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Sunday, May 3, 2020

Reopening Narratives

My impression of discussions is that they are gravitating towards the regurgitation of various narratives that match the speaker's views. The hard data is not particularly meaningful, and so there is little else to work with. We are likely to be stuck in this limbo for a few months, at least until the hard economic data stabilises.

Right now, the question of re-opening the economy is dominant, with people projecting their views onto particular countries, mainly Sweden. Since nobody is in a position to travel from country to country to get a good view of what is happening, these comparisons are largely a war of dueling anecdotes.

I think the following points need to be kept in mind.
  • Local circumstances matter. Even within Canada, there is a big difference between areas that have been badly hit (Montreal), and elsewhere (e.g., rural areas of Quebec, Manitoba).
  • So long as the worst super-spreader venues are closed (e.g., crowded sports events), it is unclear how much difference there is in practice between safety regimes, since a good portion of the population is self-quarantining. Firms and local politicians might be willing to force workers to show up, but they cannot force customers to walk into the door.
  • Discussions of "herd immunity" continuously come up. The defining characteristic of these conversations so far is that they have been based entirely on wishful thinking about immunity, without solid data on what percentage of the population is actually immune. As blood testing capacity (as well as clinical experience with the virus), some information may seep into the debate.
  • Since only a handful of people are willing to run risks, entertainment venues like bars or movie theaters are in deep trouble, regardless of regulations. Restaurants will have to pivot to take-out, or perish.
  • Regions that are dependent upon tourism will be subject to greater weakness, with Las Vegas being a major example.
  • The exception will likely be the countries that have largely eliminated the virus locally (see https://www.endcoronavirus.org/). My instinct is that these are the places that should return most quickly to something resembling normality.
  • It is easy to spend too much time on policy changes, as that is normally the focus of business cycle analysis. However, the institutional framework matters more than usual. Unless they are sabotaged by fiscal concerns (courtesy of euro membership), the European welfare states are in a much better position to ride out a shutdown. The institutional capacity to make payments households exists.  Conversely, the United States is having a bad crisis, and there is little sign that things will improve. As was the case in the Financial Crisis, the U.S. federal government is mainly sensitive to weakness in the stock market and banking system, and it is willing to let small firms and households bear the brunt of economic adjustment. In particular, austerity at the state and local level seems to be on the horizon, which will help cripple the recovery. 
Regardless of reopening policies, GDP trajectories are likely to be somewhat L-shaped. There will be a small recovery as some activity comes back on line, but GDP will be lower than it was before the pandemic hit. The percentage drawdown is going to vary (for reasons noted above), and considerable efforts will be wasted trying to come up with mathematical models to explain the discrepancies. Realistically, one will need to look at industry-level data, and see which industries can operate under the new regime. Even there, there are regional differences. The main example that has shown up is the ultra-concentrated, labour-intensive North American meat packing industry underperforming international peers.

(c) Brian Romanchuk 2020

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