I sold my stocks. I’m an economist who usually doesn’t believe in market timing, but the market looks irrationally exuberant right now.

First let’s look at the economic fundamentals right now:

  • GDP has crashed by more than it has since the Great Depression due to a pandemic with no end in sight.
  • Unemployment is higher than it has ever been since the Great Depression.
  • Both measures have crashed despite the biggest fiscal peacetime stimulus ever in the world. The US stimulus already spent this year makes all of Obama’s efforts to fight the Great Recession look like chump change and most countries spent much bigger stimuluses as a percent of GDP.
  • The Fed almost immediately dropped the federal funds rate to zero and that is all that it can do with conventional monetary policy. The Fed couldn’t drop interest rates much because rates were already very low before the pandemic started, so the Fed’s abilities are weaker than usual.
  • Inflation is low and all signs are that inflation will continue to be low. If inflation were to rise, that could be a reason to buy stocks, but there is so sign of it yet.
  • The bond market was already warning of a weak economy last fall well before the pandemic hit so even without a pandemic we would likely still be in a recession now for unrelated reasons.
  • Unlike the last recession which almost exclusively just hit developed nations, this recession is truly global and probably no nation will escape. Last time China and most developing nations still had robust demand for exports, but they won’t help us out so much this time.
  • There have been riots and looting in major cities across the US unlike anything since the riots of the 1960s.
  • The US government is mired in dysfunction. The president was just impeached for using taxpayer dollars to pressure a foreign power to dig up dirt on his political opponent. The Senate gave up on even trying to deal with the end of unemployment benefits that ran out at the end of July and disbanded for their August vacation. The Executive Branch is so incompetent that it faulty leadership caused the US to have the worst pandemic experience of any rich nation.  It is worse than most poor nations too. The House can’t come to any agreement with the other branches.
  • There is a rancorous election coming up and prominent leaders on both sides are saying that it could be the end of our Democracy if the other side wins. Although the President has the most responsibility for the smooth execution of our elections, rather than working diligently to make our election great (again–like every other election), he is regularly saying that he is expecting massive voter fraud for the first time in American history and signaling that he won’t accept the results if the vote doesn’t go his way. He is likely to lose and cause a constitutional crisis because he has never had the approval of the majority of Americans in polls.  Ever.

Normally the stock market hates uncertainly. Normally you would expect the stock market to price in some of the fundamental problems we see and although many foreign nations are in better shape than the US right now, almost all foreign stock markets are down for the year, as you would expect. But we are living in a time when a significant percentage of Americans are irrationally optimistic and so the S&P 500 is UP for the year even though the US is having bigger problems than most nations. The only other stock markets that are up are Venezuela, Korea, and Shanghai. Venezuela is even more bizarre and mismanaged than the US so I won’t try to understand why their market is up, but it is easy to see why Korea and Shanghai have booming stock markets. Both nations stopped the Covid-19 pandemic more successfully than most of the world, so it isn’t so surprising that their markets are doing well. But there is nothing about the US situation that should give our stock market more optimism than Germany, France, Britain, Australia, Japan, etc…

So the question I asked myself is whether I thought that there is a bigger chance that the stock market would rise 10% in the next six months or fall 10% in the next six months. The fundamentals listed above give a lot of reasons why the market could fall 10% whereas I definitely think it is highly unlikely that it will rise 10%. That’s why I recently sold off most of my domestic stocks and bought bonds. I mostly kept my international stocks because they haven’t bounced back as irrationally as my US stocks and that seems more reasonable.

This is the first time in my life that I have attempted market timing to beat the market like this. I usually think that it is foolish to try to beat the market because the market usually seems extremely efficient at pricing in all available information about global risks, but this time seems completely different.

And the crazy thing is that I really, really hope I am wrong. I hope I lose out on a huge stock market boom in the next six months. That is because a 10% rise in the stock market will mean that the pandemic will already be under control and my job will be secure. It will mean that my students will have an easy time finding jobs when they graduate next spring because unemployment will already be low again and life will return to stability and prosperity. It will mean that we will have successfully run a peaceful election again. But if I’m unfortunately right and something does go wrong, I have bought myself a little bit of financial insurance by selling stocks and buying the safety of bonds at least for a while.

What have you got to lose?

Posted in Macro

Black lives matter more in countries with fewer guns. Even most police don’t need guns.

As I’ve written before, I’m not a gun-control advocate because there are lots of other factors that can reduce violence that are more politically feasible. For example, Franklin Zimring has numerous suggestions for how to change the rules of engagement to reduce the number of Americans police kill every year.  He says that New York and Philadelphia dramatically reduced police killings by changing the rules of engagement and they did it without increasing any risk to police officers.

