The Coronavirus and the Economy: A Tutorial

The novel coronavirus that causes the disease COVID-19 will harm the U.S. economy. That we know, even though, as of this writing, the effects have barely begun to show up in statistics on employment, inflation, and real output. But just how bad will the impacts be, and what, if anything, can be done about them?

Although the economic effects of the virus will be complex, and we are sure to see some surprises, we can learn a lot from a simple model of the macroeconomy used in Econ 101 courses everywhere. This new slideshow presents a brief tutorial.

The model used in the tutorial is based on the concepts of aggregate demand and aggregate supply.

• Aggregate demand means the amount of real output – the inflation-adjusted quantity of goods and services – that consumers and firms want to purchase at any given time. Other things being equal, the quantity demanded is greater when the price level is lower.
• Aggregate supply means the quantity of real output that firms are willing to supply in response to the prevailing aggregate demand. Other things being equal, when demand increases, firms tend to react partly by increasing prices and partly by increasing the quantity of output.

When the economy is operating smoothly, as it was, for the most part, early in 2020, the rate of inflation is low and real output is close to potential GDP, which is the quantity of goods and services that can be produced in the long run without causing the economy to overheat.

A Safety Net for the Job Apocalypse

Even if it's not this bad, we need to prepare

Automation and artificial intelligence are increasingly disrupting the labor market. Some see a coming “job apocalypse.” Others simply see a continuation of existing trends toward growing inequality as more and more people fall out of the middle class into less stable, lower-income employment. In either case, we are not prepared.

One of the many things that need attention is our social safety net, especially those parts of it that deliver health care and income support to those in need. This post suggests two major safety net reforms that would mitigate the impact of coming shocks to the labor market.

A scenario

A specific scenario will help focus the discussion — one based on a job category that is likely to grow in the coming years even as many routine and repetitive jobs disappear. That category comprises home health aides, personal care aides, and other occupations that can be loosely referred to as “eldercare.” These jobs are resistant to automation because they are neither repetitive nor routine. Moreover, they are jobs where people value the human touch.

Can Health Insurance Be Both Universal and Voluntary?

A tracking poll from the Kaiser Family Foundation finds that 56 percent of Americans favor a fully government-run Medicare for All insurance plan, but that an even larger 68 percent favor a mixed public-private approach with a public option. The most common reason given by those who support a public option but oppose Medicare for All is a desire for choice. They do not oppose the idea of public health insurance, but they do not want to be forced onto it.

Given those public attitudes, it is not surprising that many Democratic presidential aspirants have shied away from Medicare for All in favor of plans based on a public option. Pete Buttigieg emphasizes the element of choice in the very name of his plan, which he calls Medicare for All Who Want It. Other candidates backing one or another form of public option include Joe Biden, Amy Klobuchar, and Michael Bloomberg.

There is a dilemma at the heart of the public option approach, however. Is it possible to offer choice in health care coverage and still achieve universal coverage, another cherished goal of reformers? Or does the attempt to achieve universality inevitably require making enrollment compulsory?

In my view, it should be possible to preserve meaningful choice in health care while ensuring universal access to coverage. But doing so will require attention to some details of program design that the candidates’ plans have not fully addressed.

The issue

Although the universal-vs.-voluntary dilemma is inherent in all public option plans, the version advanced by the Buttigieg campaign has drawn the most attention to the issue. At least part of the reason is that the Buttigieg plan comes closest to addressing the dilemma directly. Writers for The Washington Post, The New Republic, the Wall Street Journal, and Slate have all argued that his public option is designed in such a way that it would inevitably become compulsory.

The central question in all of this is how to ensure that the risk pool covered by the public option includes an adequate number of healthy subscribers along with those who are ill. If people can easily buy into coverage only after they become sick and drop out at will when they recover, the average cost of claims made by those left in the pool rises and premiums become unaffordable. The result is the notorious “death spiral,” known to economists as adverse selection.

More on How To Make a Carbon Tax a Generational Win-Win

Last April, Laurence Kotlikoff, together with three distinguished colleagues, published a long, highly mathematical working paper on how to make a carbon tax a “generational win-win,” that is, something that can benefit those of us who are alive to day as well as our great-grandchildren. Both Kotlikoff and I think the answer is “Yes,” but for different reasons.

