Friday, March 6, 2020

What to watch on jobs day: Expected future impact of COVID-19 [feedly]

What to watch on jobs day: Expected future impact of COVID-19

As COVID-19—commonly known as the coronavirus—continues to spread throughout the world, it is likely to have a direct impact on the United States through the health and well-being of our population. It is also likely to have an impact on economic activity, as workers stop working to care for themselves or their families, and people generally reduce social spending. I'll be watching this in tomorrow's job report from the Bureau of Labor Statistics, and keeping an eye on it in the coming months. The first order of business, however, is to make sure that workers can follow the Centers for Disease Control and Prevention (CDC)'s recommendations to stay home and seek medical care—if they are lucky enough to have paid sick days and health insurance. While there are still very few reported cases in the United States, it is expected to spread and the effects may be far-reaching.

In terms of the economy, there has already been an impact on the manufacturing sector as inputs from China are delayed because of temporary factory closures. The Federal Reserve has cut interest rates in expectation of further economic disruptions. Many employers are making contingencies for workers to telecommute rather than risk illness. Unfortunately, this isn't an option for millions of workers in direct service professions across the economy. Another likely side-effect of the pandemic is a pull-back on social consumption. Either because people become sick themselves or are avoiding public spaces, there will likely be a drop in certain types of spending across the economy.

The figure below takes a top-down look at the economy and shares of private-sector employment for various sectors. Manufacturing makes up 10% of private-sector employment and may report some losses in Friday's jobs report as inputs to production are delayed. The delay in inputs will likely impact construction as well. But, what about the reduction in social spending? Retail trade—minus nonstore retailers—represents 11.7% of private-sector employment. Leisure and hospitality—of which food services and drinking places are a major part—will likely experience a downturn. This sector represents 12.9% of overall employment. Other services—such as personal care services—represent 4.6% of the private-sector labor force. All three sectors combined represent over one-fourth (29.2%) of private-sector employment. If consumption drops as it is expected to, employment in these sectors may experience short-term, but serious losses.

Figure A

Education and health services are likely to be impacted as well. If schools close temporarily, students will have to stay home and parents will be even more strapped to continue working through that period. Health services—which alone makes up about one-eighth of private-sector employment—will be pressed to provide health care to all who need it.

While I'll be watching upcoming job reports to look for signs of COVID-19 in the employment data, policymakers can act now to mitigate harm and plan for the future.

 -- via my feedly newsfeed

Thursday, March 5, 2020

America's Jobs Engine Braces for Virus Hit After Steady February [feedly]

America's Jobs Engine Braces for Virus Hit After Steady February

America's streak of robust job gains is being threatened by a spreading coronavirus that's roiling financial markets and may exact a growing toll on the U.S. economy.

Friday's employment report is projected to show payrolls increased 175,000 in February, below January's pace but in line with the average of the past year, according to a Bloomberg survey of economists. The unemployment rate is seen holding near a 50-year low as wages keep marching higher.

U.S. forecast to see robust monthly payroll gain in February

But the February data, and what they say about the labor market's health and momentum, may already be outdated ahead of such a unique economic shock. The Federal Reserve this week cut interest rates half a percentage point in response to the growing outbreak. While the virus probably failed to dent February hiring, America's jobs engine is unlikely to be immune to its effects.

"Conferences and meetings are getting canceled; travel, business travel is getting canceled," said Stephen Gallagher, chief U.S. economist at Societe Generale SA. "How much are you going to hire in March? How much are you going to hire in April? You're going to slow down."

  • Total payrolls rise 175,000; private payrolls up 160,000
  • Unemployment rate holds at 3.6%
  • Average hourly earnings up 0.3% from prior month, 3% from a year earlier

The potential of the virus "to spill over into sectors that are responsible for a lot more of hiring and jobs in this country I think presents an added degree of risk that we haven't seen yet this cycle," said Sarah House, senior economist at Wells Fargo & Co.

Data on Thursday showed no broad impact yet from the virus. Filings for unemployment benefits fell by 3,000 to 216,000 last week, remaining near a half-century low, according to the Labor Department.

