down the reproduction rate at much lower cost.

Politicians sort of figured this out. They quickly closed bars, restaurants, and other gatherings where people are in close quarters breathing each others' air.

We're still opening and closing and not fixing enough. Food stores are open. But we aren't all wearing masks, the cashiers still don't have transparent barriers, and so on. Lots of businesses are closed that could easily open in ways that provide a reproduction rate under 1. Zero is not necessary. Under 1 is enough. Once it's under 1, it's not worth pushing harder -- go work on the super-spreaders

It's all about the probabilities. Lockdowns and extreme measures try to give zero chance of spreading  the virus. (Except that half the population is "essential," and from the looks of things not doing a very good job.)  All we need is to get the transmission rate under one. Activities with possible but very low transmission rates, and high economic benefits should go on. Don't separate to "essential" and "non-essential." Separate into "high likelihood of transmission" and "low likelihood of transmission."

Why are we not using masks everywhere? Sure, they're not perfect. Sure, an old hankerchief might only cut the chance of transmission by half. We're not all surgeons. Cutting by half is enough to stop the virus. 

Conversely, why did they close the state parks? Really? Just how dangerous is it to drive the dog to a hiking trail and stay 6 feet away from other people? Parks, ski areas, golf courses, all sorts of businesses that surely can be run with a reproduction rate far less than one are just shut down. I met a realtor on our dog walk yesterday. They're totally shut down. Just how hard is it to run a realty business with a 0.5 reproduction rate? One family in the house at a time, don't touch anything, an hour between showings, stay 6 feet from the realtor... But instead the whole business is just shut down.  

Testing Last week I got over-enthusiastic about testing as the key to virus-safe reopening.

Testing is just a high-tech approach to reducing the transmission rate at lower cost. If we could test everybody every morning and know the answer instantly, then we could send the healthy off to work, isolate the sick, and reduce transmission to zero at low economic cost.

But that's all it is -- one of many devices to lower the transmission rate more cheaply than a lockdown. There are many others.  Which is a good thing, seeing as we will not have a daily test for 325 million people for a long time.

Testing doesn't have to be perfect. For the question of deciding which sick patients should be isolated and treated, and which should not, yes, we need fast, accurate, individual tests. But for the public health question, imperfect testing is useful.

False positives are not really a problem. If 2% of the population has the virus, but 4% register positive, then 2% are sent home needlessly. That's a lot better than 100% sent home because we can't tell the 2% from the 98%.

False negatives are worse, but tests with false negatives help too. Suppose half of the people who have it test negative. If you give everyone a test and isolate those who test positive, then you cut the reproduction rate in half. Cutting the reproduction rate from 1.99 to 0.99 would be enough to stop the virus.

False negatives are also only a problem if the person has a high risk occupation or lifestyle. The reproduction rate of a Hoover  fellow is likely about 0.2. If the test misclassifies me, it makes little difference. Save the tests for the people and activities that must unavoidably have a very high reproduction rate.

Thermometers. There is a test that is simple and fast with lots of false positive and negatives. Why are we not asking every person to take their temperature every day, and self isolate if they have a fever? Why are we not using those infrared probes at the entrance to every food store, place of business and so forth? Sure quite a few covid-positive people with no fever will get through, and quite a few feverish people with something else will get sent home. But it cuts the probabilities at almost no cost.

Or a simple web form with symptoms? Fill this out, take your temperature, the web form says ok to work or stay home.

It's an indication of a very first-world attitude that public policy seems to be relying exclusively on DNA technology that didn't exist 10 years ago to provide us with perfect tests.

The goal is to let out people and activities with low reproductive rates, and keep at home those with high reproductive rates. Testing everyone with a perfect test and letting out those who pass is a magic bullet. But it's not the only bullet, and it's a bullet we don't have right now. There are lots of simpler low tech ways to let out people and activities who are likely to have low reproductive rates, and keep home those who are likely to have high reproductive rates. We don't have to wait for snazzy technology.

Economics So what'w the answer? I think it remains the same, and the one that our public policies seem not to be working on: reopen safely.  Phrasing it in terms of reproduction rate might help. For each business, how are you going to open in such a way that the reproduction rate among your customers and employees is less than one? Disinfect premieres every day, take the temperature of everyone coming in, everyone wears masks, move workstations six feet away, rotate workers from home, add barriers... Is that enough so that a sick person coming in infects no more than one other person? Good enough.

There must be a safe reopening plan. We're not going to get nationwide testing of well people any time soon,

Herd immunity The optimist case for this virus right now centers on the idea that many more people have got it than we think, and therefore are immune going forward. If half the people already have it, then this cuts the transmission rate in half. Again, everything is about the transmission rate.

While I hope this is the case, it will mean we dodged a bullet and just got immensely lucky. The virus is out there that makes everyone sick and kills 10%.

Good links

Larry Kotlikoff thinks through the practicalities of group testing, a way to cut the costs of testing by orders of magnitude.

Health and Pandemics working group on pandemic economics

Jim Stock's blog. Jim's March 23 paper is excellent. Jim also clarifies that policy is about one and only one thing: reducing the average transmission rate. Jim thinks about dynamics, making the point that reducing the rate early is better than reducing it late, and worth paying more to do so,

Becker Friedman blog. Good short fact-laden posts.

