Tag Archives: Economy

Updates from Chicago Booth

Some basic economics of COVID-19 policy
A look at the trade-offs we face in regulating behavior during the pandemic
By Casey B. Mulligan, Kevin M. Murphy, and Robert H. Topel – The costs of the COVID-19 crisis come in two primary forms. The first is the direct impact in terms of health and lives lost. The second is the indirect impact that comes from efforts by individuals, private institutions, and governments to mitigate those health impacts, such as social distancing, stay-at-home orders, and mandatory business closures. It is imperative that we keep in mind that both are costs, and that less of one typically means more of the other. Like it or not, the first lesson of economics is that there are trade-offs, and choices are inevitable.

Regardless of how we choose to bear them, the costs of the pandemic will be large. Some very rough estimates provide perspective. Based on our earlier work on the value of mortality reductions and improved health, we estimate that an unrestricted pandemic infecting 60 percent of the US population and with an infection fatality rate (IFR) below 1 percent would result in roughly 1.4 million deaths, heavily concentrated among the elderly, with a total value of lost lives of about $6 trillion. For comparison, that is equivalent to about 30 percent of annual US GDP, suggesting that even small progress against the spread of the disease can be quite valuable.

Against this, we estimate that efforts to slow the pandemic via a nationwide shutdown of “non-essential” economic activities would carry a cost approaching $7 trillion per year (roughly $20 billion per day), even ignoring other long-run costs from reduced values of human and physical capital and any intrinsic value of reduced civil liberties.

Of course, an unrestricted pandemic is implausible even in the absence of government interventions, as individuals have powerful incentives to engage in self-protection once the risks are even partially known. Even so, these are big numbers. more>


Updates from Chicago Booth

A simple framework to help revive the US economy
By Emily Lambert – The COVID-19 crisis has seemingly left US policy makers with a choice between two terrible options: keep the economy shut down, or risk allowing the disease to run rampant throughout the populace, overwhelming the health system and opening the door to an unthinkable number of deaths.

But there is a middle course that decision makers can chart, and Chicago Booth’s Eric Budish has created a framework to help them do so. Managing COVID-19 for the time being, he says, requires bringing the rate of the disease’s spread down to an acceptable level and then finding ways to maximize economic activity without exceeding those epidemiological bounds. And he suggests that some combination of low-cost interventions, such as public-awareness campaigns and requiring people to wear masks in public, could be the way forward.

His framework starts with the rate of transmission of the coronavirus that causes COVID-19. Let’s assume the rate of transmission is 2—one person infects two people, those two infect four, the four infect eight, and so on. The actual rate is currently uncertain, but many estimates put the unconstrained rate, absent interventions, at between 2.5 and 3.

Ideally, interventions would bring the rate of infection to 0 and wipe COVID-19 from the planet. But there could be huge social and economic costs involved, at least until a vaccine or cure is developed. For example, one influential epidemiological model by scholars at Imperial College London, which helped push the US and UK governments to impose lockdown measures, predicts that schools would need to be closed for most of two years, Budish notes.

Is there an acceptable alternative? Reducing the rate to 1 or less would contain the spread, he notes. Take R as the rate of transmission. If R = 2, the number of infections doubles constantly and quickly, but R < 1 constrains the exponential growth. China, South Korea, Singapore, and Hong Kong have all managed to bring the rate under 1 by using social distancing, widespread testing, and other nonpharmaceutical interventions, Budish writes. Other countries could similarly reduce the rate to below 1, maybe by overshooting it at first to err on the side of human health. more>


China, America, and the International Order after the Pandemic

By Mira Rapp-Hooper – As people around the world fall ill, global markets convulse, and supply chains collapse, COVID-19 may also reorder international politics as we know it. No analyst can know when this crisis will end, much less divine the world we will meet at its conclusion. But as scholars have begun to note, it is plausible that China will emerge from the wreckage as more of a global leader than it began.

Following World War II, the United States was a chief architect of the so-called liberal international order and became its uncontested leader with the Cold War’s end. China, with its breathtaking economic growth and vast increases in military spending, has been on the ascent for decades, but long remained focused on domestic stability and the security of the Chinese Communist Party. It clambered to center stage after 2008, when the global financial crisis appeared to signal a weakening of American primacy.

China and others took the American financial stumble as a blunder of democratic capitalism, and a moment of opportunity to advance their own agendas. Under Xi Jinping, Beijing has seen the last decade as a period of “strategic opportunity” — one it did not necessarily expect to last, as it faces its own expected economic and demographic slowdowns. It built military bases in the South China Sea in contravention of international law, launched the vast and opaque Belt and Road Initiative to spread economic and political influence, doubled down on the state’s role in the economy and prejudicial policies, and coopted international human rights bodies. Along the way, it began to develop its own global governance aspirations and visions.

