Friday, August 21, 2020

Unions and Inequality: Looking at the Obvious

At the same time that a particular labor union (teachers) has successfully pushed to keep school buildings closed, we are reminded that unions are part of the "solution to inequality."  As an update to an old literature on unions and inequality, let's first look at distributional effects of closing school buildings.

The chart shows that closing school buildings reduces learning for all groups, but especially low-income and minority pupils.  So the actions of teacher unions today (they are far more likely to have their schools closed) will add to inequality in the future as the pupils enter the labor market.

Now let's look at today's labor market.  The weekly cash earnings of teachers are 22 percent more than those of nonteachers.  As a result of being offered more and richer fringe benefits (see the table below), their weekly compensation is 39 percent more, which I estimate assuming that retirement benefits involved an average 5 percent employer contribution for nonteachers and value teacher's pensions according to actuarial calculations (17 percent of salary).

It appears that an occupation that is well above average income is closing schooling buildings to the detriment of millions of low-income and minority children.

Thursday, July 16, 2020

Are Regulations "Job Killing"?

The traditional models of regulations and growth treat regulation as an adverse productivity shock (more inputs for the same output) in order to help the environment, fairness, or some other social good.  But a productivity shock has opposing income and substitution effects on labor supply.  Arguably a regulation that works as a productivity shock has no aggregate effect on jobs.

Reminded how Gary Becker many times told me that "somebody benefits," I do not endorse the productivity-shock model of regulation, at least as relates to the Federal regulations added and removed over the past 20 years.  In economics jargon, the "rectangle" created in a market by regulation is not entirely wasted: some of it is a transfer to special interests and therefore not an income effect in the aggregate.  This kind of regulation is more like an excise tax with the revenue paid to special interests.  Excises taxes unambiguously reduce aggregate equilibrium employment.

As the CEA showed in the 2019 and 2020 Economic Reports of the President, many of the regulations removed by the Trump Administration were more like the excise tax than like a productivity shock.  That's why special interests fought back so hard (and a couple of times, they won).  

[Even a productivity shock reduces employment in the short run to the extent that it reduces the productivity of investment.  i.e, that's another way that the "job killing" can occur.  There is another interesting case in which the rectangle from regulation is a transfer from Americans to foreigners in which case the employment reduction is outside the country.]

The sign of the effect on the employment of the regulated industry is also ambiguous.  If the regulation is a transfer from consumers to producers, with no adverse productivity effect, the regulation will reduce industry employment because that transfer is achieved by restraining supply.  But that frees up resources for other industries, which is why the aggregate employment effect can be nil.

To the extent that regulation reduces productivity in the regulated industry, we need Marshall's Laws of Derived Demand to sign the effect on industry employment.

One application provided in Chicago Price Theory is the regulation of illegal drugs.  Their demand is price inelastic in the sense that drug prohibition reduces consumption (although see here for a tragic exception) while it increases what consumers spend on drugs.  The price elasticity of demand is an important part of Marshall's Laws.  For illegal drugs, the result is more people working to (or serving prison time for) grow, manufacture and distribute illegal drugs because law enforcement reduces their "efficiency."  But those people are coming out of other activities, which is why the aggregate employment effect can still be nil. 

Wednesday, June 24, 2020

Shoddy Executive Order Bears Fingerprints of Navarro and Krugman

An immigration Executive Order was issued two days ago.  I read it yesterday and gathered my thoughts and relevant memories over the subsequent 24 hours.

The EO contains immigration regulations and purported economic justifications for the regulations.

The EO’s economic justification is essentially that it is good to suppress labor supply during a recession.  I disagreed with such a conclusion when it was offered years ago by Krugman, Eggertson, and others.  The conclusion is just as wrong when it comes from President Donald Trump.

The empirical fact, which is not a surprise from a theoretical point of view, is that labor supply and demand matter just as much at the margin during a recession as they do during an expansion.  See Chapter 8 “Recession-era Effects of Factor Supply and Demand” of my 2012 book (a more recent JPE paper confirmed these results but I cannot find the link right now).  A recession is not an economic excuse for suppressing labor supply.

The faulty economic analysis I see in the EO sounds to me like Peter Navarro talking.  Hearing his voice now catches me a bit by surprise because, although he is a part of the populist story, his “rudeness, ignorance, and dishonesty” are well known from the President on down.  [I believe that Hassett, Mnuchin, Mulvaney, and Kudlow shot down such Navarro initiatives in the past, although I was not present at those meetings or even much involved with the prep.]

Suppressing labor supply is also poor public relations.  The employment and productivity numbers will come in lower than they would with a more market-oriented recovery.  (Only a couple of the Navarro stories were included in my 2020 book because they were a small fraction of my experience, and the President is a lot more interesting.  But a hilarious one – in the reader-spits-out-coffee category – is about another time that Navarro flunked marketing.)

The justification for the EO’s regulations, if there is any, would have to be that it somehow begins a path to fixing the broken status quo system that was in place before Monday.  That system was full of special-interest favors, which the President should be removing as he has removed them in many other regulatory areas.  I am pessimistic (i.e., optimistic for the entrenched special interests) that there is any such path in the immigration area, though.

Gary Becker’s immigration plan should be given serious consideration.  President Trump agrees with that on purely economic grounds (Chapter 6 of my book), although he sees that as a political nonstarter (“radical” as Becker put it).  Perhaps the immigration plan Trump proposed in May 2019 (essentially the Canadian and Australian systems) is a more politically correct approximation to the Becker plan.

