Does the Federal Reserve Have a Place in Fighting the Coronavirus?

When you think of trying to fight coronavirus, you would first think of doctors, nurses, or researchers working tirelessly to find a vaccine. Monetary policy would not be the first thing that comes to mind. Yet the Federal Reserve has been active in its attempt to make sure that a health crisis doesn't also turn into an economic crisis due to this exogenous shock. The Fed cut interest rates to near-zero, as well as injecting $1.5 trillion into the short-term credit market (which is to be returned to the Fed with interest). The American Action Foundation (AAF) provides a timeline of the Fed's actions if you want more detail. What I wonder is whether monetary policy can be effective in this crisis.

• The libertarian Mercatus Center actually details the tools that are at the Fed's disposal, including eliminating reserve requirements, price level targeting, quantitative easing, and buying a wider range of assets (e.g., stocks), or buying Treasury bonds and mortgage-backed securities.
• In a similar vein, the Council on Foreign Relations covered how the Fed is doing so far and what tools are at its disposal. 
• The Economic Cycle Research Institute, which focuses on business cycle research, opined that lowering the interest rates was an exercise of futility because a lack of consumer demand is not what is triggering this economic downturn. 
• The Brookings Institution postulates that the Fed will have minimal impact on the economic contraction. One, the businesses are shutting down regardless of the Fed injecting the liquidity into the economy. Two, it didn't have much wiggle room and has even less with near-zero rates, which eliminates conventional tools. Third, the uncertainty behind COVID-19 means that investors are more likely to wait and see what happens with the outcome before proceeding with future investments. 
• An article from the Foundation for Economic Education argues that it is not the coronavirus per se that is responsible for the economic downturn, but the structural problems that underlie the economy, some of which are propped up by the Fed.
• For a criticism of the Fed's loans to the short-term credit market, the Mises Institute provides a perspective from the Austrian school of economics. 
• The American Institute for Economic Research argues that monetary policy cannot mitigate the aggregate supply shocks that we are experiencing. 
• The conservative think tank Heritage Foundation makes the case to stop paying interest on bank reserves in order to improve liquidity. 
• Economist and Senior Fellow at the University of Chicago John Cochrane argues that the Fed should not go for negative interest rates or quantitative easing. Instead, Cochrane finds that the Fed's best bet is to focus on a price-level target and fixing the spread between indexed and nominal debt. 
• American Enterprise Institute (AEI) scholar Desmond Lachman makes a call for what economist Milton Friedman called "helicopter money." Essentially, helicopter money is a monetary stimulus of distributing large amounts of money to the public in the hopes that it spurs consumer demand. I'm skeptical about helicopter money in this case because stimulating demand can't be nearly as effective if output (and therefore supply) cannot increase. For further detail on helicopter money, you can read this brief from the centrist Brookings Institution.
• AEI scholar Stan Veuger thinks that small- and medium-sized businesses should receive loans that are facilitated by the Fed.
• As the International Monetary Fund (IMF) mentions in its brief on coronavirus and policy, the Fed launched the Term Asset-Backed Securities Loan Facility that could be helpful with loans to businesses. 
• The President at the AAF explains why the Fed has been doing a good job so far (see video below at the end).

My Takeaway: Much like the coronavirus is "more than a common flu," the upcoming economic downturn is more than your typical economic downturn. In most recessions, it is either a supply shock or a demand shock. In this case, we have the worst of both worlds by having a simultaneous supply shock and demand shock. Monetary policy can do very little to nothing to deal with supply shocks. I think the Fed's role will be more minimal since it cannot cure coronavirus or deal with the supply shocks. Rather than save us, the Fed's job is to make sure that the impending economic downturn doesn't go from bad to worse. While I do not agree with all of the Fed's measures (e.g., the aggressive lowering of interest rates), I think there is still something they can do to mitigate fallout, but more of this is going to fall on fiscal policy and the cooperation of individuals in the private sector to voluntarily come together and win this. The current partisan dumpster fire in Congress gives me less hope that they will provide targeted relief instead of trying to advance agendas, but I can comment on that in future posts. Although I have criticized the Fed in the past, it's amazing how they seem more put-together than Congress. Let's hope that policy can be enacted so we can avoid either the Great Recession or, even worse, the Great Depression 2.0. 