With the election of Donald Trump, the United States widened Beijing’s window of opportunity with its self-inflicted political convulsion. To China’s great fortune, American foreign policy was now expressly hostile to multilateral institutions, bellicose on trade, and defined national security in terms of narrow, homeland defense. To experts in the United States and abroad this looked like a willing abdication of the system the United States had constructed and led. But alongside these fears, and in another significant shift, foreign policy thinkers from both major parties increasingly agreed that the United States and China had entered a period of a great-power competition, in part, over the future of the international order and which power would set its terms.

Alone, the United States could not hope to match China’s economic and military heft in Asia. With allies by its side, America could remain peerless and manage peaceful change. Narrow unilateralism stoked renewed perceptions of further American decline and attenuated an otherwise favorable balance of power.

Enter the novel coronavirus.

It should be stunning that a virus that originated in China and spread in part due to Chinese government mismanagement may reorder the world to Beijing’s advantage, as Kurt Campbell and Rush Doshi have argued. more>

Updates from Chicago Booth

Many retailers are making a basic mispricing mistake
By Robin I. Mordfin – Retailers have long set prices ending in 99 cents, knowing that buyers view $4.99, for example, as significantly less expensive than $5. But many companies underestimate consumers’ left-digit bias and should be using these prices more than they do now, according to research by Chicago Booth’s Avner Strulov-Shlain.

Strulov-Shlain analyzed price data from 1,710 popular products in 248 stores of a single US retailer, as well as data on 12 products carried by more than 60 chains and in 11,000 of their stores. He finds that one-quarter to one-third of all prices ended in 99 cents.

But companies tend to miscalculate how customers react to a one-cent price change, Strulov-Shlain asserts. Buyers treat a price increase from $4.99 to $5 as if it were a 15–25 cent increase, while companies behave as if customers respond as though it were a 1.5–3 cent increase.

To learn how much companies should charge, Strulov-Shlain built a model that combines previously established left-digit bias models with a profit-maximizing formula that takes left-digit bias into account. Using the model and retailers’ pricing data, he estimates what price sensitivity and left-digit bias the companies had in mind when setting prices. Many items would have been better priced with a 99-cent ending, because demand dropped when the dollar digit changed, he finds. That was also the case at higher costs, where selling more units for the lower 99-cent price was more profitable than selling fewer units at a higher price. more>


A Foreign Policy for All

Strengthening Democracy—at Home and Abroad
By Elizabeth Warren – Around the world, democracy is under assault. Authoritarian governments are gaining power, and right-wing demagogues are gaining strength. Movements toward openness and pluralism have stalled. Inequality is growing, transforming rule by the people into rule by wealthy elites. And here in the United States, many Americans seem to accept—even embrace—the politics of division and resentment.

How did we get here?

There’s a story Americans like to tell ourselves about how we built a liberal international order—one based on democratic principles, committed to civil and human rights, accountable to citizens, bound by the rule of law, and focused on economic prosperity for all. It’s a good story, with deep roots. But in recent decades, Washington’s focus has shifted from policies that benefit everyone to policies that benefit a handful of elites. After the Cold War, U.S. policymakers started to believe that because democracy had outlasted communism, it would be simple to build democracy anywhere and everywhere. They began to export a particular brand of capitalism, one that involved weak regulations, low taxes on the wealthy, and policies favoring multinational corporations. And the United States took on a series of seemingly endless wars, engaging in conflicts with mistaken or uncertain objectives and no obvious path to completion.

The impact of these policy changes has been devastating. While international economic policies and trade deals have worked gloriously well for elites around the world, they have left working people discouraged and disaffected. Efforts to promote the United States’ own security have soaked up huge resources and destabilized entire regions, and meanwhile, U.S. technological dominance has quietly eroded. Inequality has grown worldwide, contributing to an unfolding nationalist backlash that seeks to upend democracy itself. It is little wonder that the American people have less faith in their government today than at any other time in modern U.S. history. The country is in a moment of crisis decades in the making.

To fight back, we need to pursue international economic policies that benefit all Americans, not merely an elite few. We need strong yet pragmatic security policies, amplified by diplomacy. And the United States can no longer maintain the comfortable assumption that its domestic and foreign policies are separate. Every decision the government makes should be grounded in the recognition that actions that undermine working families in this country ultimately erode American strength in the world. In other words, we need a foreign policy that works for all Americans.

