Quick Comment on “Making Money” from the Bailout [feedly]

Baker is back to regular blogging! He must be agitated. When he is, the zingers keep coming!!

Quick Comment on "Making Money" from the Bailout
https://cepr.net/quick-comment-on-making-money-from-the-bailout/

Folks probably recall that the federal government "made money" from the last bailout. Guess what? We're going to make money from this one too.

Let's go through the simple logic here. The Fed is by far the lowest cost borrower in the country. It can borrow right now at an average interest rate of roughly 0.5 percent. (That's averaging short-term and long-term rates.) It is going to lend to the bailout beneficiaries at a higher rate, let's say 4.0 percent. This means that it will net 3.5 percent annually on the money it lends out.

So, if we take the $17 billion designated for Boeing in the rescue package and assume it is borrowed for a year (it may be considerably longer), then we will make $595 million on this bailout. Sounds great doesn't it?

But let's step back for a second. The government can lend money to anyone in this crisis. If Boeing is borrowing from the government at a 4.0 percent interest rate, then it is because it would have to pay more to borrow in the private market. Let's say it would cost borrowing 9.0 percentage points to borrow in the private market. This means that we effectively subsidized the loan by 5.0  percentage points (9.0 percent minus 4.0 percent). That is the same as handing Boeing $500 million on its one-year loan.

If this is hard to understand, suppose I had a home that I paid $150,000. Imagine that I could sell it for $250,000 on the market, but I chose to sell it to a friend for $200,000. While I still made $50,000 on the home (I got $200,000 from my friend, but only paid $150,000), I effectively gave my friend $50,000.

In this case Boeing is our friend since it is in the privileged position of being able to borrow at below market interest rates. In the Great Recession, Goldman Sachs, Citigroup and the other big banks were our friends.

Of course, in principle, there is the risk that these businesses will go under and not be able to repay their loans. In the Great Recession that risk was essentially zero. As then Treasury Secretary Timothy Geithner wrote in his autobiography, he was not going to allow any more Lehmans. If any of the major banks was threatened with failure, he would give them enough of the taxpayers' dollars to keep them going. Eventually, getting below market interest rate loans from the government, coupled with a fairly explicit government guarantee of solvency, will allow even a seriously underwater bank to get back in the black. This is the story of the 2008-09 bailouts.

Can we be assured that Boeing will be able to survive to pay back its loans? My personal bet is that, if $17 billion is not enough to get it through, there will be Round II and Round III of the rescue, so that eventually our politicians and hack columnists will be able to say that we made a profit on the bailout. 

So folks, you should be happy that we are bailing out all these big corporations. We're going to make money on it!

The post Quick Comment on "Making Money" from the Bailoutappeared first on Center for Economic and Policy Research.

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Stiglitz Calls for 'Super Chapter 11' to Avoid Systemic Collapse [feedly]

This would be an excellent "socialist moment" if, in exchange for "super" bankruptcy protection, the state obtains a STAKE in the too big to fail corporation.  Interesting path to "the commanding heights" -- we have to have it, even if it cannot be safely run for profit maximization.

Stiglitz Calls for 'Super Chapter 11' to Avoid Systemic Collapse
https://www.bloomberg.com/news/articles/2020-04-09/could-super-chapter-11-help-an-economy-avoid-systemic-collapse

text only:

Bankruptcy laws were written to help individual companies. They don't work so well when many get into trouble at once. The companies' balance sheets are interdependent: Reducing what one owes will weaken its creditors, making it impossible for them to pay their creditors, and so on. Businesses that could have bounced back are forced to liquidate as their court cases drag on.

This is called systemic bankruptcy, and it's the nightmare scenario for the financial impact of the Covid-19 pandemic. Steps can be taken to avoid it, but it's not clear whether governments and central banks in the U.S. and around the world will take them in time.

Bloomberg U.S. Financial Conditions Index

A measure of stress in the bond, equity, and money markets to assess the overall availability of credit

Readings above zero mean conditions are more accommodative. Readings below zero mean conditions are tighter.

Data: Bloomberg

The best way to avoid debt gridlock is to use government support to keep the number of bankruptcies below the tipping point at which they become systemic, says Joseph Stiglitz, a Nobel laureate economist at Columbia University. He co-wrote a paper with Tarik Roukny and Stefano Battison about interconnectedness and systemic risk that was published in 2018 by the Journal of Financial Stability. "Somewhere between the case of an isolated bankruptcy (American Airlines) and mass default (Indonesia, with 70% of businesses in arrears) is the borderline between individual and systemic bankruptcy. There's no bright line," Stiglitz wrote in an email on April 6. (His example of an isolated bankruptcy, American Airlines, was under protection from creditors from 2011 to 2013.)