Update

Thanks to commenter "Fat Man," Jonathan Kay at Quillette writes on the skewed distribution of the transmission rate, and the fact that most models take it as a single number.
In a 2016 paper, South Korean doctor Byung Chul Chun noted that the MERS outbreak could be summarized as:
"an explosive epidemic by infrequent super-spreaders. The number of secondary cases in the transmission tree was extremely skewed. Among 186 confirmed cases, 166 cases (89.2%) did not lead to any secondary cases, but 5 (2.7%) super-spreaders lead to 154 secondary cases. The imported index case [i.e. original case] was a super-spreader who transmitted the MERS virus to 28 people (referred to as secondary cases), and 3 of these secondary cases became super-spreaders who infected 84, 23 and 7 people, respectively. Eighty-four secondary cases resulting from a single case is one of the largest numbers observed in a SSE since the SARS outbreak in Prince of Wales Hospital in Hong Kong. None of the super-spreaders in the MERS outbreak in Korea was a healthcare worker."...
... June, 2020 Centers for Disease Control and Prevention (CDC) report, Identifying and Interrupting Superspreading Events—Implications for Control of Severe Acute Respiratory Syndrome Coronavirus 2, by Thomas R. Frieden and Christopher T. Lee. Echoing points made by Dr. Chun and others, the authors note, “SSEs highlight a major limitation of the concept of R0,” since R0, being a mean or median value “does not capture the heterogeneity of transmission among infected persons.”...
From Seattle to South Korea, many of the biggest outbreaks were fuelled by a small handful of very sick, highly symptomatic people who drifted along for days before their condition was correctly treated and isolated. (In South Korea, some have noted, the problem was exacerbated by patients who went “doctor shopping,” spreading their germs in many different clinics.)...
While we are at it, we need to stop wasting resources on pointless measures such as closing remote parks and natural reserves, where few people come close to one another anyway. In an especially important section of the aforementioned CDC report, the authors note that even COVID-19 super-spreaders can’t seem to infect people effectively in open spaces: “Rapid person-to-person transmission of COVID-19 appears likely to have occurred in healthcare settings, on a cruise ship, and in a church. In a study of 110 case-patients from 11 clusters in Japan, all clusters were associated with closed environments, including fitness centers, shared eating environments, and hospitals, [where] the odds for transmission from a primary case-patient were 18.7 times higher than in open-air environments.” These closed environments represent the sort of scenario we need to target—not British couples out on a jaunt to Sugar Loaf, Pen-y-Fan and other rustic destinations...
Even long before COVID-19 was a thing, infectious-disease experts such as James Lloyd-Smith were arguing that “the distribution of individual infectiousness around R0 is often highly skewed”; that approaches accounting for super-spreaders do a better job modelling the sudden cluster-based boom-and-bust quality of many diseases; and, crucially for today’s policymakers, that such analyses show how, in these cases, “individual-specific control measures outperform population-wide measures.”

This piece goes half way, I think, to the right conclusion. Reproductive rate is not a low number plus a few super spreaders. It is a distribution with a very fat tail. The report seems to personalize the super spreaders as particularly ill behaved people. They are more likely normal people who participated in a particularly poorly structured activity, like the famous South Korean church.

Our first goal should be to stop that fat tail.

More
Click the "pandemic" link below to see all blog posts in this series.


Saturday, March 28, 2020

Defense production vs. markets

Take your bets which produces more ventilators faster.

From Marginal Revolution. First quoting New York Times,
The White House had been preparing to reveal on Wednesday a joint venture between General Motors and Ventec Life Systems that would allow for the production of as many as 80,000 desperately needed ventilators to respond to an escalating pandemic when word suddenly came down that the announcement was off.
The decision to cancel the announcement, government officials say, came after the Federal Emergency Management Agency said it needed more time to assess whether the estimated cost was prohibitive. That price tag was more than $1 billion, 
The president went on to invoke the defense production act, to somehow force companies to do it.

MR:
At $1.2-$1.5 billion that’s $15,000-$18,750 per ventilator which is well below the standard price of $25,000-$50,000 
FEMA are you out of your minds? Haggling over $1 billion and wasting time? 

Lack of ventilators (and simple masks and gowns) are costing the Federal taxpayer $2,000 billion immediately, and $1,000 billion per month or so of lost GDP, to say nothing of 80,000 lives.  80,000 ventilators would have been a great deal at $10 billion!

It is a classic example of how bureaucracies follow rules and cannot be expected to think. Sure, stocking up ahead of time we want a good deal. FEMA bureaucrats follow rules to get a good deal. With opportunity costs thousands of times larger, we don't. But they're not allowed to think.

Which reminds me. Dear FEMA: The virus has been around since January. Why has nobody thought until just now that ordering up some masks, shields and ventilators might be a good idea?
Trump also named Peter Navarro as the national Defense Production Act policy coordinator for the federal government. 
It will be fun to see if GM and Ford now actually do produce ventilators faster than other companies and ever become a significant source of supply, or if Mr. Navarro's interference leads to one snafu after another.

BTW, one reason we're short of such a basic commodity as masks is tariffs on Chinese goods. Which by the way have just been suspended, a little noticed concession to common sense. But the Chinese, who could send us masks and ventilators quickly, are hardly in a mood to do so.