He also argues that victims of police should be able to sue police departments for having unhealthy, (lethal) rules of engagement and that the financial pressure of lawsuits will work better for reducing police killings than enhanced criminal penalties against officers.  He says it is that simple: let victims sue for financial penalties to pressure police departments to change their rules of engagement.

The Black Lives Matter movement has recently risen up with remarkable mass mobilization and energy to correct police abuse problems, and I’m not convinced that the movement has clear ideas for how to achieve less violence against Blacks. For example one of the biggest police abuses against Blacks is the fact that very few murders of Blacks are ever solved. This helps explain why so many Blacks get murdered because there is simply less deterrent against murdering Blacks when the police neglect to solve those crimes. Many BLM activists want to defund the police, but that will only exacerbate this abuse.

One focus of the BLM movement is the high number of Blacks who are killed in police confrontations and this is something that all racial groups should support not only for racial justice, but because all races face a higher probability of getting killed by American police than people in most other developed nations. In fact, more whites are killed by police than Blacks simply because there are a lot more whites in America.

Defunding the police could help reduce police killings of civilians, but there is a potent tradeoff: fewer police will likely mean more violence from criminals. This is why defunding the police isn’t popular. Most people logically fear an upsurge in crime. But Franklin Zimring says the main reason that American police kill so many Americans is that there are so many guns in America. American police are always scared of getting shot, so they are always on a hair-trigger alert about it and that isn’t true in other rich nations.

In most developed nations, the police don’t expect to ever draw their guns. In the Netherlands, gun use by police is so rare that every use is publically investigated. In Japan, the police get more training in hand-to-hand martial arts than in gun use because they are not expected to use guns. In several nations including the United Kingdom, most police never carry a gun at all and that might seem unfeasible in the US where we have more guns per capita than any other nation in the world, but a couple of conservative thinkers have proposed just that.

The reason is, as Tate Fegley points out, that most of what police do is related to monitoring cars on roads where guns aren’t needed. Only a relatively small minority of policing time is spent dealing with actual felony crimes. Policing cars is primarily a matter of mild infractions and misdemeanors.

According to the US Department of Justice’s most recent report on contacts between the police and the public, over half are traffic stops, and an additional 14.6 percent are in relation to traffic accidents… officers spend around 74 percent of their time engaged in patrol, typically in a car. Over 9 percent of arrests recorded in the 2018 FBI Uniform Crime Reporting (UCR) Program data are for driving under the influence… In addition, revenue from traffic citations can constitute an important source of municipal funding. One example (though definitely an outlier) is the town of Randolph, Missouri (pop. 47), which issued 3,132 traffic fines, collecting an estimated $148,000 of their $270,043 total revenue in 2009…

That’s right, some towns, such as Randolph, MI get most of the revenues for their town not from taxing local people but from issuing fines on drivers which are probably aimed at nonresidents or else the city government would have been voted out of office because if the fines were only levied on residents, they would total over $3,000 per person! This is a remarkably common strategy for small towns located on busy highways. They set up speed traps and leech as many fines out of as many outsiders passing by as possible. There is absolutely no reason those people should be toting guns all the time which sometimes end up hurting innocent people. Because these traffic stops rarely involve dangerous motorists, Alex Tabarrok suggested that traffic enforcement should be the “unbundled” from police:

The responsibility for handing out speeding tickets and citations should be handled by a[n] unarmed agency. Put the safety patrol in bright yellow cars and have them carry a bit of extra gasoline and jumper cables to help stranded motorists as part of their job – make road safety nice.

This would undoubtedly reduce police violence, but the main thing that would reduce violence is the absence of guns. There really isn’t much reason to create a completely separate bureaucracy, and there is already a tradition of traffic police in the US who do not carry weapons. And America doesn’t need our police to tote as many guns as in the past because violent crime has declined by more than 70 percent since 1993 and fewer Americans have guns (see below for details).

An additional benefit of having traffic police that don’t carry weapons is that they would be less likely to essentially rob people of their property. This is called “civil forfeiture” and it is another lucrative way for corrupt municipalities and police departments to raise money for themselves. Tate Fegley points out one Texas town called Tenha with a population of 1,100 which “seized millions of dollars in forfeitures from traffic stops before being sued in 2009.”

As Derek Thomson pointed out, the role of guns in the police reform debate is oddly absent even though it really should be central.

the United States has more armed police than similarly rich countries, more panicky officers, more adversarial police encounters, more officer shootings, and more civilian killings.

The morbid exceptionalism of American police violence cannot be explained by the amount of money the U.S. spends on police, or by the number of cops it employs. The U.S. spends less on police than the European Union does, as a share of GDP. Italy has more officers per capita than any state in the U.S., according to a comparison of FBI and Eurostat databases. Greece has more officers per person than Newark, New Jersey; Baltimore; and Chicago.

