Could it have been much worse?

Toward the end of a recent podcast, Tyler Cowen remarked that the pandemic could have been much worse, and because we’ve been through this we’ll be much better prepared next time.

At first I agreed with both observations. But while I still believe that we’ll be much better prepared next time, I have doubts as to whether it could have been much worse. This might have been the worst possible epidemic that could possibly have hit the world in 2020. It all depends on what economists call “elasticity”, which means responsiveness of behavior to changes in incentives.

I don’t doubt for a moment that one can imagine viruses that are much more deadly than Covid-19, including SARS, AIDS and Ebola. But just because a virus has a higher case fatality rate (CFR) doesn’t necessarily mean it leads to a higher total death toll, or a longer economic depression. The damage depends on both the CFR and the number of cases. And in general, the number of cases will be inversely related to the CFR, other things equal.

The best way to see my argument is to look at some data. When looking at incentive effects, I am going to use the term “response” rather than “policy”, because I’m interested in the response of both governments and private individuals, not just governments.

Germany has a fatality rate per million that is between 1/4th and 1/6th the rate of other populous countries such as Italy, France Spain and the UK. It seems plausible that the difference in death rates is due to a difference in response (although of course other factors such as genetics and luck may play a role.) If the disease had been 5 times more deadly, then it seems quite possible that the other big European countries would have responded as effectively as did Germany.   They’d still do more poorly than Germany (which would also respond more strongly to a deadlier epidemic), but not more poorly than they actually did with Covid-19.  In a deadlier epidemic, the Italians would respond more like the Germans did in this case, and the Germans would respond more like the Chinese did in this case.

[If you are thinking that Italy had the disadvantage of being hit first, then compare Germany to the UK in this thought experiment.]

Some readers may be thinking, ‘You can’t compare Germany to the other four countries, as Germans are more disciplined in following rules and their government has more state capacity.” If that’s what you are thinking, then you’ve completely missed the point. Those cultural differences are likely real, but they merely explain why Germany did better than the other four when faced with this particular epidemic. It tells us nothing about counterfactuals of how Germany and the other four would have reacted to a much more serious epidemic.

Italy responded to the epidemic in March and April far more effectively than in February. Basic Italian culture did not change in one month—they simply became more aware of the need to try to control the epidemic. Chinese provinces outside of Hubei had death rates that were only a tiny fraction of the death rates in Hubei province. That’s not because the non-Hubei provinces of China had a different culture, rather they responded differently to the epidemic because they knew more about the risks by the time it got there.  The response of the population is hugely important.

So don’t confuse cross sectional comparisons of response for a given epidemic, with counterfactual responses in the same country for a wide range of hypothetical epidemics. Young people would not be having Covid-19 parties if the death rate were 50%, and almost everyone would be wearing masks.  There’d be a sort of WWII mobilization push for test/trace/isolate (which helped keep the German epidemic under control.)

We know that lots of countries controlled the epidemic more effectively than the US or Western Europe. And there are wide variations even within areas like Western Europe. Had the epidemic been far worse, then many more countries would have responded much more strongly. Taiwan had a death rate of 0.3 per million from Covid-19 (so far). Assume their case fatality rate were 100 times worse, making the disease close to 100% fatal. Even in that case, and even in the worst case with no behavior response, the fatality rate in Taiwan would have been only about 30 per million. That’s less than 1/20th the UK rate. So even a highly deadly epidemic doesn’t kill that many people if controlled effectively.  And the UK actually had more time to prepare than Taiwan. My claim is that if Covid-19 had been as deadly as AIDS, then the UK (both public and government) would have taken steps so that the total number of British deaths was no higher than the actual number—roughly 45,000.

So maybe it could not have been much worse; maybe this was the perfect storm. Just deadly enough to shut down the global economy, but not deadly enough to make most countries take Taiwanese-style precautions.

PS.  Australia was recently hit by a second wave.  We know the specific mistakes that led to this happening, and it seems very unlikely these mistakes would have happened if the CFR had been 50%.  (Guards were partying with quarantined airline passengers.)

PPS.  You can think of this in economic terms, where the societal demand for safety is roughly unit elastic.  This is different from individual demand elasticity, as there is a public good aspect to public health.