Part of this EO pertains to foreign-born scholars working in the U.S., which saddens me personally.  My closest friends are squarely in that category.  The value they add is so great that policy will likely change so that they continue to work in the U.S. 

A little known fact is that President Trump is a very good listener (my book is filled with examples; that’s how he became a populist president).  So speak up!  He may decide in your favor.  After listening, he may articulate your position better you do.  In that case, I’m sorry because that is a strong indication that he is deciding against you (e.g., here) and wants you to at least know that you were heard.

Friday, June 19, 2020

Dueling Memoirs: Mulligan vs. Bolton

What do readers have to say?

A New York Times Review says that Bolton's memoir "has been written with so little discernible attention to style and narrative form...."

One reader (who asked to remain anonymous because he/she fears retribution at work) finds You're Hired! to be an "extremely well-written book." Brian Blase found it to be "enjoyable and easy to read."

Back to the review of Bolton, "Underneath it all courses a festering obsession with his enemies ...the book is bloated with self-importance."

Pages xii and xviii of You're Hired! explain how I was "the Apprentice" and that readers should be "prepared to be as amazed and humbled as I was."

By Joe Grogan's reading, You're Hired! is an "an insightful, honest, book ...  free from score settling and self promotion."

You're Hired! shows that Bolton has distorted the truth, omitted important context, and contradicts critical facts in plain sight.  Excepts related to this matter were published on-line as Bolton is Wrong; I was There.

Sunday, June 7, 2020

Coronavirus and What it is Like to Speak with Trump

One viewer says "You play it very straight which at this point is unheard of in Washington."

Saturday, June 6, 2020

The Higher Ed Market after Floyd

@GlennLoury objects to what university administrators are doing. They are economic actors too, who will not benefit from a repeat of 1968, so it is predictable that their reactions might risk some scholarship, reason, and learning.
But there is also competition in the industry and thereby an opportunity for an (aspiring?) administrator who expresses the interests of the many individuals who have not yet reached the fashionable conclusions. Something like the famous Zimmer letter.
This competition might play out slowly given that (barring regulatory favors) universities will now compete in another important dimension: whether 2020-21 students are allowed to purchase a college education that does more than Zoom (which would have made 1968 impossible).

Moreover the Zimmer letter was not written on a blank tablet. A Uchicago committee led by @stone_geoffrey had already worked on it 2 years before. If this capital does not yet exist for the current situation, it will take time to build it up.

Thursday, June 4, 2020

Labor Market Recovery Begins when States Begin to Open

The first chart below is an estimate of weekly US employment per adult.  It suggests that the bottom was the week ending May 7, and that a recovery may have begun.

The estimated recovery may not look large on the scale of the current depression, but it is about 7.5 million employees above May 7 and 3 million employees above late April.  Note that the entire recovery from the 2008-9 recession was "only" 7 million employees above population growth and took ten years rather than a week or two.

At about the same time, states began ending their stay-at-home orders.  E.g., Texas May 1 and California May 8.  I expect another increase in early June as more reopening occurs.  A big increase will occur when UI bonuses expire, which may be as early as August.

The imputation is based on the scatterplot below.

Monday, April 27, 2020

Measuring Employment between Monthly Surveys

The Employment Situation Report by the Bureau of Labor Statistics comes only monthly.  It measures only the seven-day week (or, with the establishment survey, pay period) including the 12th of the prior month, which means that this month four very interesting weeks will be skipped and that the report on that April week will not be released until May 8.

Three data sources provide employment information on at least one of the missing four weeks, with the results shown in the chart below.  The results suggest that employment has fallen more than 20 million and perhaps as much as 36 million by April 11.  This does not begin to count employees who had their hours reduced.

One is an attempt by Bick and Blandin (2020) to imitate the BLS household survey for the week of Sunday March 29 to Saturday April 4.  They sampled 1,118 respondents, finding that employment per adult aged 18-64 was 17.8 percent below what it was in February and 17.4 percent below what it was in January.  They find that hours worked per person (including zeros for those not employed) were 27.7 percent below what they were in January and February.

Coibion, Gorodnichenko, and Weber (2020) surveyed 18,344 members of the Nielsen HomeScan panel during the days Thursday April 2 through Monday April 6.  The respondents were asked “Do you have a paid job?” which is different from the BLS questions but the same as January surveys of the Nielsen panel.  Their sample shows a 12.5 percent decline from January to April.

As a third source, I use the excess of continued UI claims for the week ending April 4 rescaled by 0.4, which is the typical ratio of continued claims to persons unemployed during the 2008-9 recession.[1]  The rescaled amount is 16.1 percent of February employment as measured by the February household survey.  This approach also offers employment estimates for the weeks before and after the week ending April 4.

Especially during the pandemic, “employment” and “unemployment” can vary significantly merely due to definitions.  Is a person on the payroll but told not to work considered employed?  The BLS knows from its experience with Federal shutdowns that surveyors and respondents frequently misclassify relative to the technical definition in the survey.  The practical classification grey areas are also presumably sensitive to question wording.  UI claims also have a grey area that presumably changes as new Federal policies increase the financial reward to unemployed rather than out of the labor force.

These measurement challenges suggest using hours worked rather than employment and using multiple data sources, which are not entirely congruent approaches because only one of the three sources measures hours worked.[2]  I therefore measure the decline in hours worked by averaging the three employment estimates and then applying the Bick-Blandin estimate of the decline in hours per employee.