For more reading on macroeconomics and coronavirus, here is a nice online compilation from the Centre for Economic Policy Research entitled Economics in the Time of COVID-19.

Why Social Distancing Is Better to Fight Coronavirus Than Large-Scale Quarantine

You would have to be living under a rock if you have not heard of coronavirus (COVID-19) by now. It has prompted the shutting down of schools, travel bans, and tumbling stock markets that are likely to cause economic downturn of some sort. It is not that we have never dealt with pandemics before, but the last one was the 1918 Spanish influenza pandemic. While there were international trade flows a century, our world has become more interconnected since then, which makes the matter of COVID-19 all the more unprecedented. It depends on the country, state, province, or jurisdiction, but government officials have been imposing greater measures to slow down the spread of COVID-19.

Last week on this blog, I discussed how worried we should be about COVID-19. While there are reasons for concern, my conclusion was that there were enough factors to minimize the worry, something that the stock markets do not seem to take to heart. In any case, one of the things I had mentioned was the idea of "flattening the curve." If too many people catch the pathogen too quickly, it could overwhelm the hospital system, as we see in Italy. Since COVID-19 is a pathogen that is most commonly past by being less than 6 feet (2 meters) from someone or by respiratory droplets (e.g., coughing, sneezing), keeping one's distance is important. The non-pharmaceutical practice of keeping greater distance than normal to prevent the spread of a disease, known as social distancing, is vital as the world deals with COVID-19. The reason it is vital at the onset of an outbreak is because it could mean the difference between a lot of infections all at once (thereby overburdening the healthcare system) or spacing it out enough where we can handle it.

What does social distancing entail? Per the World Health Organization, it means maintaining an absolute minimal distance of 3 feet (1 meter). Measures have varied as to what sort of distancing that entails. In Maryland, which is where I currently reside, the Governor shut down restaurants, bars, movie theaters, and gyms yesterday, as well as public gatherings involving 50 or more people. My employer has told me that all employees (except the ones that have to be in the office) are working remotely until further notice. You can read more from the Atlantic or Vox on social distancing.

The academic paper that has been cited to prove the success of social distancing is a 2007 paper in the Proceedings of the National Academics of Sciences of the United States of America [PNAS] (Hatchett et al., 2007). According to the PNAS paper, Philadelphia did not impose social distancing at the beginning of the 1918 Spanish Flu, whereas St. Louis did. The per-capita death rate in St. Louis was less than half in Philadelphia as a result (see below) because St. Louis banned large public gatherings [of 20 people], shut down schools, libraries, playgrounds, and limiting of streetcars. One of the co-authors of the PNAS paper, Richard Hatchett (also worked for the Obama administration), said earlier this month that timing on these social distancing efforts matters greatly. If we can implement them before 1 percent of the population catches the pathogen, then the measures spread the disease much less.

Whether we have reached that stage is unknown since COVID-19 testing has been painfully slow. According to Dr. Marty Makary, who is a professor at Johns Hopkins, the number of infected, as of March 13, could be anywhere between 50,000 and a half million." The good news is that even if you take the higher estimate of half a million, that would only mean that 0.15 percent of the U.S. population of 327.2 million are infected, which means there is still time for social distancing to work. Also, if you want to read more on the positive potential of social distancing, read this policy paper from the CDC (Fong et al., 2020).

In either case, I am worried to see how other countries are handling this. Italy was just the first country to issue a nationwide quarantine. France and Spain have recently implemented quarantines, only allowing for such essential businesses as grocery stores and pharmacies to remain open. The difference between social distancing and quarantine is that of magnitude. There is a difference between isolating those who are sick from the rest of the population and throwing everyone in together. It is hard to give definitive impact, in part because the quarantining that Wuhan province of China or the country of Italy has imposed are historically unprecedented. That is why I am not citing a ton of studies like I normally do. But let me get into some postulating as to why going into the direction of quarantine, as opposed to major social distancing, is problematic.

