I'm doing a Zoom talk at the Bendheim Center, Princeton, with Markus Brunnermeier, 12:30 Eastern today (Monday May 18) on this, tune in if you're interested. It's mostly based on recent blogs and opeds. Sign up here. I'll post a link to the video when it's over.
I had the chance to watch it. It was very good.
ReplyDeleteHere is one of my thoughts/questions I put forth and I think Dr. Cochrane answered it, if not exactly directly:
Hello. So, we have business to consumer business and business to business firms. How will bankruptcies in small business, along with unemployment as a result of the virus mess, aggregate into the larger macroeconomy? How can monetary and fiscal policy coordinate to stop the bleeding? And, related to this, as Dr. Cochrane has suggested numerous times, how can a smart re-opening of the economy function and what kind of enforcement mechanisms do we need so that this smart re-opening can turn the tide against bankruptcies and unemployment? Is this possible or is the culture against enforcement? Are we reliant on fiscal and monetary bazookas?
The answer seems to be: YES. Why? The SIR models Dr. Cochrane put forth assumed different behavioral models. Self-enforcement appears to be spotty. This is important because if we want to be "smart" and not "dumb," people have to at least have a modicum of respect for their fellow citizens, which for some is not even a consideration. Enforcement of rules to protect the populace will need to take place. Otherwise, we risk another fiscal and monetary bazooka.
And a final thought:
Do we really want to reopen the economy in its current form? Do we really want to go back to trading away long term stability for short term gains and risk again? Is this an opportunity for sustainable economies? Opportunities for infrastructure investment towards that end?
Best,
M
Dear Professor Cochrane,
ReplyDeleteI watched the talk and in it you argued that government mandates are not necessary and that individual behavioral changes are likely sufficient. You cite airline traffic as an example. But a review of airline traffic, the latest I could find (although I did not work too hard) does not show much of a chnage prior to government shelter in place orders: https://www.transtats.bts.gov/TRAFFIC/
Then later in your talk you upbraid all those people in Wisconsin and other places going to night clubs. So, behavioral chnage is not always so reliable.
My point? Sure, rational self-protection is often observed, but so is irrational action. Knowing the death rate, as in your behavioral SIR model, is noisy, and reaction to it are likely to be quite wrong. And, among the young, there is no need to self protect because there is no deaths. The negative externality is obvious. And positive externalities are possible, but more in the realm of economists dreams than a reality.