PPPS.  I have doubts as to whether my argument applies to poor, densely populated countries with low state capacity.  Perhaps in some places there was no feasible level of response that could have prevented disaster if the CFR had been high. (Recall the Black Death.) But we know that’s not true of developed countries, or even many developing countries such as Vietnam.

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In an Epidemic, Individuals are not Plants

An econometric study by Austan Goolsbee and Chad Syverson of the University of Chicago estimates that the lockdowns imposed by state and local governments may have been responsible for only 7% of the drop in economic activity. Most of the impact came from individuals who decided to avoid crowded places, as can be seen by comparing traffic in shops that were not under lockdown orders and those that were.

This is consistent with a basic economic idea: individuals respond to incentives (here, the fear of being infected), even in the absence of coercion. People are not just plants.

The authors used a database of cellphone data on foot traffic spanning contiguous counties subjected to different or differently-timed legal restrictions from March 1 to May 16. The data comprise more than 2.25 million business locations. (Note that the study tracks only foot traffic for consumption purchase, not traffic for work purposes.)

The main results of this working paper:

The results indicate that legal shutdown orders account for a modest share of the massive overall changes in consumer behavior. Total foot traffic fell by more than 60 percentage points, but legal restrictions explain only around 7 percentage points of that. … The vast majority of the decline was due to consumers choosing of their own volition to avoid commercial activity.

The authors conclude:

The COVID-19 crisis led to an enormous reduction in economic activity. We estimate that the vast majority of this drop is due to individuals’ voluntary decisions to disengage from commerce rather than government-imposed restrictions on activity.

It is not clear how these conclusions fit into the current neglect of social distanciation rules and the resurgence of infections in many states where the lockdowns were ended, but they still suggest that an epidemic will, to a certain degree, be attenuated by the private means used by individuals to protect themselves.

In an older paper, Tomas Philippon, also of the University of Chicago, reached a similar conclusion (“Economic Epidemiology and Infectious Diseases,” in A.J. Culyer and J.P. Newhouse, Editors, Handbook of Health Economics, Vol. 1 [Elsevier Science B.V., 2000]):

Incentives for prevention make epidemics self-limiting, because the prevalence of a disease raises the incentives for preventive behavior. … The economic approach yields the insight that public intervention often provides less benefit than predicted by epidemiology, because private incentives counteract its effects.

We may add that, in the case of Covid-19, government intervention often generated perverse incentives. For example, public health agencies long claimed that wearing masks was useless for the general public. We may hypothesize that this detrimental advice was motivated by the shortage of masks (and other personal protective equipment) created by governments’ own price-controls and their efforts to commandeer the consequently insufficient quantity supplied. (On these shortages, I have written a number of posts starting with one on March 6, “Don’t Confuse Shortage and Smurfage.”)

 

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Cooking Official Statistics Is Not Easy, for Now

After the Bureau of Labor Statistics announced a drop in the unemployment rate—from 14.7% in April to “only” 13.3% in May—a friend emailed me to share his suspicion that the unexpectedly low figure was a propagandist lie. The probability of that is not zero, I explained to him, but it is extremely low.

These data are gathered (through a monthly survey of 70,000 households), assembled, analyzed, and summarized by bureaucrats from the Census Bureau and the BLS, many of whom are professional statisticians. Bureaucrats could of course be co-opted or corrupted by political leaders, as they were in Argentina and Greece not so long ago. But there are reasons why this is less likely to happen in America.

Any attempt at political interference in official statistical data (which would probably be a crime under federal law) could be resisted or blocked at many points in the process. Successful conspiracies involving a large number of people are rare because, like in the Prisoner Dilemma game, anyone has an incentive to defect before anyone else does. A political manipulation at the last stage would be visible to many who have participated in the process. (The BLS Commissioner apparently only sees the report once it is completed.) Any success at political manipulation would quite certainly be followed by some resignations. High-level bureaucrats have an incentive to preserve the value of their personal brands. A professional statistician suspected of having acquiesced to data fraud may be unable to find another job in his field. Moreover, a political manipulation would be interpreted as meaning that US statistical agencies having become of the Greek or Argentine sort. The credibility of all federal statistical agencies would suffer—and may take decades to recover. Treasury yields would probably increase as creditors would suspect that the federal deficit and debt numbers, for example, are cooked too.