Of course invoking the defense production act is political. Everyone in the Administration understands this basic economics.  I was listening to NPR coverage this morning and the only criticism from reporters and largely democratic governors was that Trump wasn't "doing enough" or had not invoked it soon enough. Well, now they get their way.

Contrary good news from MR
Now that the CDC and the FDA have gotten out of the way, we are producing more tests.
Honeywell and 3M are already ramping up production of N95 masks. We should arrange with China to buy more. The Federal Government is playing a useful role by buying surgical masks from companies like Hanes. Ironically, we will be importing them from Latin America....
Using U.S.-grown cotton, the masks are being produced in Hanesbrands’ sewing factories in El Salvador, Honduras and the Dominican Republic.
These factories would normally be producing T-shirts, underwear, socks, sweatpants and sweatshirts.
(Note the stupid requirement to use American Cotton.)
One of many stupid requirements still in place. Perhaps there is a silver lining, that people are starting to see how many regulatory and protectionist weeds impede production in the US.





Friday, March 27, 2020

Group testing

Christian Gollier and Olivier Gossner pass on a beautiful and simple idea: Group testing. It's also known as test pooling.)

To stop the virus, we need testing. But we don't have enough tests. As a result, a trillion dollars a month stands to go down the toilet, unemployment is skyrocketing, and a big financial crisis looms. What to do?

Test groups. Group testing works particularly well given that so far, the percentage of infected people is low.

Get a group of 32 people, and they each spit in a bucket. Test the bucket. (Metaphorically. Actually, the samples are swabs, and we mix parts of the samples.) If it's negative, everyone in the group is clean and they can go back to work.

If not, split the samples into two groups of 16, and test again. Again, if a group of 16 is negative, they're all clear. Keep going 8, 4, 2, 1. (You don't get new samples, of course. You take the original samples and split them apart, and test them again.)

If nobody has it, you find out in 1 test, not 32. If 1 out of the 32 has it, you find him or her with 12 tests not 32.

Often the goal of testing is not to find one particular person. And if tests take a day to come back, repeated testing is impractical. But with two rounds of testing you can at least very quickly find groups of 32 and 16 who are all clear, and isolate the smaller groups.

There are distinct reasons to test. If you have a very sick patient and you need to find out what he or she has, you need to test that person. But now testing has moved to public health questions. We want to find and certify the vast majority who do not have it. We want to find out what fraction of a neighborhood has it. And so on. For these purposes, group testing makes sense.

This idea strikes me as particularly good because of the spatial concentration of a virus. With one test we can find out if a city of 10,000 has any infected people. With one test, we can find out if a zip code is free of virus.

Update:  This seems like an especially useful idea to get business going again. Every morning, test the group sample of everyone at a business, plant, or building, say even groups of 100. As long as they are all clear the business stays open. To show a business does not have a virus, you only need to test the group.

Update 2: In response to comments. For the purpose of slowing a virus, it doesn't have to be perfect. Paul Romer's simulations are good on this. Just lower the probabilities and you lower transmission rates.

Bailouts v Bankruptcy

Bailouts are back. It's all 2008 all over again.

Bankruptcy of a large corporation does not leave a crater behind. Bankruptcy is reorganization and protection, not liquidation. The point of bankruptcy is precisely to keep the business going. When a corporation files for bankruptcy, the stockholders are wiped out, bondholders lose a lot and become the new stockholders. The company rewrites a lot of contracts -- union contracts requiring a plane to fly even with empty seats, contracts to buy fuel at high prices, gate leases, and so forth.

Bailouts are bailouts to stockholders, bondholders, creditors, unions. The first three all basically signed up to write insurance, and got a fee for doing so. Bailouts are not bailouts to "the corporation" which isn't a thing.  Maybe maybe there was a case in 2008 that big banks were "systemic" and their creditors could not take the losses that they had signed up to take. Not so industrial companies.

Airlines and similar companies are in this mess because they took on way too much debt. If the government does bail out their stockholders and creditors, it makes a lot of sense not to let them take on  so much debt again. Repurchases per se are not the villain, as companies can borrow and pay big dividends. We might also start by finally, finally, removing the huge subsidies to debt.

If you're not persuaded, Veronique de Rugy and Gary Leff have an excellent and exhaustive article on this The Case Against Bailing out the Airline Industry. 

Road to Recovery: A Grumpy Virus Podcast


Click the picture or here. 

Daily testing

What's the perfect answer? Larry Kotklikoff has a good candidate: Daily testing.

Imagine everybody gets a test every day. Positive? Stay home and isolate. Negative? Off to work you go. It's over in a month. Nobody who is sick gets anyone else sick.

Testing includes
temperature scans, a quick chest exam by stethoscope, a quick questionnaire about Coronavirus (CV) related symptoms, multiple PCR (swab) tests, antibody tests (as soon as they are available), and saliva and urine tests if such become available. 
Larry has a pretty intrusive regime in mind,
Anyone who is negative on all indicators/tests would be given a badge to wear during the day that would permit them to go work, frequent restaurants, shop, etc. Anyone who is positive on the indicators/tests would be quarantined together with their family members and have their contacts be subject to immediate tracing.
The passive voice (would be) hides a lot of questions -- who is going to do all this and how much interaction does that mean?  But one needn't be so intrusive. At home tests, tests done by employers to everyone who shows up, and proper incentives would do a great deal. (If you are positive you get a free two weeks in a local empty hotel, and full salary.)