Temporary hiring for the 2020 census is likely to inflate the headline number in the coming months, though the effect in February was probably relatively small.

Here are a few ways the coronavirus could filter through future employment reports:

Leisure and Hospitality

As the coronavirus spreads and the death toll rises, more companies have restricted non-essential business travel, some Americans have canceled personal trips and the U.S. has expanded travel restrictions. Conferences have been postponed, canceled or shifted to "virtual" formats.

The leisure and hospitality sector makes up about 11% of total nonfarm U.S. employment and may be one of the first to show a noticeable impact from the virus.

Leisure and Hospitality Jobs

As historical sites close and events are canceled, coronavirus could dent hiring

Source: U.S. Department of Labor, Jan. 2020 data

These industries are "right in the target in terms of all these cancellations of events in an effort to contain the spread of the virus," Gallagher said.

What Bloomberg's Economists Say

"The fast breaking nature of the Covid-19 outbreak materially changes the relevance of incoming economic data... The knock to economic growth from the recent market selloff will similarly weigh on the pace of job creation in the near term."

-- Carl Riccadonna, Yelena Shulyatyeva, Andrew Husby and Eliza Winger

Click here for the full note.

Transportation and Warehousing

Another sector poised for a sizable hit is transportation and warehousing as travel plans change and supply-chain disruptions alter delivery schedules.

Airline employment may stall or decline amid flight cutbacks, with United Airlines saying Wednesday it's freezing hiring through June 30. Payrolls tumbled following the September 11 attacks and the SARS outbreak as many Americans chose not to fly; employment in the industry has yet to fully recover.

9/11 and SARS outbreak both dented airline employment in the early 2000s

Additionally, the virus has disrupted supply chains and slowed port activity. Cargo traffic through the Port of Los Angeles was down about 25% in February amid canceled ship sailings, according to its executive director.


Caught in the crossfire of trade uncertainty, slowing global demand and Boeing Co.'s 737 Max production halt, manufacturing employment has been anemic during the past year. The February report is forecast to show a third straight decline in factory jobs, and the coronavirus stands to weaken the sector even more.

Factory hiring was sluggish in 2019, stands to fall more with virus threat

Timothy Fiore, chair of the Institute for Supply Management's manufacturing survey committee, said there were a lot more comments in the group's latest report about actively managing the labor force through layoffs.

As global demand diminishes because of the virus, "staffing levels will have to be managed more likely through layoffs rather than just attrition," Fiore said.

Hours Worked

The average workweek also may begin to dip and overtime hours could decline. While working from home shouldn't impact this number, less consumer spending ultimately could.

The workweek dipped in recent years but remains elevated ahead of virus

While it may be too soon to forecast what will happen to wage growth from Covid-19, the decline in hours could impact the take-home pay of Americans even if the average hourly wage continues to rise.

Still, there may be some delay "before you see a real decisive change in trend," said Michelle Meyer, head of U.S. economics at Bank of America Corp.

— With assistance by Chris Middleton

 -- via my feedly newsfeed

Economic policy and Covid-19—Mitigate harm and plan for the future: A list of considerations for policymakers [feedly]

Economic policy and Covid-19—Mitigate harm and plan for the future: A list of considerations for policymakers

The direct cost that Covid-19 inflicts on human health is obviously its most important effect on society. But this direct cost can be worsened by flawed economic and policy structures. And the indirect damage the disease causes through economic ripple effects could be large, so policymakers should do everything they can to minimize them.

Past decisions that have weakened our economic policy infrastructure will hamper our response to Covid-19; this is already baked into the cake. But there are some short-run ameliorative actions we can take that might help, and there are long-run policy changes that will aid our response to future epidemics.

In technical economic terms, Covid-19 combines potential supply shocks with sector-specific demand shocks. Basically, supply shocks hamper our ability to produce goods and services, and demand shocks are sharp cutbacks in spending from households, businesses, or governments. I provide a list for policymakers of what could/should be considered to deal with some of these below.

The supply shocks come from disrupted global value chains, as, for example, Chinese production of inputs used by U.S. manufacturing and construction firms are not delivered on time because Chinese factories have temporarily closed. In countries where schools are shut down for long periods of time, a shock to labor supply can occur as working parents have to stay home to care for kids.

