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Monday, March 23, 2020

Ending Lockdown?

One line of argument that I have been seeing repeatedly is from critics arguing that lockdowns have been done in a panic, and there has been no weighing of the costs. This is ignoring the obvious: the authorities had no real choice in the matter. Yes, one can say that it would have been nice to take other actions months ago. However, that is the classic "shoulda, woulda, coulda" thinking that does not help matters. Some restrictions may be in place for an extended period (e.g., international travel), but we can expect steps towards some normalisation of activity (as seen in Japan) on a region-by-region basis in North America.

Different countries are in different situations. I am looking at this from a North American perspective, and thinking may be similar in other countries. Since everyone wants to use World War II analogies, we are in the Phony War stage in most cities -- we have seen the effects of the virus elsewhere, but limited cases locally.

Why the Lockdown?

There is a great deal of arguments about the deadliness of COVID-19. However, we can put those theoretical arguments aside, and look at what we know: patients have overwhelmed hospitals in every city where there is a big cluster of cases.

Meanwhile, we can describe the North American situation as follows: hospitals do not have enough ventilators and protective equipment for medical staff stockpiled, nor is there enough testing capacity for aggressive testing campaigns.

Given the uncertainty, a lockdown was necessary to contain risks until supply chains have a chance to catch up. Meanwhile, both vulnerable populations and medical staff refuse to be used as "cannon fodder" (a term used by an anonymous doctor in the United Kingdom) so that young people can go to pubs or the beach. Politicians know that they could not survive the wrath of those groups, so locking down non-essential activity was inevitable.

Why Does a Lockdown Work?

Imagine a theoretical ideal where every member of society is perfectly physically isolated for two weeks (or whatever the contagious period for COVID-19 is). People who have the virus will either have to be treated (admittedly conflicting with the physical isolation assumption), or else the virus will pass without symptoms and the individual is hopefully immune.

There would be no transmission, and the virus is vanquished.

Obviously, we cannot get that theoretical ideal. But if a significant portion of the population does properly physically isolate, then transmission probability is lowered. The hope is that the proportion of communities without clusters is higher.

GDP Guessing

Lockdowns will blow a massive hole in GDP. However, as everybody was supposed to know, GDP is not a measure of well-being. What really matters is the real standard of living. As most policymakers figured out (with some very important exceptions), they need to keep income flowing to households during the sudden stop period. Firms should have the capacity to look after themselves, and things can be sorted out later.

In North America, lockdowns are largely under the control of local authorities. National virus statistics do not really matter, rather the local situation. Although this is normally a concern, a significant portion of North America consists of low density housing. Manufacturing concerns are nowhere near the centres of large cities. Most of the absolutely essential items that are still produced in North America -- e.g., Canada's strategic toilet paper industry -- are in an environment where physical distancing can be imposed with limited impact on productivity. City centres are filled with office drones and support staff -- and that work is easiest to be done remotely.

The extreme divergence between productive capacity across industries makes guessing what the level of GDP will be fairly pointless. The only metrics to judge economic outcomes will be the production of key materials, bankruptcies, and unemployment.

Economy was in Trouble Anyway

If we want to second guess decisions, it would be extremely unfair to pretend that a recession was not going to happen. Supply chains were disrupted already, and the North American non-traditional oil industry was going into a mass bankruptcy anyway. This was probably enough to vapourise levered positions in financial markets, and so the "Minsky Moment" was yet again upon us.

How Big Are Non-Essential Industries?

It will be nearly impossible to define what are essential industries, rather the focus is going to be what are the non-essential industries. For example, a factory producing critically important goods will have a variety of inputs, and so those downstream factories also have to be open.

Some non-essential industries are going to disappear at least until a vaccine is found. For example, international tourist travel, and theme parks are gone for the duration. This will blow a hole in restaurant and hotel industries in certain areas. Organised sports are probably also closed.

One of the largest non-essential industries is restaurant dining. However, sales will not entirely disappear (at least in less hard-hit areas), as take-away and delivery are being allowed. Although wait staff will be shed, kitchen staff can be kept going. Meanwhile, landlords are not in a good bargaining position, and so deferrals on lease payments seem inevitable (even if there is no government-ordered freeze).

Flexibility by health authorities will depend upon the local situation in intensive care units. If COVID-19 is as little of a health risk as the skeptics claim, that will show up in the data in the next two months, and relaxation will happen. Realistically, the situation will vary wildly across North America, and so aggregate statistics will mask huge divergences.

As for the non-essential industries, the question is what to do with them. The optimal solution is to mothball them, and see to what extent they can be revived. Since the biggest problem areas (e.g., theme parks, airlines) are largely run by large firms, fairly easy to deal with from a crisis management standpoint. The problem are the small firms in their orbit.

Assume a Can Opener... 

Until a vaccine is found, the silver bullet to deal with COVID-19 is mass testing (and contact tracing). I have seen a small genre of comments by economists explaining how that mass testing is the optimal strategy. This is exactly the "assume a can opener" logic for which economists are famous for. The testing capacity does not exist in North America, although it is being ramped up quickly. That is one of the key reasons to have an immediate clamp down: to allow testing capacity to catch up to demand.

Nudges, My ...

There has been a whole bunch of academic research on using nudges to get the population to change behaviour. However, I have seen reports that the brain trust in the United Kingdom was surprised that a good portion of the population ignored suggestions to stay home from the pub (or whatever). (Once again, cynics may reflect on the usefulness of popular fields of modern academic research.)

The authorities need to go old school, and smack the population over the head with a newspaper to get their attention. Somewhat draconian lockdown periods will get everyone on board with the idea that slightly changing behaviour so that fellow citizens might not die is perhaps a good idea. The key behavioural changes appear to be hand washing, and mask wearing. Hand washing is hard to validate, but it seems straightforward to require mask use in places where people congregate. The idea is to push enforcement onto the private sector, and social pressure will hopefully do the rest.

To what extent behaviour changes, relaxation of controls would be quicker.

Turning Japanese

For other developed countries, the best case seems to be to emulate Japan (or perhaps South Korea, but I am less familiar with that country). Japan has an advantage due to cultural norms, but that is offset by North America's low housing density.

(c) Brian Romanchuk 2020

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