Regarding initial claims versus continued claims, initial claims may not be granted due to ineligibility and do not show a stable ratio to employment changes during the 2008-9 recession.  Initial claims are reported a week ahead of continued claims.[3]

[1] The average continued claims was 1.7 million in both January and February, which is the baseline from which I calculate the “excess.”
[2] Hours worked are also of interest because many people were under employed in April (Bick and Blandin 2020).
[3] In March and April 2020, continued claims may include an abnormal share of ineligible claims due to abnormal delays in state processing, although this effect should disappear over a horizon long enough for states to process the claims.  On the other hand, the CARES Act passed March 27 will begin distorting the relationship between employment and continued claims because the Act included a large UI bonus that will encourage an abnormally large fraction of the eligible unemployed to apply.

Monday, April 20, 2020

Show us the fevers

By all accounts, hundreds of millions of us are confined to home despite being perfectly healthy.  The purpose of all of this, we're told, is to make sure that we do not bump into people infected with the coronavirus.

The wise people forcing us to do so owe us some evidence that in fact the virus is out there in sufficient quantities to merit draconian measures.  They point us to deaths in New York hospitals, and growing numbers of positive test results.  But those presumably were infections that occurred weeks ago (perhaps also some false positives).

Smart thermometers suggest that hardly anyone has had a fever for a couple of weeks now.  Perhaps this data is faulty or easily misinterpreted, but the wise people owe at least an explanation to the hundreds of millions of people paying the costs of their policies.

The time to be at home is when there is lots of virus outside.  That does not appear to be now.

30+ million out of a job

A one-size-fits-all policy, even at the state level, has been a mistake from the beginning.  Instead policy should be favoring decentralized mechanisms over direct control and ensuring that the chosen regulations deliver more net benefits than less stringent alternatives.  It is too bad that governments are causing so much harm at this critical moment by ignoring these longstanding principles of government regulation.

Expressed at an annual rate, the shutdown is already costing $7 trillion, or about $15,000 per household per quarter.  Employment had already fallen 28 million by April 1 and continues to fall as the shutdown continues.  Not only is the shutdown costly, but it is a cost-ineffective way of reducing the health harms from the virus.  My recommendation is to achieve close to, but somewhat less, of the mortality reduction at dramatically less cost to hundreds of millions of workers, consumers, and business owners.

Here's why I think at least 30 million are out of work as of today.  First, that's where I expected we would be headed based on the fact that workdays as we know them have been eliminated.  Second, as of the week of March 29-April 4 (hereafter "April 1"), the employment rate of persons aged 18-64 fell from 0.738 to 0.607.  Assuming conservatively that the same percentage decline (17.8%) also applied to persons 16, 17, or 65+ years old, the decline is 28 million people as of April 1.

There is no reason to believe that the decline (an average of 1.3 percent per day for two weeks) was finished by April 1.  The stay at home order for Texas and Maine was not until April 2.  FL, GA, MS: April 3.  AL: April 4.  MO: April 6.  SC: April 7.  Even if the decline were only 0.2 percent per day over the two weeks beginning April 5, that would put the cumulative employment decline past 30 million.

Friday, April 17, 2020

Shutdown reduces the flow of GDP by 28 percent

New data from Alexander Bick and Adam Blandin suggest that the flow of real GDP is 28 percent less than it would be under normal circumstances.  Using two entirely different methods, I previously forecasted 25 percent and 26 percent.  Below are the details of my calculations from Bick and Blandin.

Bick and Blandin (2020) find that working hours per working age adult circa April 1 declined 27 percent from February.  Moreover, among those working in February 2020, between 59 and 61 percent are now absent from their workplaces either due to not working or working at home.  If half of the capital in those workplaces is idle and not replaced by utilizing capital located in home offices, then capital utilization has fallen by 30 percent and GDP by 28 percent.

The GDP calculation assumes production-function exponents of 0.3 and 0.7, respectively.

This brings my estimate of the welfare cost of shutdown, relative to a normally functioning economy, of $7.1 trillion per year or $233 per household per workday.  For this purpose I use the average GDP estimate from the "input method" cited above and the output method I used earlier.

Saturday, April 4, 2020

What's Wrong with this Reasoning?

  1. FACT: the population density of NYC is 27K per square mile
  2. FACT: the population density of Indianapolis is 2K per square mile
  3. FACT: COVID-19 was able to be introduced and spread in a city with only 2K susceptible people per square mile (Indianapolis is such a city).
Conclusion: COVID-19 will continue to spread in NYC until either (i) the number of susceptible people falls to 2K per square mile or (ii) a vaccine.  i.e., until more than 90% of NYC has contracted and recovered from COVID-19.  [This conclusion says nothing about time frame; i.e., it could be years]

Does the conclusion follow from the three facts?

Thursday, April 2, 2020

Where did the fevers go?

This website tracks real time fevers using thermometers connected to the internet.  A first glance at their map suggests to me that:

  • fevers spiked two week ago.
  • The timing of the spike is similar across the country,
  • but magnitude greater in those regions with more COVID-19 deaths.
  • The time difference in the peak across counties is at most a few days.

Does this mean that the rest of the country is not significantly lagging NYC?  Or that COVID-19 fevers are a small fraction of all fevers?

Tuesday, March 31, 2020

What's Happening with Drug Abuse?

I don't know where to find very recent counts of drug overdoses.  Below is alcohol sales, showing that the sales increase is greater for higher alcohol content (up to 75 percent for spirits).