The potential sector-specific demand shock is to businesses where consumption is largely social—done with other people around. Think bars, restaurants, grocery stores, and malls. As people avoid social contact to minimize disease transmission, this leads to less activity in these sectors.

These effects mean it will be hard indeed for policymakers to spare the economy any pain from this.

There's very little that can be done about the supply-side shocks—particularly in the short run. Demand-side shocks are generally easier to address with policy (in theory—policymakers still often fumble the ball in this regard), but the specific nature of the demand shocks associated with Covid-19 make them slightly harder to address. Simply giving households more money won't boost consumption much in the sectors likely to be affected—the pullback in consumption is not driven by income constraints, but due to concerns over catching the illness.

This means that while traditional stimulus can be useful in keeping this sector-specific demand shock from spilling over to the economy more widely, it likely will not be able to completely neutralize the effects of this sector-specific shock.

What are the types of things policymakers should be thinking about as they wrestle with the economic effects of Covid-19 and (hopefully) think about the next epidemic? In the long run, the list is obvious.

  • Halt the steady downward trend of non-defense discretionary spending in the federal budget. This portion of the budget funds agencies like the Centers for Disease Control and Prevention (CDC) and the National Institutes of Health (NIH). Higher levels of this spending could also finance greater aid to states, including for public investments like universal high-speed broadband. This would allow many businesses to continue to operate during the next epidemic with many employees working remotely to avoid spreading the illness. Non-defense discretionary spending has been cut to the bone in recent decades, and the result is a less robust public health infrastructure.
  • Make paid sick leave a basic mandated labor standard. Far too many low-wage workers in the United States are compelled to work even when sick because they aren't paid otherwise. Paid sick leave has been shown to significantly reduce the spread of disease—this is a major benefit.
  • Reform the U.S. health system to expand coverage and reduce costEpidemics thrive on people reluctant to obtain health care because of its financial burden.
  • Reform unemployment insurance (UI). The UI system provides income support to laid-off workers so that temporary spells of joblessness (like those caused by the cutback in social consumption and its spillover benefits) are less damaging. In recent years, state cutbacks to UI generosity and eligibility have greatly weakened the readiness of the UI system for an economic shock. Besides helping individual recipients, by supporting laid-off workers' incomes and consumption during their period of joblessness, UI keeps this initial shock from snowballing into a wider slowdown.

But all of these options will take a long time to phase in and will likely miss the current Covid-19 epidemic. Is there anything in the short run we could do to blunt the potential economic pain of Covid-19?

  • The federal government could commit to picking up the tab for all Covid-19-related health spending. The South Korean government made this commitment early on in the Covid-19 outbreak. An obscure provision in the law governing Medicare allows governments to expand its coverage to anybody experiencing health costs due to an environmental emergency. Would anybody really complain if this was used to cover all costs from the coronavirus?
  • Congress could pass measures to provide short-term cash payments to households. This could plug some (but likely not all) of the demand hole caused by the cutback of social consumption. These payments would yield the highest bang-for-buck if they are targeted at low- and moderate-income households. This means by definition that centering income tax cuts as a mechanism for this is the wrong approach.
  • Congress could increase funds temporarily for short-time compensation (STC) benefits. STC benefits essentially make up the income difference for workers who have their hours of work reduced. Congress could provide a premium to STC benefits for the duration of the virus. This would encourage sectors exposed to the Covid-19 demand shock—like restaurants—to cut hours across the board rather than lay off workers. A number of states have decent existing infrastructure to allow this kind of work-sharing.
  • Congress could enact temporary payroll tax cuts (both to workers and to employers) and mandate temporary paid sick leave. Payroll tax cuts could provide demand stimulus generally but also give firms affected by the temporary cutback in spending some breathing room to pay bills during the demand slowdown. The employer-side payroll tax cut would help firms finance the week of mandated paid sick leave. As always, any temporary cut to payroll taxes must be accompanied by provisions to hold harmless the trust funds (Social Security and Medicare, most importantly) that these taxes finance.

