Recent Posts

Sunday, March 29, 2020

Unlocking Society

There is a pointless internet debate about the trade-off between "the economy" and "health." This is being fueled by a handful of articles from highly privileged people telling poor people to go back to work because it was impacting their stock or real estate portfolios. The reality is that there is no such thing as an "economy" at this point, just "society." Although a shutdown is tenable to flush out infections, the essentials must flow. From a North American standpoint, I believe that the emphasis will be on regions, and regions will unfreeze at different times.

I will first note the article "National coronavirus response: a roadmap to reopening" by Scott Gottlieb. As a card-carrying crypto-Keynesian, I don't normally cite the AEI very much, but I could not spot anything I disagree with after scanning the article. Although the section header says "state-by-state reopening," the text discusses the reality that re-opening may be more regional in nature -- which I think is the optimal course.

A regional strategy is already taking place in Qu├ębec, where eight outlying regions are being cut off from non-essential travel (Montreal Gazette article link).  These regions have very few cases, and the province wants to keep it that way.

The big challenge is setting the criteria for reopening. The Canadian provinces have always taken responsibility for health care, and the free market war on state capacity is much less advanced here. The provinces have the administrative capacity to make their own decisions -- and the legal authority to take actions like freeze intra-provincial travel. The situation is less clear in the United States, where states are not particularly responsible for health care -- and if there are problems, they blame the other party. Meanwhile, there is an extreme partisan gap on the seriousness of the virus. Ideally, the Federal Government would act like the grownup in the room, setting a national standard, and regions would follow a stance tied to that standard.

This national standard appears to be the main potential area of political warfare, as I would argue that otherwise there is a consensus among non-extremist economists about these principles.

What Does Society Need?

We need to throw GDP out the window, and start from scratch. What do we need right now?

The minimal answer is something like:
  • Medical care, medical research, and production of pharmaceuticals and tests.
  • Production of personal protective equipment (PPE).
  • Keep grocery stores and pharmacies stocked for the population stuck at home.
This immediately creates a chain of other activities.
  • Electrical, natural gas, internet, and phone grids.
  • Emergency services (ambulance, fire, police).
  • Gasoline and refineries.
  • Logistics.
  • Infrastructure repairs (winter does a good job demolishing road networks in Canada).
The list grows rapidly. We can survive a couple week shut down, as happened in Montreal during the 1998 Ice Storm. However, we run through inventories, and activity will have to resume. And it is not as if production ceased completely -- grocery stores and the associated supply chains have been running full tilt.

North America's Low Density Planning Comes in Handy

The main necessities are goods of various sorts. The evolution of North American cities has moved goods production to low density areas, unless it absolutely cannot be relocated. (For example, Montreal is a port, and the port is smack next to the extremely trendy area Old Montreal. Great place to visit in the summer whenever travel ever comes back.) I doubt that a high percentage of North America factory workers take public transit; they drive to work. 

Small towns (outside of some ski areas) were not a major destination of the globe trotters who were the initial transmission vector of the novel coronavirus. Other than a few unlucky ones, an initial lockdown will have flushed out whatever cases exist, and the town would likely be relatively safe. A return to mask-wearing (masks were common in the Spanish Flu era), physical distancing, and the shutdown of "super-spreader" venues would allow these towns to approximate the success of places like Japan. Given that most industries have a certain amount of excess capacity, the production of essential goods could ramp up again, and essentials supplied.

The prospects for the larger cities (like Montreal) is less optimistic. Suburbs are low density, and some might be able to return to closer to normal functioning. However, places reliant on public transit will be facing greater restrictions.

Mothballing Non-Essential Firms

It is going to be a lot easier to identify non-essential firms and activities than essential ones. But if consumer-facing non-essential firms are mothballed, their suppliers will have no customers. Market forces will fill in for government planning.

The key is that governments need to offer a financial incentive for firms (and workers) to go into suspended animation. The non-essential ones will take the government up on their offer, or work around restrictions (like working from home). If I am in a generous mood, announced government policies approximate this ideal situation. Governments will have time to tailor a longer-term framework in the coming weeks.

