Category: Healthcare

Vaccine Passports

Discussions of the pros and cons of mandated lock downs to stop (or slow) the spread of Covid-19 often miss the most important point. The key factor in restraining the spread of a contagious disease (beyond vaccines, basic public health measures, etc.) is the behavior of each one of us. Given our respective risk preferences the question is whether we adjust our behavior sensibly to protect ourselves and others from infection? Our behavior may be responding to government mandates to close restaurants, theaters, and factories or it may be responding to information provided by public health experts on the nature of the risks and measures to mitigate them. In the latter case our experience and that of our neighbors will depend importantly on the quality of the information provided and our trust in its efficacy. Our individual choices allow responses that are more suited to the individual situation of each actor.  “The unnecessary fight over covid-19”

In short, if governments were to say, “do whatever you want, but these are the risks as we understand them,” people would not necessarily rush to the concert hall, or baseball game, or hop on a plane. “Sports fans live attendance poll”  Offices, factories, restaurants and entertainment venues must convince their workers and customers that they have taken reasonable steps to be safe from Covid-19 (or other risks). Thus, comparing the results (infections and economic output) of lock down with no (or mild) lock down countries is not the right test.

We need to focus attention on the quality of the information being provided to the public, the public’s trust of such information, and the efficacy of the measures being taken by those offering reasons to gather in public places to enhance its safety. Those who have had Covid-19 or who have been vaccinated for it face minimum risk of catching it (again) or of spreading it and can pretty safely attend public events. Thus, a trustworthy way of establishing that fact would be very useful. I carry my vaccine certificate wherever I go but they are relatively easy to counterfeit if it became useful to do so. Thus, the reason behind the various projects to develop so called vaccine passports (better named vaccine certificates) is obvious.

The technical design, including privacy protections, raise more issues than you might at first imagine, including establishing interoperability standards and access to public records. However, the position taken by Florida Gov. Ron DeSantis defies understanding by those of us who place our individual freedom in first place. He stated that: “We are not supporting doing any vaccine passports in the state of Florida…. It’s completely unacceptable for either the government or the private sector to impose upon you the requirement that you show proof of vaccine to just simply be able to participate in normal society.”  “Biden vaccine passports-DeSantis”  This is incredibly wrong. Restaurants now serving indoors already test our temperature before allowing us to enter. I visited my credit union in the IMF building in downtown Washington, DC today and they took my temperature as well. If gatherings are not convincingly safe, sensible people won’t attend. Countries requiring arriving passengers from other countries with a high incidence of Covid-19 infections to quarantine for two weeks would presumably wave that requirement for passengers with a credible vaccine certificate.

It is hard to imagine that the public accommodation clause of the Civil Rights Act of 1964 would require a restaurant to admit and serve a customer with a contagious disease. But there are privacy and other technical concerns with implementing a reliable certificate of a covid vaccine. “The next front in the pandemic culture wars vaccine passports” The benefits to the economy and our freedoms are significant enough to make the effort to overcome them.

Should you get vaccinated for Covid-19?

“A CBS/YouGov poll released this weekend found 33 percent of GOP voters say they will not get the vaccine when it’s available to them. Another 20 percent say they aren’t sure.” “The-daily-202”  After being thoroughly satisfied that Moderna was safe and effective, I have received both of my jabs. But I sympathize with those who are skeptical and/or distrusting of the information they have been fed over the last year. The messaging from the Trump administration was inconsistent and the CDC has now removed some earlier postings that had been more influenced by politics than by science (which, by the way, is far from having all of the answers yet).

In addition to poor messaging from the government, some badly misguided, if not deliberately evil, groups have spread false information.  So, I find it very encouraging that many of those refusing to get the vaccine say that they “want to be educated not indoctrinated.  The responses of focus group participants suggest they can be persuaded — but perhaps not by politicians, including the former president…. Be honest that scientists don’t have all the answers. Tout the number of people who got the vaccines in trials. And don’t show pro-vaccine ads with politicians — not even ones with Donald Trump.  That’s what a focus group of vaccine-hesitant Trump voters insisted to politicians and pollsters this weekend….