If government aid fails to stem the tide, Stiglitz says, the fallback should be what he calls "super Chapter 11"—building on the chapter of the federal bankruptcy code that's designed to keep a company in business. It would resolve the problems of many companies at once under the auspices of a government-appointed supervisor. It would also be fast, usually keep management in place, and give more consideration to workers and less to creditors than in conventional bankruptcies, in his vision.

In some cases the federal government would inject money in return for shares, so taxpayers would get a piece of the potential upside. "This is going to be rough justice," Stiglitz says. Companies that don't like the government's offer could try their luck in standard Chapter 11. He says he hasn't been approached by anyone in Congress or the White House about implementing super Chapter 11, which he and co-author Marcus Miller broached in an unpublished paper in 1999 and again in 2010 in an article in Britain's Economic Journal.

Systemic bankruptcy is more than a remote threat. The record jump in initial claims for unemployment insurance—10 million in the two weeks through March 27, vs. a recent two-week average of fewer than half a million—shows that companies are in extreme distress and a lot of consumers are having trouble paying bills. A handful of companies have already filed for Chapter 11 citing Covid-19, including British clothing retailer Laura Ashley Holdings Plc and U.S. energy companies Whiting Petroleum Corp. and Hornbeck Offshore Services Inc.

The underlying problem is that, as Harvard economist Lawrence Summers has put it, economic time has stopped because of the pandemic, but the financial clock continues to tick. Interest payments, rents, and other obligations are still coming due, but the money to cover them has dried up. Yet a blanket moratorium on all financial obligations isn't the right solution. It would benefit some well-off individual and business debtors that don't require the help and harm some who need the payments, such as an elderly homeowning couple who live off the rent from a tenant or two.

What's needed, says David Skeel, a University of Pennsylvania Law School professor, is a yellow flag like the one waved at a Nascar race when there's an accident. The flag doesn't stop movement, but it locks all the cars—in this case, all the debtors and creditors—in the same order so no one gets an advantage during the pause.

The $2.2 trillion CARES Act that President Trump signed on March 27, and the monetary actions of the Federal Reserve, attempt to wave a yellow flag for the U.S. economy. The stimulus bill includes grants to families and loans to companies that will be forgiven if they don't reduce staff. Small businesses can reorganize in Chapter 11 more easily under a new subchapter that took effect in February, and the CARES Act temporarily makes businesses with up to $7.5 million in debt eligible for the flexibility. Meanwhile, the Fed is buying Treasury securities and mortgage-backed securities to suppress borrowing costs and finding creative ways to extend a lifeline to various sectors.

It's almost certainly not enough, though. The U.S. economy needs nothing short of life support for the duration of the lockdown, and some sectors aren't being helped. For example, Michael Bright, chief executive officer of the Structured Finance Association, says that mortgage servicing companies—which collect payments—are caught in a vise between home and building owners who are skipping payments and the ultimate lenders, or owners of mortgage-backed securities, who continue to expect payment on the loans. "The government is kind of waiting to see how bad it gets. It's a dangerous game they're playing," he says.

Companies that lack investment-grade bond ratings also have less access to help, though some are eligible for the Small Business Administration's Paycheck Protection Program or the Federal Reserve's forthcoming Main Street Business Lending Program. Critics say some of those debtors, such as companies that borrowed heavily to juice their investment returns in the expectation of good times, shouldn't be bailed out. But Lee Shaiman, executive director of the Loan Syndications and Trading Association, says circumstances are so extreme that all companies should be eligible for aid, regardless of their investment rating: "I look at this as a meteor hitting the Earth. It could never have been anticipated."

The same thing happened in the 2008-09 financial crisis, which pitted those who favored bailouts to rescue the economy against those who opposed helping fat cats. Stiglitz says a few simple rules can separate the deserving from the undeserving. Without such rules, he says, "This could be a drawn-out process. If it's a drawn-out process, the likelihood of systemic bankruptcy increases."
 
Read more: The Stock Market Is Telling Trump to Listen to the Experts

BOTTOM LINE - Policymakers need a way to prevent debtors from going under while the economy is on lockdown. A kind of simplified, fast Chapter 11 process could be part of the solution.



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Josh Bivens: How can the U.S. get more transformative with its coronavirus-shock response? With payroll guarantees and an economic ‘deep freeze’ plan. [feedly]

How can the U.S. get more transformative with its coronavirus-shock response? With payroll guarantees and an economic 'deep freeze' plan.

Josh Bivens

https://www.epi.org/blog/how-can-the-us-get-more-transformative-with-its-coronavirus-shock-response-with-payroll-guarantees-and-an-economic-deep-freeze-plan/

Since March 8, Congress has passed three bills to provide resources for health care and economic relief and recovery in response to the shock of the coronavirus. Yet more remains to be done. We should continue to make marginal improvements on the existing framework of response, but we should also think about how to move our policy response closer to the international best practices established by other countries.