Another part of the difficulty would be to reconcile false unemployment statistics with other numbers calculated by other federal statistical agencies, like the Bureau of Economic Analysis (at the Commerce Department), which will, at the end of July, provide a first estimate of second-quarter GDP. And note that cooking a number one month may require cooking it again the following month and so forth, increasing the probability of the fraud being discovered.

Think also of the Department of Labor’s Inspector General, who may investigate any suspicion of statistical manipulation. It is true that federal Inspectors General may now be scared of investigating political malversations after President Trump removed five of them in different agencies over the past few months. But who knows, the Department of Labor Inspector General may still investigate out of personal integrity or because his legal responsibilities require it.

Fortunately, then, lying is not always easy in a government limited by the rule of law and constrained by numerous centers of power. We could say that, like in Rudyard’s delicious novel The Man Who Would Be King (1888), even the king cannot do everything he wants.

The intriguing error in employment data made by the BLS over the past three months does not change my opinion. As my co-blogger David Henderson explained, an error by interviewers led to misclassify the workers furloughed due to the coronavirus as employed instead of “unemployed on temporary layoff” as they should have been. Without this error, the correct unemployment rate would have been closer to 20% in April and to 16% in May, as opposed to the published figures of 14.7 and 13.3%. This big error blunts the impact of the pandemic and especially of government measures to combat it.

The notification of this error in the BLS’s June 5 report covering May (available at https://www.bls.gov/bls/news-release/empsit.htm#2020) reads as follows:

However, there was also a large number of workers who were classified as employed but absent from work. As was the case in March and April, household survey interviewers were instructed to classify employed persons absent from work due to coronavirus related business closures as unemployed on temporary layoff. However, it is apparent that not all such workers were so classified. BLS and the Census Bureau are investigating why this misclassification error continues to occur and are taking additional steps to address the issue.

If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported (on a not seasonally adjusted basis). However, according to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reclassify survey responses.

(The constraint of maintaining data integrity exists to prevent intentional manipulation.)

A notice similar to the one above appeared in the report for April (published May 8) as well as in the report for March (published April 3); see also https://www.bls.gov/bls/news-release/empsit.htm#2020 for these reports. The same data collection error was committed three months in a row.

Let’s hope the BLS and the Census Bureau continue investigating until they find how the error happened. And let’s hope that their Inspectors General are (still) ready to do their own investigations if necessary.

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Just Say No to State & Local Bailouts

Why is the HEROES bailout so much greater than the states’ losses? Simple: State governments would likely use a large part of the bailout money to make up for shortfalls in their funds for state government pensions. In April, Illinois Senate Democrats, for example, asked Congress for a bailout of over $40 billion, $10 billion of which would go the state pension fund. A famous Illinois politician, Rahm Emmanuel, famously said “You never want a serious crisis to go to waste.” His fellow Illinois Democrats’ motto could be “Never let a crisis go to waste when you can use it to subsidize waste.”

This is from my latest Hoover article, “Just Say No to State & Local Bailouts,” Defining Ideas, June 3.

Another excerpt:

Governor Newsom, in a May 17 interview with CNN’s Jake Tapper, asserted that the $54 billion budget deficit the state government is facing “is a direct result of the impact from the coronavirus pandemic and not because of existing financial troubles.” Close but no cigar. There are three problems with this statement.

First, in claiming that California’s government would have a $54 billion deficit, Newsom contradicted the California’s Legislative Analyst’s Office (LAO). That office, which has a stronger incentive to tell the truth than the governor has, estimates that the budget deficit will be a much more manageable $18 billion to $31 billion. The $18 billion estimate is based on a U-shaped recession, with the recovery starting this summer. In case you think that’s too optimistic, the LAO’s U-shape assumes that economic activity stays “below pre-recession levels well into 2021.” The $31 billion estimate assumes an L-shaped recession, with the economy in recession well into 2021 and gradual recovery not beginning until the second half of 2021. Now that’spessimistic! In 2019, California’s gross state product was $3.2 trillion. Of course, it will be lower this year. But I point that out to note that the pessimistic $31 billion deficit is only about one percent of last year’s gross state product.