 “’These people represent 30 million Americans. And without these people, you’re not getting herd immunity,’ said Frank Luntz, the longtime GOPpollster who convened Saturday’s focus group over Zoom.” Unfortunately Mr. Luntz is speaking nonsense as well. We would still get herd immunity even without a vaccine as people would acquire immunity as a result of being infected. The process would be slower with more deaths, but we would get there. I am sure that Mr. Luntz meant well.

Participants in these focus groups “all believed the coronavirus threat was real, with many having contracted it themselves or aware of critically ill friends and family, and they didn’t want to be condemned as “anti-vaxxers” who opposed all vaccines. Instead, they blamed their hesitation on factors like the unknown long-term effects of new vaccines, even though scientists have stressed their confidence in the products. They also accused politicians and government scientists of repeatedly misleading them this past year….

“For instance, [House Minority Leader Kevin] McCarthy said he understood the Trump voters’ hesitation because pharmaceutical companies waited until after Trump lost the election to announce their promising vaccine results — a comment that sparked participants to share their own resentments.

‘It was political stunts like that that leave doubt in our minds,’ said a man identified as David from Texas.”

In another session “a man called Chad from Minnesota,… praised [former head of the CDC Dr.] Frieden for acknowledging that the long-term risks of the vaccines aren’t yet known. “He’s just honest with us and telling us, nothing is 100 percent here, people.”

The lessons are clear. The best results are obtained by treating the public like adults. The government needs to honestly present the best information available, acknowledging what is known and what is uncertain.

“’I’ve been thinking the messaging was going to be very different for communities of color, for Democrats, for Republicans,’ said Natalie Davis, co-founder of United States of Care, a public health advocacy group working on vaccine outreach with organizations like the de Beaumont Foundation and Kaiser Family Foundation. ‘But it feels like it comes down to the basics that are shared across populations. People want full, accurate information so they can decide if this is the right thing for them and their loved ones….’

“‘The vaccines were approved quickly in part because red tape was cut, not corners,’ [Dr. Frieden said. ‘And almost all the doctors who are offered the vaccine get it.’”   “Vaccine hesitant republicans focus group”

The unnecessary fight over Covid-19

We American’s expect to be able to make our own choices about what risks we are willing to take. The limits on our behavior generally concern when it threatens to harm others. When state after state issued stay at home orders and mandated the closing of many businesses (restaurants and theaters, etc.) a year ago they violated this principle. Many people rebelled at this intrusion into their prerogatives, but sadly by often making foolish decisions of their own. Of course, those who contract a contagious disease, such as Covid-19, should be legally quarantined.  Otherwise, businesses and individuals should make their own decisions about how to respond to this pandemic on the basis of the best possible information about its risks and how to mitigate them. A role in which the government failed miserably.

As with economic decisions more generally, countries that give maximum scope to individuals about what to produce and/or buy have been far more prosperous than those in which more decisions are made centrally and imposed from the top (socialism). Among other things the CARES Act suspended debt payments (and associated defaults, bankruptcies, and evictions) for understandable reasons https://wcoats.blog/2020/04/11/econ-202-cares-act-who-pays-for-it/. However, it was part and parcel of centralized mandatory decision making and inferior to individual case by case decisions by lenders and borrowers (debt restructuring) and landlords and tenants (rent forgiveness or holiday or eviction). In normal times when a debtor is unable to service its debt, for purely profit maximizing reasons lenders evaluated case by case whether to allow temporary arrears (debt restructuring) or to invoke the default provisions of the loan (bankruptcy).

Restaurants that felt they could safely open with social distancing and other safety measures that would convince their customers to return should be allowed to do so. They should be free to decide whether requiring face masks when entering and walking about the restaurant would attract more customers than not doing so. Customers who were not comfortable in a restaurant that did not take these safety measure would not patronize them. The relevant government should decide whether to require them on public transportation, etc.  If you come to my house, be sure that you are wearing one.

The culture war we now witness over face masks and other aspects of appropriate public behavior with regard to Covid-19 was so unnecessary. The American government behaved like a parent dealing with children and many Americans responded by behaving like children. They didn’t choose not to wear face masks because they were convinced by medical data that they are not effective (most data shows that they are very effective). Rather they chose not to wear them because the government told them they must. Childish indeed. Almost a year ago I wrote that the government’s most effective role was to provide the best information available (and more was coming available every week) about the nature and risks of Covid-19 and how best to avoid or mitigate those risks. If restaurants felt that they could safely remain open, they would need to convince potential customers that they had taken measures to protect them from exposure to the virus. This was not the approach taken by the government and public trust in the statements of the government in recent years has been, to say the least, low.

