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." googlegroups.com. March 23, 2020. https://fb8280a8-a-62cb3a1a-s-sites.googlegroups.com/site/mathiastrabandt/home/downloads/EichenbaumRebeloTrabandt_EpidemicsMacro.pdf?attachauth=ANoY7coRODwA_z1gJoSLHsTEXF0IQcWOQbFP5bfX9cHSypuO2NuwJPyq7T2A4p2wdppOl0jWVgmAzN4-16-irT7vZqkwvBs8_8PNb3hs0ZJmZtr.
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 (ChicagoPriceTheory.com), 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." govexec.com. September 17, 2019. https://www.govexec.com/pay-benefits/2019/09/agencies-paid-federal-employees-37-billion-not-work-during-recent-shutdowns/159936/.
Mulligan, Casey B. The Redistribution Recession. New York: Oxford University Press (redistributionrecession.com), 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).

Saturday, March 21, 2020

Will write soon on the real economy

What is happening to the real economy right now is straightforward from the perspective of the supply and demand for labor and capital.  This perspective shows how the real-economy costs are massive, and largely unnecessary, especially to the extent that they continue more than a week or two.  (I discussed the political economy of this here).

This perspective shows how the recovery will look.

This perspective shows why equities are so much cheaper, beyond what is "justified" by reductions in the future dividend stream (hint: Irving Fisher, but as I have written in the past, do not interpret "interest rate" as the yield on Treasury Bills or Fed Funds but rather as the profit rate on real capital). 

I will write up the details soon.

Wednesday, March 18, 2020

COVID-19 policy: your costs will be ignored unless you speak up

It is a fact that, despite requirements to the contrary, Federal health professionals do not consider the costs of health-enhancing rules and regulations in their normal course of operations.  Jerry Ellig has documented this fact in his regulatory report cards where he shows that the cost-benefit analysis from HHS (the Federal department making health policy) consistently ranks as one of the worst agencies in terms of considering costs as part of its regulatory impact analysis.  (Using other Federal agencies as a benchmark is an incredibly low bar!).

This HHS tradition is not new (Ellig's latest report card was prepared in 20116), and continues even into the current administration, as I witnessed first hand.  For example, when HHS is of a mind to reduce the number of people uninsured, they impose any cost on taxpayers and consumers in pursuit of getting people signed up for insurance and furthermore pretend that those costs are so negligible as to be unworthy of counting.

We can safely assume that HHS continues this approach to COVID-19.  They want to minimize the rate of new infections.  It won't matter to them how much of our money that costs.  It won't matter how much human capital our children and young adults lose.

Although it was not true in the past with health insurance, opioids, and other matters, perhaps this time they are doing the right things.  If so, it is the blind squirrel story, because they are ignoring costs.

The only way for Federal health decisions to reflect costs is for YOU TO SPEAK UP.  HHS reports to elected officials, who can and often do listen to their constituents.  President Trump certainly does listen (I know that first hand).  But they will not hear unless PEOPLE SPEAK UP.

Cass Sunstein, whom I admire, has nonetheless made a big mistake by perpetuating the myth that "Technocrats have triumphed,” which is his way of asserting that Americans are now ruled over by nonpartisan career professionals who carefully balance costs and benefits.  This depiction of balancing costs and benefits is absurd, especially as regards to health policy, which is the single biggest area of Federal regulation.

What I never anticipated is that it would become so obvious to so many regular people how health policy is conducted without regard to the costs they bear.

Wednesday, March 11, 2020

Subsidizing Addiction

In both 2015 and 2016, U.S. life expectancy fell from the previous year. A single-year drop had not happened in 22 years, and two consecutive drops had not occurred in more than 50 years. This sharp reversal in the national trend toward longer lives is widely understood to be connected to the opioid epidemic that began in the 1990s. The best kept secret about the epidemic, however, is how much of it – arguably most of it – resulted from Federal policy changes initiated by both Democrats and Republicans.

Opioids include prescription drugs like oxycodone as well as illicitly manufactured drugs like heroin and fentanyl. Since 2000, the Federal government has increased subsidies on both types of opioids and cut taxes on illicit opioids.

