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Can the House Democrats drive a hard bargain on CARES 2?

Michael Grunwald argues in Politico that House Democrats have a lot of bargaining power in negotiations over the next coronavirus relief bill, but that they are not aggressively using their leverage.  He suggests that Democrats are holding back because they are worried about being labeled obstructionist and getting blamed if legislation does not pass.

I agree with some of his analysis and have doubts about other parts.  But here I want to make a suggestion for getting an aggressive but narrowly-tailored bill through Congress.

Suppose that House Democrats quickly put together a new Democratic CARES 2 bill that aggressively attacks the epidemic.  The CARES 2 bill should include more aid for small business, funding for state and local governments, hospitals, transit agencies, the Post Office, etc.  It should extend the unemployment insurance provisions until the unemployment rate falls below, say, 5%.  It should impose stricter oversight on the Trump administration.  It should repeal the tax cut for real estate developers that was included in the first CARES act.  It should include tens of billions in funding to increase testing capacity and to make masks widely available.  It should include reforms to ensure that the 2020 election is fair, such as national vote-by-mail.  The bill can and should be aggressive, but it must be narrowly-tailored to fighting the epidemic.  No Christmas-tree stuff that makes it look like the Democrats are exploiting the crisis for narrow partisan purposes.

Because this would be a Democratic bill, it cannot pass the House by unanimous consent.  So suppose House Democrats come back to Washington and pass the bill.  They would be risking their lives to do right by the American people.  Seeing the older – and even elderly – House Democratic leadership wearing face masks as they take an emergency vote would be inspiring to many Americans.  And then the House Democrats should go home to be safe.  It would be up to the Senate to take or leave the Democrats offer.  If Republican Senators whine about this or that provision, the Democrats can say there will be time to fix it later, but that right now what is needed is for the Senate to come back into session and pass the House bill.  The Democrats’ courage in returning to Washington would make it difficult for Republicans to blame them for obstruction, and, as Grunwald says, Trump and the Republicans need a bill just as much as Democrats do.

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Where-oh-where would we be without Trump’s firm leadership in this crisis?

Kevin Drum reminds us that our fearless leader restricted air travel from China after the airlines had already done so.

And today’s New York Times:

New research indicates that the coronavirus began to circulate in the New York area by mid-February, weeks before the first confirmed case, and that travelers brought in the virus mainly from Europe, not Asia.

“The majority is clearly European,” said Harm van Bakel, a geneticist at Icahn School of Medicine at Mount Sinai, who co-wrote a study awaiting peer review.

A separate team at N.Y.U. Grossman School of Medicine came to strikingly similar conclusions, despite studying a different group of cases. Both teams analyzed genomes from coronaviruses taken from New Yorkers starting in mid-March.

The research revealed a previously hidden spread of the virus that might have been detected if aggressive testing programs had been put in place.

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Trump’s blame-avoidance is politically shrewd

Trump’s handling of the Covid-19 pandemic is predictably chaotic, vengeful, irresponsible, and impulsive.  His actions have worsened the epidemic, they have led to unnecessary deaths and to a very painful economic lockdown.  Coming in the year before he is up for re-election, this seems self-defeating:  if Trump could re-run history I have little doubt he would take aggressive action to nip the epidemic in the bud.  That said, the political strategy that is emerging from his chaotic approach to emergency management is actually quite shrewd.

As President, Trump will naturally get credit if things go well.  If the epidemic ends quickly and the economy roars back to life he can take a victory lap even if his actions make this outcome less likely.  Trump understands this:  what he is worried about is being blamed if things go badly.

It might seem that the need to avoid blame would give him an incentive to competently manage the crisis – to coordinate the distribution of ventilators and personal protective equipment, for example, but he is not even trying to do this.  (Exhibit A:  putting Jared in charge.)  The reason is that he understands that any effort to actively manage the epidemic will make him the target of criticism for problems even if his actions actually make problems less likely or severe.  If he takes responsibility for distributing masks or ventilators, then every time a shipment gets lost in an airport, every time a patient dies for lack of a ventilator or a health care worker gets sick with Covid-19, critics will ask why he didn’t do more to prevent it.  His strategy is to simply deny that he is in charge, and to place as much blame as he can on governors and states.  Or at least to lay the groundwork for doing this if things go south.

