Ready to reopen?

Are we ready to reopen? No but not for the usual reason.

Once we have testing we can reopen, says conventional wisdom. I doubt that. Who is going to give these tests, and what are they going to do with the information? 

Maybe maybe maybe if we had a free test, with instant results, that every American (and person flying in on a plane) could take every day; if almost all Americans were actually willing to take said test; and if people were universally willing to quarantine themselves upon its results, the test might help. But even that's a pipe dream. 

We won't have a vaccine, applied to the entire world's population, for a long time. "Herd immunity" seems unlikely. It's not even clear that exposure to COVID-19 confers immunity. (I've been looking for any study of how often people who had it once get it again. Let me know if you see one.) The whole point has been to bend the curve so that the vast majority don't get it. 

So, we will have through summer and fall, a pretty susceptible population and a virus ready to break out any chance it gets to. 

The point of "testing" and "reopening" is to have a system whereby public health interventions take the place of draconian economic shutdown to keep the reproduction rate under one. 

Public health does not mean just lots of tests. It means using the tests to identify small outbreaks and keep them from getting big. And that requires a tooled up, effective, nimble, local, public health bureaucracy. And a bureaucracy that steps on a lot of toes. 

Suppose your neighbor gets one of these tests and is positive. What gets done about that? First of all, under HIPPAA, his or her test result is nobody else's business, not even local government. Who forces him or her to self-quarantine? Who forces them to get the test if they know forced quarantine is coming? 

In Asia, apps tell you who got tested and the result. You can judge if you had contact. Or state  surveillance tells you that tracking your cell phone and theirs the authorities know you had dinner together last week and you're being isolated now. We, properly, have big laws against all of this! Are we willing to do this? How fast? Will we faintly have the capacity to do it? In a month? 

Maybe after weeks of wrangling, local public health officials (which local public health officials?) can use the information to decree there has been a positive test on your block and impose a quarantine on the whole block. The heck with that, say you, proud American. Like me, you've been strenuously distancing for a month, so you know you haven't got it from the neighbor, you're off to the newly opened park for a jog. Obviously, such edicts will have to be enforced, against a restless and resentful populace. Can you really see cops cordoning off apartment houses, blocks, towns, controlling who goes in and out? Do we even have cops to do it? And the method to figure out who goes where?

"Testing" and "tracing" are popular. Do most Americans (and our 10 million undocumented residents!) really want to tell someone from the government every person they've met in the last two weeks? Knowing the government is likely to quarantine them and ask more questions?  Or let them track your phone? Or carry your phone the minute you know they're tracking it? 

Birthday parties are just as bad as bars. Are we going to allow health authorities to monitor our cellphones and bust up birthday parties? 

A key part of public health is to isolate known areas. Are Americans going to put up with travel bans?  Are there any public authorities with the competence to put in place data-driven nuanced travel bans? Again, for the vast majority of people, the travel ban will be a senseless annoyance. 

We will need a robust public health response, to keep a small number of cases from ballooning, and allow the economy to open. We will need the response we should have had in January. "Testing" is one of many inputs to that response. But "testing" is not the response itself. An effective public health response needs a detailed, competent bureaucracy, temporary relief from thousands of privacy regulations -- and swift assurance that those privacies are reinstated when it's over -- and enforcement in order to something useful with the tests. I doubt Americans will put up with the enforcement. I doubt our government has the capacity to put them to that test. I hope I'm wrong as the alternative is waves of lockdown.  

MR Admiration

24 hours of Marginal Revolution:

April 16 1:23 PM Covid-19 Fast Grants update

April 16 12:15 PM. The vital daily links, including

2. An alternating lockdown strategy.
3. Vox on the Watney Stapp Mercatus mask plan.
4. Derek Lowe on vaccine prospects.
5. Will coronavirus change the proper CPI bundle?
6. “This paper argues that daily ‘universal random testing’, as recently proposed by Paul Romer, is not likely to be an effective tool for reducing the spread of Covid-19... Link here.
7. Why is Detroit worse than Baltimore?  And is there also a Brazilian heterogeneity? (limited information, however)
8. JPMorgan reopening plan, involves building herd immunity among the young. ...
9. How well did Italy do lowering R0 through lockdown?  [Very important -- models predict much swifter end than were are seeing]
11. Ongoing chart of Covid-19 deaths in Sweden, also accounting for reporting delays.
12. Who is this helping? (NYT): “Amazon said Wednesday that it would temporarily halt its operations in France after a court ruled the company had failed to adequately protect warehouse workers against the threat of the coronavirus and that it must restrict deliveries to only food, hygiene and medical products until it addressed the issue.” 

April 16 7:28 AM When Will The Riots Begin? Protests against lockdowns have begun. Crucial.

April 16 7:26 AM PPE Shortages and the Failure to Increase Prices. Vital. Anti-price gouging rules are inhibiting supply. An interesting new mechanism: usually people won't pay for stuff until it's delivered. But if you have to ramp up production 10x, you don't have working capital to buy supplies. higher prices provide working capital. There is a rising supply curve everywhere.

April 16 2:59 AM (!) One reason why food intended for restaurants is not reallocated to supermarkets We've been puzzling about that here. Why are farmers throwing away food? At our dinner table the answer was obvious -- some regulation is getting in the way. But which one? Food labeling is an obvious one. You can't just sell, you know, food, in a food store. "I’ll say it again: America’s regulatory state is failing us."

April 16 12:22 AM Supply curves slope up round 1. Why you get more tests if you agree to pay higher prices. (As I've written a few times, ponder that we are spending a trillion dollars a month on stimulus yet worrying about "price gouging" and haggling over $40 tests and $1 face masks.)

I can't keep up! I can barely read this fast.

Financial pandemic

The headlines are on the disease, the shutdown, and the hoped-for safe reopening. It's time to pay some attention to the financial side of the current situation, and the Federal Reserve's immense reaction to it.

Disclaimer: do not read in this post criticism of the Fed. Maybe the world would have ended if they had done things differently. But it is important for us who study such things to understand what they did, what beneficial and adverse consequences there are, and how the system might be set up better in  the future.

Big picture: We face an extremely severe economic downturn, of unknown duration -- it could be a V,  U, or L. If it is not a V shaped in months, there will be a wave of bankruptcies from personal to corporate, and huge losses all over the financial system. Well, earn returns in good times and take losses in bad times, you may say, and I do, more often than the Fed does, but for now this is simply a fact.

Our government's basic economic plan to confront this situation is simple: The Federal Reserve will print money to pay every bill, and guarantee every debt, for the duration. And, to a somewhat lesser approximation, to ensure that no fixed-income investor loses money. 

I reiterate, the point of this post is not to criticize. If you are reading economics blogs, you like me probably have a nice work-from-home job that still pays some money. This is not what's going on. From a combination of voluntary and imposed social distancing, the economy is collapsing. As I detailed in an earlier post  20 million people, more than 1 in 10 US workers, lost their jobs in the first month of this shutdown. That's more than the entire 2008 recession. In 3 weeks. 1/3 of US apartment renters didn't pay April rent. Run that up through the financial system. Most guesses say that companies have one to three months of cash on hand, and then fail. We'll look at signs of financial collapse in a bit, that the Fed reacted to. If you want to know why the Fed hit the panic button, it's because every alarm went off.

Pay every bill? Yes, pretty much. This is not "stimulus." It is get-through-it-us. People who lost jobs and businesses that have no income can't pay their bills. When people run out of cash they stop paying rent, mortgages, utilities, and consumer debts. In turn the people who lent them money are in trouble. Businesses with zero income can't pay debts (just why debts are so large is a good question to keep track of), employees, rent, mortgages, utilities. When they stop, paying they go through bankruptcy and their creditors get in to trouble. If you want to stop a financial crisis, you have to pay all the bills, not just some extra spending cash.