If the increase in drug overdoses were also 75 percent, that would be an increase of about 1000 fatalities per week.

Is a Shutdown an Overreaction?

60,000 - 80,000 Americans died from the 2017-18 flu, without exceeding the capacity of ICU beds.  This flu was experienced around the world.  Not a single country found it worth shutting down their economies in that situation.

In 2020 the forecast is that about 90,000 Americans will die from COVID-19, including some deaths due to insufficient ICU capacity.  Shutting down "nonessential" businesses is now the norm.

This forecast comes from the Institute for Health Metrics and Evaluation IMHE at the University of Washington.  Unlike me, IMHE are not amateurs with contagious disease time series.  With "about 500 statisticians, computer scientists, and epidemiologists on staff, IHME is a data-crunching powerhouse. Every year it releases the Global Burden of Disease study...."

At what point is a reasonable person allowed to ask why the economic policies of 2017-18 and 2020 are so disproportionate?

Some people will say that the 90,000 would have been much higher without shutting down the economy.  At what point can a reasonable person follow up with "Why were ALL of the 2020 costs, which were in the $ trillions, taken on the economic (and civil liberty) side of the ledger, and essentially NONE on the mortality side?"

Monday, March 30, 2020

An example of 7(a) perversion

Let's say that you have 700 employees in the prior year, earning an average of $50K.

If you continue that between now and the end of Q2, Title I of the 2020 CARES Act will give you nothing.

BUT if you fire at last 201 of those employees, and THEN apply for a $10 million 7(a) loan, the entire $10 million will be forgiven at the end of Q2 as long as you keep enough of the 499 employees that remain.  Moreover, you pay no business tax on the forgiven amount.

You are eligible for the $10 million loan because your prior year payroll was over $10 million.  You are eligible for $10 million forgiveness because your payroll still exceeds $10 million.

In effect, the Federal government has paid you $50K per employee, tax free, to fire people pursuant to a provision called "KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT."

The SBA could fix this problem when it issues guidance around the CARES Act by setting a time frame sufficiently far in the past that it cannot be manipulated.

Sunday, March 29, 2020

Has Lombardy Reached the Flat Part of the Daily Death Curve?

From various sources.  I don't have exact numbers before March 15, but the first half of March averaged closed to 100 per day and February's daily average was less than one.
[updated through Apr 3]

Notes on 2020 CARES Act, in reading order

Note that this law is just one of multiple new COVID-19 relief laws.  These are my notes on the labor market provisions in the law, which are all of Titles I and II, and parts of Title III.

  • A.k.a., 7(a) loans
  • "Loans" to small businesses that maintain their payrolls
    • Payroll does not include any payments to employees making $100K+ annually
  • The loan amount is capped by the prorated amount of payroll for the prior year
  • The loans can be forgiven in whole or part
    • The forgiveness is capped by the minimum of
      • $10 million;
      • the sum of ongoing payroll, rent, utilities, interest;
      • the loan amount (itself capped at 2.5 times average monthly in the prior year).
    • The forgiveness is free from business tax.
  • For this act, a small business is less than 500 employees.
    • The date of this determination is crucial.  If the SBA Administrator is not careful with its guidance, it could be interpreted as the date of the loan.
    • For businesses with more than 500 employees, this act would be a MASSIVE SUBSIDY TO FIRING enough people to be at 499 or less before making the loan application.
      • Firing employees making more than 100K is most advantageous under this title.
      • The SBA Administrator's definition will also affect expectations about how extensions of this Title will be implemented.
    • Another part of this law will pay the fired employees, perhaps more than they were making as workers.
    • Nonprofits are eligible too.
  • Ends June 30, 2020
    • Businesses with significantly less than 500 employees have a zero marginal cost of adding employees.  However, June 30 is too soon to make much profit from hiring.
Title II
    • A new program making payments to unemployed not covered by traditional unemployment assistance, such as someone who
      • quit their job, or
      • has no work experience.
    • This program expands the UI-eligible pool by a factor of at least six.
      • Normal pool is a subset of persons laid off from work, which should be less than 20 million.
      • With Section 2102, the pool is any adult not on a full time payroll, which is at least 128 million (259 million adults minus Feb 2020 full-time employment of 131 million). 
      • See Section 2104 below ("$1000 a week") and then calculate what the Treasury would spend on that section if, say, 80 million people were collecting $1000 per week.
    • Program lasts through Dec 31.
    • Weekly benefits last 39 weeks plus the duration of any extension of traditional UI.
    • If a state were to deny UI benefits to a person failing a drug test, this program would pay them full benefits at Federal expense!
    • The Federal government takes over the UI "contributions" of government and nonprofit employers through Dec 31.
      • Background: Normally, all employers make contributions that partially reflects their history of layoffs.  In effect, part of a UI benefit is paid by the employer who fired the person.  This is a normally a tax on making layoffs.
    • By eliminating such contributions, the new program is a SUBSIDY FOR LAYOFFS by government and nonprofit employers
  • Section 2104.  $1000 a week!
    • Not to be outdone by the 2009 "stimulus" law, which paid a $25 weekly bonus to UI recipients, the 2020 EUC program pays a $600 weekly bonus!
    • This bonus goes on top of the normal UI benefit, which averaged $378 per week at the end of 2019.  i.e., get paid $1000 per week for NOT WORKING!!
    • It lasts through the end of July.
    • $1000 per week is more than most full-time workers get paid for working.
    • This disincentive to work and subsidy for layoffs is massive and not even close to any historical precedent.
  • Section 2105.  Federal financing of the first week of unemployment.
    • As with Section 2103, this is a subsidy for layoffs but for all employers.
    • In contrast to Section 2103, this section only pays for one week.
  • Section 2106.  Clean up of the previous coronavirus law.
  • Section 2107.  Pandemic EUC
    • Like the 2009 EUC program, this EUC programs provides Federal money to continuing paying UI benefits after state benefits have been exhausted.  It is limited to 13 weeks, putting the total duration of UI benefits at 52 weeks.
    • Beneficiaries have to be actively seeking work.
      • This will means some VERY long lines to apply for jobs, because standing in such line is both (i) proof of actively seeking and (ii) pretty safe protection against a job offer that would end UI.
    • It lasts through the end of the year.
  • Sections 2108-2110.  Part-time UI (a.k.a., "work share")
    • Pays Federal benefits to part-time workers whose hours were reduced from full time.
    • It lasts through the end of the year.
    • Take a worker earning $800 per week full time.  With the CARES Act, the employer has two more options
      • Lay her off so she can get $1000 per week from UI.
      • Change her to half time so she can get $400 per week from the company plus another $500 week from UI, for a total of $900 per week.
  • Section 2301.  Employee retention tax credit.
    • Businesses with 0-100 full-time employees
      • Section 2301 is a 50 percent tax credit for wages paid to any employee.
    • Businesses with 101+ full-time employees
      • Section 2301 is a 50 percent tax credit for wages paid to employees on the payroll but not at work due to COVID-19.
      • For these employers, Section 2301 is a tax on work because employer has full payroll tax only when the employee works (as opposed to being on the payroll).
    • Regardless of size, the employer must have gross receipts that are sufficiently low compared to the previous year.
    • The credit applies to wages paid through the end of the calendar year, and cannot exceed $5000 per employee.
    • These credits are fully refundable and administered through the payroll tax.  Nonprofits can get them too.
    • Regardless of business size, Section 2301 is a step-function sales tax.  i.e., as soon as sales exceed a threshold, the payroll tax jumps discretely.
  • Sections 2303-4.  Symmetric treatment of business gains and losses.
    • Background: As an business' net income changes sign from year to year, so does her after-tax cost of payroll because the deduction of payroll from business income has tax value only in years with positive net income (subject to some complicated carry forward and backward provisions).  This normally gives employers an extra incentive to stop paying workers during a loss year.
    • These sections by themselves, increase the incentive to have payroll during a year with negative net income, which 2020 will be for many businesses.  I don't think the sections have much effect on the incentive to have the employees actually work (as opposed to be paid without working).
    • These sections also open the door to Treasury losses due to clever tax accounting, which is why gains and losses are historically treated asymmetrically.
Title III forthcoming