But none of those places shares our epidemic of police violence. American police kill about 1,000 people every year. Adjusted for population, that body count is five times higher than that in Sweden, 30 times higher than that in Germany, and 100 times higher than that in the United Kingdom…

Gun prevalence… is a danger for cops, too.  As the Vox reporter German Lopez writes, police officers are especially likely to be shot dead in states with more guns. A 2015 study published in the American Journal of Public Health examined the relationship between state firearm-ownership rates and police killings, controlling for factors that relate with homicide rates, such as income, poverty, property crime, and alcohol consumption. The researchers concluded that “a 10% increase in firearm ownership correlated to ten additional officer homicides” from 1996 to 2010.

Where guns are abundant, civilians are more likely to kill civilians and cops, and cops are, in turn, more likely to kill civilians. A 2018 study from Northeastern University and the Harvard Injury Control Research Center found that “rates of police shooting deaths are significantly and positively correlated with levels of household gun ownership,” even after accounting for other variables, such as poverty.

Instead of BLM protesting gun violence, the nation has focused upon racism which is a serious problem, but racism cannot just be legislated away. Guns can be. And there isn’t any evidence that anti-racism trainings have done anything to stem police violence, and putting more Blacks in police uniform hasn’t helped, and the racial composition of neighborhoods doesn’t explain police shootings, whereas in countries where there is less gun violence, there seems to also be less police violence although international policing statistics are difficult to compare. But a stronger focus on guns might work better to reduce the violence of racist police than anything else we could do. Blacks also have much less to lose in the gun control debate because more than double the proportion of white households own guns compared with Black households.

Finally, the politics of gun control will eventually shift due to the tides of history which are steadily moving away from guns as can be seen in the changing patterns of gun ownership. The percent of Americans who hunts has dropped in half since 1977 (to only 15%) and the percent of Americans that owns a gun has also been steadily dropping (to about 22%). Most people are aware that the number of guns in America has been steadily rising, but that is because the shrinking number of households (now about 31%) that has guns is steadily buying larger and larger gun collections. So the percent of Americans that owns a gun has been steadily shrinking, but that shrinking minority has become increasingly enthusiastic about guns and buying more and more. It is only a matter of time until the majority of Americans that has nothing to do with guns decides that they aren’t comfortable with some of the gun fanatics in their neighborhood.

Gun control may seem politically impossible but it is way more popular than defunding the police and look what happened with that issue this year.  Some common-sense forms of gun control already have the popular support of the majority of Americans and even many police support various forms of gun control including the Virginia-based  International Association of Chiefs of Police.

Separating the violent crimes and felony’s policing from nonviolent traffic safety policing would be a great way to reduce police violence.  A similar story happened when paramedic services were unbundled from policing. In the 1950s, the police generally transported injured people to hospitals in modified police cruisers like this one:

In the 1970s in Pittsburgh, an all-Black ambulance corps pioneered what became the paramedic system that America has today. The police still perform some paramedic services, but the primary responsibility has been unbundled to EMS specialists who have more training and (generally) don’t get paid as much. And, of course, like traffic safety police, they don’t need guns.

Posted in Discrimination, Violence & Peace

Prejudice is inefficient and often hurts the people with the prejudices — sometimes as much or more than their targets.

Inequality due to discrimination is inefficient and can even hurt the people at the top. For example, the slave states were economically backward and although the white elites were rich, they weren’t growing the size of their economy as much as the elites in the northern states who got even richer because the northern states had more efficient economies because they weren’t basing their society on slavery. The reduction of discrimination is definitely more efficient and that can benefit everyone. Jim Tankersley:

In 1960, cutting-edge research from economists at the University of Chicago and Stanford University has documented, more than half of Black men in America worked as janitors, freight handlers or something similar. Only 2 percent of women and Black men worked in what economists call “high-skill” jobs that pay high wages, like engineering or law. Ninety-four percent of doctors in the United States were white men.

That disparity was by design. It protected white male elites. Everyone else was barred entry to top professions by overt discrimination, inequality of schooling, social convention and, often, the law itself…

The Chicago and Stanford economists calculated that the simple, radical act of reducing discrimination against those groups was responsible for more than 40 percent of the country’s per-worker economic growth after 1960. It’s the reason the country could sustain rapid growth with low unemployment, yielding rising wages for everyone, including white men without college degrees…

A recent and devastating study is co-authored by a University of Tennessee economic historian, Marianne Wanamaker, who served a year in the White House on President Trump’s Council of Economic Advisers. She and a co-worker went back to Reconstruction and measured how much easier it was for the sons of poor white men to climb the economic ladder than the sons of poor Black men.