And that's pretty much the plan. There will be unemployment insurance, with 100% replacement of wages, for people who lose jobs, so they can pay rent, mortgages, utilities, and consumer debts. The Small Business Administration will make forgivable loans to businesses. Bailout plans are in place to make sure industrial companies like Arlines do not file for bankruptcy. (Much of this money is stuck in snafu, but that's the plan if not the execution.) And, where the big money is, the Fed is propping up corporate bond, municipal bond, treasury, money market funds, and other markets. I'll survey the programs below, this is big picture for now.

Printed money? Yes. Start with the Treasury. The Treasury wants to spend $2 trillion in the first stimulus bill. Where is that money coming from? In normal times, that would mean selling $2 trillion of treasury bond and bills. But who has $2 trillion of extra income lying around that they want to use to buy treasury debt right now? Yes, the new treasury debt has to come from a new flow of savings. Well, you can argue if that's there or not, but you don't have to. The Fed is buying more debt than the Treasury is selling. 

When the Fed buys Treasury debt, it prints up new money, and gives it to the holder of the Treasury debt. (I will say "printing money" as that is clearer. The Fed actually creates new reserves, accounts banks have at the Fed, by flip of an electronic switch. Banks can convert reserves to cash and back at will.)  On net, if the Treasury borrows and spends the money, and the Fed buys the Treasury debt, the government as a whole has printed up new money to spend. That's what's going on now. 

From the March 4 and April 8 Fed H.1 data, we learn that the Fed held $2,502 billion and $3,634 billion Treasury securities on those dates, an increase of $1,132 billion.  From the Treasury debt to the minute page, we learn that debt held by the public (including the Fed) rose from $17,469 billion to $18,231 billion -- a (huge) rise of $762 billion. $9 trillion at an annual rate. The Fed bought all the Treasury debt, printing new money to do it, and then some. On net, the government financed the entire $762 billion by printing new money and printed up another $370 billion to buy back that much existing treasury debt. 

The UK is abandoning pretenses. Bank of England to directly finance UK government’s extra spending writes the FT. Rather than have the government sell to the market, and then the bank buy it, the bank will now print money for the government to spend, and the government will print treasury debt to give to the bank in return.

(Who cares you may ask? The US Fed is not legally allowed to buy from the Treasury. The Treasury must sell in private markets to establish the interest rate, i.e. the price of the debt. If not, there is an inevitable temptation to say that markets are "impaired" or "illiquid" requiring too high rates, and thus the Fed buys at artificially low rates and high prices. The laws against inflationary finance are pretty thoughtful.)

The new lending programs are explicitly financed by the Fed printing up new money to do so.

The Fed and Treasury are teaming up to provide trillions to lend money to businesses and banks, and to buy assets including  money market funds, corporate bonds, municipal bonds, mortgages,

Now where do these trillions come from? Answer, in short, the Fed simply prints them up. It prints up the new money, and gives it to a business or bank or uses it to buy assets. 

A bit longer explanation 

In normal times, the Fed creates money (reserves) by buying Treasury bills. It has an asset -- the Treasury -- and a liability -- the money. The money is backed by Treasurys, a good principle of non-inflationary policy. That's the simple version of which  the Fed just did a trillion. 

When the Fed lends money to a bank or a company, the Fed likewise prints up money, gives it to a company, and counts the company's promise to pay back the loan as the corresponding asset. You can see the danger. The Fed is supposed to make only safe loans, to guard against inflationary finance, and to keep the Fed politically independent. Printing money to hand gifts to well connected firms and politically powerful interest groups is dynamite, and an independent agency will not stay independent long if it does so. 

For this reason the Fed and Treasury work together. The Treasury agrees to take the first tranche of losses, so the Fed can say this is a safe loan. Jay Powell was, as usual, clear on this. 

I would stress that these are lending powers, not spending powers. The Fed is not authorized to grant money to particular beneficiaries. The Fed can only make secured loans to solvent entities with the expectation that the loans will be fully repaid

What happens if the loans are not paid back? Well, in the first 5 to 10%, the Treasury takes the loss.  But right now, the Treasury gets its money from the Fed. So it really comes back to printed money anyway. If losses are so severe that the Fed loses a lot of money, the Treasury will have to recapitalize the Fed with a gift of Treasury bills. 

So, if the loans are not paid back, one way or another, we end up with that much more outstanding Treasury debt, either owned by the Fed and money outstanding, or owned by people. 

But this Fed vs treasury business, while important inside baseball for Fed independence and a bunch of issues on how the plumbing works, is really beside the point. The Fed and Treasury right now are, together, printing up trillions of dollars -- $4 -$6 trillion is the current guesstimate, which assumes a short sharp recession -- and handing them out. Most of it is "loans" which the Fed and Treasury hope to recoup. Then they can reduce the amount of money left outstanding. 

Is this really lending? 

As Jay Powell emphasized, the current vision is that most of the current support is lending, not spending. The Treasury kicks in something like $400 billion which really is spending, the anticipated loan losses (companies that don't survive) and forgiveness (programs that promise to forgive the loan if the company meets employment or other goals). The Fed lends $4 trillion on top of that, and gets its money back. The government as a whole has only spent $400 billion when its over, and the new debt (money) is soaked up again by repayment. 

But is this really lending or just spending?  Well, in the short run it's lending, but if the recession lasts more than a few months it will turn in to spending.

Companies have no income but must pay rent, debts, (interest on their corporate bonds and bank loans used to purchase now idle plant and equipment), utilities, skeleton staff, etc. Local governments are in a similar bind. They borrow to cover this cost. What's wrong with that? 

Well, borrowing usually corresponds to a productive asset, to an increase in value. If a bakery borrows to buy an oven, the bakery will make more bread, and use the additional profits on the extra bread to pay off the loan. If it doesn't work out, the oven is a real asset, collateral that the bank can sell to get some of its money back. A city borrowing to build a highway gets more tax revenue from greater activity to pay off the loan. 

But there is no economic value to these loans. These are consumption loans, stay-afloat loans, preserve-the-business loans. They are loans against future profits, but not additional future profits. They are a transfer of the franchise value of the firm to the lender. 

So, first, the firm clearly at some point is better off shutting down than promising its entire profit stream to a lender just for the right to reopen someday. Second, the government, already inclined to forgive, say, student debt, has every reason to forgive these "loans" as well. The business "loans" explicitly promise forgiveness if the government keeps workers on board. When we are in a sluggish recovery, and businesses are saying "well, I would hire more people, but we have all this extra debt because we took Fed loans to keep our employees fed while we were shut down," let's see just how tough the government is going to be on repayment. 

So, in a matter of months, these loans turn to gifts. The $4 trillion Fed lending package winds up as $4 trillion permanently added to Treasury debt. 

Does this mean inflation? 

You would think that, if the Fed and Treasury are going to print up something like $1 trillion a month of money to pay everyone's bills and prop up markets for the duration, we would be heading for inflation, soon. 

No, or at least not immediately. Reserves pay interest. Reserves are just another form of Treasury debt. (Reserves that pay interest is one of the best innovations of recent decades, and Kudos to Ben Bernanke and everyone else involved.) 

So why does it matter? Couldn't the Treasury just print up Treasury bills, sell them for reserves, hand out the reserves, collect loans in due time and retire the Treasurys? In the short run it does matter, which should send a few shivers up our spine. Apparently the Treasury had a hard time finding willing buyers. So printing up the reserves directly made a difference. So, the Fed ends up with a loan "asset" on its balance sheet against reserves, rather than the Treasury with that loan as an asset on its balance sheet against Treasury bills. Conveniently, also, reserves though equivalent to Treasury debt are not counted in the debt limit along with many other contingent liabilities. 