Perhaps notably absent from this list is anything about the Federal Reserve, even as the Fed's response—culminating in today's decision to cut interest rates by half a percent—occupied much of the economic commentary surrounding the response to Covid-19. The Federal Reserve is a hugely important economic institution, and their decisions matter a lot for many reasons—but they're largely a sideshow in the response to Covid-19. For one thing, their main instrument to boost demand (cutting interest rates) operates with a lag that is long enough to likely miss much of the epidemic's duration. Further, unlike fiscal policy responses, the Fed's tool really cannot be tailored or targeted in any way to alleviate particular distress. If a knock-on effect of the economic damage done by Covid-19 includes distress in the financial sector, then the Fed can usefully provide liquidity and other support to banks (in exchange for banks' forbearance in collecting debts from affected businesses). But in the first round of response, it seems like focusing on what the Fed will do is a bit of a distraction. Economic policy commentary has become far too Fed-centric over the past decade. We really need to start thinking of a much richer set of economic tools that can solve society's problems in coming years

 -- via my feedly newsfeed

Tuesday, March 3, 2020

Tim Taylor: Winning the "War on Poverty"--And Now What? [feedly]

Luv the way Tim Taylor drills down on key questions.

Winning the "War on Poverty"--And Now What?

resident Lyndon Johnson declared "war on poverty" during his State of the Union address on January 8, 1964. But the official poverty rate has remained disturbingly high. Here are figures showing the total number of people below the US poverty line and the poverty rate from the US Census Bureau:
Notice that the number of Americans below the poverty line falls sharply in the 1960s. But since about 1970, the number of people below the poverty line has generally trended upward with the growth of population, and the poverty rate hasn't moved much. 

It's mildly amusing to watch responses to these patterns from across the political spectrum. For example, liberals often are quick to embrace the basic interpretation of these figures--that poverty remains an enormous and unsolved social problem--but don't much like the implication that US programs to reduce poverty have been pretty ineffective over the decades. On the other side, conservatives are quicker to embrace the implication that US anti-poverty programs haven't worked well, but are less comfortable with accepting the idea that poverty remains as big a social problem as it was 50 years ago.

Of course, one can also argue that the official measure of poverty is misleading for various well-known reasons. For example, the official poverty measure is based on before-tax income received, and thus does not take into account how the poor might benefit from non-cash programs like Medicaid or food stamps, or from poverty benefits that involve reducing taxes or providing refundable tax credits. Another issues is that the official poverty lines (which vary according to number of people in a household) are increased each year according to the level of inflation as measured by the Consumer Price Index--but is that the most appropriate adjustment? Another more subtle issue is whether poverty should be measured across a "family," which refers to people who are related by marriage or parent-child status, or or whether it should be measured across a "household," which includes all of those living together at a certain address.

Richard V. Burkhauser, Kevin Corinth, James Elwell, and Jeff Larrimore recalculate what the official poverty rates would look like with an alternative set of adjustments for these factors in "Evaluating the Success of President Johnson's War on Poverty: Revisiting the Historical Record Using a Full-Income Poverty Measure"  (December 2019, IZA DP No. 12855). Here's how the patterns change:
The top line is the official poverty line, with an adjustment for what is called the "equivalence scale," which refers to how much the poverty line should be adjusted based on the number of people in a household. The authors write: "For our equivalence scale, we adjust poverty thresholds based on the square root of the number of people in the household. For example, the poverty threshold for a 4-person household is twice that for a 1-person household." As they point out, this equivalence scale is fairly standard for a lot of work on poverty lines across different countries. Using a single equivalence scale doesn't make a big difference, but holds this factor constant for the calculations that follow.

Using the household as the unit of measure, rather than the family, takes into account how families live together and share resources, and thus reduces the poverty rate as shown. Looking at after-tax income, not before-tax income, reduces the poverty rate further as shown by the orange line. Accounting for non-cash, non-health insurance benefits like food stamps reduces the poverty rate further as shown by the green line. Adding health insurance benefits like Medicaid, together with all the other changes, reduces the poverty rate as shown by the orange line.