Notes on Families First Coronavirus Response Act, in reading order

Note that this law is just one of multiple new COVID-19 relief laws.

Division A
  • Section 1101.  Schools are incentivized to remain closed more days.
  • Titles II-IV, VI.  Small amounts given to agencies to be spent at the Cabinet member's discretion.
  • Title V.  $1 billion for HHS to pay COVID-19 expenses for the uninsured.
Division B

  • Titles I and II.  School lunch money is now available when school is closed "due to COVID-19."
    • This incentivizes to schools remain closed more days, especially those getting the most school lunch money.
    • Will add the learning gap between poor and affluent schools.
  • Title III.  Raise limits on the duration of time that a household can participate in SNAP/Food Stamps.
Division C
  • Section 3102.  "Emergency Family and Medical Leave Expansion Act."  Employees at small businesses are entitled to be out of work with pay if they have a child at a school or day care closed due to COVID-19.  
    • Here, a small business is less than 500 employees, but with certain exceptions for businesses less than 25 employees.
    • The duration of leave is capped at 12 weeks.
    • The pay must be at least 2/3 of normal salary, capped at $200 per day and $10,000 in the aggregate (see also here), which does not bind unless the annual salary exceeds $60K or so.
    • Even an employee who has been on the payroll only 30 calendar days (as few as 20 working days) can get the full pay for 12 weeks.
    • Employers get payroll tax credits for these payments (Division G).
    • The provision
      • sharply reduces the financial reward to work for such employees,
      • and further incentivizes schools (that are responsive to parental demands) to remain closed.
  • See also Division E, which covers the first 10 days of the leave and is not tied to children in school.
Division D
  • Section 4102.  $1 billion for state unemployment programs.
  • Section 4105.  Full Federal funding of extended benefits.  This means that employers do not have to help pay for extended benefits, and therefore amounts to an enhanced subsidy for layoffs.
Division E
  • Emergency Paid Sick Leave Act
  • Covers the first 10 days of the leave provided in Division C.
  • The child/dependent care pathway has the same pay minimums and caps.
  • Other pathways, such being in quarantine, are full salary with $511 per day cap (that is $128K annual salary).
  • Children in school closed school or daycare is not the only pathway to eligibility.
  • Also regulates employers:
    • They cannot ask sick employees to help find a replacement during their absence
    • They cannot discharge or discipline employees for either taking leave or instituting any proceeding under the Act
Division F
  • Health insurance must cover COVID-19 tests.  (Short-term plans are not considered insurance for this purpose).
Division G
  • Employers may claim payroll tax credits for moneys paid to employees under Divisions C and E.

