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Economics in the time of COVID-19 – Joshua Gans

by Venky

How I wrote and published a book about the economics of ...

As a dumbstruck world is trying to come to grips with what arguably has to be the most severe onslaught of a pandemic since the Spanish Flu in 1917, the social, psychological and economic costs of this unpredictable event have been, putting it mildly, incalculable. Phrases such as Social Distancing, Hand and Respiratory Hygiene and Basic Rate of Transmission have entered the Lexicons of everyday life and routine. How man, the quintessential social animal goes about interacting with his fellow compatriots has undergone a paradigm shift. The MIT Press, during these troubled times has endeavored to offer expert insight on matters that inform urgent local and global consequences. These titles, published in double quick time, almost ‘on the fly’, strive to step back and assume a rational, calm and systematic view of the subjects that are intended to be covered.

The first book in the series is titled “Economics in the time of COVID-19” and is authored by Joshua Gans. Holding the Jeffrey Skoll Chair in Technical Innovation and Entrepreneurship at the Rotman School of Management, University of Toronto, Mr. Gans until 2011, was an economics professor at Melbourne Business School in Australia.

Mr. Gans begins his engaging book, by expounding on the technique of “thinking at the margin”. An integral facet of the dismal science, this notion seeks answers to fundamental questions of trade-off such as what or how much of a particular product or thing or advantage one has to sacrifice in order to obtain or possess a bit more of some other thing or advantage. In unprecedented times such as the one currently staring us in the face, this particular thinking may be conflated, and integrated with epidemiological models to secure plausible options moving forward.

There are a myriad number of choices available to countries to tackle the ongoing pandemic and bring the economy back on its rails. Sweden has gone about as though the days of the pandemic denoted nothing unusual and desisted from any type of lock down measure. This effort to induce ‘herd immunity’ however has ensured a surge of deaths in the Scandinavian country. Singapore, Taiwan and Korea on the other hand have resorted to a maniacal testing, tracing and isolation binge thereby keeping the rates of infection under check. Whatever be the strategy adopted, as Mr. Gans informs his readers, a pandemic is characteristic of two unavoidable factors:

“(1) that a pandemic hollows out our ability to maintain the same balance between health and the economy and

(2) that our choice of priority changes our options going forward; that is, they can drift.”

Hence, if we were to emulate the Swedish strategy and let the pandemic have a free reign before running its course without mitigation, this would lower economic activity, thereby leading to what the author terms “dark recession.” “This is a recession where we see a reduction in the availability, ability, and health of the workforce as the virus spreads unabated. This causes a large reduction in economic activity.”

Mr. Gans agrees with the economist Eric Budish in the latter’s observation that it is vital to possess the correct mindset when thinking about how to reach the frontier. “In particular, if you have a mindset that focuses solely on reducing the infection rate as quickly as possible, this will not necessarily get you to the frontier. Instead, that frontier involves targeting an infection rate that stops the pandemic but, otherwise, picking allowable activities that reflect both their value for the economy and their risk in terms of public health.”

One of the classic conundrums that can be birthed as a result of a pandemic is the procrastination surrounding the value called the real option value. Directing the reader’s attention to a paper penned by economists Patrick Bolton and Joe Farrell, Mr. Gans constructs a fictional scenario where there is an imperative to establish a factory each to manufacture face masks as well as ventilators. But neither of the manufacturers know which factory would be able to do each task at the lowest cost. In a free-market economy, both the manufacturers may hone in on one product as most efficient, retool for that purpose and produce the same product. The result, we will end up with either too many face masks and too few ventilators or vice versa. But there might arise another tricky scenario. Both the manufacturers might adopt a wait and watch approach to gauge their competitor’s move. Hence no one produces anything and hence, untold and perfectly avoidable delays in production.

How does one go about addressing the economic exigencies triggered by the pandemic? An extraordinarily innovative and out of the box thinking, refers to “Stopping time” a creation of Scott Ellison, who was quoted on the Marginal Revolution blog with this proposal:

“I propose temporarily stopping time. This means that today’s date, Tuesday, March 17th, 2020, will remain the current date until further notice. This also means that everything that happens in time (e.g. mortgage due dates, payrolls, travel bookings, stock market trading, contractor gigs, concerts, sporting events) will be paused. It also means that all of these events remain on the books, and will continue as planned once time is resumed.”

Another drastic suggestion was offered by French economists Emmanuel Saez and Gabrielle Zucman. Saez and Zucman opine that governments should become “payers of the last resort.” This, in the event a business is staring at the discomfiting prospect of facing a shutdown, the government would come in and pay for employees and for fixed-cost payments such as rent, utilities, and interest. “Unemployment payments could simply be made as if workers have lost their jobs, to provide an easy route to such payments. They would also allow self-employed or gig economy workers to report themselves as idle to be eligible for such payments. For businesses, if they are part of lockdowns for more extreme social distancing, they would report their costs, be reimbursed, and then any misreporting would be worked out later.”

Mr. Gans also reiterates the need for according short-term help to tide over the crisis and preventing it from ballooning into a major headache. Also price control measures may be instituted on essential products that play a role in reducing the spread of the infection.

In order to boost the efforts to introduce a vaccine, Mr. Gans advocates an approach suggested by Michael Kremer. An approach that involves the use of Advanced Market Commitments (“AMCs”). “Suppose you are trying to encourage the development and then manufacture of a vaccine. An AMC is a contract without a specific counterparty that a donor/sponsor offers to deliver the intended vaccine. The contract specifies that the provider (as yet unknown) will be guaranteed a certain payment per dose of the vaccine up to a specified number of doses. This serves to set a floor on what the provider might earn because the contract specifies a subsidy for every dose actually purchased. So, a country, for instance, may pay a low price (such as $1) per dose but the provider would receive an additional subsidy (say, $15) per dose. Thus, there is a guaranteed payoff for providers, but, in return, providers agree to cap the price they charge for the vaccine.”

Mr. Gans also lays great emphasis, and rightly so, on the need for making widespread testing both available and affordable.

“Economics in the time of COVID-19” is a handy primer for all those who are interested in a rejuvenation of the global economy, while at the same time, preserving the health and welfare of the citizens.

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