I expressed these views almost exactly a year ago (March 31, 2020). I repeat that blog here:

Beating covid-19: Compulsion or Persuasion and Guidance

Access to COVID-19 vaccines

In less than one year from learning of this virus, we now have two approved safe and effective covid-19 vaccines with at least one more on the way. Millions of doses have already been produced. This is a near miracle. Thank you pharmaceutical industry and the governments (and their tax payers) that are paying for it.

Getting the vaccine into our bodies is quite another thing. This has several elements. The first is distributing the vaccines to each state/county and site of vaccinations. The second (or first and a half) is staffing these sites with professions able to administer the shots with the necessary equipment (refrigeration, syringes and needles, etc.). The third is determining who can receive the shot this week and getting them to the right place. The need for these three elements has been known for as long as the need for a vaccine has been known. And officials have known the likely vaccines for at least half a year. But planning for delivering the vaccine to your arm (or the lack of it) has been totally botched.

Focusing on the United States, the federal government promised to vaccinate 20 million people by the end of the year (last week). “Of the more than 12 million doses of vaccines from Moderna Inc. and Pfizer Inc. with BioNTech SE that have been shipped, only 2.8 million have been administered, according to federal figures….  The federal government is sending vaccines to states based on their populations, and it has provided guidelines, but no rules, about how they should be distributed…. On Friday [Jan 1, 2021], Sen. Mitt Romney (R., Utah) criticized the vaccine rollout, saying in a statement that the lack of a comprehensive federal plan to be shared with states “is as incomprehensible as it is inexcusable.”  WSJ: Covid-19-vaccines-slow-rollout-could-portend-more-problems”

Priority

Beyond the above fiasco, it is necessary to determine the priority for receiving the shots and communicating that information to you and me.  As we have already seen it will take a while–many months–to vaccinate everyone even without the above mess. So, who should get them the first month and the second month etc.? I discussed this issue last May. https://wcoats.blog/2020/05/18/the-vaccine-who-gets-it-first/

One criterion for establishing inoculation priorities is to allocate the vaccines so as to maximize the lives saved. I suggest that a better criterion is to maximize the life saved. The difference between the number of lives saved and the amount of life saved can be explained with a simple example. If there is only one dose and it is given to an 85 year old woman otherwise in good health, she might live another healthy year. If given to a 40 year old nurse, he might live another 46 healthy years. In both cases only one life has been saved but in the second case much more life has been saved (46 years of life rather than only one). But this potentially understates the case for giving the jab (as the British call it) to the nurse. One nurse that has been immunized against covid-19 can safely treat more patients that have covid-19 thus saving even more lives and more life. An argument in the other direction of inoculating the elderly first is to flatten the curve (i.e., reduce the inflow of covid-19 patients into overflowing hospitals).

In my view there is a strong case for maximizing the life saved rather than the number of lives saved. We older people should not crowed out younger people who as a result of the vaccination might enjoy much longer lives, something we have already enjoyed. The case, in my view, is overwhelming for critical workers (healthcare workers, grocery store workers, delivery people, etc.) of all ages to receive priority. “Many states are following CDC guidelines to start with front-line medical workers and people in long-term care facilities, but not all. Florida Gov. Ron DeSantis on Dec. 23 extended eligibility to people aged 65 and older.  Because each county and hospital in the state implemented its own approach, many people didn’t know whether to call, log on or show up in person to secure a spot.” [Same WSJ article] 

 A single dose of Moderna and Pfizer’s vaccines “appears to provide strong protection against the coronavirus…. With supplies of the vaccines limited — and hundreds of millions of people waiting for inoculation — this leaves epidemiologists grappling with a complicated question. Should the nation vaccinate fewer people with the best protection possible, or provide twice the number of people with a single shot, covering more of the population but with slightly weaker protection?”  “Coronavirus-vaccine-single-dose-debate”

But if the government can get itself organized (I know that that asks a lot) the existing and rapidly expanding supply of vaccines can be administered in a relatively modest number of months after which the priority issue vanishes.