When it comes to managing the economic damage his strategy is to advocate – irresponsibly – for an early end to the social distancing and a quick resumption of normal economic activity.  My prediction is that he won’t actually push very hard for this, because if there is an early end to social distancing and it goes badly he would be on the hook for it.  So he will be happy leaving this decision to governors.  He is setting himself up to blame others if the economic slowdown continues and becomes a political liability.
There is no guarantee that his blame-avoidance strategies will work, but Trump is playing a bad hand skillfully.

An interesting question is whether Trump is pursuing this blame-avoidance strategy intentionally, or if it is just a happy (for him) side-effect of his managerial incompetence and his intense personal desire to avoid criticism.  My guess is that it’s a bit of both.  He is a talented and experienced grifter, with an intuitive understanding of how to play an audience.  His impulsiveness and his thin skin may sometimes lead him to act in self-defeating ways, but he has a natural understanding of the politics of credit-claiming and blame-avoidance, and right now that ability is standing him (not the world) in good stead.

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Mass testing for Covid-19: economics, politics, and policy options

The Covid-19 epidemic is creating a painful dilemma for policymakers.  On the one hand, we need to practice social distancing to keep people healthy and to prevent our hospitals from being overwhelmed.  Unfortunately, this strategy is causing a severe economic contraction as people avoid contact with others.

An ideal response to this dilemma would have three basic components.  First, we would implement a hard, nation-wide lockdown to slow the spread of Covid-19.  This would “flatten the curve” and save lives by preventing hospitals from being inundated with patients in the next few weeks.  It would also buy time to put in place the testing, prevention, and surveillance measures we will need to start cautiously re-opening our economy.  Putting these measures in place should be the second element of our strategy.  Finally, as Paul Romer and Alan Garber argue, we need a major effort to increase our capacity to test for Covid-19, and to produce masks, gloves, and other forms of personal protective equipment (PPE) by an order of magnitude or more.  The ability to do mass testing and to provide masks and other PPE to most Americans will substantially reduce the risk that the epidemic drags on for many months and leads to an economic catastrophe.  (For further discussions, see here, here, and here.)

In this essay I explain why it is important to massively increase our ability to produce Covid-19 tests and PPE.  I also discuss how this can be done, considering the apparent reluctance of the Trump administration to lead this effort.  I make four basic points.

First, the ability to test millions of people daily for Covid-19 and to produce PPE for millions of Americans will require a large up-front capital investment by manufacturers that may turn out to be unneeded, but this investment is socially justified to lessen the risk of a severe and protracted economic shutdown.

Second, without firm contractual commitments from the government, businesses will not invest at the scale required to ensure that we can avoid a disaster.  Several factors will deter adequate investment by industry; the most important is probably the risk that the epidemic will abate and they will not be able to recover their investment costs.  The government can overcome this problem by agreeing to pay companies for tests and PPE even if the epidemic abates, by subsidizing investment in the capacity to produce tests and PPE, etc.  The critical point is that the government needs to make binding commitments NOW, it cannot wait to see if the epidemic can be brought under control using other means.  Valuable time has already been lost.

Third, the powers that the President has under the Defense Production Act to directly control the use of resources are not particularly useful if our goal is to spur investment in the capacity to produce tests and PPE.  We need to give firms incentives to invest in new capacity using contracts, competitions, and similar tools.

Fourth, an ambitious effort to expand production of tests and PPE will inevitably lead to genuine contracting failures and to situations that create the perception of failure.  Trump is clearly anxious to avoid setting ambitious goals and taking actions that might later be used to criticize him.  In response, Congressional Democrats want to force Trump to exercise his powers under the Defense Production Act.