As an article from FiveThirtyEight, the website maintained by statistician Nathan Silver, points out, there is not much historical evidence to find that quarantines actually work, especially given the enforceability issues involved. I find quarantines to be problematic because those who are not sick can be stuck with at-risk or already-infected individuals. Think of how the spread of COVID-19 on cruise ships has played out, and you get the idea.

I also think that quarantines do not have an end game in mind, at least without relying too much on creating a vaccine. Regardless of outcome, one could dig in their heels with a quarantine and continue to justify draconian measures. At least with social distancing, we see that they are most effective at the onset of a disease, which implies that there is a certain point in which we have minimized COVID-19 spreading it or we are screwed regardless.

The more major actions, such as cutting off other countries, also have major impacts on the economy because cutting off all of this international trade, especially when entire countries are doing it (as opposed to back in pre-modern times when it was just a single city), has its impact. Right now, global financial services firm Morningstar predicts that the global 2020 GDP will most probably drop by 1.5 percent, which is not terrible all things considered. At the same time, there is still reason for concern on the economy. The travel and retail industries are already getting hammered by some of these international decisions. The more that countries decide to shut out their economies from the rest of the world, the longer they will feel the economic impact. Economic impact is not just about "dollars and cents." It is about livelihood, the ability to afford food, healthcare, and education. Eroding purchasing power is eroding one's way of life.

As much as COVID-19 causes health issues, going to the extreme of quarantine is going to economically impact us all in a way that we have only begun to feel. Because we live in such a global economy, it will not only affect those who live in currently quarantined countries (although they will feel it most acutely). In short, such measures as social distancing are shown to be more successful than the more draconian measures.

How long social distancing last depends on when the United States reaches its peak, as well as such factors as whether or not spring and summer weather will provide some reprieve or how long the people can handle social distancing. What we, as a people, should continue to do is practice social distancing, wash our hands, work remotely if we can, and not cough or sneeze on people. Aside from that, we can only hope that social distancing measures will be adequate in the United States, and indeed other countries who are not overburdened like Italy, to slow the spread enough to minimize its overall impact.

How Worried Should We Be About Coronavirus?: March 2020 Edition

Coronavirus. It's all over my news feed, and was an even bigger news item than President Trump's recent impeachment proceedings. I have seen everything from "it's just like the flu, and it's not a big deal" to the mentality of "we're all going to die," as if this were the first time in human history we are dealing with pathogens. For most of us, we realize that the truth is somewhere in the middle of these two extremes, although it is more difficult to tell where since the World Health Organization (WHO) declared yesterday that coronavirus is at pandemic stage. Coronavirus (COVID-19) symptoms are non-specific, although they tend to be similar to an acute upper respiratory disease of the flu. As I am writing this, coronavirus (COVID-19) has been identified in nearly 128,000 individuals over the span of 112 countries (see database from Johns Hopkins here). Even with the WHO's announcement, how worried should we be? Viruses are never fun, but are the concerns overblown or is the panic legitimate?

Before delving into the particulars, I want to say that because it is a novel virus (i.e., it has not been previously identified in humans), there will be new information coming in that will better inform us of the severity of coronavirus. That  means over time, the situation will evolve. It could either be better or worse than previously predicted. Second, the data used are as of March 12, 2020 at 10:33am EST. Third, I am not an expert epidemiologist, but I will be citing public health experts in the hopes to give you the best information available. Let's begin, shall we?