In the long run it does not matter. The Fed and Treasury print up reserves, lend it to Joe's Laundry; Joe pays his mortgage; the mortgage company pays its investors. If those investors are happy sitting on reserves (bank accounts backed 1:1 with reserves on the margin), it sits. If they are not, which would be the beginning of the inflationary process, the Fed can just raise the interest rate on reserves until they are, really really transforming reserves to Treasury debt. Or the Fed can give them some of its stock of Treasurys and so on up the reserves. 

With abundant interest-paying reserves, reserves and Treasury debt are almost exactly the same thing, and in roughly functional markets, what matters is their total supply, not reserves alone. Inflation is a danger, but from the total quantity of government debt, not its split between reserves and  bills. Inflation comes basically if the US hits a debt crisis. 

(That is, so long as the Fed pays market interest on reserves, and lets the market basically have as much or as few reserves as it wants. If the Fed, and Treasury, start worrying about interest costs of the debt, and do not pay interest on reserves and do not allow people to convert to Treasurys, then inflation comes sooner. )

But we're looking for sure at raising US debt from $22 trillion to $27 trillion, likely hitting 150% of GDP if this is a short and swift recession. It could be much larger if the recession goes on a year or more. Is there a demand for that much more treasury debt in the long run? Is there a flow of that much new saving that people are willing to park with Uncle Sam? How much more can markets take? So the chance of a global sovereign debt crisis and inflation is not zero -- but not centrally from the fact that it's currently financed by printing money. I'll come back to this issue in detail later. 

Questions. 

First, how long can this go on?

As you can see, the viability of this whole plan depends on a short recession. The Fed is printing up something like $1 trillion per month. If the recession ends up being L shaped, those numbers will ramp up as reservoirs of private cash dry up. A few large company bailouts, a few more "dysfunctional" markets turn to the Fed to buy everything, and so on. The  IMF wants  $1.2 trillion to bail out emerging market economies. After 3 weeks. That will get worse. State and local governments, already facing pension crises, are gong to be toast when sales and income tax receipts collapse. Bear Stearns, Fannie and Freddy, AIG...

Where is the limit? Perhaps the peasants with pitchforks, remarkably absent so far, will revolt. Perhaps the willingness to hold interest-bearing reserves or US Treasury debt will find its limit after $10 trillion. Or $20 trillion.

At some point, people who bought risky, high return debt, and earned nice returns on the way up, will have to bear some of the genuine economic losses. There is no magic. Government debt is paid back by taxes. (If you think that law has been repealed by MMT or r<g, I'll disabuse you of that in an upcoming post.) Trillions will be spent. Either taxpayers pay it, or creditors pay it. 

Second, isn't there a bit of moral hazard here? Now, you may say, nobody asks about moral hazard in a foxhole. But at some point we have to address the moral hazard. Half of these interventions were things done in 2008, and we said no, never again, we'll pass a mountain of regulations to control moral hazard. Remember "no more bailouts?" Especially money market funds? And here were are, one week into it and airlines are too big to fail and money market funds need the Fed to stop from breaking the buck. At a minimum we can look at what the Fed has done, remark on how the post 2008 controls on moral hazard failed, and at least think about how we might avoid being in exactly the same  pickle in 2032.  We can also once again Monday morning quarterback and suggest how things might be done in a way to diminish the moral hazard. At least we can get a better playbook for next time.

I will look at both these issues in detail in upcoming blog posts.

A happy thought on super-spreaders

From one of my super-smart colleagues.

The key is to get R0, the average number each infected person gives it to, below one. If that is done, the virus dies out.

R0 has a fat tail. Almost all spreading is done by a few super spreading people in super spreading events and activities. Cut those out and the problem is gone. Keeping the rest of us at home is a waste. (Latest, discovery by my wife. Dog groomers are shut down. One cutter, one dog, one store. No)

Happy thought: to the extent that super spreaders are super-spreading people, people with particularly bad habits, or people in particularly exposed jobs, they are most likely to get it and become immune. Thus, super-spreading naturally tails off on its own, and the average reproduction rate falls on its own. If the small herd of super-spreaders gets immunity, that helps the virus to die out.

This is one case I've heard of that heterogeneity in R0 rates affects the average that is tracked by most epidemic models.

How soon does it end?

How soon does it end? This is a big question which models can help us with.

Jesús Fernández-Villaverde and Chad Jones are working on estimating and simulating a epidemiological (SIRD) model of Covid-19. The numbers are based entirely on numbers of deaths, which eliminates much data uncertainty. It includes an initial spreading rate (R0), and the introduction of public policies that lower that rate. One may object to economists treading in these waters but economists (especially of such great talent) are really good at fitting models to data.

Here is how the model fits New York daily deaths per million. The three lines reflect three different possibilities for the death rate, 0.1%, 0.3% and 0.5% of infected people. You can see how the three death rates fit about the same up to now (the other parameters get reoptimized), but differ on the forecast for the future. The cumulative death rates under the three assumptions are quite different, about 800, 1200 or 1500 per million.

But what struck me is how close the peaks are -- no matter what parameters you pick, the peak is between April 11 and April 20. By mid-May things are well under control, and it's over by June. This is a really hopeful simulation for our big V U or L discussion.

The key input to seeing it over is indeed, "bending the curve," or the peak in sight.  Here is Italy,

Italy is clearly past the peak, no matter what parameters you use, and will be over in a month.

Here is another insightful plot, for New York

The lines are forecast based on data made 1,2, 3, 4, out to 7 days ago (red). The time of the peak is pretty well known.

But here is California:

California is at a much lower level -- note the vertical scale. 2 deaths per million not 50 in NY. But we don't have that signature of exponential growth, growth slowing and then a peak. So the progression of the forecast rom red to tan (extraordinary good news) is very sensitive to the data from the last 7 days, and you can see it's a bit noisy.

In all these simulations, the big unknown is the total death rate. The speed of the event is still in months. On current data, New York ends up with 21% ever infected, and California with 1% ever infected, and total deaths 0.3% of that. But the infection always comes and goes in a matter of two months. 

This seems like great news for the V, U, L, debate. Back to work in June. There is a big assumption here. Jesús and Chad assume there is an initial reproduction rate, and policy intervenes to bring that down to a lower level. For New York, those are 4.9 and 0.9. (How many people each sick person infects.) For California, 4.0 and 1.0. They then assume that the new lower reproduction rate stays put.

If "reopening" in California means going back to a 4.0 reproduction rate, in a population that 99% of people still are uninfected, we just start right back again.

So where is a rosy economic scenario that this is over by June and the economy can get going again? Absent a vaccine, it depends on public health being able to take over form blanket shutdowns, to keep R0 below one in a population with very few (but not zero) cases. 

If we just reopen there will be a second wave, or an endless half open economy. Public health -- lots of testing, tracing, isolating -- allows you to keep R0 low when there are relatively few cases without shutting down the economy.

So I think Jesús and Chad's simulations offer great hope that the economic calamity can end quickly if the public health infrastructure is in place to do what it so massively failed to do in January.

(The slide deck and paper will be up soon on Chad and Jesús websites. I saw it at our Monday zoom lunch seminar. Thanks to Chad and Jesús  for sharing the slides.)

V, U or L? Three views

Will the recovery be V shaped, U shaped or L shaped?

The 1918 influenza stood in most economists' memories as the paradigm -- a short, small V shaped slowdown, despite massive mortality. But 1918 was different. People and public policy went about their business ignoring the death toll to a large extent.

François Velde writes about the 1918 Influenza.