In terms of economic mobility, they found, the penalty for being born Black is the same today as it was in the 1870s…

If America can once again tear down barriers to advancement, it can tap a geyser of entrepreneurship, productivity and talent, which could by itself produce the strong growth and low unemployment that historically drive up wages for the working class, including working-class white men…

All Americans have a stake in the protests for equality they see every night on the news…

Jim Tankersley… is the author of “The Riches of This Land: The Untold, True Story of America’s Middle Class,” from which this essay is adapted.

For another example, most economists think that higher immigration would help the group most opposed to it: white working class Americans. Immigrants reduce the prices that Americans have to pay for most stuff (although not rents) and even low-skilled immigrants increase demand for native born workers to perform higher-paid jobs as supervisors and salespeople.

The group that has the most to lose economically from additional immigration are the immigrants that are already present because new immigrants have job skills that are close to perfect substitutes for the previous immigrants and it is much more likely that their wages will suffer than anyone in the native-born population who are more likely to gain economically.

Posted in Discrimination, Inequality

Long-term trends in manufacturing, farming, and protectionism

Peter Drucker was one the most influential management scholars of the 20th century. In 2000 he wrote a special report for The Economist magazine to think about changes over the 20th century and looking towards the 21st.

The 20th century saw the rapid decline of the sector that had dominated society for 10,000 years: agriculture. In volume terms, farm production now is at least four or five times what it was before the first world war. But in 1913 farm products accounted for 70% of world trade, whereas now their share is at most 17%. In the early years of the 20th century, agriculture in most developed countries was the largest single contributor to GDP; now in rich countries its contribution has dwindled to the point of becoming marginal. And the farm population is down to a tiny proportion of the total.

Manufacturing has travelled a long way down the same road. Since the second world war, manufacturing output in the developed world has probably tripled in volume, but inflation-adjusted manufacturing prices have fallen steadily, whereas the cost of prime knowledge products—health care and education—has tripled, again adjusted for inflation. The relative purchasing power of manufactured goods against knowledge products is now only one-fifth or one-sixth of what it was 50 years ago. Manufacturing employment in America has fallen from 35% of the workforce in the 1950s to less than half that now, without causing much social disruption. But it may be too much to hope for an equally easy transition in countries such as Japan or Germany, where blue-collar manufacturing workers still make up 25-30% of the labour force.

… The decline of farming as a producer of wealth and of livelihoods has allowed farm protectionism to spread to a degree that would have been unthinkable before the second world war. In the same way, the decline of manufacturing will trigger an explosion of manufacturing protectionism—even as lip service continues to be paid to free trade. This protectionism may not necessarily take the form of traditional tariffs, but of subsidies, quotas and regulations of all kinds.

He continues in a section focused on manufacturing:

Between 1960 and 1999, both manufacturing’s share in America’s GDP and its share of total employment roughly halved, to around the 15% mark. Yet in the same 40 years manufacturing’s physical output doubled or tripled. In 1960, manufacturing was the centre of the American economy, and of the economies of all other developed countries. By 2000, as a contributor to GDP it was easily outranked by the financial sector .

The relative purchasing power of manufactured goods (what economists call the terms of trade) has fallen by three-quarters in the past 40 years. Whereas manufacturing prices, adjusted for inflation, are down by 40%, the prices of the two main knowledge products, health care and education, have risen about three times as fast as inflation. In 2000, therefore, it took five times as many units of manufactured goods to buy the main knowledge products as it had done 40 years earlier.

… The purchasing power of workers in manufacturing has also gone down, although by much less than that of their products. Their productivity has risen so sharply that most of their real income has been preserved. Forty years ago, labour costs in manufacturing typically accounted for around 30% of total manufacturing costs; now they are generally down to 12-15%. Even in the car industry, still the most labour-intensive of the engineering branches, labour costs in the most advanced plants are no higher than 20%…

Manufacturing is following exactly the same path that farming trod earlier. Beginning in 1920, and accelerating after the second world war, farm production shot up in all developed countries. Before the first world war, many Western European countries had to import farm products. Now there is only one net farm importer left: Japan. Every single European country now has large and increasingly unsaleable farm surpluses. In quantitative terms, farm production in most developed countries today is probably at least four times what it was in 1920 and three times what it was in 1950 (except in Japan). But whereas at the beginning of the 20th century farmers made up the largest single group in the working population in most developed countries, now they account for no more than 3% in any developed country. And whereas at the beginning of the 20th century agriculture was the largest single contributor to national income in most developed countries, in 2000 in America it contributed less than 2% to GDP…

At the time this was written back in 2000, Peter Drucker was forecasting that manufacturing output would double by 2020 (100% increase), but now that we have data we can see that from 2000-2020 US manufacturing output only increased 4% total. (The red line just emphasizes the year 2000 for comparison.)