Reasons to Worry

• A novel disease comes with unknowns. Oftentimes, it is the unknown that scares us more than the known. We don't know if we can cure it. We're not certain about all modes of transmission, although social distancing seems to be one of the best ways to slow down transmission. This affects our sense of risk and control, which can cause anxiety (read this article on how to deal with anxiety during the coronavirus pandemic). 
• We do not have a vaccine for COVID-19. People compare COVID-19 to flu season. The flu has a mortality rate of 0.15-0.20 per 100. The problem with that comparison is that there are flu vaccines to keep the mortality rate low. It would most likely take at least 6-12 months to have a vaccine ready for mass production.
• It mimics other viruses. Since its symptoms are non-specific, it is more difficult to determine whether one has COVID-19. Without getting a test, COVID-19 looks quite similar and undistinguishable from a cold or flu. Both the mildness in most cases and issues with detectability make it more difficult to contain. 
• Particularly risky for elderly and immunocompromised. The elderly and immunocompromised have a greater difficulty fighting off diseases generally. COVID-19 is particularly bad for these demographics because it can evolve into pneumonia or other major respiratory issues. The fatality rate is estimated at 3.6 percent for those in their sixties, 8 percent for those in their seventies, and 14.8 percent for those in their eighties. To put in perspective, the fatality rate for influenza is 0.83 percent for those in their eighties, but that's because we have a vaccine (see previous point).
• Global macroeconomic risk. If there is anything that markets hate more than regulations, it is uncertainty. It's no wonder that stock markets are taking a nose dive. But it's more than the financial sector that is hit. Especially since China is such a vital contributor to supply chains worldwide, there is a supply shock reverberating across multiple industries. Macroeconomic modeling from the Brookings Institution (McKibbin and Fernando, 2020) has shown that the global economy could easily take a significant hit in the short-run.
• Transmission rate of COVID-19. The basic reproduction number (or R0) indicates the level of transmission of a pathogen. If R0 is less than 1, it means that the pathogen will unlikely pass it on to even one person. A R0 greater than 1 means that one sick person infects one person on average. While still preliminary, a study in the Journal of American Medical Association [JAMA] puts it somewhere between 2.0 and 3.5 (Del Rio and Malani, 2020). This means that someone with coronavirus will, on average, infect at least 2-3 people. Since COVID-19 is so new and certain measures can be enacted (see Postscript at the end), the R0 can change. However, to contextualize the R0, the typical season flu has an R0 of 1.2, SARS has an R0 of about 3.5, smallpox has an R0 of 7, and measles has an R0 between 12 and 18. I put this in "Reasons to Worry" because it is higher than the flu (although again, we now have a vaccine for the flu). At the same time, it is lower than other viruses that have plagued humanity before.
• Another word on transmission: COVID-19 is primarily spread either through person-to-person contact within six feet or respiratory droplets (e.g., coughing sneezing). This helps contribute to its R0. On the other hand, COVID-19 does not seem to be particularly airborne, which is why social distancing works as well as it does (see Postscript).
• Possibility of underestimating death toll. If you include all the cases that have not run their course, it is possible that the death rate is underestimated because it does not include cases that could result in death later.  
• Potential overload of hospital systems. This is the most valid worry I have seen so far. If the number of those infected with COVID-19 becomes too high too fast, it could overburden the health care system. We already see this playing out in Italy. Overwhelmed health care systems are bad for everyone, not just those infects. This is why epidemiologists suggest social distancing through what is referred to as "flattening the curve." If we can at least prevent COVID-19 from being spread too quickly, it would likely not overburden hospitals. 

Reasons to Not Be So Worried

• Most cases of COVID-19 are mild. Coronavirus is not a death sentence for the vast majority of those infected. Eighty percent of those infected have such minor symptoms and do not require care, according to Dr. Robert Murphy, who is the Executive Director of the Institute of Global Health at Northwestern University. A study of over 72,000 Chinese individuals who had COVID-19 concludes that 81 percent of those infected have a mild form of COVID-19 (Wu and McGoogan, 2020). As the WHO stated, "most people will have a mild disease and get better without needing any special care."