Second, although much of the budget deficit is due to the pandemic, a large part is also due to Newsom’s extreme lockdown, which he began on March 19. In attributing the deficit to the Covid-19 disease, Newsom, like many politicians and pundits, failed to distinguish between the voluntary social distancing measures that people undertook before the lockdown and the lockdown itself. Those voluntary measures certainly reduced economic activity, with the decline in spending on restaurants and bars being one of the main ways that happened. But the Newsom lockdown went much further, causing a closure of many retail outlets that people would have still been inclined to patronize, albeit with social distancing. In short, part of the economy’s decline is on Newsom.

If you want to know the third reason, read the whole article.

Thanks to Eileen Norcross of the Mercatus Center at George Mason University for a helpful conversation and for providing some good links to state data on budgets.

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A Humble State with No Motorcade

In many ways, the modern world, including economic freedom, was born from the fear of tyranny and the institutions (not always successful) to prevent it. In Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships (Basic Books, 2000), famous economist Mancur Olson had interesting historical remarks about Italian city-states in early modern times:

Sometimes, when leading families or merchants organized a government for their city, they not only provided for some power sharing through voting but took pains to reduce the probability that the government’s chief executive could assume autocratic power. For a time in Genoa, for example, the chief administrator of the government had to be an outsider—and thus someone with no membership in any of the powerful families in the city. Moreover, he was constrained to a fixed term of office, forced to leave the city after the end of his term, and forbidden from marrying into any of the local families. In Venice, after a doge who attempted to make himself autocrat was beheaded for his offense, subsequent doges were followed in official processions by a sword-bearing symbolic executioner as a reminder of the punishment intended for any leader who attempted to assume dictatorial power. As the theory predicts, the same city-states also tended to have more elaborate courts, contracts, and property rights than most of the European kingdoms of the time. As is well known, these city-states also created the most advanced economies in Europe, not to mention the culture of the Renaissance.

This quote is from pp. 39-40 of Olson’s book. Part of it is reproduced at Liberty Tree quotes.

Instead of a bully state, we are in urgent need of a humble state where political leaders and bureaucrats know their place. I especially like Venice’s symbolic executioner, who could beneficially replace the motorcade or, at the very least, occupy the last limousine. (For more discussion of related issues, see my Econlog post “Praetorian Guards from Ancient Greece to Palm Beach or the Hamptons,” January 14, 2019.)

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A Humble State with No Motocarde

In many ways, the modern world, including economic freedom, was born from the fear of tyranny and the institutions (not always successful) to prevent it. In Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships (Basic Books, 2000), famous economist Mancur Olson had interesting historical remarks about Italian city-states in early modern times:

Sometimes, when leading families or merchants organized a government for their city, they not only provided for some power sharing through voting but took pains to reduce the probability that the government’s chief executive could assume autocratic power. For a time in Genoa, for example, the chief administrator of the government had to be an outsider—and thus someone with no membership in any of the powerful families in the city. Moreover, he was constrained to a fixed term of office, forced to leave the city after the end of his term, and forbidden from marrying into any of the local families. In Venice, after a doge who attempted to make himself autocrat was beheaded for his offense, subsequent doges were followed in official processions by a sword-bearing symbolic executioner as a reminder of the punishment intended for any leader who attempted to assume dictatorial power. As the theory predicts, the same city-states also tended to have more elaborate courts, contracts, and property rights than most of the European kingdoms of the time. As is well known, these city-states also created the most advanced economies in Europe, not to mention the culture of the Renaissance.

This quote is from pp. 39-40 of Olson’s book. Part of it is reproduced at Liberty Tree quotes.

Instead of a bully state, we are in urgent need of a humble state where political leaders and bureaucrats know their place. I especially like Venice’s symbolic executioner, who could beneficially replace the motocarde or, at the very least, occupy the last limousine. (For more discussion of related issues, see my Econlog post “Praetorian Guards from Ancient Greece to Palm Beach or the Hamptons,” January 14, 2019.)

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