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Thursday, April 16, 2020

Health Policy Convergence

My instinct is that health policies are going to be converging across the developed countries. The main differences will be in the implementation of testing and tracing policy, which I think will depend upon local institutions. Even if governments "open the economy," enough of the customer base will stay home to not make a difference for high-risk activities. The main policy variable to look at will be the question of school re-opening (and regional travel restrictions).
I want to keep my comments brief, since they are impressionistic.
  • There seems to be considerable caution in populations, so many activities like in-restaurant dining will not be economically viable even if governments allow re-opening. Having these firms shut by health officials is probably more merciful, since governments would then feel they have an obligation to offer compensation.
  • Best safety practices will spread globally, and so a great deal of "safe" activity might be able to resume without governmental micro-management. People are aware of the hammer of quarantines above their heads, and so they have an incentive to pursue social conformity with respect to safety measures. Although there are anecdotal reports of firms ignoring the safety of their employees, nobody is really a fan of pro-virus institutions, so such behaviour may not be sustainable.
  • The big policy decision seems to be the question of pre-university schooling. (University students are supposed to be adults, and the university system can muddle through safety restrictions like the private sector.) In North America, those decisions will probably be mostly punted until late in the summer.
  • Outcomes in the United States are worrisome from the perspective of this non-American. It is extremely unfortunate that beliefs about the virus has been politicised, and the possibility of major errors being made is entirely plausible.
  • The area where there will be considerable divergences across regions is how testing and tracing is handled. A great many people are pinning hopes on apps, which would be uniform across countries. However, I have my doubts about the effectiveness of apps in the North American context. In any event, this will be a big area of cross-country comparisons.
From a GDP-watching perspective, we have the hypothetical capacity to transition to a steady state that represents the activities that are viable in the new safety regime (which is a decent fraction of pre-pandemic GDP). The economic policy response challenge is to get to that new steady state, and it remains to be determined how successful each jurisdiction will be in achieving this "soft crash landing." The obvious risk is a debt-deflation spiral causing an overshoot of this notional equilibrium. (Financial market commentary is filled with bears demanding that policymakers allow that overshoot, so that they can cash in on their short positions.)

Although the health policy response might converge, my feeling is that the internet will continue to be flooded with badly-conceived cross-country comparisons.
  • Unless there is a breakout into the wide population, infection numbers are relatively small. The number of cases is highly sensitive to a few super-spreader events. As such, outcomes are somewhat random; we will only be able to diagnose obvious failures.
  • The low percentage of the population that is infected means that national per capita infection numbers are meaningless. For example, the confirmed infection rates are currently between 0.0007% - 0.0040% for the districts within the island of Montreal (which is a hot spot for Canada) -- link to latest statistics)  Even if we account for the reality that confirmed infections are lower than actual infections, the virus is spreading through a largely non-infected population. As such, there is effectively no "herd immunity" effect yet. As such, the overall population size has no effect on the ability of the virus to spread, nor does the size of the population elsewhere affect the handling of the outbreak in a particular area.
  • Outbreak statistics are highly dependent upon testing, and even death statistics are misleading since many deaths are outside the hospital system.
  • Economic weakness may only be tangentially related to lockdown policies. The most extreme example being the energy sector, as energy production would collapse even if not a single worker is infected by the virus. [Thanks to Jerry Brown for spotting typo in previous sentence!] Meanwhile, one would need to dig into the sector level statistics to see the effect of lockdowns on aggregates. Nevertheless, it is extremely likely that some analysts will do something like panel regressions of GDP drawdowns versus infection rates.


(c) Brian Romanchuk 2020

4 comments:

  1. "Economic weakness may only be tangentially related to lockdown policies. The most extreme example being the energy sector, as energy production would collapse even if not a single worker is unaffected by the virus."

    I don't understand this. Is there maybe a typo?

    ReplyDelete
    Replies
    1. Pretty ugly phrasing; probably mangled in my editing. I think "unaffected" should be "infected," and the similarity of words caused me to miss noticing the substitution. Thanks.

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    2. Thanks for the reply. I am still not getting it though. Are you talking about the large decline in oil prices maybe? You aren't talking about electricity right? I don't think electric companies are going to collapse or would even be allowed to if for some reason they wanted to collapse. Maybe I just don't understand what 'energy production' is referring to?

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    3. Oil and natural gas, as well as the associated service sector, which are hit by the global supply glut. Utilities are OK, as you suggest.

      Delete

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