Earlier, I published a commentary on Kotlikoff’s working paper here on Medium. In the meantime, he has written a shorter, much more readable version of his “win-win” thesis for the Milken Institute Review. The editor of MIR asked me for a comment on the new version, which has now been published. Here is what I said:

In his Milken Institute Review article, “Leaping the Divide,” Larry Kotlikoff identifies a key problem of political economy that complicates efforts to slow climate change: a large part of the costs of the transition to a low-emission economy must be paid upfront as the economy retools, while the greatest benefits will become apparent only decades, even centuries, down the road. That makes costly policies like taxing emissions to spur green investment a hard sell.

Kotlikoff would like to fix that. Somehow, he says, we need to make a carbon tax a “generational win-win” that would “give all generations an equal stake in the policy.” If so, we would not have to rely on the weak reed of intergenerational altruism to build a successful political coalition behind a climate action plan.

Can it be done? I agree with Kotlikoff that it can, but I have serious reservations about the way he proposes to do it. Let me explain.

Starve-The-Beast Libertarians Should Beware the Rule of the Clan

Tyler Cowen thinks that libertarians are waking up to the idea that the problem we face is not that the state is too big, but rather, that it lacks the capacity to do what needs to be done. That, in his view, is to “maintain and extend capitalism and markets.” He coins the term “State Capacity Libertarianism” (SCL) to refer to this post-anarcho-capitalist perspective.

Writing for this site, Sam Hammond offers three motivations for the transformation of old-fashioned libertarianism into the new kind. I would like to suggest an additional motivation, drawn from Mark S. Weiner's 2013 book, The Rule of the Clan.

The “starve the beast” doctrine embraced by many traditional libertarians holds that depriving the government of the resources it needs to go about its business will increase personal freedom and strengthen markets. That would make sense if the default alternative to state capacity were a free-market utopia like those portrayed in the Galt’s Gulch chapters of Atlas Shrugged or in Robert Heinlein’s The Moon is a Harsh Mistress. Unfortunately, as Weiner explains, the default alternative is something less attractive to lovers of freedom and individualism.

The EPA's SAFE Vehicle Rule is a Triple Play of Regulatory Ineptitude

In 2018, the EPA released a proposal called the SAFE Vehicle Rule, with SAFE standing for "Safer, Affordable, and Fuel Efficient." The rule featured an aggressive rollback of Obama-era fuel economy rules for motor vehicles. The original version would have frozen corporate average fuel economy (CAFE) standards at 37 miles per gallon, rather than allowing them to rise to 54 MPG, as would happen with no new action.

Since that time, the agency has been working on a revised version. Although the revision has not yet been made public, the Washington Post has published a description of it, in the form of a letter written by Senator Thomas Carper (D-Del). If the details given in the letter and the Post article are accurate, the new rule is both weaker and even less defensible than the original version.

For those who like CAFE standards, the new rule might look like a step in the right direction. Rather than freezing fleet mileage standards at 37 mpg, it would allow them to increase by 1.5 percent per year until they reached 40.5 mpg by 2030. But, as I pointed out in an earlier commentary, a policy that supplemented CAFE standards with a carbon tax, or even replaced them entirely with such a tax, would do even more to cut greenhouse gas emissions.

The Scissors of Supply and Demand are Cutting Carbon Emissions, but Not Fast Enough

Since the time of Alfred Marshall, more than a century ago, economics professors have taught their students that markets are like scissors: They have a supply blade and a demand blade that work together to determine prices and quantities. 

An example of the scissors at work can be found in a new report on greenhouse gas emissions from the Rhodium Group.

The report is a classic case of good news and bad news. The good news is that overall U.S. GHG emissions fell by 2.1 percent in 2019. The evidence makes clear that both blades of the scissors are doing some cutting.

Looking first at the demand side, we see that the decrease in total emissions comes despite an estimated 2.3 percent increase in U.S. real GDP last year. Together, the 2.1 percent drop in emissions and the 2.3 percent growth of GDP mean that emissions per dollar of GDP fell by a far-from-trivial 4.4 percent. American industries and consumers are finding that they don’t need to pump out the same amount of pollution they used to in order to maintain equivalent levels of production and consumption.