At the heart of those best practices are payroll guarantees and a willingness to "deep freeze" the economy.

Other nations have shown greater social solidarity and a much keener recognition of just how different the coronavirus shock is from previous recessions. In essence, the public health response to the coronavirus has mandated an economic "sudden stop." The challenge is giving households and businesses resources to live on during the shutdown (relief), while making an economic bounceback once the all-clear sounds as fast as possible (recovery).

One key ingredient in fostering a rapid recovery is preserving labor market matches between workers and their employers and allowing employers to continue paying fixed nonlabor costs during the shutdown period.

We should certainly hope we never have to do something like this again. But hope isn't a plan.

Nations like the United Kingdom, Denmark, and the Netherlands have all taken on this kind of "payroll of last resort" plan, with the central government paying up to 90% of all payroll costs for firms affected by the public health shutdowns. Some proposals—like that forwarded by economists Emmanuel Saez and Gabriel Zucman—would go even further and would have the government essentially replace all demand in the economy over the shutdown period, becoming the purchaser of last resort and covering every business payment over this period.

In essence, all of these plans envision an economic "deep freeze," in which large swaths of the economy shut down, but workers and businesses are held as near harmless as possible.

Given that the U.S. has passed three bills and allocated trillions of dollars already to approaches that do not lead to this kind of comprehensive "deep freeze" of the economy, it may be hard now to completely mirror other countries' ambitious approach in the current crisis. However, it is far from guaranteed that we will never experience an epidemic-mandated shutdown ever again. The only thing worse than preparing to fight the last war is being unprepared even for a repeat of the last war. Further, even the current coronavirus might induce localized shutdowns in the coming years before a vaccine is developed.

Having a plan to "deep freeze" local economies without causing great human misery would be a smart thing.

One attractive plan going forward would hinge on a vastly improved unemployment insurance system (UI). If our UI system allowed temporary changes in the replacement rate of UI benefits relative to previous earnings and allowed for temporary changes in maximum benefits, then it could pay 100% of benefits for nearly every worker facing loss of employment during an episode like the one we're facing now. Further, if the system could handle furloughs and short-hours compensation and not just layoffs, then all labor demand extinguished by a public health shutdown could be compensated for by the UI system, and furloughs would allow employers to temporarily shed labor costs but still remain attached to their workers.

Other changes to our UI system—like the ability to waive one-week waiting periods or requirements for active job search—have been undertaken already in the response to the coronavirus, so these could serve as models for future response.

Finally, and most fundamentally, the biggest change needed to our UI system would just be the simple ability to process claims in a timely manner. One of the best parts of bolstering our UI system in these ways would be that the system would simply function much better and more flexibly even during run-of-the-mill recessions. Decades of neglect of our UI system left us deeply unprepared for the coronavirus shock.

For fixed costs (rent and interest payments, for example) faced by businesses—particularly small businesses—during the downturn, provisions that extended grants to firms to make rent and debt service payments during a shutdown could be instituted, based loosely on the small business provisions of the recently passed CARES Act (we'll talk a bit more about these provisions below).

Having wages paid directly to furloughed workers who remain attached to employers through the UI system would minimize the amount of money that had to run indirectly from the federal government through employers to employees during an economic "deep freeze." For many firms, just having labor costs lifted off of them during this type of shutdown might be enough to allow them to get through the period, and the inevitably bureaucratic process of applying for grants to cover fixed costs could be skipped. If some subset of firms with particularly high nonlabor costs needed to lean on the ability to get aid for rent and interest payments (restaurants, perhaps), this could be more easily accomplished with fewer businesses overall crowding into this program.

Another option that leans less heavily on the UI system could have both labor and nonlabor fixed costs paid by the federal government for shutdown firms. This is largely what the money appropriated for the Small Business Administration (SBA) in the CARES Act is meant to do. However, the administrative capacity of the SBA and of banks serving small and medium-sized businesses is not obviously up to the task of having this money reach firms in time to keep workers attached to employers throughout the downturn.

A fundamental transformation of the SBA paycheck protection program (PPP), to make it more like what countries such as Denmark and the UK have done,

• would likely see Treasury, not the SBA, manage the plan;
• would remove size caps;
• and would remove the role of banks as loan processors.

If it worked smoothly enough, many employers could choose to pay for continuing payroll with money allocated through this program rather than furloughing workers and having them claim UI directly. This would be an appealing near-term workaround for not having a well-functioning UI system.

Just because Congress has acted already and taken steps down a different path than the comprehensive "deep freeze" approach doesn't mean it's too late to come forward with a more transformative plan. We know that more help for relief and recovery is absolutely needed—our recommendations for filling in some of the more substantial cracks in the existing coronavirus response framework are detailed here.