Burns and Mitchell (1946, 109) found a recession of “exceptional brevity and moderate amplitude.” I confirm their judgment by examining a variety of high-frequency data. Industrial output fell sharply but rebounded within months. Retail seemed little affected and there is no evidence of increased business failures or stressed financial system... Interventions to hinder the contagion were brief (typically a month) 

Of course the fact that interventions were brief has a lot to do with the mildness of the recession. Still,  it was on this historical evidence that most economists thought in February that this might be the great vacation.

I then use high-frequency cross-sectional data to confirm the visible but brief impact of the epidemic and of the intervention measures (closings of certain businesses) that were adopted at the time. Banking data shows a financial sector functioning as it should (increasing loans). Conspicuously, there is no evidence of stressed balance sheets in the nonfinancial sector: business failures were on an uninterrupted downward trend, and cross-sectional data fails to find any effect of mortality....

Here is the picture of a short sharp V shaped 1918 -- followed by the deeper but equally V shaped 1921, not influenza related

And here is the absence of business failure, all before the CARES act, stimulus, massive Fed lending, and so forth. 

François constructs

an index of local business conditions from weekly qualitative reports and use it, along with measures of payments volumes, to examine if the speed with which economically costly interventions were put in place made a difference in economic outcomes. I find clear evidence that interventions changed the dynamics of the epidemic and affected economic activity by reducing the number of infected, though broader effects (through a reduction in demand or activity) proves elusive.

Things are not always the same

[Interventions] imposed mostly by cities but sometimes at the state level, took a wide variety of forms ranging from shutting down public gatherings and crowded places to staggering business hours, closing schools, imposing quarantines for infected people, requiring masks, etc. No intervention went as far as closing non-essential businesses, as have the lockdowns of the 2020 pandemic.

Velds goes on to make an important point. There are lots of pandemic macroeconomic models being built at breakneck speed right now. They should fit not only this one -- a massive recession -- but also fit the milder earlier ones. 

*************

Sergio Correia, Stephan Luck and Emil Verner write Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu 

Looking across the US, 

more exposed areas experience a sharp and persistent decline in economic activity. The estimates imply that the pandemic reduced manufacturing output by 18%. ...

This differs a bit with Velde. In part they emphasize the longer lasting cross sectional effects, but I'm not sure if that totally accounts for the difference. 

We find that cities that intervened earlier and more aggressively do not perform worse and, if anything, grow faster after the pandemic is over. Our findings thus indicate that NPIs not only lower mortality; they may also mitigate the adverse economic consequences of a pandemic.

This is surely true. The way to nip exponential growth in the bud is to stop it early.


************

Scott Baker, Nick Bloom, Steven J. Davis and Stephen J. Terry COVID-Induced Economic Uncertainty are much more pessimistic. They use their measures of economic uncertainty, derived from newspaper reports and (panicked) financial markets, fed through a model that relates uncertainty to economic outcomes, to forecast a long, deep recession.

Here too, the past may or may not be a guide to the future. The hope is for a swift all-clear, people return to the jobs they had and businesses reopen, without the agonizingly slow dynamics of a usual recovery. Well, that's the hope.

**************

Robert J. Barro, José F. Ursua, Joanna Weng "The Coronavirus and the Great Influenza Epidemic" look across countries,

Regressions with annual information on flu deaths 1918-1920 and war deaths during WWI imply flu-generated economic declines for GDP and consumption in the typical country of 6 and 8 percent, respectively

The death rates were enormous relative to now

150 million deaths worldwide when applied to the world’s population of around 7.5 billion in 2020. 

and they note that we are choosing much more economic dislocation to save lives.

However, extreme mitigation efforts—such as widespread cancellations of travel, meetings, and major events—will themselves contribute to the depressed economic activity.

I'm not sure what implications to take for our question.

**************

SNAFU

We should not be shutting down the economy. Where we are is a sign of a great loss of bureaucratic competence, of state capacity. The old joke that the federal government is an immense insurance company with an army has never been so true.

Our government has,  apparently, the capacity to spend two trillion dollars in a month. But, with three month's notice, it cannot procure 50 cent face masks or plastic face shields (properly certified and regulated). (Actually, unemployment insurance and SBA snafus suggest it cannot even disburse the rivers of cash.)

We lack the basic state capacity, bureaucratic, technical infrastructure for anything more nuanced than blanket shut downs -- no trace, track and isolate, no apps to check temperature and symptoms, no commonsense that maybe (say) gardeners and tree trimmers can work now. It took Walmart to figure out that taking employee's temperature every morning might be a good idea.

I hope a lesson that comes out of this is the need to clean up America's bloated regulatory state, and to re construct a competent effective bureaucracy.

To these general points, Veronique de Rugy writes on  The monumental failure of the CDC,

The lack of preparedness at every level of government (federal, state, and local) has nothing to do with a lack of funding or inadequate staffing. Instead, it has everything to do with governments’ bloat, mismanagement, cronyism, and poor focus.  ...

“CDC officials botched an initial test kit developed in an agency lab, retracting many tests. They resisted calls from state officials and medical providers to broaden testing, and health officials failed to coordinate with outside companies to ensure needed test-kit supplies, such as nasal swabs and chemical reagents, would be available, according to suppliers and health officials…

“This was kind of a perfect storm of three separate failures,” said Tom Frieden, who directed the CDC from 2009 to 2017, citing the botched test, overstrict FDA rules and sidelined private labs.”

Veronique's piece contradicts the common conservative view that our government got incompetent because it spent so much money on programs -- writing checks to voters -- that no money is left for core institutions.

 the agency’s poor record and its lack of preparedness has nothing to do with a lack of funding. From 2004 to 2018, total CDC spending grew by over 30 percent, from $8.3 billion to $11.1 billion.

Unfortunately, the vast majority of this growth in spending—shock!—did not go to pandemic prevention and protection from COVID-19. 

For instance, funding for its National Center for Emerging and Zoonotic Infectious Diseases—which aims to prevent diseases like Ebola—received only $514 million in 2018, a tiny sliver (less than 5%) of total CDC funding. And less than half of that $514 million went to emerging diseases like COVID-19. The rest of that budget is spent on stuff like chronic fatigue.

Meanwhile, funding for the CDC’s chronic-disease programs—which aim to prevent smoking, alcohol consumption, and poor diets—received nearly $1 billion over that same time, almost double the funding for infectious-disease prevention. As Michelle Minton at the Competitive Enterprise Institute notes in a must-read piece, more money goes to efforts like “environmental health ($180 million), injury prevention ($270 million), and occupational safety ($330 million).” All these projects are also funded by other agencies.

And, of course, let’s not forget the large amount of time the CDC (along with its companion in failure, the FDA) spends on alarming everyone about youth vaping. It is not an epidemic, it’s not contagious but it’s certainly got plenty of attention from the CDC, and the FDA. Isn’t it obvious now that these busybody government bureaucrats should have focused their efforts instead on fighting and preventing actual, real-world epidemics—you know, of the contagious type. 

This is a picture of unsupervised bureaucratic drift,  not lack of money

Brett Stephens writes of bureacratic bungling in the New York Times. 

A lot of poor kids get lunch at school, a pretty important source of regular meals. School is closed.

The U.S.D.A. didn’t have any trouble responding to school closures by switching to summer feeding programs. And Congress knew enough to give the department authority to waive some of the regulatory requirements. But,.. “Every waiver has layers and layers and layers on it.”

“To get a waiver each district has to apply to the state,” she notes. “The state has to decide whether to accept it. If they agree, then they have to apply to the U.S.D.A. If the U.S.D.A. says yes, the state can get the waiver, the district can get the waiver, but then the state has to interpret how you do it.”

Example: Oregon applied to the U.S.D.A. for an area-eligibility waiver so it could provide food for needy families living in non-poor areas. The department allowed the waiver, with the requirement, Wilson says, that each school district would have to work with a state agency “to develop a plan as to how they are going to target the most-needy students.”