Thursday, March 26, 2020

The Economic Cost of Shutting Down "Non-essential" Businesses

THE ESTIMATES BELOW WERE MADE CIRCA MARCH 20, 2020.  Updated estimates are available here, complete with additional cost categories and references and based on important new data.

We are currently fighting a war against the COVID-19 virus.  The war presents an obvious and massive tradeoff between “guns” – activities whose primary purpose is war production – and “butter,” which refers to the normal activities of households and businesses.  Without any improvement in our techniques for fighting the war, the sacrifices by households and businesses will be staggering and historically unprecedented.

This document enumerates and quantifies the sacrifices using two novel methods.  The results suggest that negative 50 percent is an optimistic projection for the annualized growth rate of U.S. GDP in 2020 Q2 if the nonessential businesses were not allowed to operate during that quarter.  GDP losses, while massive, nonetheless understate the true costs of the sacrifices that households and businesses are making, which I estimate to total almost $10,000 per household per quarter.  This is why better techniques for fighting the war are incredibly valuable.

Government officials around the world have ordered businesses shut and families to stay in their homes except for essential activities.  My purpose here is to enumerate and quantify the real economic costs of fighting the war in this way.  This document estimates the opportunity costs of lockdown relative to a normally functioning economy, which is the relevant comparison for the purposes of policy decisions such as medical innovation (or, possibly, a statistical sampling effort) that could end the lockdown earlier. 

To be clear, the cost-enumeration exercise can be consistent with a conclusion that the war is worth fighting – that depends on quantifying the benefits, which are surely significant given the value that people place on health and longevity.  Although this document does not address the question of whether a lockdown is better than no policy response, it offers some of the essential ingredients for such an analysis.  No policy response would itself involve economic contraction during the period of time in which no treatment or vaccine is available.

The lockdown method of fighting the war on the virus directly affects how people allocate their time.  That includes what they do, where they do it, and with whom.  Because normal time allocation includes elements of saving and capital accumulation, such as learning skills, the economic effects of the war are felt into the future as stocks of physical and human capital are reduced.  For enumeration purposes, I distinguish market production activities from all other activities, especially because market production is counted in conventionally-measured GDP whereas leisure activities are not.  Although I refer to the non-market activities as “leisure,” they include religious gatherings and forms of effort such as student effort in school and effort put toward housework.  Both market production and leisure activities are significantly affected by lockdown.

A.  Net Costs Associated with Market Production

Lockdown reduces the amount and effectiveness with which people work.  The effects of this can be measured on either the production side of the national accounts, as the value of goods and services not produced, or the income side as reductions in total incomes.  Either approach yields the same result, up to measurement error.[1]  However, the incidence – the distribution of impact across industries, occupations, and income groups – is different from the production and income perspectives.

Momentarily putting aside costs associated with leisure activities, the lockdown can be analogized with a change in the number of holidays and weekends (“nonwork days”).  A well-studied, albeit obscure, element of national income accounting is the adjustment for the fact that the number of nonwork days normally varies from year to year.[2]  A normal year has about 251 working days and about 114 nonworking days.[3]  The national accountants have found that adding a nonwork day to the year reduces the year’s real GDP by about 0.1 percent and have been applying this estimate to both the production and real income accounts.[4]  Adding a nonwork day to a quarter would therefore reduce the quarter’s unadjusted real GDP by about 0.4 percent.

Extrapolating from this finding, removing all of the working days from a quarter is 62 or 63 times this, or 25 percent.[5]  In other words, if seasonally-adjusted GDP 2020-Q2 would have been $5.5 trillion at a quarterly rate (see Table 1), then changing all of that quarter’s working days to the functional equivalent of a weekend or holiday would reduce the quarter’s GDP to $4.2 trillion.[6]  Applying the same approach to 2020-Q1, with a lockdown occurring for one-eighth of the quarter, 2020-Q1 real GDP (in 2020-Q2 prices) would be $5.4 trillion.  The quarter-over-quarter growth rate of seasonally-adjusted real GDP would, expressed at annual rates, therefore be -10 percent in Q1 and -63 percent in Q2.[7]  The Q2 growth rate would be less negative to the extent that a lockdown was in place for only part of the quarter or for part of the country.

[Table 1 contains POINT ESTIMATES, not worst-case scenarios.  If these costs are to be netted against health benefits, then those benefits should be POINT ESTIMATES too.  Worst-case scenario health benefits should be compared with worst-case scenario costs, which far exceed what I provided].

Lockdown is not exactly the functional equivalent of changing workdays to weekends or holidays.  On one hand, a segment of the workforce will engage in telework during lockdown that they would not perform on a normal weekend or holiday.  Other segments or regions will be exempt from shutdown.  This by itself suggests that the $4.2 trillion estimate is too pessimistic.  On the other hand, much of the normal weekend activity such as restaurants, entertainment, and religious activities is not occurring during lockdown.  This by itself suggests that the $4.2 trillion estimate is too optimistic.

A second method uses the production side alone.  Labor is reduced by the number of “non-essential” employees, which has been about 30 percent during Federal shutdowns.[8]  In some of the industries, real capital will continue to be used, albeit by fewer employees.  Other industries will not use their capital, although it may be repurposed, such as a hotel being used as a hospital ward.  To be conservative, I assume that few industries increase their labor-capital ratio.[9]  The reduction in capital input is therefore somewhere between 0 and 30 percent; I assume 15 percent.  History has repeatedly shown that labor is more important in the production process than capital, so that by the second method real GDP is reduced 26 percent.[10]

The estimates above assume no black markets.  But, as seen with border patrol and the war on drugs, any government regulation attempting to block valuable gains from trade will result in black market activity.  Businesses will also work the gray area, lobbying and distorting their operations to have more activities declared “essential.”