This is a mistake.  Trump would likely veto any bill that tried to force him to act, and, in any event, it is very difficult for Congress to force a reluctant President to act.  Fortunately, there is no need for contracting efforts to be directed by the President.  Rather than trying to force a reluctant Trump to exercise his contracting powers under the DPA, Congress should either delegate the power to an agency, or it should create incentives itself, directly.  I will sketch out how this can be done.  The same point applies to efforts to organize mass testing, the distribution of equipment, and other activities where direct commands are an effective means of achieving our goals:  Congress should accept that Trump is unwilling (and arguably unable) to lead these efforts and try to work around him in ways that he can accept.

Mass testing and distribution of PPE mitigate the risk of economic disaster

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Business interruption insurance and pandemics

Not surprisingly, many business owners are upset to discover that their business interruption policies do not cover losses due to pandemics.  Although it is easy enough to understand their frustration, it is important to understand the underlying economics.  (Full disclosure, I worked in the property casualty industry for many years.)

The main business of insurance companies is risk pooling.  They take premiums from (say) large numbers of drivers, and then use those premiums to pay claims for the small number of drivers who have accidents each year.  What is essential to the viability of this business model is that risks are uncorrelated or independent:  the chance that you have an auto accident must be largely independent of the risk that your neighbors do.  If everyone has an accident at the same time, the premiums everyone pays will not come close to covering the accident losses.  To some extent, of course, losses are correlated, and this can result in losses to insurance companies and their investors.  For example, when it snows accidents go up and losses rise.  Insurance company investors can bear these risks.  Some losses that are correlated locally can be spread globally.  This is what happens with the losses caused by hurricanes and earthquakes – they are pooled across the globe by reinsurance companies.  But if losses are too widespread, large, and highly correlated they cannot be insured using the standard logic of insurance.  My guess is that pandemic losses from business interruption fall into this category.

I haven’t seen an analysis, but I suspect that an effort to force companies to pay business interruption claims would impair or bankrupt many insurers and reinsurers.

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The corporate bailout

The Senate economic rescue package contains $500 billion for bailouts of large corporations.  Much commentary has focused on the lack of accountability, but the bigger issue is simply the massive waste of taxpayer dollars.  From the WAPO:

In a Tuesday interview on Fox, Boeing chief executive Dave Calhoun said he would not be willing to give the government an equity stake in the company in exchange for a bailout, implying the company would only accept assistance on its own terms. President Trump has said he would support the idea, suggested by his economic adviser, of taking an equity stake in companies that receive assistance in the package.

“If they force it, we just look at all the other options, and we’ve got plenty of them,” Calhoun said.

Why are we giving them money?

It’s not clear how the bailout provisions will work, at least to me.  There will be loans and perhaps some equity investments.  But Delta stock is up 50% over two days; Boeing is as well.  Between the two of them this represents roughly $35 billion in market capitalization, a gift to their shareholders.  Maybe some of this is based on optimism about the general economic benefit of the stimulus, but the $35 billion number may also be an understatement of the true give-away, because part of the Senate bailout package was priced in more than two days ago, and some of it may not be fully priced in yet.  Much will depend on the terms and conditions attached to loans and investments; it is not clear to me that the law will require the government to drive a hard bargain or even has enforceable provisions regarding disclosure.

And let’s be clear that there are no benefits at all for taxpayers from these bailouts.  We have a well-functioning bankruptcy system in this country that would prevent a failure of either company from harming the broader economy.  If we don’t trust the bankruptcy system, or want to protect unionized workers, we could allow existing shareholders to keep a small fraction of the value of the companies and let the government own the rest, in exchange for an equity investment in these companies.  These bailouts represent a giveaway to powerful constituents, pure and simple.

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Insider trading by members of Congress

The recent insider trading by members of Congress (notably but not exclusively by Senator Burr) is appalling.  One policy response – advocated for by Elizabeth Warren – would prohibit MOCs from investing in the stock of individual companies, requiring them instead to invest in mutual funds.  This would prevent the type of corruption evident in the Chris Collins case.  However, under this proposal MOCs could still have cashed out of stock funds and moved into bond funds based on their advance knowledge of the coming epidemic.