Brett links to the  "F.D.A.’s almost-comical mishandling of an effort to roll out coronavirus test kits" here, and summarizes

First the F.D.A. approved a flawed test. Then they stymied an effective test by requiring its developer to submit his request not only electronically but also mailed in paper and via thumb drive. Then the F.D.A. demanded that the developer see if his test worked against other coronaviruses. Then the F.D.A. shut down a testing regime developed by the Seattle Flu Study because it lacked the correct licensing requirements.

Congress also had to overturn F.D.A. regulations in order to permit hospitals to purchase N95 masks previously approved only for industrial use. The country may need billions of such masks now. But as Reason magazine reported last month, federal regulators have told one would-be manufacturer that certification and approval might take between 45 and 90 days.

And this is government operating in an emergency. 

Dan Frosch, Deanna Paul and Ian Lovett write in the Wall Street Journal the story of Abbott Labs' amazing 15 minute coronavirus test:

After conducting a bulk purchase with Abbott, the federal government this month gave every state except Alaska 15 devices and 120 cartridges, regardless of its population or severity of its coronavirus outbreak.

In Illinois, where Abbott Laboratories is based, Gov. J.B. Pritzker said he spoke to the company more than a week ago and thought he had an agreement to conduct 88,000 tests a month, or about 3,000 tests a day. He subsequently learned that the federal government was taking over purchasing and distribution of the tests.

Instead, Illinois received 15 Abbott machines and 120 cartridges. “That’s eight tests per machine for all of Illinois” 

My italics. Lots of people are touting the need to "centralize" critical supplies, to stop states "competing" over them. Here is a look at how that's going to work out.

We are relying on the amazing creativity of American scientists and industry. The knowledge that the federal government is going grab your market cannot be salubrious to innovation and supply.

WWII generals fought each other viciously for supply too. Centralized allocation does not increase amounts.

The economy

V shape L shape or U shape? How far are we from financial collapse?

17 million people have filed for unemployment. In the first three weeks of the shutdown alone! The current rate 6 million per week. This is an astonishing number. The US labor force is about 165 million. One in 10 are out of a job in three weeks. 

In one sense this may not be as bad as it seems. I hear more and more anecdotes that companies and workers are reacting to the huge expansion of unemployment insurance (including self-employed and gig workers) by firing, laying off, furloughing workers that retain an attachment to the firm, and both sides are ready to get back to the same job quickly. So "unemployed" means "not working" and "we'll take the Federal government up on the offer to pay wages for a while."

This is arguably preferable to companies borrowing borrow money to pay the workers, which might have to be repaid, and has advantages over the European system in which the government pays companies to pay people who cannot work.

(In some cases, employees even keep health insurance. Bernie Sanders is right that the virus "has exposed for all to see how absurd our current employer-based health insurance system is." He is wrong that the only alternative is government-provided health. Individual, portable, guaranteed-renewable health insurance sticks with you if you lose your job, just like car and home insurance.)

In another sense, though, it is horrific news -- it means that already the employers of 1 in 10 people in the US labor force are shutting down completely. Those employers may not be around if the virus lasts very long.

Update: Olivier Coibion, Yuriy Gorodnichenko, and  Michael Weber look more closely at the numbers, with really depressing results:

Job loss has been significantly larger than implied by new unemployment claims: we estimate 20 million lost jobs by April 8, far more than jobs lost over the entire Great Recession. Second, many of those losing jobs are not actively looking to find new ones. 

So unemployment, defined as those without jobs but looking for jobs will not rise as much or measure the economic damage. In some sense that is optimistic, reinforcing the story that they are just waiting at home for their old jobs to come back. But the direct measure is less comforting.

Third, participation in the labor force has declined by 7 percentage points, an unparalleled fall that dwarfs the three percentage point cumulative decline that occurred from 2008 to 2016. Early retirement almost fully explains the drop in labor force participation both for those survey participants previously employed and those previously looking for work.

If so, those workers are not coming back. Still, people's responses to questions whether they are looking for a job or would take one if offered change quickly over time.

Nearly a Third of U.S. Apartment Renters Didn’t Pay April Rent.

Some tenants will be temporarily protected from eviction... unpaid rent could set off a chain of events that first cause commercial mortgage defaults, zapping investments in bonds backed by those mortgages.

Well, first many landlords are not big businesses but moms pops and small investors who put their life savings into a building, with a mortgage. They default, then whoever holds their mortgage defaults and up the line we go.

Again, it may not be all that bad. When the government announces that evictions and foreclosures are stopped, not paying rent may be a first place to save some cash. And just who is your landlord going to rent to anyway? But it is a signal of just how many people are in some sort of financial distress and again adds up to catastrophe in a few months.

Mortgage servicers are the next to go. Mortgages are no longer largely held by banks. If you don't pay your mortgage, as you are now allowed to do, the mortgage service company still has to pay its creditors, who typically hold mortgage backed securities.

If 25 percent of borrowers fail to make their mortgage payments, the industry would need $40 billion to cover three months of payment....

Bright, who formerly managed the $2 trillion portfolio of government-run mortgage financier Ginnie Mae, said he believes the Fed will come through with an emergency lending program for the industry.

“Even though that language wasn’t included [in the Senate bill], I do think it’s likely that this could be part of [the Fed’s Term Asset-Backed Loan Facility Program] in the end,” he said.

Federal Housing Finance Agency Director Mark Calabria...said this week in a Bloomberg TV interview that he was confident that large banks would continue to extend credit to mortgage servicers for the time being....

Still, he said, “if we get to a situation where this goes longer than two months, absolutely there’s going to need to be a bigger solution.”

Broeksmit said some mortgage companies won’t make it that long,

The article goes on to ask for help from the Fed.

In all three cases, our government's reaction is basically that the Fed will print up money to pay everyone's bills for the duration, subject only to the usual snafus at unemployment offices, bank regulations, SBA offices in actually spending the money. Just how long can that last? A topic for an upcoming post.

Social distance vs economic distance

Social distance need not mean economic distance.

This is an attempt to put advice to policy maker into one simple sentence. They have shut down the economy telling us not to go to work or businesses to open, except those deemed "essential" which are going on much as before, often with a surprising lack of attention to virus spreading.

The virus spreads socially. It does not care how much GDP you're producing when you're together socially. A birthday party is a virus-spreading disaster. It may give great joy to life, but does not help people pay bills. The key target is the average reproduction rate -- if one person gets it how many does he or she spread it to. The goal of policy is to get that below one without destroying the economy.

So here is my suggestion: Regulate interactions, not where those interactions take place. Reopen the economy with social distance protocols.

In part, this amounts to safety protocols that businesses should incorporate -- all businesses, essential or not. But it applies equally to social interactions. By regulating the nature of interactions, not specific businesses, reopen policies will also be, and be perceived as much fairer, which is going to matter.

The principles are pretty simple.

Large groups should not meet indoors in close quarters.  Where groups do have to work together, minimize the number of new people -- keep shifts together, and so forth. Stay 6 feet apart. Wear masks. Sanitize. People who do have to interact a lot, be they emergency room nurses, or grocery cashiers, need extra precautions. Use all the tests we have. If you have a temperature or any symptoms, stay home and don't contact other people.

Write a common sense set of rules for essential and non essential business, and social interactions. Focus on the super spreading activities. Keep it simple so social pressure can monitor, which is more effective than official pressure.

In heaven's name, reopen parks. Allow gardeners and tree trimmers to work -- they work outside, alone, and with masks on. Clamp down every bit on birthday parties as much as on noisy hot indoor bars.

Grumpy and Goodfellows podcasts; Cato panel

The latest Grumpy podcast on all things Covid still.

Rue Britannia, the latest Good Fellows podcast. 