Meanwhile, we can add in the percent of the labor force that is working in manufacturing. Manufacturing employment plummeted from 12% of jobs to just 7.5% of jobs during the same period! So American manufacturers are producing 4% more output with drastically fewer workers.

The stagnation of manufacturing output can best be explained by the explosion of globalization since 2000. As manufacturing technology has improved, it has increased output for centuries, and so while improving technology is the main reason for job losses, it cannot explain stagnant output. Globalization fits the bill as America’s trade deficit in manufactured goods has risen. As you can see in this graph, the manufacturing trade deficit in 2019 was almost triple its average value for the 1990s. As Americans manufacture less, we are also exporting more financial products and services, so this doesn’t mean that the overall trade deficit has almost tripled, but it does help explain why manufacturing output is stagnant.

Drucker continues:

The decline of manufacturing as a producer of… jobs changes the world’s economic, social and political landscape. It makes “economic miracles” increasingly difficult for developing countries to achieve. The economic miracles of the second half of the 20th century—Japan, South Korea, Taiwan, Hong Kong, Singapore—were based on exports to the world’s rich countries of manufactured goods that were produced with developed-country technology and productivity but with emerging-country labour costs….

The decline in manufacturing as a [share of national] wealth and jobs will inevitably bring about a new protectionism, once again echoing what happened earlier in agriculture. For every 1% by which agricultural prices and employment have fallen in the 20th century, agricultural subsidies and protection in every single developed country, including America, have gone up by at least 1%, often more. And the fewer farm voters there are, the more important the “farm vote” has become. As numbers have shrunk, farmers have become a unified special-interest group that carries disproportionate clout in all rich countries…

America’s trade unions have …become staunchly protectionist and declared enemies of “globalisation”. No matter that the real threat to manufacturing jobs is not competition from abroad, but the rapid decline of manufacturing as a creator of work: it is simply incomprehensible that manufacturing production can go up while manufacturing jobs go down, and not only to trade unionists but also to politicians, journalists, economists and the public at large. Most people continue to believe that when manufacturing jobs decline, the country’s manufacturing base is threatened and has to be protected. They have great difficulty in accepting that, for the first time in history, society and economy are no longer dominated by manual work, and a country can feed, house and clothe itself with only a small minority of its population engaged in such work.

Drucker goes on to use Mancur Olson’s theory of concentrated interest groups to predict that industrial unions will grow in political power as the number of union members shrinks just as what happened with the farm lobby, but manufacturing unions are face much greater political problems than farmers because unions (in the American tradition) have always been opposed by an even more concentrated interest group: management. In contrast, farm owners and farm labor is often one in the same because the farm owners provide their own labor, so there hasn’t been much divide between the interests of labor versus capital in farming. In corporate America, management is legally set up to be solely an agent for the interests of capital owners. Partly because the agents of capital have had even more powerful financial backing than unions, they have been generally been winning battles with unions for over a half century already and manufacturing union power has been on decline by every measure: membership, pay differential, absolute pay, legal rights, etc. So Drucker was wrong in fearing the growing power of unions. It has been management that has been the bigger (and growing) power in lobbying for protectionism.

This is because the protectionism of manufacturers has benefitted management & owners of protected firms far more than union members on a per-capita basis, so it is management that has the biggest interest in lobbying for protectionism, not the unions that Drucker fears. Drucker seems to think that owners want free-trade, but both unions and management always want the biggest possible profits for their firms and protectionism always boosts profits for a protected firm. The conflict between the unions and management is in how to divide the profits and America has had a stronger tradition of conflict between labor and management compared with most European nations so it has been hard for labor unions to work together with management on things like lobbying for protectionism which could generate profits that benefit both at the expense of the rest of the nation.

Posted in Globalization & International

Some basic economics of the covid-19 pandemic

In 2007, the St. Louis Fed summarized research about the 1918 influenza pandemic and used it to predict what would happen in a pandemic like the present covid-19 crisis. Their predictions have been pretty accurate. For example, the report predicted that low-income and minority households would have higher mortality rates than households with more resources. The report also made some predictions about the urban/rural divide:

• Given the positive correlation between population density and influenza mortalities, cities are likely to have greater mortality rates than rural areas. Compared with 1918, however, urban and rural areas are more connected today—this may decrease the difference in mortality rates between cities and rural areas. Similarly, a greater percentage of the U.S. population is now considered urban (about 80 percent) com-pared with the U.S. population at the time of the pandemic (51 percent in 1920)…

• Urban dwellers are likely to have, on average, better physical access to quality health care, though nearly 19 percent of the city population in the United States has no health coverage compared with only 14 percent of the rural population.28The question remains as to affordability of health care and whether free-service health-care providers, clinics and emergency rooms (the most likely choices for the uninsured) are able to handle victims of the pandemic.