• Estimated mortality rate likely to be too high. Yes, the WHO estimates that 3-4 percent of COVID-19 cases have died. The caveat here is "reported" cases. Since there are more hard-to-count cases (see previous point), it is reasonable to assume that the current estimated mortality rate of 3.0 deaths per 1,000 is too high. 
• Another reason for optimism: South Korea has tested 140,000 people. There have been 6,000 confirmed cases with a mortality rate of 0.6 people. This is not only significant because they have an ample sample size, but also because South Korea has brought done the infection rate without resorting to citywide lockdowns seen in China and Italy. 
• A report from the New England Journal of Medicine (Fauci et al., 2020) points out that pneumonia has a mortality rate of 2 percent, which is worth pointing out since some coronavirus cases lead to pneumonia. Assuming that the number of mild or asymptomatic cases is much higher, the report predicts that the mortality rate will be much closer to flu season [of 0.15 percent], as opposed to a SARS-like 9-10 percent.
• A preliminary modeling analysis from European researchers shows that the mortality rate can be as low as 0.15 per 100 people (Anastassopoulu et al., 2020), which would make it comparable to the flu.
• Progress has already been made. While there is still not a vaccine, we already have a head-start in comparison to past epidemics. First, we have already identified the genome. Contrast that to HIV/AIDS, which took two years to identify. Second, we have been able to detect the virus since January 13 (Corman et al., 2020). We already have 164 scientific articles on COVID-19 that are accessible. For the SARS epidemic of 2003, it took a year to reach half of that amount. Finally, there are already vaccine prototypes and there are 80 clinical trials that have been launched.  
• Many more recoveries than deaths. There have been 68,310 recoveries while there have been 4,718 deaths. That means that for every death, there have been over 14 recoveries (Johns Hopkins).
• Lower death rate for younger people. With the data from China, the death rate for those under 40 is 0.2 per 100, and 0.4 for those between 40 and 50 (Wu and McGoogan, 2020). 
• Number of cases in already-affected countries is leveling off. This point is brought up by economist Anatole Kaletsky. Because it is an exponential process, Kaletsky uses a logarithmic scale. With that scale, Kaletsky shows how the spread of COVID-19 in the countries affected earliest in the outbreak are leveling off (see below). This finding can also suggest that the contagion effect is weaker than initially anticipated. 

Postscript 
The first person fell ill to COVID-19 about three months ago. For many countries, including my home country of the United States, we are in the outbreak stage of coronavirus, which means that any findings are preliminary. What we do know seems to provide a sense of mixed blessing, although I would say that the media has overblown COVID-19 based on information we have so far and that there is reason for medium-term optimism. Yes, there is risk, as there is for any pandemic. While we should not dismiss areas of concern, COVID-19 needs to be kept in perspective.

COVID-19 is especially a problem if you are elderly or are immunocompromised. However, for most people infected, the effects of coronavirus will be minimal or simply nonexistent. That's on an individual level. The implications for public health and the economy depend on how well we can slow the spread of coronavirus. It is too soon to tell what the magnitude of the effects of coronavirus will be, but it is safe to say that it will get worse before it gets better. In the meantime, the best ways to minimize contagion are to wash your hands, minimize social interactions, avoid close contact, clean surfaces you use often, work remotely if you can, and only wear a face mask if you are sick (or if you are caring for someone who is sick). Let's hope that we can do enough to minimize the spread of coronavirus and make the coronavirus scare as much of a thing of the past as we did with SARS and H1N1.

Bernie Sanders Cherry-Picks New and Flawed Study to Advocate for Medicare for All

During the Democratic primary debate last Tuesday, forerunner Bernie Sanders had a rough night because the other candidates were targeting Sanders. As Pete Buttigieg brought up, "Senator Sanders at one point said it was going to be $40 trillion, then it was $30 trillion, then it was $17 trillion. That's an incredible shrinking price tag." Of course, Sanders wants to make Medicare for All (M4A) appear as inexpensive as possible. That is why during the debate, Sanders mentioned a study from Lancet magazine, which is one of the most prestigious medical journals in the world. It is true that such a study exists in Lancet (Galvani et al., 2020), and it is true that the study claims that it would save $450 billion annually in health care expenditures. This study sounds like a win for the Sanders campaign. But is it? Let's forget for a second that the primary co-author, Prof. Alison Galvani, was an unpaid advisor for the Sanders campaign. The study itself is riddled with flaws that make the claim quite spurious. Kaiser Health News (KHN) and Politifact co-authored an analysis of Sanders' claim. I will integrate those findings with other points I found upon research to show why the Lancet study is greatly flawed.