More generally, if we really can stop transmission, 100%, for just about three weeks -- so everyone who has got it now is over it -- then it's over. Full stop.

Why not? Well, because we don't have enough tests.

Like all perfect answers, I think this focuses the mind. The shutdown is costing us a trillion dollars a month. Daily testing of everyone would solve it. Why don't we have more tests? Why is the Federal government spending a trillion dollars handing out checks here and sunder, rather than a trillion dollars on one thing, test kits? (Ok, and masks, shields, and ventilators. $500 billion each.)

More realistically still, any public health response has to include lots of random testing, so we know how many people really have it, in each town or neighborhood. If you don't have enough tests so you have to lock down, well, at least do it smart based on real data.

My understanding is that the piece, 3 hours old as I write, is out of date in its claim that the Administration does not want to test. The new letter from the Administration to governors will emphasize random testing as soon as possible, to isolate hot spots.

Wednesday, March 25, 2020

Reopen the economy -- but carefully!

I did a WSJ oped today on reopening the economy.  As usual it's gated so I can't post the whole thing for 30 days. Their lead editorial expresses many of the same sentiments

Closing down the economy is a panic response. It is not how we should be fighting the virus. We should be following the Korea, Taiwan, Singapore models: Test everybody. Trace all their contacts. Isolate those who test positive or with symptoms. Isolate people who are most likely to get really sick and use scarce ventilators. Tamp down hotspots with local lockdowns. Allow business to open, but with stringent protocols adapted to that business and its employees. The options are not lockdown vs. back to nothing. The needed option is reopen with social distance.

The cat is out of the bag on that one, as our governments were caught flat-footed -- as governments almost always are -- and responded late. The snafus and regulatory roadblocks to get testing ramped up and even to produce or allow the importation of masks and gowns are scandalous. But here we are. The situation is out of control. Sometimes you do hit the panic button.

The point of the oped -- closing down the economy is the panic button. It is going to cost something like a trillion dollars a month. So during the next few weeks, our governments -- federal state and local -- need to be getting ahead of the curve, so they can implement the above appropriate public health response. NOW.
Businesses were doing a good job already: announcing sanitation, social distancing and other protocols to keep operations safe and reassure customers. Visit any airline’s website.
State and local governments need to work with businesses to figure out a satisfactory combination of personal distance, self-isolation, frequent testing, stricter rules for those who must interact with customers, cleaning protocols and so on. Each industry will likely be different. Even onerous rules, which can be eased as officials and businesses gain information and experience, are better than a blanket ban.
What are the rules for reopening an auto paint shop? The public parks?

Much of the lockdown is to keep hospitals from getting full. Most of the people hit by this disease are old. And retired people by and large are not counting on a monthly paycheck. That's what "retired" means. The obvious conclusions: Older and retired people may face lockdowns while healthy people can go to work. That and location and contact tracing are horrendous violations of civil liberties, yes.
Is this an awful violation of civil liberties? Doesn’t grandpa have a right to go play golf, or head down to the senior center? Not in an emergency. He does not have the right to expose himself to a virus and then claim a spot in an ICU bed that is costing society $20 million dollars a month. Prepare also to claw back civil liberties promptly when the pandemic is over, as we did after wars. 
There are a lot of empty hotel rooms, with cable TV, and lots of empty restaurants who would like more takeout business, and lots of unemployed uber and grub hub drivers. Want a stimulus? Anyone who tests positive gets a free two week stay at the hotel, meals included, at government expense.

A trillion dollars a month is an immense cost. The shadow value of those missing masks and ventilators is huge. And it's worth spending an immense amount of money to avoid a trillion dollars a month. No, we don't need the defense production act. Just pay 10 x cost -- pay $100 billion for masks ventilators and test kits, and remove the regulatory barriers, and we'll be flooded. Defense production is what a government does that wants battleships but can't afford to pay for them. We've got oodles of money. Profit is a fine motive.

It is even more important for our governments to get the real public health plan going NOW because we are in the calm before the storm. In two to three weeks the crush at the emergency room will be in full swing, and there will be no political breathing space for anything but more panic. This too can be an advantage. People will see the need for the extensive virus safety protocols they will have to follow at work. But that will be a terrible time to start thinking about how to save a tanking economy, and vanishing public trust.  People will not wait for the last case to pass, and the government to sound the all clear in July or August, emerging from their homes like the end of a Zombie movie to find a destroyed economy around them. The choice is sensible plan NOW or widespread disobedience and chaotic re emergence of the virus over the summer and fall.




Tuesday, March 24, 2020

Hoover "Virtual Policy Briefing"

Yesterday I did a "virtual policy briefing" with our Director, Tom Gilligan, discussing the virus crisis, with a lot of question and answer. Hoover too is innovating on how to connect virtually, and this sort of effort may extend past the crisis. This is the first in a series. Kevin Warsh talked about the Fed today, = Scott Atlas will talk about medical and health policy on Thursday. More such projects are in the works!