Importantly, there is already talk of modifications to the SBA PPP plan that could let it function more substantially as an instrument for "deep freezing" small business payroll throughout the crisis, even without the fundamental transformations described above. For example, one provision that triggers forgiveness of the payroll protection loans is the share of the total loan that is not spent on payroll (25%). As noted before, some small businesses have higher nonlabor costs than this and so this might worry them that their loans will not be forgiven. Boosting the share of allowable nonpayroll costs would make this more attractive (to be clear, firms will still have to preserve their entire payroll to get loan forgiveness).

Congress could also think about boosting the overall allocation of money to the PPP, to reassure potential borrowers that money for loan forgiveness will not run out before it reaches them. Extra money could also slightly bump up the fees banks get for processing loans, with bonuses for timely processing. Finally, in recent days the Federal Reserve has also indicated a willingness to buy these guaranteed loans from banks to ensure banks retain enough capital to keep making loans. This was identified as a potential bottleneck for making loans that may now be removed.

The work in providing relief and priming recovery from the coronavirus shock is not done.

There are gaping cracks to be filled in to even the most admirable bits of relief and recovery measures that have passed. And we should move our national response as close as possible to international best practice as we can before the end of this crisis. This best practice is letting the large swaths of the economy enter a deep freeze that does no harm to workers and business owners, and lets them preserve labor market matches throughout the crisis. Getting as close as possible to this best practice in the current crisis will reduce human suffering, and having this model for the next time the national economy—or a large local economy—must reimpose physical distancing measures to fight an epidemic could be valuable.

We should certainly hope we never have to do something like this again. But hope isn't a plan.

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Josh Bivens: Even with already-passed relief and recovery measures, job losses from the coronavirus shock could easily exceed 20 million [feedly]

Even with already-passed relief and recovery measures, job losses from the coronavirus shock could easily exceed 20 million
https://www.epi.org/blog/even-with-already-passed-relief-and-recovery-measures-job-losses-from-the-coronavirus-shock-could-easily-exceed-20-million/

This blog post is based on a particular GDP forecast from 3/31. If new and substantially different forecasts are released, we will update these numbers.

The effect of the novel coronavirus and the public health measures enacted to slow its spread—particularly "social distancing"—have been profound for economic activity in the United States. We have already seen some of the leading edge of this effect in recent data releases. This post highlights some recent forecasts of the effects of the coronavirus shock on measures of economic activity, and what these contractions in economic activity mean for jobs. Its key findings are:

• Forecasts of the size of the drag on growth imposed by the coronavirus (and associated public health measures) have risen rapidly in recent weeks.
• Currently, forecasts indicate that gross domestic product (GDP) will be roughly 12.8% smaller by the end of June 2020 due to coronavirus effects—an extraordinarily fast economic collapse.
• To return to pre-shock economic health by the middle of 2021, at least $1.4 trillion in additional recovery spending would be needed—with $2 trillion being a more-prudent target.
• A contraction this rapid would be consistent with job-loss of roughly 19.8 million by the end of June 2020.
  • This estimate of 19.8 million jobs lots could be too high or too low, for a number of reasons. For example, employers could reduce hours instead of laying off workers and because policies to keep workers on the payroll may be effective, keeping job-losses down. Or coronavirus effects may be concentrated in relatively labor-intensive industries, so employment might actually fall faster than GDP. A plausible range is between 18 and 28 million jobs lost.

On March 15, the Goldman Sachs forecast that GDP would contract at a 5% annualized rate in the second quarter of 2020. On March 20, their forecast jumped to 24% annualized contraction. And on March 31, their forecast for second quarter contraction grew to 34%. This pattern of rapid deterioration in projected coronavirus-related contraction has been true across literally every other forecaster. The logic of these forecasts of rapid and historically large collapses in GDP is easy to see. Even a 5% across-the-board contraction in consumer spending over a short period of time (say because a housing price bubble popped) can send the economy into a steep recession. But the coronavirus is causing well over half of all economic activity in some major sectors to stop dead. For example, accommodations and food service by itself accounts for 14% of all consumer spending. If economic activity in just this sector is cut in half, this alone can drive a steep recession. But, of course, other sectors are also affected and contraction in some sectors will be well over 50%.

Because these forecasts are expressed as quarterly changes in GDP expressed at an annualized rate, they can be slightly confusing. You can't quite just divide the annualized rates of change by four to figure out how much smaller GDP would be in a given quarter, but you get close to the right answer doing that. The figure below shows GDP if it had grown at a trend rate of growth of 2% (roughly what has characterized recent years' growth) versus what the latest projection from Goldman Sachs shows. The difference between the two is explained in the chart note.

Figure A

By the end of the second quarter (June), GDP is 12.8% smaller than it would have been absent the coronavirus shock. Crucially, even with fast projected growth at the end of this year, the economy remains 5.1% of GDP beneath its pre-crisis path by the middle of 2021 (and still 4% beneath at the end of 2021).

