Proactive and reactive policies

New York magazine has a good article on Covid-19:

“Basically, going back to January, they’d be like, ‘China’s not going to control it; 80 percent of the population is going to get it; all efforts to contain it are going to fail; we have to learn to live with this virus; contact tracing and testing make no sense; this is going to be everywhere; right now we need to build up hospitals’ — which they didn’t even do. But they really didn’t think it was stoppable,” she says. “And then all of a sudden you started to see, in February, South Korea stopping it, Taiwan stopping it, and China stopping it. Then, in March, New Zealand. And then Australia. And then there’s this realization of, ‘Oh, wow. Actually, it is controllable.’”

At the beginning of March, South Korea was averaging more than 550 new daily confirmed cases, compared with just 53 in the U.K. At the end of the month, South Korea had 125; the U.K. was at 4,500 and climbing. “In the UK we have had nine weeks to listen, learn and prepare,” Sridhar wrote angrily in the Guardian, berating the British regime for failing to establish basic systems for supplies, testing, and contact tracing.

Later they point out that things are not quite that simple:

Francois Balloux, an infectious-disease epidemiologist and computational geneticist at the University College of London, goes further. “It’s not obvious that different measures taken in different places have clearly led to different outcomes,” he says. “There’s a lot of idiosyncrasy, and I think it’s simplistic to say that the countries that have controlled or eliminated the virus did things extremely differently. If you just list, for instance, the interventions that places like New Zealand or Australia have implemented, they’re not drastically different — in stringency nor duration — than in some other places. The country that had the strictest lockdown for longest in the world is Peru, and they were absolutely devastated. I think the slightly depressing message,” Balloux says with a sigh, “is that there is not just a set of policies that will bring success and can just be applied to any place in the world.”

So how can we reconcile these two conflicting narratives?  First we need to distinguish between public policy and behavior.  I suspect that the relatively low level of Covid deaths in some areas of the US (Washington, Oregon, Utah, Northern New England and even the SF Bay area of California) has more to do with culture than public policy.  People behave differently in different parts of the US.  If death rates in the Pacific Northwest and northern New England are similar to those in Canada, is it so far-fetched to believe that their culture also resembles Canada more than it does much of the rest of the US?

But the big international differences may require an additional explanation.  Reading the NY magazine article, I was immediately reminded of the global recession of 2008-09.  I’ve argued that the recession was caused by tight money policies, especially in the US and Europe.  But why was Australia able to avoid a recession?  Their central bank didn’t do any QE, and didn’t even cut interest rates to zero.

In fact, what to the average person looks like an “easy money” policy is often the exactly opposite.  It’s precisely because Australia had a more expansionary policy early in the recession that they were able to avoid some of the more “reactive” policy measures employed elsewhere during the 2010s.  Similarly, the US was a bit more (proactively) aggressive than the ECB during 2009-10, and as a result the ECB ended up being forced to do aggressive (reactive) QE and negative interest rates in the middle 2010s.

So if you see news stories of positive interest rates in Australia during the global recession of 2008-09, do not conclude that easy money is not stimulative.  And if you see news stories of restaurants being open in Taiwan, Australia and New Zealand during the Covid pandemic, do not conclude that social distancing is not helpful.  Rather the positive interest rates are a sign that Australia took proactive steps to prevent a deep fall in NGDP growth, and the open restaurants are a sign that they got on top of the pandemic early on, with an aggressive policy aimed at driving Covid rates down close to zero.

There’s another interesting comparison between Covid and the 2008-09 recession.  In both cases, bloggers were often ahead of the experts in diagnosing the problem and recommending appropriate policies.  Bloggers pointed out that the Fed’s October 2008 decision to begin paying interest on reserves would have a contractionary effect.  Today, that criticism is widely understood as being correct.  Indeed in his memoir, Ben Bernanke acknowledges that monetary policy was too tight after Lehman failed.  Similarly, bloggers like Alex Tabarrok and Tyler Cowen have been consistently right in their criticism of the public policy response to Covid.

PS.  The US is currently at 1670/million Covid deaths.  Canada is at 595/million, or halfway between Utah and Oregon.  Here are the lowest 7 states:

Note:  The 15 highest Covid death rates are in both northern and southern states, as well as both urban and rural.

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Rethinking the Great Recession

When I studied history, I was perplexed as to how the US could have done things like the internment of Japanese-Americans in WWII or the Joe McCarthy witch hunts of the early 1950s. Today, as I observe the growing anti-Chinese hysteria, these events are becoming easier to understand.

When I studied economic history, I was perplexed as to why economists of that period were blind to the costs of an extremely tight monetary policy that drove NGDP sharply lower during the early 1930s. Today, having seen a similar blindness in regard to the Great Recession, I’m no longer so perplexed.

The Economist has a very good (but also very depressing) article discussing how the field of macroeconomics has changed during the past decade. I take no pleasure in being right 10 years ago when I warned that misdiagnosis of the Great Recession could lead to the same sort of “dark ages” of economics as developed during the 1930s (and we escaped from in the latter 20th century).

Kevin Erdmann recently wrote a book pushing back against many of the myths regarding the housing bubble and bust, and I have a book coming out next April (University of Chicago Press) on market monetarism and the Great Recession.  Until then, you might be interested in our joint Mercatus working paper, which presents some of the key ideas in both books.

PS.  The Economist article is excellent, but does have one mistake:

Several factors might yet make the economy more hospitable to negative rates, however. Cash is in decline—another trend the pandemic has accelerated.

Actually, use of cash (mostly as a store of value) has increased sharply under Covid-19.  That makes the economy slightly less hospitable to negative rates.  Cash is a substitute for negative rate bank deposits.

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