My Annoyance with the Anti-Panickers

Finally, I want to vent my annoyance with the know-it-alls who have popped up to say that all these actions are panicked over-reactions. This is a worthless, content-free stance being offered by people with no skin in the game (to channel my inner Taleb).

If they are right, they will run around saying "I told you so." If they are wrong, they will just delete their more deranged tweets, and say "Well, it was an eight sigma event [or the equivalent], nobody could have predicted that!" 

Policymakers and society faced a situation where cases are growing exponentially, with no sign that growth is slowing in the absence of hard containment measures. North American policy makers waited until the last possible minute -- probably too late -- to bring in the only available policy option: lockdown. Delaying in the face of uncertainty was no longer an option, and the consequences of being wrong are massive. 

If we were to believe that actions taken were an over-reaction, it will show up very rapidly in the data. Other than for people with an obsessive attachment to GDP, the costs of lockdown are not much different than that of any other recession. Meanwhile, we cannot blame a recession entirely on the lockdown: the oil patch was toast, and that sector unraveling was going to be enough to cause projectile vomiting over risk assets.

(c) Brian Romanchuk 2020

11 comments:

  1. Yes I have got very annoyed with what you call the 'Anti-Panickers' myself. I have already vented quite a bit on them so I'm happy you are doing so. But then we have the hyper-inflation panickers, like always it seems, so maybe I should be called an anti-hyperinflation panicker myself.

    ReplyDelete
    Replies
    1. I’ve seen a few calls of hyperinflation - from the same group that’s been calling for hyperinflation for over a decade. There’s probably going to be some stuff getting quite expensive, but it’s hard to get too excited about cauliflower when gasoline prices are way down.

      Delete
  2. Do you not think it possible -- in, say, four months time -- many economies may be facing a short bout of something akin to stagflation?

    I do not mean a repeat of the 1970s (and energy prices and real interest rates are expected to remain historically low).

    What I wonder about is a situation of rapid inflation of many goods (due to a supply shock engendered by the current curtailment of production, which is not being felt now due to substantial inventories but could have an effect in several months)...

    combined with...

    an on-going recession, caused initially by COVID-19, but vastly exacerbated by the huge levels of private debt in the US, many European countries, Canada, Australia, South Korea etc., and the continuing uncertainty and collapse of confidence caused by the confluence of the short-term COVID-19 effects and long-standing challenges.

    Maybe the correct historical analogy is the immediate post-war conditions in Europe, in 1946 to 1948?

    ReplyDelete
    Replies
    1. I wrote about inflation, price changes are going to be all over the map.

      The area of concern I see is with food. Right now, supply chains in the developed world have been thrown into complete disarray. Even without the lockdown, people have switched from eating at restaurants to eating at home, and that is a big volume of food flows to be redirected. On top of this, people are going from having a few days food in their house to a couple weeks. Meanwhile, some countries have curtailed exports. The northern end of North America has not started planting yet, so disaster might be avoided.

      Outside food (and medical equipment), we have a collapse in demand meeting a collapse in supply. People don’t like price gougers, so I think the response will be to leave shelves empty instead of raising prices. It’s only necessities that will have price rises, and factories are retooling production for those necessities.

      Delete
  3. "There is a pointless internet debate about the trade-off between 'the economy' and 'health.' This is being fueled by a handful of articles from highly privileged people telling poor people to go back to work because it was impacting their stock or real estate portfolios."

    Indeed many highly privileged people are telling the poor to go back to work, which is scandalous.

    However, there are also many self employed people and small business suffering with the covid crisis, which usually are not rich (many are actually poor). And there are also the rising number of unemployed people.

    In developed countries that may not be an issue, but in developing countries this means that many will die of hunger. There are also many who will not die but will be moved from poverty to extreme poverty.

    In this scenario, people start questioning if indeed the virus is as deadly as the media and others are portraying. And it makes a lot of sense when part of the population is dying of hunger. Some may even start to believe that maybe facing the virus would be a better choice.

    Even if the government suddenly started to see the world through MMT lens and deployed reasonable policies and resources to face the crisis, it wouldn’t be able to create food out of thin air, nor logistic networks, nor a magic virus shield for those who would produce the food, transport and sell it. So even in this scenario, some people would die of hunger.