Information

Whatever your priority turns out to be, how do you know where and when to show up? Do you need a prescription or approval and if so where do you get it? My insurance company is sending regular updates on what I should do. My Maryland county (Montgomery) website has information on the priority phase they are in (phase 1 at the moment) and that is about all (probably because every dispensary–hospitals, doctor’s offices, CVS–sets its own rules). I plan to contact my Primary Care Physician (PCP) for instructions next month when the situation might be a bit clearer.  What should people without medical insurance or a PCP do?  I have visited Kenya many times with the IMF and suspect that they are doing a better job with this than we are. How and why is this such a mess?

Replacing Social Security with a Universal Basic Income

The idea of a Universal Basic Income (UBI) in place of existing entitlement programs (Social Security, Medicare, Medicaid, food stamps, unemployment insurance, etc.) that is financed by a flat rate income or consumption tax calls for a deeper discussion of its financing. “Our-social-safety-net”

For purposes of illustration, lets assume a UBI of 18,000 dollars per year for adults and half that for children (under 20 years old). This is somewhat above the current average Social Security benefit for someone retiring at age 65.  The current American population of 330 million consists of about 82 million children and 248 million adults. Thus, the total cost of such a UBI would be about 5.2 trillion dollars. This would exceed total expenditures in 2019 of 4.4 trillion dollars, of which 2.7 was for the social safety net (entitlements–social security and welfare). Total Federal tax revenue in 2019 was 3.5 trillion dollars of which 36% or 1.26 trillion dollars was from payroll taxes (social security and Medicaid and Medicare). This left a staggering deficit in 2019 of almost one trillion dollars that had to be borrowed from China and others when our economy was at full employment and should have been in surplus. And now look at our shocking deficit in this pandemic year! But that is another story.

The goal of this note is to illustrate the significant progressivity that would exist with a flat rate consumption tax in place of the corporate and personal income taxes and the payroll tax when replacing existing safety net expenditures with a UBI.

The original rational for the regressive payroll tax to pay for social security pensions was that social security was a traditional retirement program funded from the savings of each pensioner. The assumption was that the pension it paid reflected the money that each worker paid into the so called but misnamed social security trust fund. In short it was characterized as what we call a defined contribution system (you get what you saved) when it was in fact structured as a defined benefit system (you get a defined amount no matter what you actually paid in). In fact, as Americans lived longer and longer, thus enjoying more and more retirement years, the system collapsed into a basically pay as you go system (today’s workers were paying for today’s retirees’ pensions). The trust fund has very little savings in it. So instead of the payroll tax funding the worker’s future pension it became a regressive tax funding current retiree pensions. The payroll tax should be abolished. “Saving Social Security”  

A flat tax (whether on income or consumption) has many economic virtues, with simplicity at the top of the list.  But a flat rate rubs some people the wrong way who think that the wealthier should pay more tax than implied by a flat rate. My sense of fairness calls for someone with twice the income (if we are focusing on an income tax) to pay twice the tax. That is exactly what a flat rate tax (the same tax rate for everyone whatever their income level is) provides.  Whether we go for an income tax or a consumption tax we should forget about the corporate income tax. It is more trouble than it is worth in a world in which many if not most companies operate globally (i.e. in many different tax jurisdictions). It only contributed 7% of total Federal tax revenue in 2019 and unfairly taxes the company incomes of company owners twice. “Principles of Tax Reform”

A flat personal consumption tax that would raise the same revenue as raised by all Federal taxes in the U.S. in 2019 (3.5 trillion dollars) would require a 24% rate. But that revenue did not cover all of the government’s expenditure as noted above. In addition, replacing existing safety net expenditures of 2.7 trillion dollars with a UBI of 18,000 dollars per adult and 9,000 dollars per child (5.2 trillion dollars) would result in total Federal government expenditures in 2019 of 6.9 trillion dollars or 2.5 trillion dollars higher (5.2 – 2.7). A flat consumption tax rate of 47% would be needed to raise 6.9 trillion dollars. This seems very high for two important reasons. First it assumes a balanced budget for the actual level of defense and other non-entitlement expenditures in 2019, i.e. it raises almost one trillion dollars more than the government actually collect in 2019.  Secondly it is financing the additional 2.5 trillion dollars for the UBI from which the higher tax would be paid, i.e. the net tax would be lower.