The economics of lockdowns, CATO webinar with Ryan Bourne, Anna Scherbina and Emil Verner.   Anna summarizes her modeling work on length of the recession, Emil on lessons from 1918. Only at CATO do we get good questions about economic and civil liberties endangered by lockdowns. 

Still needed -- the back to work plan

I return today, in detail, to an old topic. In a month or so, cases in hospitals will have stabilized or tapered, and it will be time to begin reopening the economy. But most people will still not have been exposed, the virus will still be looking around ready to break out again. Technological saviors, in particular a vaccine or an effective treatment, will not have arrived.

It will be time to return to where we should have been in January. There are two parts to this. First, businesses and people need to adopt common-sense efforts to limit the spread of the virus. Second, we need an intense public health response: A regime of intensive watching, testing, tracing, isolating, locking down hotspots, and running businesses smartly.

Finally, I am seeing news all over that this thought is spreading. Today I do my bit to super-spread it. We need both, like yesterday.

This is not rocket science. But it does take a detailed, competent bureaucracy, following a well-thought out script. Both are in short supply these days. And, as we are discovering with masks, ventilators, unemployment insurance, and small business loans, you can't make them up and successfully implement them on the spot. Us economists have one big weak spot -- we dream up a program, like "let the small business administration lend them money," and assume it can happen tomorrow. It does not. (MR "regulatory state is failing.")

Even if we had perfect cheap tests that could test everybody every day, who is going to assemble the data on those tests, make sure the positives isolate? That in itself needs a large and well oiled bureaucracy. Which we do not have. Exhibit A:

People lined up for unemployment-benefits applications in Hialeah, Fla., on Tuesday.

PHOTO: CRISTOBAL HERRERA/SHUTTERSTOCK (WSJ) 

Well, at least they're wearing masks.

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 Test and isolate is darn hard

I do not think Americans are at all realistic about just how intrusive the alternative to Great Depression lockdown is. We face a hard choice, between economic calamity and a deeply offensive restriction on civil liberties. (Temporary, one hopes.) I'm just as zealous a civil libertarian as I am a free marketer. But I'm an economist and you can't wish away a budget constraint. It also needs a well-oiled bureaucracy, lots of regulatory relief, and is primed for snafu and fubar.

"Test, trace, and isolate" write V. V. Chari and Chris Phelan,

 theirs [Korea, Taiwan] are aggressive but targeted quarantine policies. They quarantine people displaying symptoms, aggressively trace the people they have contacted, test their contacts, and then quarantine those who have the virus (and sometimes those who have just had contact with those who test positive), regardless of whether they are symptomatic or not.

Given the huge costs associated with non-targeted shutdowns, the needed testing and tracing infrastructure simply has to be priority one during the mass quarantine period. Put simply, a limited mass quarantine period makes sense only if we use the time it buys us to radically change the facts on the ground once this limited time is over  

Yes. but somebody in the US needs to do all this. We don't need super duper tests -- a fever, a case history are enough. But tell us everyone you have contacted, haul them in for tests, forcefully quarantine people? In the US? Do we even have the state capacity, let alone the will to do this?

Travel restrictions are popping up. You're not allowed to travel to your vacation home. People are being turned away at state lines. Are we going to allow this?

A vendor handed food to a customer over a barricade surrounding a residential compound in Wuhan, April 6. NOEL CELIS/AFP/GETTY IMAGES (WSJ)

This is Wuhan. Now. In the reopening. Barricades surrounding residential compounds. Are we going to do this in the US? Who decides? How long?

Wuhan is our future -- the health emergency is over for now, but intrusive public health remains in place, a long with a lot of justified fear.  The chance of a second wave remains strong.  From WSJ

In the past few days, however, it has tightened restrictions on some housing complexes, and said others will remain in place, after confirming dozens of new asymptomatic cases. An official newspaper said Monday there could be 10,000 to 20,000 such cases in Wuhan.

Opening up will not be easy.

(Well, Wuhan is different in many ways -- particularly the transparency and honesty of public officials, and deeply dishonest data throughout the system, which will make it a lot harder for them to get people to believe it's safe!

The report was swiftly deleted online. 

Epidemiologists, U.S. intelligence sources and Wuhan residents suspect that Chinese authorities substantially undercounted infections and deaths over the past several months, especially in Wuhan, in part to boost President Xi Jinping’s image.

Say what you will about our officials, nobody is lying about anything.)

Dan Grover on How Chinese Apps handled Covid-19 is instructive. (HT Marginal Revolution as usual). Dan's tone is sort of gee whiz tech wonder, the same tone that pervades American's wait for a vaccine or instant cheap tests. But read between the lines.

China’s apps played a pivotal role in supporting some of the most effective tactics the country used in fighting Covid-19, including the use of fever clinics and the strict quarantining of individuals based on their risk level. 

I'm going to put verbs with subjects back in many quotes today. The local government decides you or your apartment is "high risk" and literally there is security outside blocking entry and exit.

Check Your Exposure: Multiple tools let people check whether other passengers of specific planes and trains they’d been on had been diagnosed (this information aggregated by the State Council). Independently-developed let people even check individual apartment blocks.

This would be very useful, and very effective. And very very illegal in the US, the land of HIPPAA privacy protections. Nobody but nobody can find out if you've tested positive. The wife of a colleague works in a testing lab. They're all still driving to work and sitting three feet from each other because databanks are secure enough to make sure nobody's test results leak. So, are we going to build a whole security and information infrastructure by which names and addresses of positive tests are released to just the right public officials who take just the right steps to enforce isolation? In three weeks flat? Whether private or public, testing and isolating is really intrusive on civil liberties.

Security guards at companies and apartment complexes came up with their own schemes to compel sick people to quarantine. This involved doing temperature checks and asking people about their health and travel history before being allowed into offices, stores, and public transit. To help with this, the phone companies provided a service to offer proof of travel history based on location data, in case it was called into question during the grilling.

Security guards at apartment complexes? Phone companies keeping track of your location and sharing it with public health authorities? Yes, that's what it takes.

if you thought you had coronavirus?

You would be sent to a fever clinic. They would take your temperature, your symptoms, medical history, ask where you’d traveled, your contact with anyone infected. They’d whip you through a CT scan …

The point of these “fever clinics”  as distinguished from ordinary hospitals, was to give anyone who thought they might be even a little sick a way to get tested and, more importantly, control the spread by isolating even asymptomatic carriers away from their family and co-workers and give them a place to wait it out. 

A reminder, we don't need recombinant DNA. Symptoms, fever, and "whip you through a CT scan" -- a hilarious idea applied to US medicine -- gives a darn good idea who has it. But "isolating even asymptomatic carriers away from their family and co-workers and give them a place to wait it out." Who does this "isolating" away from "family and co-workers"? That would be the Chinese State. Is the US ready for the idea that the minute you test positive you're whisked away to a hotel, a security guard in front, the fact of your test splashed all over an app for your neighbors to see?

(Incidentally, this whole post is worth reading for a view into the much more innovative app culture that seems to be China right now. For one example,

Maps directing people to the nearest fever clinics and ICUs. ... tools let users check the quality of a mask given its serial number, view the quantities of masks at stores near them,...

Where is Silicon Valley on any of this stuff? If China is heading to "technological dominance," as my fellow good fellows seem to fear, it isn't state run companies investing in AI and quantum computing that will do it -- it's good old American-style private sector innovation, ingenuity and cutthroat competition that they seem to be beating us at. )

*********

Commonsense at work is harder than you think. 

Alex Tabarrok in MR, Safety protocols for getting back to work. notes several businesses redesigned shifts, to minimize contacts between people in different shifts. The FAA did this, keeping groups of controllers together. Airlines are keeping pilot-copilot teams together.