• Estimation of payment rates to hospitals. This is the first flawed assumption made under the Lancet study, which is that it assumes that Sanders' M4A plan can pay hospitals Medicare rates across the board. First, the hospital lobby is a powerful lobby in the United States that has fought off payment reductions in the past, which would put political feasibility into question. Second, this assumption has not played out in the past. As I brought up when analyzing Elizabeth Warren's M4A plan in November, there is one state that has a plan similar to Sanders' M4A plan: Maryland's all-payer system. Under Maryland's system, they could not keep prices down (Pope, 2019). In Washington state, they passed a public option. They could not keep prices down at Medicare rates; they ended up being 174 percent higher than Medicare rates.
• Estimation of utilization rates. As one can imagine, some people skip treatment if they cannot afford it. The authors of the Lancet study assumed that there would be an increase of consumption of health care goods and services for the 24 percent that are uninsured or underinsured. The problem with the assumption that the Lancet study makes is that the remaining 76 percent are not going to increase their utilization as a result of M4A. Harvard health economist Adrianna McIntyre was so critical of this assumption that she wondered how the Lancet study ever made it past the peer review process. And I'm not at all surprised at McIntyre's criticism. Other countries that have implemented single-payer healthcare could not keep down utilization rates, which contributed to single-payer costs.  
• Estimation of administrative costs. By removing the middle man (i.e., the insurance company), certain costs are removed, such as co-pays. There is some intuition to that notion, which is why the Lancet study estimates a savings of $219 billion annually. Medicare has its administrative costs at 2 percent, and the Lancet study assumes that M4A can maintain those rates. I remain skeptical about these cost savings. First, Medicare is partially administered by the IRS [for tax collection] and the Social Security Administration [for collecting premiums]. Also, Medicare's administration is tax-exempt, which cannot be said for private insurers. Second, when you look at cost per beneficiary as opposed to percent of budget, it turns out that Medicare pays more than private insurers (Book, 2018). Third, as brought up in the KHN/Politifact analysis, while M4A would require a smaller back-end staff, it would still not be able to fully reduce the costs at Lancet estimations due to need for such expensive items as electronic health records. This helps explain why Politifact ranked Sanders' "administrative cost savings" claim as half-true.
• Long-term care. Sanders wants to be more comprehensive in M4A than even the Lancet authors assume. Sanders wants to cover for long-term care, which is estimated to cost $4 trillion over a decade. This expenditure is not covered at all in the Lancet study.  

Postscript: It's no wonder why Sanders picked the Lancet study to make M4A look good: it comes with quite rosy and unrealistic assumptions. Sanders' claims ignore how other countries could not contain their costs. More importantly, he claims that all studies, whether "conservative or progressive" show savings. The truth is that reputable estimates independent of the Sanders campaign put the cost of M4A anywhere from an additional $26 to $35 trillion over a decade, which is significantly higher than his most current estimation of $17 trillion. The centrist Rand Corporation estimated that M4A could increase costs by 9.8 percent in a year. The left-of-center Urban Institute estimated that a) federal spending would increase by $34 trillion over ten years, and b) even factoring in the net spending of private and public spending, it would still cost a net increase of $7 trillion over ten years. Urban's conclusion was that "the increase of spending for people with this generous new coverage would outweigh the savings from lower prices for health care providers and and lower administrative costs." And this says nothing of the libertarian Mercatus Center, provided a high-bound estimate of a net increase of $32 trillion in new costs.

Yes, it is true that there is a study from Lancet claiming how M4A could theoretically save money. Yet it is equally true that it has such flawed assumptions that it ignores the reality that M4A comes with too high of a price tag, far higher than Sanders claims. If Sanders were to confront this reality, he would not only realize that he would have to considerably raise taxes on everyone (and not just the 1 percent), but that he truly does not know how he would pay for it.