This forecast accounts for the CARES Act and even assumes a 4th, so-far-unpassed, recovery package that contains substantial aid to state and local government (a particularly effective form of fiscal support). This implies that to return the economy to full potential by the middle of 2021, another recovery package that contains "substantial" state and local aid as well as 5% of GDP on top of that is needed. If the baseline aid to state and local governments assumed in the Goldman Sachs forecasts was $250 billion, this would imply roughly another $1.4 trillion is needed between the end of the CARES Act and mid-2021 to engineer a full recovery by then.

This additional $1.4 trillion in aid needed gets substantially larger, however, if we do not actually see the extraordinarily fast 15% growth in the last half of 2020 that Goldman Sachs is currently projected. Prudence would argue for a recovery aid package more on the order of $2 trillion. What we've learned from the recovery from the Great Recession is that demand growth needs substantial help from policymakers—there are long-run trends in the economy suppressing this growth, so we should always aim to overshoot on recovery spending.

In regard to what this means for employment, if the economy is producing 12.8% less in terms of goods and services, it should be using 12.8% less labor, all else equal. Applying this 12.8% decline to the 2019 annual employment level in the Current Population Survey (CPS) and the Current Employment Survey (CES) of 154.2 million gives the 19.8 million job-loss figure.

This figure on job losses might be too high—often in recessions it is average hours rather than payroll headcount which are reduced as firms contract (and hours not headcount which rebound when growth starts again). To neutralize the effect of changing hours, one can look at the change in full-time equivalent employees (FTEs) associated with a 12.8% smaller GDP by the end of June. This translates into roughly 18.1 million FTEs shed due to the GDP decline.

However, much of this margin of adjustment absorbed by hours in recessions is less a function of firms' response and more a function of which sectors are actually affected. For example, manufacturing jobs are disproportionately lost in most recessions. These jobs have high average hours of work and as they are lost, average hours worked economy-wide falls. But the coronavirus recession is landing first in service-sector jobs that are low-hours on average, so as these jobs are lost, average hours economy-wide may actually rise, forcing more adjustment to show up in headcount.

Further, in the coronavirus recession, employment may fall more than 1-for-1 with GDP, as the sectors that are being affected first are extremely labor-intensive. A contrast with manufacturing might again be useful. When manufacturing bears a disproportionate share of job-loss in recessions, because manufacturing is extremely capital-intensive, each job lost brings with it a lot of lost GDP. But for each service-sector job lost, much less GDP is brought down. So, any given decline in GDP will lead to more job-loss in the service-sector industries that seem to be bearing the first brunt of the coronavirus shock.

Earlier this week we examined initial unemployment insurance (UI) claims by industry from the state of Washington—the epicenter of the coronavirus outbreak in the United States. These claims—which should correlate tightly with layoffs and be a good sign of which sectors will suffer earliest from the coronavirus—skew heavily towards labor-intensive sectors with low ratios of value-added to hours worked. In fact, if we calculate the average labor-intensity of the sectors weighted by their share of new UI claims, they are fully 30 percent more labor-intensive than the economywide average, indicating that job-losses associated with a 12.8% decline of GDP by June might be substantially larger than 19.8 million—closer to 28 million.

More hopefully, the historical relationships between GDP and employment loss could be dampened by smart policy, particularly policy the encouraged employers to engage in "labor hoarding" during the economic shutdown—keeping workers on payroll even at zero hours until the economy restarts. In recent decades, U.S. firms have been extremely disinterested in hoarding labor over recessions, instead jettisoning workers at the first sign of distress. This has been one manifestation of typical workers' lack of labor market leverage in this time. But the recently passed CARES Act includes provisions that could encourage this labor-hoarding. For one, firms can reduce hours—sometimes all the way to zero (furlough) and workers can have their wages recouped through UI benefits. Additionally, the $350 billion set aside for small business aid provides a powerful incentive for firms to maintain payroll throughout the crisis—if they do, generous loan terms become even more generous and are completely forgiven. The more firms hoard labor during the economic shutdown, the easier it will be to organize a rapid ramp-up of production once the social distancing measures ease. We should certainly hope these measures work and job-losses are less than what the GDP forecasts might imply.

The Goldman Sachs forecasts are consistent with substantial labor hoarding. They see unemployment reaching nearly 15% soon after June—a level consistent with job-losses of at least 18 million workers, all else equal. Yet they forecast payroll employment to fall by only 5 million workers in the second quarter of this year. The only way these numbers really hang together is if many workers are on temporary layoff or furlough (and hence are counted as unemployed in household surveys where workers are asked their status) yet still appear on the payroll of firms (which are the surveyed unit for calculating total employment in the United States)

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Dean Baker: The Length of the Shutdowns Will be Determined by Donald Trump, not Science [feedly]

you got to love Baker's bare-knuckled approach to bullshit

The Length of the Shutdowns Will be Determined by Donald Trump, not Science

https://cepr.net/the-length-of-the-shutdowns-will-be-determined-by-donald-trump-not-science/

Many people are thinking about policy through this crisis as though the country will be largely shut down for many months. This is not going to happen. The length of this shutdown will be determined by Donald Trump, not science, and he is not going to allow a shutdown of many months regardless of what the science says.