An additional step is to think about the appropriate level of inflation to use over time. The official poverty rate uses the Consumer Price Index. But one interesting fact about the CPI is that after it is calculated, it is never revised--not even when the US Bureau of Labor Statistics later makes changes in the technical formulas used to adjust the CPI. Because various contracts and laws depend on the CPI, this lack of adjustment makes some sense. But if you want to know how the poverty rate should have been adjusted over time, it makes sense to use the most current methods for calculating inflation. One prominent measure of buying power that is adjusted over time is called the Personal Consumption Expenditures price index. There is also a Consumer Price Index "Research Series" that uses modern methods to calculate what the CPI would have been in the past. The authors write:
Compared to 1963 thresholds, in 2017 the CPI-U used by the Official Poverty Measure generates a threshold that is 8.0 times as high in nominal dollars to hold the real value of the thresholds constant. To the degree that this is an overstatement of inflation, it will effectively raise the real level of these poverty thresholds and exaggerate the share of people in poverty in 2017 relative to 1963. In contrast, all of the other measures of inflation shown result in smaller changes in nominal thresholds. In particular, the PCE—which we use for the Full-income Poverty Measure—generates nominal thresholds in 2017 that are 22 percent below the thresholds using the Official Poverty Measure's CPI-U, whereas using the Meyer-Sullivan adjusted CPI-U-RS would generate thresholds that are 46 percent below that using the CPI-U.
Adding this different measure of inflation, the preferred "full-income poverty rate" for these authors looks like this:
Clearly, one's beliefs about whether the "War on Poverty" was a success depends the extent to which these kinds of changes seem reasonable to you.  It's also worth remembering that attempts to measure the number of people in poverty using consumption data, rather than income data, also show a dramatic fall in the poverty rate.

Of course, while it might seem that evidence suggesting that that US poverty level is actually far below the official rate is good news (to the extent that it is true), nothing is simple in a politically polarized world. Conservatives would have to accept that a number of government programs have had a dramatic effect in successfully reducing poverty rates. Liberals would have to accept that poverty is now a much smaller problem than several decades ago.

A deeper problem here is that "poverty" is a judgement that always applies in the context of a specific place and time. US poverty isn't the same as what it means to be in poverty in Brazil or Nigeria or India. US poverty in 2020 isn't the same as what meant to be in "poverty" in the US in 1964 or in 1920 or in 1820. Burkhauser, Corinth, Elwell, and Larrimore suggest this conclusion (citations and footnotes omitted):
President Johnson's War on Poverty—based on economic standards when he declared that war—is largely over and a success. ... Nonetheless, societal views on poverty evolve over time. In 1971, Robert Lampman observed that "by present-day American standards most of the several billion people who have ever lived, and most of the three billion people alive today, were or are poor". He also suggested that the goal of eliminating poverty based on these initial standards "should be achieved before 1980, at which time the next generation will have to set new economic and societal goals, perhaps including a new distributional goal for themselves"... Nevertheless, the dramatic reduction in poverty by 2017 based on President Johnson's standards suggests that policymakers might consider setting new poverty thresholds that reflect modern-day expectations for what it means to be impoverished.
For a sense of what poverty meant back practical terms in the late 1950 and early 1960s--in terms of malnutrition, poor health, and lack of education--a readable starting is Michael Harrington's 1962 book: The Other America: Poverty in the United States. My own sense is that what one might call "consumption poverty" has dramatically decreased in the last 50-60 years, both because of government programs like Medicaid and food stamps and also because of how technologies from the microwave to the smartphone have become widespread even among those with lower incomes.  However, what one might call "opportunity poverty"--those who reach their late teens and early 20s with considerably less preparation to take participate in what 21st century America has to offer--remains a severe and ongoing issue. 

 -- via my feedly newsfeed

The Fiscal Fight Against COVID-19 [feedly]

Interesting and, I think, excellent, advice from leading econ advisor to Japanese PM Shenzo Abe

The Fiscal Fight Against COVID-19

Governments should rely on fiscal rather than monetary measures when responding to natural disasters or epidemics such as the new COVID-19 coronavirus. Above all, policymakers must act quickly, and – particularly in the case of Japan – not be swayed by misleading statements regarding the level of public debt.