Other safety protocols include:

• Shift work for white collar workers as well as for blue collar workers.
• Senior shopping hours.
• Temperature checks, perhaps via passive fever cameras at work and public transport.
• Mandatory masks for public transportation.
• Masks for workers.
• Sanitation breaks for mandatory hand washing.
• Quarantining at work for essential workers, as the MLB is thinking of doing despite not being essential.
• Reducing touch surfaces (even with simple things like propping up bathroom doors) and copper tape for hi-touch surfaces that cannot be eliminated.

...I believe that applying these protocols will allow many of us to work safely. We aren’t ready yet but now is the time to plan for our return. 

It seems so obvious. But, grocery store workers are still not wearing masks. The temperature check idea has been around forever, and implemented widely in asian countries. Nobody is doing it in the US. Amazon workers are striking from lack of these basics. See above for unemployment offices.

Alex is a bit guilty of passive voice vagueness here. Notice the absence of a subject anywhere here. Actually notice the absence of verbs at all. Who is going to do all this? Governments are imposing lockdowns, governments need to have assurance some level of this is happening before reducing lockdowns, and they haven't even written the guidance sheet and started applying it to "essential" business.

Europe also wants to reopen, but I don't see any specific test trace and isolate protocols worked out either. There is a general idea of common sense

Salini Impregilo, one of the companies building a new metro line in Milan, on Wednesday said it had restarted work on the project. New measures include body temperature checks at the start of the workday and at lunchtime, the use of face masks, frequent cleaning and disinfection of the work site and common areas, and guaranteeing a one-meter (3.3 feet) distance between people at all times.

but that's not a test trace isolate regime, and it's a company, not a government.

Eric Budish has it right: the goal of policy has to be to get R<1 at minimum economic cost. Not at any economic cost -- we can't go on at $1 trillion per month forever.  Cost efficiency means a scalpel, not a sledgehammer. It means lots and lots of little details, not one big plan. And since the government is closing us down, it is the government that needs to master this detail. 

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Waking up

On the good news front, "Government and Businesses Turn Attention to Eventual Reopening of $22 Trillion U.S. Economy" write Stephanie Armour and Jon Hilsenrath. Well, good news that people are starting to ask the question, not for reports of much progress on answers

a host of questions arise: Under what conditions should people be allowed back to work and stay-at-home orders be lifted? How will people at work be monitored for reinfection or antibodies to prevent a resurgence of the deadly virus? Does it all happen at once or is it staggered? Who is in charge of the effort?

...I’m worried we don’t have the systems in place to carefully reopen the economy,” Dr. Gottieb said in an interview. “You need to be able to identify people who are sick and have the tools to enforce their isolation and [tracing of people they contact]. You have to have it at a scale we’ve never done before. We need leadership.”

 Well, they are starting to begin to think about it:

The federal government has yet to put in place the kind of nationwide testing, tracing and surveillance system that public health experts say is needed to prevent another surge in coronavirus cases when social distancing eases. 

Mr. Trump said Saturday that he is considering a second coronavirus task force focused on reopening the country. The administration’s current social distancing guidelines run through April.

GOP Texas Lieut. Gov. Dan Patrick announced Tuesday he is forming a task force on how to reopen the economy, and GOP Maryland Gov. Larry Hogan has created a response team to discuss measures that must be in place for opening the state back up.

That's good news. You've got three weeks to get this up and running on the ground! 

The Scott Gottlieb et. al. AEI report is one of the most authoritative and detailed "plans" to date. But overall, it shows really just how far we have to go. Reopening the economy is Phase II.

Individual states can move to Phase II when they are able to safely diagnose, treat, and isolate COVID-19 cases and their contacts. 

Stop and ponder a minute just how far away we are from that. Diagnose. Still no tests, especially for asymptomatic people, still no protocols, not even a Chinese app that evaluates symptoms, temperature and a quick CAT scan. Isolate? And their contacts? 

... some physical distancing measures and limitations on gatherings will still need to be in place to prevent transmission from accelerating again. For older adults (those over age 60), those with underlying health conditions, and other populations at heightened risk from COVID-19, continuing to limit time in the community will be important.

More of those verbs with ill defined subjects. Just who is going to do this limiting time?

Public hygiene will be sharply improved, and deep cleanings on shared spaces should become more routine. Shared surfaces will be more frequently sanitized, among other measures. In addition to case-based interventions that more actively identify and isolate people with the disease and their contacts, the public will initially be asked to limit gatherings, and people will initially be asked to wear fabric nonmedical face masks while in the community to reduce their risk of asymptomatic spread.

For want of 5 cent paper products... Really, an advanced industrial nation, 3 months into a crisis is home-sewing face masks?

Those who are sick will be asked to stay home and seek testing for COVID-19. Testing should become more widespread and routine as point-of-care diagnostics are fully deployed in doctors’ offices.

This is all pretty dreamy, and far short of the detailed, intrusive, full of bureaucratic snafu effort that diagnose, trace, isolate implies.

*********

The bungled recovery

Meanwhile, our government is applying 2008 policies to the 2020 invention like a two year old with a hammer.

Incentives matter. I opined last week that replacement rates past 100% would tempt employers. On cue in today's WSJ

Executive Chairman Harvey Spevak had a surprising message to stakeholders. “We believe most will be better off receiving government assistance during our closure,” ...

Equinox joins a number of companies, including Macy’s ... and Steelcase ...that are citing the federal government’s beefed-up unemployment benefits as they furlough or lay off staff amid the coronavirus pandemic. The stimulus package is changing the calculus for some employers, which can now cut payroll costs without feeling they are abandoning their employees.

Caesy Mulligan and Brian Blase have a good WSJ oped on this

the legislative remedies Congress recently passed will make the recovery slower once it’s safe to return to work.

But never before in American history could a majority of the workforce get a raise merely by receiving a pink slip.

When it’s safe for businesses like restaurants and hotels to reopen, employers will be competing with the government for a potential employee’s time. Because many unemployed workers will earn more from remaining idle, they won’t rush to come back. This will make it difficult for many businesses, particularly smaller ones, to produce at the pre-virus level of output.

The legislation also seems to subsidize layoffs by big companies.

In another provision Washington assumes responsibility for the unemployment-insurance contributions made by government and nonprofit employers through 2020—eliminating what is in effect a tax on layoffs. That will mean more payroll slashing by local governments and nonprofits.

I hope as we get to Phase II we can all start thinking about huge macro policies. I will 

*********

Humor

The Santa Clara County list of "essential" businesses makes interesting reading.

Construction, but only of the types listed in this subparagraph below:...

Affordable housing that is or will be income-restricted, including multi-unit or mixed-use developments containing at least 10% income-restricted units;

From an email correspondent, maybe DIY PPE isn't such a good idea

************

UPDATE: Since what I am calling for likely will not happen, I can't find a better forecast than Tyler Cowen's, which I repeat in its entirety:

I don’t view “optimal length of shutdown” arguments compelling, rather it is about how much pain the political process can stand.  I expect partial reopenings by mid-May, sometimes driven by governors in the healthier states, even if that is sub-optimal for the nation as a whole.  Besides you can’t have all the banks insolvent because of missed mortgage payments.  But R0 won’t stay below 1 for long, even if it gets there at all.  We will then have to shut down again within two months, but will then reopen again a bit after that.  At each step along the way, we will self-deceive rather than confront the level of pain involved with our choices.  We may lose a coherent national policy on the shutdown issue altogether, not that we have one now.  The pandemic yo-yo will hold.  At some point antivirals or antibodies will kick in (read Scott Gottlieb), or here: “There are perhaps 4-6 drugs that could be available by Fall and have robust enough treatment effect to impact risk of another epidemic or large outbreaks after current wave passes. We should be placing policy bets on these likeliest opportunities.”  We will then continue the rinse and repeat of the yo-yo, but with the new drugs and treatments on-line with a death rate at maybe half current levels and typical hospital stays at three days rather than ten.  It will seem more manageable, but how eager will consumers be to resume their old habits?  Eventually a vaccine will be found, but getting it to everyone will be slower than expected.  The lingering uncertainty and “value of waiting,” due to the risk of second and third waves, will badly damage economies along the way.