Virus crisis tidbits -- get out of the way and demand shift

The first rule of medicine is "do no harm," and not a bad first rule for economic and public policy too. The second  rule of economic and public policy should be "get out of the way." With that thought in mind,

From Marginal Revolution, FDA Stops at-home tests. Imagine what they would think of the DIY ventilator

From change.org, Allow US entities to import and use non-FDA PPE, diagnostic tests and ventilators.
There is a massive inefficiency in the global supply chain which could supply us as currently the US only allows FDA certified PPE and diagnostic tests to be imported and used. .. One example with one supplier in China I found:
500k surgical masks
100k N95 masks
500k COVID-19 rapid test kits
These products are currently available today in inventory... but no one in the US can import them as they only have the EU certification (CE)!!
The University of Chicago Booth School of Business is running a survey to find more such regulations. Contribute!

Chris Edwards at Cato on a long list of how private companies are rushing to bring products to market. No we don't need the National Defense Act. Now how much more would they do if we paid them double? Oh and
Fun fact: facemasks are regulated by four separate federal bureaucracies: FDA, CDC, NIOSH, and OSHA
The central story of the virus crisis is that our public heath systems were and still are woefully unprepared with masks, gowns, test kits, ventilators, and procedures. (A nice sort summary.) You handle this sort of thing without shutting down the economy by intensive contact tracing, massive frequent testing (remember AIDS?), isolation, and tamping down hot spots. The fact that the US was and remains unprepared for this is now going to cost us trillions of dollars -- and much suffering, lost jobs, shuttered businesses and associated woe, in addition to lost lives. At least get out of the way.

Some of what we are seeing is a shift in demand, which offers many opportunities.

Hospitals are hiring (duh), and not just doctors.

Coronavirus Sparks Hiring Spree for Nearly 500,000 Jobs at Biggest Retailers

Walmart to Pay $550 Million in Staff Bonuses, Hire 150,000 Temporary Workers

There are jobs for janitors, cleaning crew, people to staff lines, and so on, Not great jobs, but it's something for totally unemployed lower income Americans. I don't think we're close to there yet, but it would not be ideal public policy for the government to make sure that nobody lost any jobs and just sat at home.

Some of this shift in demand may be permanent. I suspect we are exiting the age of worry about terrorism, and entering -- or reentering -- the age of worrying (justly) about pandemics. That ought not to mean waves of people dead as in centuries past, but a restructuring of our economic system to control public health, maybe in analogy with the late 19th century. Air travel may be down forever. RVs up.  Restaurants too may decline, and live music, or any other event that brings lots of people together breathing the same air. We may move to a life of quite permanent "social distancing."

We might even leave behind the economy based on close personal contacts in crowded hot spots like New York and San Francisco, to an economy based on much more virtual contact centered in small towns and suburbs. That has been long forecast. When millennials come to think of an apartment and a bar in San Francisco like a cruise ship, it may happen. It will be a second boom for tech, as online delivery of everything grows. We will not be an isolated society, but we may revert to the British Pub,  the private dinner, not the jam packed Manhattan bar, club, or other mass event.

Monday, March 23, 2020

Strategic Review and Beyond: Rethinking Monetary Policy and Independence



March 4, I was honored to give the Homer Jones lecture at the St. Louis Federal Reserve. Link here

Strategic Review and Beyond: Rethinking Monetary Policy and Independence.

I used the opportunity to put lots of thoughts together in condensed form, on how the Fed and other central banks should approach monetary policy, financial regulation, and ever-expanding mandates.  The link is to the html version. It will appear in prettier form in the April St. Louis Fed Review.

The conclusion
Should, and can, the Fed stimulate with strongly negative rates, immense QE asset purchases, and an arsenal of forward guidance speeches? I think not. What sort of target should it follow? A price-level target. The Fed should get out of the business of setting the level of nominal rates and target the price level directly. Price-level control will be much more effective with fiscal policy coordination. The Fed should offer a flat supply curve of interest-paying reserves, open basically to anyone, though the Treasury should take up much of that role directly. 
Going forward, the Fed and its international counterparts should disavow the temptation toward ever-expanding mandates and economic and financial dirigisme that would take them to "macroprudential" policy, discretionary credit cycle management, asset price targeting, and exploiting regulatory power to embrace social and political goals… today on climate change and inequality, perhaps tomorrow on immigration, trade restriction, China-isolation, or whatever the smart set at Davos wants to see. Only limited scope of action to areas of agreed technocratic competence will salvage the Fed's, other central banks', and international institutions' useful independence.
Of course this effort arrives with spectacularly bad timing, as nobody is talking about anything but the Covid-19 virus. Still, life does go on, and I don't see anything that is directly contradicted by current events. And perhaps you want to read and think about something other than virus crisis, and issues we will go back to thinking about when it's all over.

In the final section (see the footnotes too) I discovered that our international institutions, BIS, IMF, FSB, and so forth were busy dragging banks into the partisan warfare over green new deal style climate policy and forced redistribution. I took a dim view of that. First of all, the idea that climate and inequality present financial risks is just fanciful. Most importantly these are political minefields that will doom independence.

I think this section holds up well. That the worthies who look in to the future and spot risks to the financial system, and drag banks into accounting for them via stress tests and regulatory accounting, found climate change and inequality the biggest run-provoking risks they could think of, not even mentioning pandemic, tells you volumes about the whole technocratic project.



If you like to watch videos, here is the actual lecture somewhat shorter than the written version.