TOKYO – As the new COVID-19 coronavirus continues to spread rapidly outside China, medical professionals and policymakers around the world are fighting to contain the outbreak. But what role can or should governments play in this situation – or, for that matter, when natural disasters strike?

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The Chinese authorities already have loosened monetary policy in response to the outbreak, an understandable move in view of the virus's serious effect on key economic sectors, notably manufacturing and transport. But monetary measures are a roundabout way of coping with real disruptions such as epidemics or natural calamities. Fiscal policies, on the other hand, are more likely to have a direct impact on economic challenges.

Alongside the efforts of medical professionals, therefore, governments should introduce various initiatives and regulations to contain the COVID-19 epidemic – such as ensuring adequate medical supplies and providing airplanes to evacuate citizens from affected areas abroad.

Of course, these measures entail additional spending. Fiscal conservatives, who believe that governments should limit the size of budget deficits wherever possible and focus on paying down public debt, typically resist immediately financing such expenditures. When Japanese Prime Minister Shinzo Abe's cabinet announced a $120 billion package to help the areas worst affected by last October's Typhoon Hagibis, for example, the plan encountered precisely this type of resistance from fiscal conservatives and the finance ministry.

But such objections miss the point. I remember an exam question in the linear-programming course I took as a student at the University of Tokyo more than a half-century ago: What is the optimal way to solve the transportation problem when a Japanese island is hit by a natural disaster such as an earthquake? We students thought of minimizing the cost or distance of the transport. But our professor, freshly returned from Harvard, said we should have focused instead on minimizing the time required to transport goods and services needed for emergency relief.

When natural disasters or epidemics strike, the desired goals must be achieved quickly. As long as the response is delayed, the economy, institutions, and everyday life in affected areas will remain paralyzed. Unless the damage is rapidly and properly addressed, its effects will lower the quality of life, and often prevent productive facilities from recovering. Both current and future generations will suffer from the destruction of social overhead capital caused by disasters and from insufficient economic recovery.

In the case of Japan, however, conventional economists and journalists seem to think in different ways. For example, a December 5, 2019, article in The New York Times by Motoko Rich provided a timely account of the Abe government's stimulus package. But its depiction of Japan's public debt was inaccurate, or at least misleading, both from a statistical point of view and in terms of current macroeconomic thinking.

For starters, when we evaluate the soundness of a firm's financial health, we look at its (real and nominal) assets and its liabilities. We do not judge a business's performance merely by its gross debt. But Rich's description of Japan as having "the biggest debt load in the developed world relative to the size of its economy" referred to gross government debt, and neglected the government's financial as well as real assets.

The International Monetary Fund's October 2018 Fiscal Monitor shows that although Japan's public wealth is slightly negative, its ratio of net debt to GDP is better than that of France and the United Kingdom, and similar to that of the United States. Thus, when we look at net rather than gross debt, Japan's fiscal position is much healthier than The New York Times and other media outlets often suggest. Perhaps Japanese economic journalists and foreign media, including those with correspondents in Japan, are too credulous toward the finance ministry, which supposedly wants higher taxes in the future.

Moreover, the need to run tight government budgets is no longer the received wisdom in macroeconomic policy. Economists since Paul Samuelson have pointed out that, when interest rates are low and an economy has excess savings, deficit financing of government expenditure can improve the welfare of both current and future generations. Today, not only radical advocates of Modern Monetary Theory hold this view; so do mainstream economists and policymakers such as Olivier Blanchard and former European Central Bank President Mario Draghi.

That is why I also disagree with Motoshige Itoh's article, "Economics of Anxieties," in The Yomiuri Shimbun on February 2. The article seems aimed at indirectly instilling fear on the part of readers, and eventually makes the groundless claim that the fiscal deficit is currently the biggest source of uncertainty in Japan.

With Typhoon Hagibis and now COVID-19, Japan has been confronted with two emergencies in the space of a few months. The government – like others elsewhere – must now act quickly and decisively, and not let conservatives' fiscal phantasms distract it from its task.