We know that Trump was hugely resistant to the shutdown all along. Just over a week ago he was boasting about how we would have full church pews on Easter. The idea that this could means hundreds of thousands of additional infections and tens of thousands of deaths apparently did not enter his head.

Fortunately, some of the public health experts were able to deter his Easter Sunday plans, but it is widely reported that he is anxious to end the shutdown and get back to business as normal. After all, the shutdown is depressing the stock market.

A factor that is likely to push Trump further in this direction is the fact that several European countries are making plans to reopen parts of their economy. Both Austria and Denmark plan to end parts of their shutdown in the next couple of weeks. Undoubtedly Trump will be driven into a rage by the idea that Europe, China, South Korea, and other wealthy countries are back on their feet, while Donald Trump's America is still in shutdown mode.

Of course, these countries have done a far better job testing and controlling the virus, which makes them better situated to reopen their economies (it may still be too soon for them), but Donald Trump doesn't care about such details. The governors will actually make the call on reopening their states, but it is hard to imagine many red state governors resisting the demands from Trump to reopen.

The Democratic governors of states like New York and California may be reluctant to go along, but Trump will have zero qualms about threatening them with denials of medical equipment and other resources if they don't fall in line. Also, the Republicans deliberately starved the blue states of money in the last rescue package. The cost of remaining shut down will mean not having the money to pay the salaries of the police department, the fire department, or for the medical care of people suffering from the coronavirus.

So, when we ask how long the shutdown will last, don't look to the rate of spread of the pandemic or what the epidemiologists say, look to Donald Trump's anger and frustration. We will stay shutdown as long as his fragile ego will allow, and not a day longer.

 

The post The Length of the Shutdowns Will be Determined by Donald Trump, not Science appeared first on Center for Economic and Policy Research

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Dean Baker: Basic Economics for Economic Columnists: A Depression is a Process, not an Event [feedly]

Basic Economics for Economic Columnists: A Depression is a Process, not an Event

https://cepr.net/basic-economics-for-economic-columnists-a-depression-is-a-process-not-an-event/

With the economy going into a shutdown mode for at least month, and possibly quite a bit longer, we're again hearing the cries from elite economics columnists about a Second Great Depression. These are pernicious, not only because they are wrongheaded, but they can be used to justify bad things, like giving hundreds of billions of dollars to the bankers who wrecked the economy with their recklessness during the housing bubble.

The basic and simple error made by the Second Great Depression gang is that they imagine we can be condemned to a prolonged period of high unemployment and slow growth by a single bad event. Their story is that letting the banks fail caused the first Great Depression and that we would have had round two if we let the market work its magic in 2008-09 on Goldman Sachs, Citigroup, and the rest. The uncontrolled bank failures were indeed very bad news for the economy at the start of the Great Depression, and a wave of major bank failures in 2008-09 would undoubtedly have made the initial slump worse in the Great Recession, but neither necessitated a prolonged slump.

What got us out of the Great Depression was the massive spending associated with World War II. There was no economic reason we could not have had this spending in 1931 rather than 1941, except have it focused on building roads, schools, hospitals, and other socially useful projects. We didn't have massive spending in 1931, or 1932, or even during the New Deal, for political reasons, not economic ones.

So let's stop the game-playing. We need good policy right now to keep people whole through a shutdown period and then to get people back to work when we reopen. Ideally, we will also be addressing long-neglected needs, like universal health care, child care, and slowing global warming, but this Second Great Depression stuff is just silly.

The post Basic Economics for Economic Columnists: A Depression is a Process, not an Event appeared first on Center for Economic and Policy Research.

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The latest research on the public health and economic costs and benefits of containing the coronavirus pandemic [feedly]

The latest research on the public health and economic costs and benefits of containing the coronavirus pandemic
https://equitablegrowth.org/the-latest-research-on-the-public-health-and-economic-costs-and-benefits-of-containing-the-coronavirus-pandemic/

Scientists around the world are scrambling to find and test anti-viral drugs and a new vaccine for COVID-19, the disease behind the coronavirus pandemic now sweeping the planet. Economists and other social scientists are equally busy attempting to unravel the economic and social consequences of the new coronavirus pandemic. These scholars are looking at a range of issues. Several examine the public health and economic costs and benefits, and the overall efficacy of social distancing. Others explore the links between the epidemiology of the disease and its economic consequences. And others are looking at U.S. historical lessons about the economic impact of the 1918 "Spanish flu" and the political impact of other recent public health scares.