The urgency of the moment cannot be overstated. At home and abroad, democracy is on the defense. The details of the problem vary from place to place, but one cause stands out everywhere: the systematic failure to understand and invest in the social, political, and economic foundations on which democracies rest. If we do not stand up to those who seek to undermine our democracy and our economy, we will end up as bystanders to the destruction of both. more>

Updates from McKinsey

Four ways governments can get the most out of their infrastructure projects
Best practices can help governments invest in infrastructure that expands the economy and better serves the public.
By Aaron Bielenberg, James Williams, and Jonathan Woetzel – Infrastructure—for example, transportation, power, water, and telecom systems—underpins economic activity and catalyzes growth and development. The world spends more than $2.5 trillion a year on infrastructure, but $3.7 trillion a year will be needed through 2035 just to keep pace with projected GDP growth.

National, state, and local governments are devoting increased amounts of capital to meet these needs, and for good reason. The McKinsey Global Institute estimates that infrastructure has a socioeconomic rate of return around 20 percent. In other words, $1 of infrastructure investment can raise GDP by 20 cents in the long run.

Gains from infrastructure are fully realized, however, only when projects generate tangible public benefits. Unfortunately, many governments find it difficult to select the right projects—those with the most benefit. Furthermore, infrastructure can provide social and economic advantages only when the capital and operating costs can be financed sustainably, either by the revenues a project generates or by the government sponsor. Too many projects become an economic burden and drain on finances when a government borrows money for an undertaking and neither its revenues nor its direct and indirect economic benefits adequately cover the cost.

Our framework includes four key best practices to help modernize decision making for infrastructure and to improve its social and economic impact. Each step is enabled by and contributes to a consistent, fact-based process for identifying and executing infrastructure projects. The first step—ensuring that projects yield measurable benefits—lays the foundation for all the rest.

  1. Develop projects with tangible, quantifiable benefits
  2. Improve the coordination of infrastructure investments to account for network effects
  3. Engage and align community stakeholders to promote inclusive economic and social benefits
  4. Unlock long-term capital

Consistent, transparent assessments are required to determine if infrastructure satisfies the elements of our framework—whether a project offers robust public benefits, is compatible with other projects and appropriately aligned with the community’s objectives, and uses the best long-term financing available. Thus, governments may have to invest in capabilities to evaluate the benefits of projects and commit themselves to transparent evaluations that include the necessary checks and balances.

Governments should assess their institutional capabilities against the framework’s elements, such as mapping current processes to develop infrastructure projects from concept to operation.

Can the government complete a structured quantification of public benefits?

Is there a way to assess the portfolio as a whole in light of the debt-management strategy? more>


The Greatest Balancing Act

Nature and the global economy
By David Attenborough and Christine Lagarde – In nature, everything is connected. This is equally true of a healthy environment and a healthy economy. We cannot hope to sustain life without taking care of nature. And we need healthy economies to lift people out of poverty and achieve the United Nations Sustainable Development Goals.

In our current model these goals sometimes seem to collide, and our economic pursuits encroach too closely on nature. But nature—a stable climate, reliable freshwater, forests, and other natural resources—is what makes industry possible. It is not one or the other. We cannot have long-term human development without a steady climate and a healthy natural world.

The bottom line is that when we damage the natural world, we damage ourselves. The impact of our growing economic footprint threatens our own future directly. By some estimates, more than 50 percent of the world’s population is now urbanized, increasing the likelihood of people losing touch with nature.

With the projected rise in ocean levels and increase in the average temperature of the planet, large swaths of land, even whole countries, will become uninhabitable, triggering mass climate-induced migration. Never has it been more important to understand how the natural world works and what we must do to preserve it.

A necessary first step is to recognize that waste is the enemy. Wasting food, energy, or materials flies in the face of sustainability. Producing plastics fated to end up as litter is a waste, especially when these plastics pollute our oceans. If we could live by the simple injunction to “do no harm,” both individually and as businesses and economies, we could all make a difference. Overconsumption and unsustainable production have put the planet in peril.

Since the natural and economic worlds are linked, similar principles apply to both.

In the financial world, for example, we would not eat into capital to the point of depletion because that would bring about financial ruin. Yet in the natural world, we have done this repeatedly with fish stocks and forests, among many other resources—in some cases to the point of decimation. We must treat the natural world as we would the economic world—protecting natural capital so that it can continue to provide benefits well into the future. more>

Updates from Chicago Booth

Does America have an antitrust problem?
Markets are becoming more concentrated—and, arguably, less competitive
By Jeff Cockrell – To those who are worried about the state of contemporary American politics—those who are concerned about the historically high levels of polarization between the two main political parties, who despair of the disappearance of anything that could be called common ground, who bristle at the apparent unwillingness of any occupant of national, state, or local office to recognize the common sense or basic human decency of any proposal coming from the opposite side of the aisle—we offer you this single harmonious word of relief: antitrust.