Black-market activity is far less productive than legitimate activity, which is why it does not come close to replacing the “non-essential” sales that were banned.  But it still has value, which is why the best welfare effects of shutdown may be less pessimistic than analysis assuming zero black market.[11]  I assume that black markets replace 25 percent of the gains from trade, based on studies of illegal drugs.[12]  However, value generated in black markets is typically not measured as part of GDP.  Indeed, black markets compete with legitimate markets for the factors of production and by this channel would reduce measured real GDP even more than would occur without black markets (Fleming, Roman and Farrell 2000).

Table 1 shows only averages, but the distribution of costs is unequal.  Revealed preference -- that fact that the demand for social insurance increases in these situations -- suggests that the inequality itself is a cost large enough that people are willing to tolerate even further increases in the average costs (i.e., further decreases in GDP) in order to mitigate the costs for those disproportionately affected.

Although the national income accounts were designed on the basis of the principles of welfare economics, GDP growth is not exactly a benefit and GDP reduction is not exactly a welfare cost because valuable activities and assets such as home production, elements of human capital accumulation, and environmental quality are not yet recognized in the official national accounts (Hartwick 1990, Nordhaus and Kokkelenberg 1999, Jorgenson 2010).  However, as discussed further below, the GDP losses cited above prove to reasonably approximate more comprehensive welfare losses.

B.  Net Costs Associated with Nonmarket Activities

The nonmarket/home sector is affected by lockdown through two basic channels, as shown in Table 1.  The first channel is discussed above: the nonmarket sector has additional labor that has been forced out of the market sector.  The second channel is that the nonmarket sector becomes less productive, both for the nonmarket time that normally exists as well as the additional nonmarket time coming from the market sector, because even in their nonwork activities people are restricted in terms of where they go and how they associate with others.  The percentage change in the value created in the nonmarket sector combines the two channels and is approximately the sum of the (positive) percentage change in labor input and the (negative) percentage change of nonmarket productivity.[13]

An important example of the second channel is the time allocation of children and young adults who would normally be enrolled in school and now spend their time at home.  Their learning from normal face-to-face interactions with teachers and fellow students is not fully reflected in GDP, but is nonetheless valuable.  In other cases, as with religious gatherings, entertainment, and tourism, lockdowns reduce the value of these activities by limiting how people can congregate and the market inputs that can be used as part of the leisure activity.

Because the national accounts are based on the principles of welfare economics, GDP would ideally capture value created or destroyed in both the market and nonmarket sectors.  Measurement challenges have so far limited the scope of conventional GDP measures to the market sector.  Conventional GDP measures therefore miss the value of additional nonmarket time added by the shutdown (the first channel) as well as the reduced productivity of nonmarket time (the second channel).  This section provides estimates of the two, which can be added to the GDP losses from Section I.B to arrive at a welfare loss of shutdown as compared to normal economic activity.

To estimate the nonmarket value of added labor, I use the short run of the neoclassical growth model, which is essentially a labor supply and demand framework.  The average nonmarket value of time is below the after-tax real wage that would normally prevail, but above the marginal value of time with a shutdown, which I estimate to be 49 percent of the former.[14]   With a 48 percent marginal tax rate (inclusive of implicit taxes on labor income), the total nonmarket value of the extra time is about $7 billion per day (see Table 1), or about 30 percent of the reduction in real GDP.  Simply put, about two-thirds of the $22 billion daily GDP loss is a welfare loss, even without considering any productivity change in the nonmarket sector.

Full-time schooling, where there are normally about 73 million children and young adults enrolled, is the part of the non-market sector’s productivity loss that is easiest to quantify.  Their time and efforts, which are known as “foregone earnings” and not counted in conventional GDP measures, are combined with direct schooling costs such as the education industry’s payroll and capital expenses because the students, their parents, or their community value the results of schooling.  The direct costs were $370 billion in 2018.  Various studies, such as Breton’s (2013) estimate that foregone earnings are about 102 percent of the direct costs, which would be $377 billion in 2018, or about $4.5 per hour that the average student was in school.  Assuming that some schooling will still occur during lockdown, I take the loss of student output attributable to their time and effort to be half, or about $2.25 per hour that they would have been in school.

Learning does not stop at graduation.  Post-graduation workers learn on the job, which shifts the composition of their compensation toward skill acquisition and away from the cash and other fringe benefits that are part of conventionally measured GDP (Rosen 1972).  Although the market sector may be the physical location of this learning, I count the foregone earnings as “nonmarket” because it is usually unmeasured.  I estimate the value of foregone earnings using the cross-section age-earnings profile and the average of two estimates of the age-training profile (Mulligan 1998).  During a shutdown, this learning does not occur for 30 percent of the workforce, although (as with market production) I assume that about one-third of its value is replaced with nonmarket activity.  The net opportunity cost associated with on-the-job training (OJT) is therefore about $107 billion at an annual rate, as shown in Table 1.

The normal population has even more adults not in the labor force than full-time students, not to mention all of the time that workers normally spend outside of work.  If a shutdown also reduced the hourly value of their time by $2.25 for 2000 hours per year for those out of the labor force and for 500 hours per year for those who work, that would be a loss of $767 billion at an annual rate.