We've selected 10 recently published working papers to highlight. Two of these studies are real-time analyses of social distancing and mobility in Italy and China, respectively, amid the coronavirus pandemic, looking at the public health dynamics in those two countries. Three of the studies step back into U.S. history to offer lessons about the 1918 flu pandemic on subsequent economic growth and about the reaction of voters to Ebola during the 2014 midterm elections. And the other four working papers model the spread of the coronavirus and its social and economic implications.

Let's preview each of them in turn, grouping them together in rough subject categories.

Estimating the economic effects of social distancing and quarantining

"Does Social Distancing Matter?" by Michael Greenstone, director of the Becker Friedman Institute for Economics at the University of Chicago, and Vishan Nigam, a predoctoral fellow at the Energy Policy Institute at the University of Chicago

Greenstone and Nigam project that three months to four months of "moderate social distancing" in the United States starting in late March 2020 would save 1.7 million lives by October 1. The two economists then employ the U.S. government's value of a statistical life to project that "the mortality benefits of social distancing are about $8 trillion or $60,000" per U.S. household; about 90 percent of the "monetized benefits are projected to accrue to people age 50 or older." Their analysis suggests that moderate social distancing over the next seven months would have substantial medium- and long-term economic benefits.

"What Will Be the Economic Impact of COVID-19 in the US? Rough Estimates of Disease Scenarios," by economist Andrew Atkeson at the University of California, Los Angeles

Atkeson engages in another modeling exercise to estimate the spread of COVID-19 over the next 12 months to 18 months based on those who are susceptible to the disease, actively infected with the disease, or either recovered or dead and so no longer contagious. How an epidemic plays out over time is determined by the transition rates between these three states. The working paper applies this model to estimate whether "the fraction of active infections in the population exceeds 1 percent (at which point the health system is forecast to be severely challenged) and 10 percent (which may result in severe staffing shortages for key financial and economic infrastructure) as well as the cumulative burden of the disease over an 18-month horizon." They say their model will allow policymakers to make "quantitative statements regarding the tradeoff between the severity and timing of suppression of the disease through social distancing and the progression of the disease in the population."

"The Macroeconomics of Epidemics," by economists Martin S. Eichenbaum at Northwestern University, Sergio Rebelo at Northwestern's Kellogg School of Management, and Mathias Trabant at the School of Business and Economics at Freie Universität Berlin

In this working paper, Eichenbaum, Rebelo, and Trabant examine "the interaction between economic decisions and epidemics." They model how "people's decisions to cut back on consumption and work reduces the severity of the epidemic, as measured by total deaths." They then explore how these decisions "exacerbate the size of the recession caused by the epidemic." They conclude that "in our benchmark model, when vaccines and treatments don't arrive before the epidemic is over and healthcare capacity is limited, optimal containment policy saves roughly half-a-million lives in the United States."

"Data Gaps and the Policy Response to the Novel Coronavirus," by economist James H. Stock at Harvard University

Stock employs another epidemiological model of contagion to provide economists with a "framework for understanding the effects of social distancing and containment policies on the evolution of contagion and interactions with the economy." Stock explores how different policies that yield the same transmission rate can "have the same health outcomes but can have very different economic costs." His working paper suggests that "one way to frame the economics of shutdown policy" is to find those policies that "trade off the economic cost against the cost of excess lives lost by overwhelming the healthcare system."

"An SEIR Infectious Disease Model with Testing and Conditional Quarantine," by economists David W. Berger at Duke University, Kyle Herkenhoff at the University of Minnesota (and an Equitable Growth grantee), and Simon Mongey at the University of Chicago

These three economists employ another infectious disease epidemiology model to understand how "the role of testing and case-dependent quarantine" can "dampen the economic impact of the coronavirus and reduce peak symptomatic infections," both of which, they say, "are relevant for [understanding] hospital capacity constraints." Their model starts at "a baseline quarantine-only policy that replicates the rate at which individuals are entering quarantine in the United States in March 2020," they explain, then posit that their model can be "used to forecast the effects of public health and economic policies" as the coronavirus continues to spread across the nation.