The report warns about the need to “flatten the curve” to slow the rate of infection to prevent the healthcare system from becoming overwhelmed because, “Health care is irrelevant unless there are systems in place to ensure that an influenza pandemic will not knock out health-care provision”. This is much more important than it was in 1918 because of the dramatic improvements in the health care technology and epidemiology since 1918. In 1918, medical science didn’t even know that the pandemic was caused by a virus nor did they understand that it was spread by airborne droplets. It is amazing that even in 1918 the support of health care to take care of hydrating patients and keeping their body temperature in a safe range was extremely helpful. That was about all doctors were able to do in 1918 and the average household didn’t have the capability to do that kind of care well. The Fed report paints this picture of the limited ability of the healthcare system in 1918:

In 1918, the world was still engaged in World War I. Movement and mobilization of troops placed large numbers of people in close contact and living spaces were overcrowded. Health services were limited, and up to 30% of U.S. physicians were deployed to military service.3

In addition, medical technology and countermeasures at the time were limited or non-existent. No diagnostic tests existed at the time that could test for influenza infection. In fact, doctors didn’t know influenza viruses existed. Many health experts at the time thought the 1918 pandemic was caused by a bacterium called “Pfeiffer’s bacillus,” which is now known as Haemophilus influenzae.

Influenza vaccines did not exist at the time, and even antibiotics had not been developed yet. For example, penicillin was not discovered until 1928. Likewise, no flu antiviral drugs were available. Critical care measures, such as intensive care support and mechanical ventilation also were not available in 1918.4 Without these medical countermeasures and treatment capabilities, doctors were left with few treatment options…

In 1918, there was very little shared information about efforts to combat the flu so local officials couldn’t learn from the public health and medical efforts of other regions. World War I led to formal or informal censorship in most nations that would otherwise have had freedom of the press. In fact the disease misleadingly became known as the “Spanish Flu” simply because Spain happened to be a neutral country during the way and it was about the only nation with an unfettered press that was able to freely report about the unfolding disaster. The earliest known case of the pandemic was in Kansas and France was an earlier epicenter before it spread to Spain. Even though scholars are unclear about the origin of the flu, they agree that it did not begin in Spain and it was less severe in Spain than in many other areas. Because there was so little information sharing about the epidemic, nobody could learn from other nations about how to respond to the crisis and every local authority could only guess about what to do. For example, the Fed argues that, “complete quarantines worked (i.e., no activity allowed outside of the home) whereas partial quarantines, such as closing schools and churches but not public transportation or restaurants (as done in Philadelphia, St. Louis and Washington, D.C.) did little to stop the spread of influenza”, but the data gathering was primitive and even today there are uncertainties about what approaches worked best .

In the current crisis, public health experts have learned from experiences in other nations with social distancing and quarantine which has been more effective than most predicted. Although they failed to predict that social distancing would be so effective to combat the corona virus, this is partly because we have never had these kinds of public health measures in the history of the world and it is partly because science takes time to come to conclusions and we still don’t have enough data to understand what kinds of social distancing measures work best nor what vectors are most important in spreading the virus.

Despite the uncertainty, most experts in both public health and in economics agree that our shutdowns have been well worth it. The shutdowns worked a lot better than expected at reducing mortality so the advice of the experts worked out even better than most people would have hoped.

The University of Chicago’s business school regularly polls elite economists about a wide variety of topics and economists overwhelmingly agree that a lockdown is better for ‘the economy’ than letting the disease spread because the mortality and healthcare costs of a pandemic cause even more economic disruption than a voluntary lockdown. In effect, the fear and illness of widespread infections would cause the economy to shut down worse than what we have with deliberate stay-at-home strategies to slow the spread.

Abandoning severe lockdowns at a time when the likelihood of a resurgence in infections remains high will lead to greater total economic damage than sustaining the lockdowns to eliminate the resurgence risk.

For newer research that supports this conclusion, see Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu

In addition to the economic effects, the mortality would be shocking.  The pandemic would infect at least half of the world without social distancing efforts and even for people in their teens and twenties, the mortality rate is about 1 in 500. 

That sounds small until you think about other comparable mortality risks in a given year.  For example, would you be willing to go on a roller coaster ride that ‘only’ kills 1 in 500 riders?  Most people would pay thousands of dollars to avoid being forced on such a ride and yet the corona virus is a lot less fun than a roller coaster.  Even if you don’t die many more people get lung scarring and reduced lung capacity that is likely to be permanent. 