Writing for PS since 2013
39 Commentaries


Koichi Hamada is Professor Emeritus at Yale University and a special adviser to Japanese Prime Minister Shinzo Abe.
 -- via my feedly newsfeed

Simon Wren Lewis: The economic effects of a pandemic [feedly]

Some very thoughtful insights on the impact of pandemic-like events on social consumption, and how much consumption is indeed social -- from Simon WRen Lewis' blog

The economic effects of a pandemic

The economic effects of a pandemic

A little over ten years ago I was approached by some health experts who wanted to look at the economic effects of a influenza pandemic. They needed someone with a macroeconomic model to look at the general equilibrium impacts. In the 1990s I had led a small team that constructed a model called COMPACT, and these health experts and I completed a paper that was subsequently published in Health Economics. We reference to other studies that had been done earlier in that paper.

The current coronavirus outbreak will have different characteristics to the pandemic we studied, and hopefully it will not become a pandemic at all. (In terms of mortality it seems to be somewhere in between the 'base case' and 'severe case' we looked at in our work.) But I think there were some general lessons from the exercise we did that will be relevant if this particular coronavirus does become a global pandemic. One proviso is that a key assumption we made about the pandemic is that it was mainly a 3 month affair, and obviously what I have to say is dependent on it being short-lived.

It is worth saying at the start that the bottom line of all this for me is that the economics are secondary to the health consequences for any pandemic that has a significant fatality rate (as coronavirus so far appears to have). The economics are important in their own right and as a warning to avoid drastic measures that do not influence the number of deaths, but beyond that there is no meaningful trade-off between preventing deaths and losing some percent of GDP for less than half the year. 

Let me start with the least important impact from an economic point of view, and that is the fall in production due to workers taking more time off sick. It is least important in part because firms have ways of compensating for this, particularly if illness is spread over the quarter. For example those who have been sick and come back to work can work overtime. This will raise costs and might lead to some temporary inflation, but the central bank should ignore this.

This 'direct' impact of the pandemic will reduce GDP in that quarter by a few percentage points. The precise number will depend on what proportion of the population that get sick, on what the fatality rate in the UK turns out to be, and how many people miss work in an attempt not to get the disease. The impact on GDP for the whole year following the pandemic is much less at around 1% or 2%, partly because output after the pandemic quarter is higher as firms replenish diminished stocks and meet postponed demand.

All this assumes schools do not close once the pandemic takes hold. School closures can amplify the reduction in labour supply if some workers are forced to take time off to look after children. On the basis of the assumptions we made, if schools close for around 4 weeks that can multiply the GDP impacts above by as much as a factor of 3, and if they close for a whole quarter by twice that. If that seems large, remember nationwide school closures impact everyone with children and not just those with the disease.

But even with all schools closed for 3 months and many people avoiding work when they were not sick, the largest impact we got for GDP loss over a year was less than 5%. That is a one quarter very severe recession, but there is no reason why the economy cannot bounce back to full strength once the pandemic is over. Unlike a normal recession, information on the cause of the output loss, and therefore when it should end, is clear.

All this assumes that consumers who have not yet got the disease do not alter their behaviour. For a pandemic that spreads gradually this seems unlikely. The most important lesson I learnt from doing this study is that the pandemic need not just be a supply shock. It can also be a demand shock that can hit specific sectors very hard, depending on how consumers behave. This is because a lot of our consumption nowadays can be called social, by which I mean doing things that bring you into contact with other people. Things like going to the pub, to restaurants, to football matches or travel. Other sectors that provide consumption services that involve personal contact (e.g haircuts) and can easily be postponed may also be hit.

If people start worrying about getting the disease sufficiently to cut back on this social consumption, the economic impact will be more severe than any numbers discussed so far. One reason it is severe is that it is partly a permanent loss. Maybe you will have a few more meals out once the pandemic is over to make up for what you missed when you stayed home, but there is likely to be a net fall in your consumption of meals out over the year. What I realised when I did the analysis was just how much of our consumption was social.

This is why the biggest impacts on GDP occur when we have people reducing their social consumption in an effort not to get the disease. However falls in social consumption do not scale up all scenarios by the same amount, for the simple reason that supply and demand are complimentary. If school closures and people taking more time off work increase the size of the supply shock, the demand shock has less scope to do damage. The largest fall in annual GDP in all the variants we looked at was 6%.