An alternative or complementary approach would be to require MOCs to place their buy and sell orders in advance – say, 6 or 12 months in advance.  This would prevent them from trading on private information, such as classified briefings about the likely economic impact of the covid-19 epidemic.  A similar rule could also be imposed on corporate insiders to (largely) eliminate insider trading and perhaps reduce incentives to manipulate financial statements.  (Executives would still have an incentive to pump up the stock price prior to an announced sale date and to lower it prior to an announced purchase, but at least other investors would be aware of their incentive to do so.)

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Coronavirus links

From Adam Levitin, a summary of the Senate economic rescue package.  Recommended.  Why can’t the news media provide information like this?  Don’t answer that.

Via Cowen, a discussion of bankruptcy.  Some kind of bankruptcy reform is quite possibly the best way to preserve established relationships, but apparently not under active consideration.

Some economic charts from WAPO.  FWIW, I think the Goldman prediction of a sharp bounceback in the third quarter is optimistic.  Could happen, but there is a real chance we will not contain the epidemic, with geographically uneven measures allowing the virus to continually resurface in new locations and reinfect areas where the epidemic is brought under control.

From TPM, the view from Thailand and Nepal.  Grim.  As noted, spread in Thailand suggests rising humidity may not save the day.

 

 

 

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Thanks, Milton Friedman . . .

On Sunday, our war time president:

“We’re a country not based on nationalizing our business. Call a person over in Venezuela,” Trump told reporters. “How did nationalization of their businesses work out? Not too well.”

Trump administration officials pointed to voluntary actions from companies, such as 3M announcing more masks are being shipped to New York and Seattle.

“We’re getting what we need without putting the heavy hand of government down,” White House adviser Peter Navarro said at Sunday’s briefing with the president.

Russ Roberts did an Econtalk episode with Tyler Cowen on the epidemic a couple of days ago.  From the transcript:

[This is Roberts] And my thought–it’s hard to have a libertarian moment or a classical liberal moment in these times–but, it seemed to me that when the Administration and Trump underestimated the seriousness of the problem and downplayed it, which I thought was a terrible mistake, but when they did, people like you and me and others said, ‘Hey, this is a real problem.’ And, the private, voluntary reaction to the crisis was quite strong. The NBA [National Basketball Association] shut down very quickly. The NCAA [National Collegiate Athletic Association] shut down very quickly. Baseball shut down very quickly. Nobody had to order folks around.

And, I think what’s been underestimated in this, in the demand for this sort of top -down, ‘Fix it. Solve it. Make everybody whole. Don’t let anything bad ever happen,’ we’ve missed the role that we can play individually. It’s going to be very imperfect, of course. People cheat on self-quarantining. I know that. But, the idea that if we could test perfectly, as if that could solve it, is unrealistic in a country of 330 million people, and our number of square miles. It just seems that the advantage of this bottom-up, voluntary response to the crisis is that it allows for nuance. The top-down says, ‘Everything’s closed.’ And that means that there’s going to be enormous economic and human results from that, that we’re just ignoring.

The advantage of the private response is it allows for people to be more flexible, to take into account when they can and should, when things are more dangerous for some than others. And, I just think that’s been lost in this maelstrom.

Yes, that’s just what we need . . . nuance and flexibility . . . if it weren’t for those darned misguided price-gouging laws the private sector would have taken care of this perfectly, no doubt.  It seems clear from the interview that Roberts knows this is ridiculous, but he just can’t help himself.  Later on in the interview (in a discussion of saving businesses from bankruptcy):

Russ Roberts: Well, I’m not sure–I’m like you. I want to minimize what we do, particularly if it’s likely to be permanent. Makes me really uneasy. We’re at risk that this becomes a watershed moment. I think it’s–actually, it’s probably too late. Everyone just expects the government to “solve this.” Again, they neglect the things that we’ve done on our own. I understand the things that we can’t do on our own to fix macroeconomic cascades. I’m not suggesting that we’re going to avoid all the problems if we just leave things alone, that’s not true.