The University of Chicago’s poll also supported the idea that the government isn’t doing enough spending on testing, treatment, and searching for a cure:

Optimally, the government [should] invest more than it is currently doing in expanding treatment capacity through steps such as building temporary hospitals, accelerating testing, making more masks and ventilators, and providing financial incentives for the production of a successful vaccine.

Another poll also showed that economists strongly agree that more testing is required before we can reopen the economy. This is what South Korea, Taiwan, Singapore, and China did. They used a massive testing program (relative to the total number of infections they had) to identify people who were sick and trace their contacts so that other people with possible infections could be identified and isolated until testing proved that they were virus free. As a result, these nations have been relatively successful at containing the outbreak and most of these nations avoided a lockdown. China has been successfully easing restrictions and restarting their economy as can be measured from satellite data showing a resurgence of air pollution as China’s industry restarts:

In order to get the economy back to work, America needs much greater investment in testing and contact tracing. There are many think-tanks and panels of experts who have come up with various plans for what it would take to successfully reopen the economy and they all agree that America needs to at least double our testing capacity (and get faster and more accurate at it) and we need to dramatically expand our public health infrastructure for tracing contacts for potential spread. That infrastructure has withered over the past decade and America is behind the Asian nations that have been more successful at limiting the spread of coronavirus without shutting down. Some states like Massachusetts are doing well at this, but to be successful, it needs to be a national effort. If any area of America lets down its guard, covid-19 will come roaring back and it will spread to the states that have been successful at keeping their own population safe. It is too hard to shut down state borders to prevent reinfection coming from out of state.

The consensus of The University of Chicago’s poll of elite economists is that the best way to stimulate the economy is a massive moonshot push to improve testing and tracing the coronavirus until we have a cure (or herd immunity) and we should be also investing massively in the effort to develop vaccines and/or treatments. Epidemiologists are divided about what percent of the population would need to get infected in order to achieve herd immunity, but most expect that at least 50% would need to get infected and that would result in millions of deaths, and worse economic disruption than our voluntary shutdown so it is a terrible option. There are a number of conspiracy theories circulating on social media about speculation that we have already achieved herd immunity because those conspiracy-theorists believe that the disease has an extremely low mortality rate and has already infected most people without them experiencing any symptoms. But that rumor is false. There is lots of evidence from random testing and from genetic studies that suggest that the percent of Americans who have been infected is closer to 1% than the 50%-80% required to achieve herd immunity.

Here is an estimate for European nations:

Long-term effects of the pandemic

There has been a lot of economic research about the effect of the black plague upon the economies of Europe, and the big conclusion is that it reduced inequality by reducing the labor supply when it killed “an astounding one-third to two-thirds of the population of Europe”. This caused wages to roughly double and rents to roughly drop in half and it reduced real interest rates. This radically reduced inequality except in places where elite property owners banded together to essentially enslave their workers by inventing serfdom in Russia and other parts of Eastern Europe to keep wages low.

I doubt the coronavirus pandemic will cause significant changes in the labor supply because modern public health measures will keep the mortality rate much lower than even the 1918 flu pandemic and unlike the 1918 pandemic which disproportionately killed the age group that was in their prime working years, this pandemic disproportionately kills retired people, so the demographic effect will be tiny and it will mostly just cause a small reduction in the dependency ratio by reducing the number of retired people the economy supports.

Posted in Health, Labor

Bush and his team were SOOO much better than Trump and his team.

Once again I find myself longing for the good old days of the George W. Bush administration which was so much more honest and competent.  And they weren’t racist nor corrupt.

Here is Bush’s chief economic advisor on what should be done today. I wish he still had the ear of the President.  Greg Mankiw:

…my thoughts about the current economic situation in light of the ongoing pandemic. Here they are, in abbreviated form:

  • A recession is likely and perhaps …the best we can do under the circumstances…
  • Mitigating the health crisis is the first priority. Give Dr. Fauci anything he asks for.
  • Fiscal policymakers should focus not on aggregate demand but on social insurance. Financial planners tell people to have six months of living expenses in an emergency fund. Sadly, many people do not. Considering the difficulty of identifying the truly needy and the problems inherent in trying to do so, sending every American a $1000 check asap would be a good start. A payroll tax cut makes little sense in this circumstance, because it does nothing for those who can’t work.
  • There are times to worry about the growing government debt. This is not one of them.
  • Externalities abound. Helping people over their current economic difficulties may keep more people at home, reducing the spread of the virus. In other words, there are efficiency as well as equity arguments for social insurance.
  • Monetary policy should focus on maintaining liquidity. The Fed’s role in setting interest rates is less important than its role as the lender of last resort. If the Fed thinks that its hands are excessively tied in this regard by Dodd-Frank rules, Congress should untie them quickly.
  • President Trump should shut-the-hell-up. He should defer to those who know what they are talking about. Sadly, this is unlikely to occur.