Could conventional monetary or fiscal policy offset the fall in social consumption? Only partially, because the drop in consumption is focused on specific sectors. What is more important, and what we didn't explore in the exercise, is what would happen if the banks failed to provide bridging finance for the firms having to deal with a sudden fall in demand. The banks may judge that some businesses that are already indebted may not be able to cope with any additional short term loans, leading to business closures during the pandemic.

It is in this light that we should view the collapse of stock markets around the world. In macroeconomic terms this is a one-off shock, so Martin Sandbu is right that the recent stock market reaction looks overblown. But if many businesses are at financial risk from the temporary drop in social consumption, that implies a rise in the equity risk premia, which helps account for the size of the stock market collapse we have seen. (I say 'helps' deliberately, as much of the impact will be on smaller businesses that do not find their way into the main stock market indices.)  

If I was running the central bank or government, I would have already started having conversations with banks about not forcing firms into bankruptcy during any pandemic. 

But economics can also influence health outcomes, and not just in terms of NHS resources. For a minority of self employed workers there will be no sick-pay and those without a financial cushion will be put under stress. One of the concerns as far as the spread of the pandemic is concerned is that workers will not be able to afford to self-isolate if they have the disease. So if I was in government I would be thinking of setting up something like a sick-leave fund that such workers could apply to if they get coronavirus symptoms.

The government also needs to think about keeping public services and utilities running when workers in those services start falling ill. In fact there are a whole host of things the government should now be doing to prepare for a pandemic. It is at times like these that we really need governments to act fast and think ahead. Do we in the UKand US citizens, have confidence that the government will do what is required? One lesson of coronavirus may be never put into power politicians that have a habit of ignoring experts.

 -- via my feedly newsfeed

OK. I have got to stop playing my position, because this is more important for America today: Jill Lepore : The Last Ti... [feedly]

OK. I have got to stop playing my position, because this is more important for America today: Jill Lepore : The Last Ti...

OK. I have got to stop playing my position, because this is more important for America today: Jill LeporeThe Last Time Democracy Almost Died 'The endless train of academics were also called upon to contribute to the nation's growing number of periodicals. In 1937, The New Republic, arguing that "at no time since the rise of political democracy have its tenets been so seriously challenged as they are today," ran a series on "The Future of Democracy," featuring pieces by the likes of Bertrand Russell and John Dewey. "Do you think that political democracy is now on the wane?" the editors asked each writer. The series' lead contributor, the Italian philosopher Benedetto Croce, took issue with the question, as philosophers, thankfully, do. "I call this kind of question 'meteorological,' " he grumbled. "It is like asking, 'Do you think that it is going to rain today? Had I better take my umbrella?' " The trouble, Croce explained, is that political problems are not external forces beyond our control; they are forces within our control. "We need solely to make up our own minds and to act"...

...Don't ask whether you need an umbrella. Go outside and stop the rain. Here are some of the sorts of people who went out and stopped the rain in the nineteen-thirties: schoolteachers, city councillors, librarians, poets, union organizers, artists, precinct workers, soldiers, civil-rights activists, and investigative reporters. They knew what they were prepared to defend and they defended it, even though they also knew that they risked attack from both the left and the right. Charles Beard (Mary Ritter's husband) spoke out against the newspaper tycoon William Randolph Hearst, the Rupert Murdoch of his day, when he smeared scholars and teachers as Communists. "The people who are doing the most damage to American democracy are men like Charles A. Beard," said a historian at Trinity College in Hartford, speaking at a high school on the subject of "Democracy and the Future," and warning against reading Beard's books—at a time when Nazis in Germany and Austria were burning "un-German" books in public squares. That did not exactly happen here, but in the nineteen-thirties four of five American superintendents of schools recommended assigning only those U.S. history textbooks which "omit any facts likely to arouse in the minds of the students question or doubt concerning the justice of our social order and government." Beard's books, God bless them, raised doubts.

Beard didn't back down. Nor did W.P.A. muralists and artists, who were subject to the same attack...

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