Fed Bombshell

The Fed just announced "extensive new measures to support the economy." What's this all about?
The PMCCF will allow companies access to credit ... This facility is open to investment grade companies and will provide bridge financing of four years. ... The Federal Reserve will finance a special purpose vehicle (SPV) to make loans from the PMCCF to companies. The Treasury, using the ESF, will make an equity investment in the SPV.
When the Fed buys a Treasury bill, it creates new money with which to buy the bill. It simply increases the amount of reserves, which banks can freely transform to cash, so you can think of it as printing up money to buy the bill. Why doesn't this cause immense inflation? Well, the Fed backs the money with the bill. The overall quantity of government debt has not changed, just the composition.

When the Fed lends money to a bank or business, it looks the same as a matter of accounting. The Fed prints up money, figuratively, and gives it to the bank or business. The loan then counts on the Fed's balance sheet just like the Treasury bill as an asset backing the money.

But there is a difference. Banks and businesses can default. That "asset" may be worthless. Printing money and giving it to business and counting the loan as an asset leads to all sorts of problems.

That's why the Fed is funneling this through the Treasury. The Fed prints up a dollar, gives it to a "special purpose vehicle" along with the Treasury, and the Treasury is supposed to take the risk of default. That is, in my view, appropriate. The Fed cannot stay independent if it lends to specific risky businesses, and takes on the risk they won't pay back.  The Treasury is politically accountable.

Overall, though, the government is printing money and handing it out to businesses. Functionally it is the same as if the Treasury borrowed money, lent it to business, and the Fed bought the Treasury bills. But it happens faster, and gets around the debt limit and lots of other interference.

This post refrains from judgement. I just thought it useful to explain what's going on.

Sunday, March 22, 2020

Unsung hero

Mark Calabria,  Director of the Federal Housing Finance Agency, which oversees Fannie and Fredy, announced an excellent policy response to the virus.

People who are in financial trouble because of the virus can stop paying their mortgages. They have to contact their lender, but the process won't take endless paperwork. It won't be reported to credit bureaus. They still have to pay eventually.  People who were already behind at least won't be kicked out of their houses to go share the virus.  People who are renting houses can get the same forbearance if their renters can't pay.

This is classic forbearance -- don't force needless foreclosures -- well measured to the emergency at hand and not creating too many horrible incentives along the way. No, we don't have the federal government forgive every mortgage, either directly or forcing banks to swallow the losses, or all student loans, or all credit card debt. Federal resources are limited and a grand piñata debt jubilee is not needed and damaging in its own right.

Mar 22 Interview on NPR and an earlier March 19 NPR interview with transcript.

Even grumpy likes to pass along wise policy and good news on occasion.

Friday, March 20, 2020

Needed: the reopening plan. Fast.

A trillion bucks is a lot of money. The costs of shutting down the economy are larger. California's GDP is essentially zero at the moment. US GDP was about $22 trillion per year before the virus hit, almost $2 trillion per month.

Shutting everything down and staying home for a few weeks is a sledgehammer. OK, our leaders have to hit a virus with a sledgehammer when they have nothing else up their sleeve. But it cannot last. Businesses will close, people will lose jobs, the economy will not be there to start up again.

Needed fast: a plan to open up the economy again in a virus-safe way.  Every business should be (and likely is) working hard to figure out how to operate in a virus-safe way. Federal state and local government need to be working 24 hours a day during the next few weeks to promulgate virus-safe practices. Not because they are particularly good at it, but because they are the ones shutting things down, and their permission is needed to reopen, fully or partly. People also will want the confidence to know that businesses they patronize are compliant. You've got two weeks -- figure out what combination of personal distancing, self-isolation, testing, cleaning, etc. will allow each kind of business to reopen, at least partially.

The option to force everyone to stay home and close all "non-essential" business for three or six months is simply not viable, at least for a disease something short of the bubonic plague. The option to wait two or three weeks and then start thinking about what it takes to allow, say, the local dry cleaner to reopen, which will take another month or so, is simply not viable.

Take two weeks. Find out who has it and who doesn't. Test test test. Isolate, put out the embers. And reopen. Slowly, cautiously, partly. But reopen.

I have kept public health and economics separate, but they no longer are. Shutting down the economy is a public health measure. The costs of this measure are astronomical -- at least a trillion dollars per month. As yourself what the government could have done with a trillion dollars to nip this in the bud. Please, next time, be ready. Massive testing, identifying cases, contact tracing, isolating areas with known cases, early and hard might have cost a lot of money and disruption. Even 100 billion dollars now looks like a very small sledgehammer.

Thursday, March 19, 2020

New Virus Podcast


A grumpy economist podcast on virus economics so far.

Implementing Federal lending

The central problem now is how the Federal government can lend money to businesses that need it -- without a budget blowout. I proposed letting people borrow from the IRS which has a pretty good mechanism for getting repaid. Martin Lowy has a more detailed suggestion along these lines:

  • Credit for any business that needs it, so long as the business’s history suggests that it will have the capacity to repay, given enough time.
  • A simplified underwriting system based solely on filed tax returns. Bank-style underwriting is a cumbersome process that would impede the flow of credit and would tend to make it subjective and political—and therefore a subject of criticism all along the way.
  • A repayment period of something like 36 months that begins a few months after the crisis has passed. A business cannot begin to repay until it has had some time to get back on its feet.
  • Use of the income tax mechanism to enforce repayment so that no new bureaucracy is required and so that the system will be seen as fair, rather than based on subjective criteria.
  • A mechanism to assure that recipients of these loans will continue to use them in part to continue to pay their employees.
The devil is always in the details. Just what rules are overstressed IRS employees supposed to implement to judge if a "business’s history suggests that it will have the capacity to repay, given enough time?" Just what is the final "mechanism?" Once again, that we have entered this crisis so unprepared means it is unlikely a measure like this can be rolled out in the needed days, let alone weeks or months. Still, it starts to flesh out a good idea -- or at least a better idea than enormous stimulus checks and bailouts all around.