But, there are a lot of things happening. People are buying gift certificates from their favorite restaurants, and other things to keep them going. They’re doing takeout. Obviously that’s not going to be enough. If people aren’t flying there’s going to be airlines going bankrupt. But, the idea that somehow we can make everyone whole–I really don’t like the idea of making businesses whole. I’d much rather make individuals whole, and I think that’s just really hard to do. This idea of giving everybody $1,000–I don’t need $1,000. Presumably you don’t need $1,000. Do we want to allow every American–to make it easy? Should we do that?

But, it’s clear there’s going to be terrible hardship on individuals who can’t get to work, or shouldn’t go to work. There’s no “free market” solution to that, that’s obvious. So, there may be some of those things that are necessarily to reduce the spread of the virus, but they’re so blunt. It discourages me tremendously to think about the consequences of how that will be going forward, both in how it affects behavior, that everyone thinks, ‘Oh I don’t have to worry about fill-in-the-blank, because eventually I’ll get check from the government.’

Yes, I too worry that if government solves this problem it will lead people to take fewer precautions to prevent the next pandemic.  This is just beyond belief.  Libertarianism can’t die quickly enough.

 

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Corona virus thinking . . .

I am still trying to wrap my head around the coronavirus disaster.  Here is some current thinking . . .

The immediate cause of the economic slowdown is a collapse in both demand and supply due to social isolation.  This will have at least two knock-on effects.  First, the initial collapse in economic activity will be magnified by a traditional demand multiplier effect.  Second, the collapse in economic activity will lead to widespread formal and informal bankruptcies as unemployed workers are unable to pay rent, mortgages, car payments, etc., and businesses and non-profit institutions are unable to service their debts or cover their fixed costs.  These bankruptcies could trigger a financial crisis as banks and other financial intermediaries end up with non-performing assets.  In addition, if nothing is done to prevent it, widespread bankruptcies and capital depletion will damage or destroy many otherwise viable businesses and critical non-profit institutions, including schools and hospitals.  Of course, demand will eventually return, but there may be large costs of redeploying capital and labor to new firms and institutions.

So, what can we do to avoid an economic disaster, assuming the epidemic does not end quickly?

Sending checks to all Americans seems to be emerging as the leading policy idea as Congress ponders its next response to the emerging economic crisis.

Sending checks to all Americans has a certain political appeal, but it is shockingly bad economics.  The majority of households are still working and voluntarily spending less, so most of the money sent out in checks will be saved, not spent.  This means that there will be little increase in aggregate demand, and also very little reduction in formal and informal bankruptcies.  On the other side of the ledger, the amount of money sent to families that really need help – and will increase their spending and payments to creditors – will be woefully inadequate.

A much better approach is to get cash into the hands of unemployed workers and their families.  There are various ways to do this, but an obvious approach would be to have the federal government pay to increase and extend unemployment benefits so that low- and middle-income families do not end up cutting back on their consumption or defaulting on their debts or contractual obligations (leases, etc.).  House Democrats may have an opportunity to refocus the conversation on unemployment compensation next week when the unemployment claims figures – which will be truly frightening – are released.

Paid sick leave would reduce transmission of the virus; it would also help maintain demand and alleviate hardship.  In my view it should be temporary and paid for by the government.  We need to get something through Congress now, we can fight to expand the safety net later.  Democrats have made only limited progress on paid leave so far, but perhaps they can leverage growing concern to get a better program through.

Dealing with the cascading insolvencies that social isolation will cause is a much more difficult problem.  Even if unemployment insurance and sick leave cushion most families, the damage done to large and small businesses and especially to non-profit institutions (that have no natural way to recapitalize after a crisis) could be immense.  There are no easy answers here, but a few thoughts:

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