A vocal concern for the power held by some of the United States’ most dominant companies—especially tech giants such as Facebook, Amazon, and Google—may be the only shared material among the talking points of President Donald Trump and the Democrats vying to run against him in 2020. Trump has asserted that the US should follow the European Union’s lead in handing down large fines to big tech companies for antitrust violations, and during his presidential campaign, he charged that Amazon has a “huge antitrust problem.” A number of prominent Democrats, including Bernie Sanders and Elizabeth Warren, are on the same page, having suggested that many such companies may need to be broken up. In July, the Department of Justice (DOJ) announced that it was “reviewing whether and how market-leading online platforms have achieved market power and are engaging in practices that have reduced competition, stifled innovation, or otherwise harmed consumers.”

Concerns about competition are not unique to the tech industry. Aggregate levels of US industrial concentration—or how market share is divided among manufacturing companies—began to increase in the early 1980s after decades of relatively little change, according to research by Chicago Booth’s Sam Peltzman. The trend continued into the 21st century. Between 1987 and 2007, average concentration—as measured by the Herfindahl-Hirschman index, a commonly used gauge of market concentration—within the 386 industries included in his analysis increased by 32 percent.

If this trend toward more-concentrated industries has been accompanied by a small number of companies expanding their market power as a result of diminished competitive pressures, the effects could be momentous. In fact, some research suggests the exercise of market power could be responsible for everything from higher prices to reduced investment to the steadily diminishing share of the US economy that’s enjoyed by the labor force. more>


Optimizing for Human Well-Being

By Douglas Rushkoff – The economy needn’t be a war; it can be a commons. To get there, we must retrieve our innate good will.

The commons is a conscious implementation of reciprocal altruism. Reciprocal altruists, whether human or ape, reward those who cooperate with others and punish those who defect. A commons works the same way. A resource such as a lake or a field, or a monetary system, is understood as a shared asset. The pastures of medieval England were treated as a commons. It wasn’t a free-for-all, but a carefully negotiated and enforced system. People brought their flocks to graze in mutually agreed- upon schedules. Violation of the rules was punished, either with penalties or exclusion.

The commons is not a winner-takes-all economy, but an all-take-the-winnings economy. Shared ownership encourages shared responsibility, which in turn engenders a longer-term perspective on business practices. Nothing can be externalized to some “other” player, because everyone is part of the same trust, drinking from the same well.

If one’s business activities hurt any other market participant, they undermine the integrity of the marketplace itself.

For those entranced by the myth of capitalism, this can be hard to grasp. They’re still stuck thinking of the economy as a two-column ledger, where every credit is someone’s else’s debit. This zero-sum mentality is an artifact of monopoly central currency.

If money has to be borrowed into existence from a single, private treasury and paid back with interest, then this sad, competitive, scarcity model makes sense. I need to pay back more than I borrowed, so I need to get that extra money from someone else. That’s the very premise of zero-sum.

But that’s not how an economy has to work. more>

Eight Reasons Why Inequality Ruins the Economy

What matters is not so much the level of inequality as the effect it has.
By Chris Dillow – Roland Benabou gave the example (pdf) of how egalitarian South Korea has done much better than the unequal Philippines. And IMF researchers have found (pdf) a “strong negative relation” between inequality and the rate and duration of subsequent growth spells across 153 countries between 1960 and 2010.

Correlations, of course, are only suggestive. They pose the question: what is the mechanism whereby inequality might reduce growth? Here are eight possibilities:

1. Inequality encourages the rich to invest not innovation but in what Sam Bowles calls “guard labor” (pdf) – means of entrenching their privilege and power. This might involve restrictive copyright laws, ways of overseeing and controlling workers, or the corporate rent-seeking and lobbying that has led to what Brink Lindsey and Steven Teles call the “captured economy.

An especially costly form of this rent-seeking was banks’ lobbying for a “too big to fail” subsidy. This encouraged over-expansion of the banking system and the subsequent crisis, which has had a massively adverse effect upon economic growth.

3. “Economic inequality leads to less trust” say (pdf) Eric Uslaner and Mitchell Brown. And we’ve good evidence that less trust means less growth.

One reason for this is simply that if people don’t trust each other they’ll not enter into transactions where there’s a risk of them being ripped off.

5. Inequality can cause the rich to be fearful of future redistribution or nationalization, which will make them loath to invest. National Grid is belly-aching, maybe rightly, that Labour’s plan to nationalize it will delay investment. But it should instead ask: why is Labour proposing such a thing, and why is it popular? more>