C.  The Incidence of the Net Costs

The massive costs of shutting down “non-essential” activities are not shared equally among Americans.  Some workers are still able to draw a normal salary even while their industry is inactive.  Others work in industries such as parts of healthcare that are booming as a result of the pandemic.  Because the aggregate reduction in the value of what is produced must equal the aggregate reduction in total income, the costs of lockdown will fall disproportionately on the remainder of the population that are not in these circumstances.

Public programs are being created and expanded with the intention of helping some of those who are disproportionately bearing the costs.  Redistribution policy may help distribute the aggregate costs more fairly, but in no way can it reduce the aggregate cost.  Even while these policies assist those who are not working because of the pandemic, they do not replace the work and production that the workers would have been doing.  Instead, redistribution itself has its own aggregate costs, for example, by reducing incentives to work and incentives of workers to shift into industries that need them most (Mulligan 2012).

D.  Bibliography

Barro, Robert J., José F. Ursúa, and Joanna Weng. "The Coronavirus and the Great Influenza Pandemic: Lessons from the “Spanish Flu” for the Coronavirus’s Potential Effects on Mortality and Economic Activity." NBER working paper, no. 26866 (March 2020).
Breton, Theodore R. "Were Mankiw, Romer, and Weil right? A reconciliation of the micro and macro effects of schooling on income." Macroeconomic Dynamics 17 (2013): 1023–1054.
Christian, Michael S., and others. Human capital accounting in the United States: 1994 to 2006. BEA, 2010.
Council of Economic Advisers. Mitigating the Impact of Pandemic Influenza through Vaccine Innovation. Executive Office of the President, September 2019.
DiMasi, Joseph A., Henry G. Grabowski, and Ronald W. Hansen. "Innovation in the pharmaceutical industry: new estimates of R&D costs." Journal of health economics 47 (2016): 20–33.
Eichenbaum, Martin S., Sergio Rebelo, and Mathias Trabandt. "The Macroeconomics of Epidemics." March 23, 2020.
European Central Bank. "The impact of the number of working days on euro area GDP in 2004." Monthly Bulletin, June 2004: 51-63.
Fleming, Matthew H., John Roman, and Graham Farrell. "The shadow economy." Journal of International Affairs, 2000: 387–409.
Hartwick, John M. "Natural resources, national accounting and economic depreciation." Journal of Public Economics 43 (1990): 291–304.
Jaffe, Sonia, Robert Minton, Casey B. Mulligan, and Kevin M. Murphy. Chicago Price Theory. Princeton University Press (, 2019.
Jorgenson, Dale W. "A new architecture for the US national accounts." Review of Income and Wealth 55 (2009): 1–42.
Jorgenson, Dale W. "Human capital and the national accounts." Survey of Current Business 90 (2010): 54–56.
Katz, Eric. "Agencies Paid Federal Employees $3.7 Billion Not to Work During Recent Shutdowns." September 17, 2019.
Mulligan, Casey B. The Redistribution Recession. New York: Oxford University Press (, 2012.
Nordhaus, William D., and Edward C. Kokkelenberg. Nature’s Numbers. National Academy Press Washington, DC, 1999.

[1] Adding the opportunity costs of production to the reductions in incomes would be double counting.
[2] Leap years also create variation in the total number of days.
[3] A year has 52 weeks plus an additional one or two days, for a total of between 104 and 106 weekend days.  There are ten Federal holidays.
[4] European Central Bank (2004).  Note that 0.1 percent is much less than 1/251; the estimate implies that the average nonworking day has two-thirds the GDP of a working day.
[5] The exact number of working days that 2020 Q2 would have normally had is irrelevant for this calculation because the national accountants adjust for its deviation from 251/4.
[6] This is the sum of Table 1’s first row with its addendum row.
[7] This assumes a baseline annual growth rate of 2 percent and applies it one for one.  The formula for the annualized growth rate in Q2 is
[8] Katz (2019).  The non-essential share has not yet been measured for government-mandated private-sector shutdowns, which is why the holiday-weekend method should receive more weight.  Given that I obtain almost the same result for the two methods, their weighting is not critical to the analysis.
[9] Using their labor is different than keeping the labor on the payroll.  An unused worker still on the payroll does not contribute to current output.
[10] Barro, Ursúa and Weng (2020) estimate that, if the COVID-19 epidemic were a scaled version of the 1918 Spanish Flu, real GDP would fall less than eight percent.  The authors note that the current pandemic is unique in that “countries have been pursuing a policy of lowering real GDP,” which are the lockdowns that are the subject of this document.  Looking at the current pandemic, Eichenbaum, Rebelo, and Trabandt (2020) estimate that aggregate consumption and GDP (their model has no investment) will fall up to 20 percent.
[11] But government regulators can hardly defend their shutdown regulations on the grounds that they will not be obeyed!  Moreover, black markets add another social cost by eroding respect for law and order.
[12] The war on drugs increases the retail price (and unit cost to suppliers) by a roughly a factor of four and reduces the quantity consumed by a factor of two (Jaffe, et al. 2019, Figure 12-1).  Illegal drug sellers have had many years to accumulate organizational and other capital that lockdown violators did not.  On the other side, drug war enforcers have had many years that lockdown enforcers have not.
[13] The approximation is exact when the changes are measured in logarithms rather than percentages.
[14] This assumes a wage elasticity of labor supply of 1/2 (0.49 = 0.72).