Medical professional organizations like the American Pain Society have been criticized for recommending more aggressive opioid prescription practices and downplaying addiction risks. But the effects of their recommendations would have been less severe without the Federal dollars that supported them. Beginning in 2000, the Veterans Health Administration (part of the Federal government) mandated that pain be seen as “the 5th Vital Sign,” which meant that pain would be routinely screened for and documented primarily based on patient self-assessments. Years later, the new Secretary of Veterans Affairs would report that veterans were twice as likely to die from opioid overdose than the general population.

This new approach would soon enter into civilian practice too, with three phases of financial encouragement from the Centers for Medicare and Medicaid Services. CMS has long conditioned hospital reimbursement under its massive Medicare and Medicaid programs on hospital quality assessments by the Joint Commission on Accreditation of Healthcare Organizations, another accreditation organization, or state survey agencies. In 2001, pain management became part of the accreditation process, putting billions of CMS dollars at stake. The second phase of incentives began in 2007, when CMS began withholding two percent from full reimbursement if a hospital failed to participate in the patient survey known as HCAHPS; hospitals and doctors discovered that their performance on the survey improved if opioids were liberally prescribed. The third phase began in 2012, when CMS implemented the “valued-based purchasing” (VBP) requirement provided for by the Affordable Care Act, which tied hospital reimbursement even more strongly to the HCAHPS survey. CMS would spend the next seven years taking steps to reduce these financial incentives for aggressive opioid prescribing.

Federal subsidies benefiting opioid consumers were probably even larger. In 2006, Medicare began to cover prescription drugs pursuant to its new “Part D” program. Although most Medicare enrollees are elderly, many of their prescriptions ended up in the hands of nonelderly people. Citing a family physician from Ohio, Sam Quinones’s book Dreamland asserts that “seniors realized they could subsidize their retirement by selling their prescription Oxys [a potent opioid] to younger folks. Some of the first Oxy dealers, in fact, were seniors who saw the value of the pills in their cabinets. ‘It’s like hitting the Lotto if your doctor will put you on OxyContin…. People don’t even think twice about selling.’” The White House Council of Economic Advisors (CEA) estimates that three-fourths of the growth in prescribed opioids between 2001 and 2010 were financed by government programs.

The 2010 Affordable Care Act requires health plans (especially Medicare) to cover “benzos” – prescription tranquilizers like Valium and Xanax. Benzos are part of the opioid crisis because they are the other half of the risky opioid-benzo cocktail that is favored by many opioid abusers. The tranquilizers enhance the feelings connected to opioid consumption, including the consumption of heroin and fentanyl. In other words, unlike the 2006 Medicare subsidies, which apply only to prescription opioids, the ACA’s benzo subsidies increase the demand for illicit opioids too.

In 2013, Attorney General Eric Holder took a step toward ending the war on drugs by instructing Federal attorneys that they should not prosecute low-level drug offenders. As I explain in my recent paper, this amounts to a tax cut on illicit opioids that would presumably reduce their street prices.

As far as I can tell, these policies went ahead because much of the Federal government did not grasp the full extent of the opioid epidemic. The Federal Register (the daily publication of US government agencies), reveals the Federal priorities at the time. Every 10,000 pages published between 2009 and 2016 had only six documents mentioning “opioid,” “opioids,” or “opiate.” In contrast, the same 10,000 pages had nearly 40 documents mentioning “climate change.” As recently as 2013 – the third consecutive year in which the death rate was almost triple normal levels – the Congressional Record mentions “climate change” 27 times more often than “opioid” or “opioids.”

Regardless of whether the government increases subsidies or cuts taxes, the result is lower prices paid by the opioid consumer, making opioid addiction more affordable. The CEA’s recently released 2020 Economic Report of the President estimates that, adjusted for inflation, out-of-pocket prices for prescription opioids fell by a factor of five between 2001 and 2010. (CEA’s price data is graphed below.) More recently, the quality-adjusted price of illicit opioids fell by at least a factor of two.
Studies have shown that opioids and other addictive substances obey the law of demand: lower prices mean more demand. If nothing else, the reduced prices for opioids have sharply increased the number of people who can afford an opioid addiction. CEA estimates that lower prescription opioid prices explain 31 to 83 percent of the increase in the death rate from 2001 to 2010 involving prescription opioids. This estimate does not include the additional effects of subsidies for benzos or hospitals, or the effects of reduced heroin prices since 2010.

Without the new subsidies supporting opioid addiction, the number of fatalities from opioid overdoses would be significantly lower, and maybe it wouldn’t even be called an “epidemic.”