    So, yes, it’s reasonable to question the lockdown and the statistics, and virus lethality.

    I personally am completely in favor of the quarantine, but I’m not a doctor nor expert, and it’s easy for me to defend this position as I’m still employed. However, I can fully understand those who question it.

    I’m my opinion you could be seen as insensitive to some who are suffering. It’s not a pointless debate. Questioning the quarantine is a matter of life or death for some.

    ReplyDelete
    Replies
    1. Complaining about “the economy” is not the same thing as discussing about food supplies. Keeping Burger King dining rooms is not necessary to stop the population from starvation.

      Quarantines have been a tool of policy for centuries. Well-run economies can deal with the fallout.

      Delete
    2. I dispute the fact that well-run economies are prepared to deal with the fallout. At least for developing countries, they clearly wouldn't be able to deal with the fallout even if the government suddenly started seeing the world through MMT lens. As I said before, the government wouldn't be able to create food out of thin air.

      The matters are even worse considering that most countries in the world are not well-run economies. They are economies led by neoliberal austerity governments. With no prospect of changes in the following elections or the next one, no matter our own personal opinions.

      Halting the quarantines would indeed reduce economic depression and rising unemployment, but it would probably lead to a much higher covid kill count and an overwhelmed health system. That's a classical political problem.

      There is clearly a valid and legitimate economy vs health debate, and many people afraid of dying and suffering in both sides. In my opinion, downplaying this debate is not helpful and actually very insensitive.

      Delete
    3. The food supply chain is functioning in North America, Europe, and Asia. The issue is that there has been a massive shift in mix of food eaten, since a significant portion of meals were taken in restaurants. Other than fresh fruit/veg that relied on migrant workers, and the difficulties faced by meat-packing plants, there are no real difficulties with assuring minimal food supplies.

      Leaving the decision to “individuals” means that in practice that many firms will use their workers as cannon fodder. Workers in high risk groups have the freedom of choosing between losing all income, or having a high probability of dying. By shutting everything down, the onus is clearly on the government to fix problems created.

      The Canadian Federal government was undoubtedly neoliberal, but they launched a wide number of programmes to deal with the problem. Their initial response was inadequate, but they corrected that. Other countries have also done a good job, with the United States being a notable exception.

      In any event, you are just running around looking to be offended. This post was written over a week ago, and referred to the pre-lockdown debate. The anti-lockdown people I was discussing lost that debate. The question of when to lift the lockdown depends on local conditions.

      Delete
    4. I'm not offended (nor looking to be offended) because I have the same opinion as you that the lockdown is the best political response (if I could understand your opinion right).

      However, in some countries there are people trying hard and almost succeeding in lifting the lockdown before the recommended period. I think it's superficial and unproductive to think that they are all highly privileged people telling the poor to go back to work. I think most of them have legitimate reasons that should be debated, and not dismissed right away just because we disagree with them. This debate is not pointless.

      There is no clear data about mortality rates, virus spread rates, the immunity levels of those who tested positive and were cured, and many other aspects of the disease.

      We shouldn't act here as traditional economists that, instead of relying on real world data, quickly dismiss everyone that doesn't accept their opinions or dogma

      Delete
    5. Did you read what I wrote? Did you look at the date? It is very explicitly about the decision to start a lockdown *People were questioning the wisdom of any lockdown.* This had nothing to do with the question of the timing of lifting lockdowns. You are being offended by what you are imagining I wrote, not what I actually wrote.

      Delete
  4. Looking for commercial places, houses, apartments, multi-family flats? Contact real estate for sale by owner for best results with strong profit returns.

    ReplyDelete

Note: Posts may be moderated, and there may be a considerable delay before they appear.

Although I welcome people who disagree with me, please be civil.

Please note that my spam comment filter appears to dislike long "anonymous" posts.

Note: if you want to post comments from Apple devices (iPhone, iPad), you apparently need to turn off "prevent cross-site tracking" in Safari privacy settings. (The reason presumably is that another URL handles comments, and so the user session needs to be preserved when redirected to that site. I don't like this, but this is not enough to make me switch my hosting service.)