Update: Lowy responds by email:


  • Who may get credit? Loans would be extended to any business that filed an application, but limited in amount by the business’s historical sales and profits as reported to the IRS.
  • In what amount? The size of advances would be a percentage of the revenue and taxable income of the applicant. The lesser of one twenty-fourth of gross sales or one-sixth of taxable income. No subjective criteria.
  • Period for repayment. Depends on the length of the crisis. If the crisis/credit advances last 4 months or less, 36-months; longer crisis, longer period for repayment.
  • Application process. Electronic only. Simple facts. Promise to repay. TIN. Account to send advances to. Amount requested per month. All based on last annual tax filing.
  • Employee compensation certification. Certify that in each pay period after receiving a credit, applicant would pay every employee who was on the payroll on February 15, 2020 at least 75% of the average amount paid to that employee in the last four pay periods before that date.
  • Interest rates. 5% per annum, except if the business was borrowing at a higher rate—then that higher rate.
  • Collateral. None.

I (Lowry) welcome additional questions about the details.

Groundhog Day virus plan.

Via Marginal Revolution, a very clever idea from Scott Ellison:
I propose temporarily stopping time. This means that today’s date, Tuesday, March 17th, 2020, will remain the current date until further notice. This also means that everything that happens in time (e.g. mortgage due dates, payrolls, travel bookings, stock market trading, contractor gigs, concerts, sporting events) will be paused. It also means that all of these events remain on the books, and will continue as planned once time is resumed.
I mentioned "the debt clock keeps ticking when the economy shuts down" as the central problem, but didn't go as far as to advocate this simple solution. (Which I still don't, read on.)

The central problem is really a coordination problem. A owes B money. A is shut down so can't pay. B understands and would be happy to wait until the crisis is over. But B owes C money, so can't wait. And on down the line it goes. It's like daylight savings time. We could individually decide to move things an hour earlier in spring, but mostly A wants to show up at work when B will be there. There are lots of coordination problems like this, and a useful function of government is to solve them.

But the economy is not completely shut down. Food and medicine need to keep going, and need to be paid! If we literally stop all payments, shutting down the ATM machines, credit card machines, and salaries of the 80% or so who will keep their jobs, we create an insane mess. So some clocks shut down and some others don't and now you have a mess on your hands.

So while this is a useful metaphor and guide to a central problem now, it's not a practical solution.   An economy is much like a human. We can sleep, but we can't freeze the clock, shut down totally and  restart again.

Wednesday, March 18, 2020

WSJ oped on virus policy

Why is the market going nuts? What should policy do? I put some of my recent thoughts in a Wall Street Journal Op-ed, here. As usual I can't post the whole thing for 30 days, but if you're clever you can find it.

This is not a "demand" recession needing "stimulus." The economic policy challenge is to allow the economy to shut down, but make sure it doesn't die in the process. The problem is -- once again -- debt.
Had everyone kept a few months of cash around, things would be fine. But many did not. Now we are seeing the beginnings of a scramble for cash, as people and businesses try to sell assets or borrow. But who is buying? And who is lending? Banks can’t make new loans to companies and people with no income.
If there is a wave of firing and bankruptcy,
A pandemic can turn quickly to a financial crash and a long recession, not a V-shaped pause. That’s the scenario spooking markets, and it should spook all of us.
What to do? Clearly the central goal of policy should be to keep businesses alive so they are ready to turn back on again.  
The main focus of economic policy should be
Lending is better than transfers. Since loans must be paid back, larger amounts can go where needed. ...
Forbearance is important. Banks and creditors should not immediately shut down a nonpayer. But they have to be allowed to forbear by their regulators, their own creditors, and their own fiduciary responsibility, and to borrow or pass forbearance up the line....
Rather than give each of us $1,000, allow us to borrow a fraction of last year’s income from the Internal Revenue Service and repay when we file our taxes. That provides more money to those who need it, and helps those even with large debts not to default. Allow penalty-free withdrawals from retirement accounts. Social-program rules must be stretched. If people have to lose a job to get help, we tempt the employer to needlessly fire them, and they and the employer are not ready to start up again fast.
This is all really hard. Economists blogging from home are full of good and creative ideas. But changing rules for who banks can lend to, to create pandemic exemptions, is much much harder than writing checks. It would be awfully nice if anyone in government had put the slightest thought into this ahead of time.

We are headed to the second huge creditor bailout. When it's over, we need to start taking seriously that if you're too big to fail, you're too big to borrow. Airlines, this means you.

The Oped summarizes many ideas in condensed form. To see more, use the "pandemic" label below, or this link

Tuesday, March 17, 2020

Airline bailouts and capital regulation

The airlines are about to get a huge bailout. Why are they in such trouble? Well, yes, nobody is flying so their revenues are cratering. But why not just stop flying for a while? The answer is, they have loads and loads of debt.