Real-time research on the coronavirus pandemic in China and Italy

"Human Mobility Restrictions and the Spread of the Novel Coronavirus (2019-nCoV) in China," by Hanming Fang at the Ronald O. Perelman Center for Political Science and Economics, Long Wang at ShanghaiTech University, and Yang Yang at the CUHK Business School at The Chinese University of Hong Kong

In this working paper, these three scholars "quantify the causal impact of human mobility restrictions, particularly the lockdown of the city of Wuhan on January 23, 2020, on the containment and delay of the spread of [COVID-19]." Their working paper seeks "to disentangle the lockdown effect on human mobility reductions from other confounding effects including panic effect, virus effect, and the Spring Festival effect" in Wuhan (referring to the Chinese New Year dates of January 23, to February 2, 2020), finding that "the lockdown of the city of Wuhan on January 23, 2020 contributed significantly to reducing the total infection cases outside of Wuhan." They also find that "that there were substantial undocumented infection cases in the early days of the [COVID-19] outbreak in Wuhan and other cities of Hubei province, but over time, the gap between the officially reported cases and our estimated 'actual' cases narrows significantly." In addition, they find "evidence that enhanced social distancing policies in the 63 Chinese cities outside [of] Hubei province are effective in reducing the impact of population inflows from the epicenter cities in Hubei province on the spread of [COVID-19] in the destination cities elsewhere."

"Compliance with COVID-19 Social-Distancing Measures in Italy: The Role of Expectations and Duration," by Guglielmo Briscese at University of Chicago, Nicola Lacetera at University of Toronto, Maria Macis at Johns Hopkins University's Carey School of Business, and Mirco Tonin at Free University of Bozen-Bolzano

These four scholars examine something different than the rapid spread of the coronavirus in Italy, focusing instead on how Italians' "intentions to comply with the self-isolation restrictions introduced in Italy to mitigate the COVID-19 epidemic respond to the length of their possible extension." Based on survey results, they find that "respondents who are positively surprised by a given hypothetical extension (the extension is shorter than what they expected) are more willing to increase their self-isolation." But they also find that "negative surprises (extensions longer than expected) are associated with a lower willingness to comply." They conclude that their findings "provide insights to public authorities on how to announce lockdown measures and manage people's expectations."

Historical lessons from past epidemics

"The Coronavirus and the Great Influenza Pandemic: Lessons from the 'Spanish Flu' for the Coronavirus's Potential Effects on Mortality and Economic Activity," by economists Robert J. Barro at Harvard University, José F. Ursúa at the fund management firm Dodge & Cox, and Joanna Weng at EverBright, a healthy living online platform focused on Asia

These three economists examine the "mortality and economic contraction during the 1918–1920 Great Influenza Pandemic [to] provide plausible upper bounds for outcomes under …COVID-19." Extrapolating from data for 43 countries, they estimate "flu-related deaths in 1918–1920 of 39 million, 2 percent of world population." This indicates that "150 million deaths" are possible worldwide amid the current coronavirus pandemic. They find that "annual information on flu deaths [between] 1918–1920 and war deaths during WWI imply flu-generated economic declines for [Gross Domestic Product] and consumption in the typical country of 6 [percent] and 8 percent, respectively."

"Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu," by economists Sergio Correia at the Board of Governors of the Federal Reserve System, Steven Luck at the Federal Reserve Bank of New York, and Emil Verner at the Massachusetts Institute of Technology's Sloan School of Management

These three economists examine the "geographic variation in mortality during the 1918 Flu Pandemic" in the United States to arrive at the finding that "more exposed areas experience a sharp and persistent decline in economic activity." They estimate that the 1918 pandemic reduced manufacturing output by 18 percent and was driven by both supply- and demand-side shocks to the U.S. economy. They also examined the economic effects of the pandemic across U.S. cities, finding that "cities that intervened earlier and more aggressively do not perform worse and, if anything, grow faster after the pandemic is over." They conclude that the "economic costs and benefits of nonpharmaceutical interventions … not only lower mortality; they also mitigate the adverse economic consequences of a pandemic."

"The Virus of Fear: The Political Impact of Ebola in the U.S.," by economists Filipe R. Campante at Johns Hopkins University's School of Advanced International Studies, Emilio Depetris-Chauvin at Pontificia Universidad Católica de Chile, and Ruben Durante at Universitat Pompeu Fabra

This study by three economists and political scientists examines "how fear can affect the behavior of voters and politicians by looking at the Ebola scare that hit the United States a month before the 2014 midterm elections." They say that by "exploiting the timing and location of the four cases diagnosed in the United States, we show that heightened concern about Ebola, as measured by online activity, led to a lower vote share for the Democrats in congressional and gubernatorial elections, as well as lower turnout, despite no evidence of a general anti-incumbent effect (including on President [Barack] Obama's approval ratings)." They further note that "politicians responded to the Ebola scare by mentioning the disease in connection with immigration and terrorism in newsletters and campaign ads," a strategic response that "came only from Republicans, especially those facing competitive races, suggesting a strategic use of the issue in conjunction with topics perceived as favorable to them." Their conclusion about the effects of the Ebola scare in 2014: "Our findings indicate that emotional reactions associated with fear can have a strong electoral impact, that politicians perceive and act strategically in response to this, and that the process is mediated by issues that can be plausibly associated with the specific fear-triggering factor."

 -- via my feedly newsfeed