What shape recovery?

Will the recovery be V shaped, quickly roaring back to the previous level? It does that every January 2 after the long Halloween-Thanksgiving-Christmas-New Years slowdown, and it did in 1984. Or will it be an agonizingly slow U or L shape, as the recovery from 2008 turned out to be?

I had early hope for a V, but a fear that shuttered businesses and permanently fired people would turn it into an L. Those take much more time to reorganize. Hence, lots of blog posts advocating a more nuanced policy than a blanket lockdown.

But now I think it's clear the virus will not end with a sudden all-clear, like January 2 or an air raid. If, as we all hope, the current unbelievably costly lockdown does its job, we will in a month or two emerge with the curve bent, a stable or declining number of cases. But the vast majority of the population will still not have been exposed. We will not have "herd immunity" -- and a good thing too as 1% of the herd will not have died to get there. And cases both home and abroad will not be zero.

Nothing short of a cheap, effective, incredibly safe vaccine given to just about everyone on the planet will change that.

That means the virus is ready to reemerge promptly. All it takes is one person to travel to a town, go to a restaurant or club meeting, wait two weeks, and you have an outbreak all over again. We will have hotspots and flare-ups needing intense testing, contact tracing, local lockdowns, travel restrictions, and so forth -- if our bureaucracies are finally up to the task of doing anything competently.

On the individual and public health level this means almost all of us -- who have not gotten it or don't trust that you can't get it again -- will be practicing some sort of social distance for a long time. And, getting to the point, this all suggests a period of very slow economic activity. I don't want to call it "recession" as that word implies simple lack of aggregate demand, the Keynesian uni-causal story. No amount of printed or borrowed money will get the social distance economy going again.

Ross Douthat nicely sketched a picture of the coming economy in the Sunday NYT:

Life at half capacity: Right now our institutions must survive while essentially closed — with few or no customers, moviegoers, travelers. But soon they will have to figure out how to reopen while maintaining the social distancing that semi-normalcy requires.

... fewer people will come out, and because there will be rules governing how many people can come in.

...the scenes at some grocery stores right now, the line of people six feet apart waiting to come inside and shop, may become a permanent feature of the semi-normal landscape. Churches will hold services with every other pew occupied. Restaurants will seat every other table. Planes could fly without a single middle seat occupied. Sports may resume without spectators, relying on TV revenue alone.

Ross doesn't fully draw the economic conclusions of this vision. Such grocery stores can only serve a fraction of the number of customers, yet need more employees and still have to pay the rent. Such restaurants make half as much money yet still must pay the rent. Such airlines still pay the pilots, flight attendants, fuel, and larger cleaning and disinfecting crews. This is not a sustainable economy -- at today's prices.

Ross turns to the government

And since the flow of money and custom and attendance won’t come close to what existed just a month ago, any government response will have to be calibrated to a half-capacity world — where institutions are technically open for business, but they still need help to stay alive.

I have bad news. The government is also a limited resource. We cannot go on for months on end with the government paying half the bill of everything. Just who is buying all those government bonds? With what income? A trillion dollars a month adds up.

The answer is, this is an enormous negative supply shock, together with a big shift in demand. If only  half the seats can be filled, running an airline just got twice as expensive. If only half the tables are filled, running a restaurant just got twice as expensive. Those prices have to double. Which in turn, will drive customers away, towards driving (RV sales should go up), cooking at home, fancy takeout, and so forth.

There is likely also to be a shift towards precautionary savings. I think lots of people and businesses have figured out that keeping some cash or money market investments around is a good idea, and overall appetite for  risk is going to be lower. I diagnosed markets as suffering from a panicked demand for cash last month. But the standard business cycle mechanism of lower "risk appetite" makes a lot of sense. The shift towards a desire for safe investments may also keep markets low for a long time. This is the standard business cycle mechanism. (Don't think about saving vs. investment. Think about desire for risky vs. safe investments. Business cycles are about risk premiums.)

Torsten Slok writes by email (summarizing gated DB research) suggesting

Increase in precautionary savings for households... More space between seats at restaurants, cinemas, sports events concerts, conferences, trains, buses and airplanes. Fewer people traveling on vacation and going out... Older generations staying at home, less willing to put parents in retirement homes. Limits on the numbers of people un supermarkets, more online shopping, more online doctor visits. Fewer people going to fitness centers, doing group sports. More people driving their own car to avoid public transportation. 

Aside. This could be the kiss of death for public transport in the form of busses and trains. If there is anything that cannot stand a doubling of its cost, and attendant decline in demand, that's it.

Less business travel.. more video conferencing... fewer buybacks, lower dividend payouts  [more equity less debt] 

and, I am not alone worrying

more supply of government bonds, increasing risk of a debt crisis.  

Policy will face the usual cruel tradeoff: The more help you give the unfortunate, the more disincentives, and the slower the recovery. Noah Williams writes perceptively of unemployment expansion (which, whatever its faults, is probably the best of the government's responses -- better than cash payments to everyone which will arrive late summer, better than bailouts for airline stock and bondholders, and municipal bond holders)

the program is poorly designed. It provides incentives for employers to lay off workers. In the future—assuming the pandemic restrictions are lifted before August—it will discourage people from returning to work.

The current federal relief package extends unemployment benefits to 39 weeks, plus additional payments....Under the new expansion, the average replacement rate across states would increase to roughly 116 percent 

You're running a business. You have some cash around, and could keep people on, at least at reduced hours and health insurance. If you fire them, though, they can get 116% of their salary from the government, and Obamacare. It's a no brainer.

There is good news in this however. It means that much of what looks like unemployment may really be furlough. The people and employer know where each other is and can snap back more quickly.

39 weeks of 116% of salary though gives people little incentive to answer that phone call. Especially while schools are closed, day care is closed, and gardeners aren't allowed to come around.

Moreover, there is already a shift in demand -- to cleaning crews, online services, and so on. Paying people to sit at home makes sense in the lockdown. But much less in life at half capacity -- and rapidly changing -- economy.

This seems heartless, but it is brainless to ignore that there is always a tradeoff between help and incentives. The last recession and half-hearted recovery was a chaos of bad incentives. Noah:

In general, unemployment-benefit programs try to balance insurance with incentives, seeking to provide relief when needed while also offering motivation to look for work. States typically require recipients to search for a job. Setting the replacement rate well below 100 percent is usually a strong encouragement for them to do so.

Covid-19 presents unusual circumstances because unemployment has been enforced by government decree. Much of this joblessness will likely be temporary, with workers rejoining their employers once the pandemic subsides and restrictions are removed. Further, while some employers (Amazon, Walmart, grocery stores) are adding jobs, most companies are, at best, putting a freeze on hiring. The disincentive effect of unemployment benefits in the current crisis is minimal, while relief needs are large; thus, Washington has increased benefits, and many states are waiving job-search requirements.

Policymakers should be wary, though, of implementing relief provisions that will delay economic recovery, as occurred during the Great Depression and the 2008–2009 Great Recession. The Federal Pandemic Unemployment Compensation program is time-limited, but if the shutdown ends within the next four months, the aggressive unemployment-benefit replacement rates well in excess of 100 percent would hamper the labor market’s recovery.

In short, great generosity makes sense in the lockdown, but must be much more carefully calibrated if we do not want an L shaped recovery.

And emerging chaos at unemployment offices and small business administration suggests the help may come just as it is no longer needed.