U.S. Airlines Spent 96% of Free Cash Flow on Buybacks writes Brandon Kochkodin on Bloomberg
American Airlines Group Inc...led the pack, with negative cumulative free cash flow during the decade while it repurchased more than $12.5 billion of its shares. United Airlines Holdings Inc. used 80% of its free cash flow on buybacks, while the S&P 500 Index as a whole allocated about 50% for the purpose. As the industry reels under the weight of the coronavirus outbreak corporate leaders are seeking federal assistance to ease the burden.
Let's be clear. It is a myth that buybacks are bad because they reduce investment. And free cash flow isn't a very interesting divisor. But buybacks do have a downside: they reduce equity and increase debt. Fine if you and the creditors are willing to take a bath in bad times. Not good if debt means taxpayers have to bail out in bad times. Too big to fail is spreading like a virus.

If airlines were financed by equity, they would have a natural shock absorber. They could just shut down, stop paying dividends, and then wake up on the other side. But they have debts to pay, and if they don't pay creditors will take them to bankruptcy court, seize assets, break them up and there won't be airlines when the virus is over.

Enter the federal bailout, as always really a bailout of the creditors.

Does this all sound like banks 2008? It is.

If we are going to bail out airlines then there needs to be subsequent capital regulation. Once bailed out you cannot finance yourself on a mountain of debt next time around.  Issue equity, retain earnings.

Everyone is watching. If debts lead to bailouts with no consequences, there will be more debts and more bailouts. Yes, even now we have to watch moral hazard. We are setting precedents for the next larger pandemic.

The only reason the economy is in trouble is that not enough people and businesses kept cash reserves or plans to weather a shut down. If the ants bail out the grasshoppers without consequences, we will enter the next crisis with nothing but grasshoppers.

If there is going to be a bailout this consideration makes it ever more important that the government lends money, or invests, and is paid back first before any current creditors or stockholders. Don't just send a check.

Unemployment insurance pandemic conundrum

Should the government make unemployment insurance more generous and easier to get in the pandemic recession? Well, yes, but it's not ideal, and a good point on which to ponder the difference between a pandemic recession and a conventional recession.

To get unemployment insurance, you have to actually lose a job (in most cases) and you are supposed to be looking for a new job. In the pandemic recession, lots of people will be temporarily furloughed - -think airline pilots or flight attendants. But assuming, and helping to ensure, that the economy comes roaring back, we don't want airlines to fire pilots and flight attendants, and we don't want them walking around looking for new jobs at other shut down businesses. It would be  much harder for airlines to get going again; the employees lose health insurance (!) and other benefits, and people out looking for work are spreading viruses around.

Yes, there are some open jobs now. Amazon is looking for workers, as much activity moves online. Anyone with medical skills should be helping at hospitals. And face-mask and sanitizer companies are hiring. But this cannot make up for the large number of Americans who will be sitting on the sidelines for a few months.

So, we want unemployment and other benefits for people who aren't technically unemployed, but whose companies are shut down for the virus and can't afford to keep paying them.

Why don't we always have that, you might ask? Well, our social programs have a lot of rules and for good reasons -- to manage the inevitable unintended consequences and moral hazards of normal times and normal recessions. Government paying salary and health benefits of furloughed workers would give companies a big incentive to routinely furlough employees instead of giving them vacations. Around the world, unemployment insurance and many other benefits are  coupled with job search or training requirements, to avoid the massive overuse experienced before those requirements were put in place. But we don't want them now.

So our problem is that a pandemic shutdown requires a different set of detailed micro rules and regulations about who get what when. Good old Keynesian stimulus and standard automatic stabilizers are completely inappropriate. Incentives matter, now as much as ever, not just cash.

Here we economists are very clever. Marginal revolution links to many clever ideas to get us through the crisis, new programs and new rules and new ways of getting money to where it is needed. I've blogged a few dozen clever ideas too.

But it is nearly impossible to ask bureaucracies to make things up on the fly in a crisis, and invent an implement new rules in a matter of weeks, even if politicians could agree what those programs should look like. This is the lesson of Graham Allison's Essence of Decision masterpiece on the Cuban missile crisis. (If you're looking for good self-isolation reading this is a great one. It also shows how important it is to have a President who can make cool decisions in a crisis, when all his or her advisers are screaming nonsense. The many pandemic books are also great reading. We have been here many times before and it's always the same chaos.) That is the lesson of 2001, when we discovered that half the emergency responders didn't have the other half's phone numbers. That's why when this is over, we need a serious pandemic economic plan, one that gets practiced and refined, and not just another big report that gets shelved and forgotten.

At the cost of repetition, there will be other pandemics.

Monetary policy and coronavirus -- French edition

Vox-Fi put up an edited version of my monetary policy and coronavirus post, in French, La politique monétaire en réponse au coronavirus

Un collègue et moi avons discuté de la question suivante : la Fed (Federal Reserve, la banque centrale des Etats-Unis) devrait-elle baisser ses taux d’intérêt en réponse au coronavirus?
Plus généralement, supposons qu’une pandémie devienne grave et que, par choix ou par décret, une grande partie de l’économie s’arrête pendant quelques semaines ou mois. Qu’est-ce que la Fed, ou toute autre politique économique devrait faire à ce sujet?
...

Practice your French. Read the whole thing here