Greg Mankiw also served as Romney’s chief economic adviser.  Too bad Trump would never pick an economist like Greg. Instead Trump has only had flaky economic advisors that are either obscure or well known for bad reasons.

#MAGNA → Make America’s GOP Normal Again.  Please.

Posted in Health, Macro

America’s covid-19 testing fiasco

Investigative journalists and at least one think tank are putting pressure on the American government to improve our shameful coronavirus testing capability. There is a great article by Brian Resnick and Dylan Scott this morning about it with this new data:

The USA is in trouble because we have a LARGE population and almost no testing compared to the size of our need. Taiwan, by comparison, has done the best job preventing the crisis. They started disease surveillance and testing early, so they haven’t needed to do that much testing because they have very few cases even though Taiwan has the highest risk of exposure given it’s location and economic ties. Taiwan has done the best job of diagnosing infected people and keeping them from infecting others. That should be our model for how to prevent and slow the pandemic.

Brian Resnick and Dylan Scott‘s article also tells stories about Americans who need testing and meet obvious risk criteria but haven’t been able to get it.  Meanwhile, American politicians who had been denying that we have a problem were able to cut in line and get tested even though they obviously don’t meet the CDC’s criteria for testing.  With such limited testing capability, America needs better triage.

The conservative/libertarian think tank the AEI has also prioritized tracking America’s testing problem to help show that it is a problem that needs to be fixed. They are disseminating their findings on twitter and this is the current state of their investigation into the theoretical capability of American labs to conduct testing:

That is the claimed capability of America’s labs to conduct testing. It is pretty pathetic compared with what China and Korea and many other nations have been doing and worse yet, it is only a fiction. It is propaganda that is completely out of touch with reality. In TOTAL, since testing began in America last January, we haven’t even tested half what the AEI claims we are capable of testing daily. I know why politicians like Mike Pence have been putting out ridiculously rosy lies about our testing capabilities, but ‘m not sure why AEI is putting out this sort of propaganda.  It is useful to see how pathetic America’s theoretical testing capability is, but the AEI should emphasize that even our pathetically small wished-for capability is outlandishly inflated compared with our testing reality.

The Atlantic magazine has been tracking the covid-19 testing reality on a daily basis and the reality is that the US had only tested 8,900 people TOTAL as of yesterday.

The CDC shamefully stopped tracking how much testing has been done in America when Pence took over leadership of our pandemic efforts.  After a lot of criticism, they finally resumed reporting test totals yesterday and their current count is 7,288 (the numbers for yesterday).  Regardless of whether The Atlantic’s numbers are right or the CDC’s, either way, our testing shortfall is pathetic and will cause unnecessary suffering and deaths.

America’s testing snafu is why the disease is currently spreading more rapidly in America than in other nations we have data for:

At this rate, the US will be have the second biggest covid-19 infection after China within 10 days of any nation in the world.

Meanwhile, Trump’s big idea does what a successful reality-TV star does best: theater. His biggest announcement in his national address last night was shutting down travel with Europe. If that hinders our testing capacity by reducing international cooperation, it will make things worse.  It already caused the stock market to tank which doesn’t help anything.  It will do nothing the slow the pandemic in the US because our cases are mostly home grown already. He is shutting the doors after the foxes are already in the henhouse. And some hens are still outside too. It is the kind of dramatic, theatrical move that Trump understands better than any other politician, but it is a pathetically weak way of stopping people from bringing the virus. First of all, probably less than a thousandth of one percent of European travelers have the virus, so it is almost like shutting down all travel to prevent a tiny number of terrorists who might try to come to the US. It would make more sense to try to identify and stop the tiny fraction of individuals who might cause a problem than to stop the 99.999% who have legitimate and important reasons to travel.

Plus, anyone in Europe can just spend $30 and fly to Britain or Morocco or any number of other third nations and then get a free pass into the USA from there, so it does nothing to stop virus carriers from coming. It just slows them down by a few hours. Imagine using this policy to stop terrorists. It would have zero effect. It will have almost zero effect on stopping infected people for the same reason. To stop the virus, we need to identify the tiny fraction of the population that has the virus just like the only way to stop terrorists is to identify the tiny fraction of the population that are terrorists.

To stop the virus we need diagnosis and testing. Let’s focus our resources on that, not on the distractions of political theater.

Posted in Health

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