Though the marginal tax rate would be flat (the same for everyone), the resulting tax burden would actually be quite progressive. To provide a rough idea of the net progressivity of the UBI with a 47% consumption tax, assume that all income is consumed (this would overstate consumption some for higher income families). The poorest families, those who have no income other than the UBI, and assuming a family of two adults and two children, would pay no net tax and receive a net income subsidy of $28,620 or $2,385 per month. For the median family in 2019 (50% income level) the average income was $63,030. But including their UBI their total tax payments would be $55,004 or an excess of $1,004 over their UBI for a tax rate on their (pre UBI) income of 1.6%. For the family at the 80% income level, the average income was $130,000 and their total tax payments would be $86,480 or an excess over their UBI of $32,480 for a tax rate on their earned income of 25%.  This is a significantly progressive outcome while preserving the flat marginal rate.

Individual states may well choose to provide assistance for individual specific purposes, as they do now, for example, for education at various levels. But at the Federal level every effort should be made to prevent such add-ons to our social safety net. If as we become richer as a whole, we choose to be more generous, the amount of the UBI can be raised (or lowered) but only for everyone equally. This would prevent individual interest groups from tacking on special assistance for themselves. The ability of such special interests to gain special favor is a major reason for the slippery slope of the creeping welfare state we now enjoy.

It is important that policies, whatever their good intentions might be, also provide good incentives for outcomes that are desirable for society as a whole. A danger with progressive marginal tax rates, is that the majority of taxpayers have an incentive to raise the rate on those with incomes greater than their own. Or at best there is no incentive for them to resist such a temptation. Soaking the rich is not only an unfair treatment of those who have prospered inventing and delivery goods and services we liked enough to buy, but it will drive them away to tax jurisdictions that better respect their property rights. One of the many virtues of a UBI financed with a flat rate consumption (or income) tax is that the only way to increase the average tax rate on the wealthy is to increase the UBI for everyone.

A UBI would fulfill our desire to help those in real need but would return the responsibility of individual decisions of how that assistance is to be used to the individuals involved. It would simplify and depoliticize the determination of who gets help and how much and would remove the burden of determining our proper tax obligation for most of us. It would thus greatly simplify the administration of such a combined program. It would better align the political incentives for the level of assistance with the preferences of society as a whole. While most people work for more than the income it generates–the self-esteem of being a useful member of society is also important–a UBI would remove the economic disincentive of many current welfare programs of working resulting from the loss of benefits when income reaches a modest level.

Our Social Safety Net

Virtually every country provides assistance to their poorest citizens–to those who fall for one reason or another from normal employment. Approaches to fulfill this objective differ widely. The Federal safety net spending in in the United States in 2019 was 2,600 billion dollars. Total government (Federal, State, and local) entitlement spending was 2,900 billion dollars. Of this, about one third was for Social Security and one third for Medicare and Medicaid.

“The federal government funds 126 separate programs targeted towards low‐​income people, 72 of which provide either cash or in‐​kind benefits to individuals. (The rest fund community‐​wide programs for low‐​income neighborhoods, with no direct benefits to individuals.) State and local governments operate more welfare programs.”[1] This year, in response to the Covid-19 pandemic, the Federal Government has added about $3 trillion dollars ($3,000,000,000,000) for temporary one-time assistance for the impact of the forced interruption of production, and is likely to add more.

The goal of these programs is, or should be, to adequately support those needing it without creating disincentives to work and with minimal abuse (corruption). The CARES Act and other pandemic assistance programs were quickly created in an emergency. It is thus understandable that mistakes were made. As time goes on charges of corruption (politically motivated expenditures) are multiplying. The administrative challenges of suddenly making millions of individual payments quickly and correctly were and are huge.

There is a dramatically better way to do this. We might characterize our existing approach of government directed assistance (e.g. food stamps) as the Socialist Model. It is top down and dictates how the assistance is to be used. Replacing all of these programs with a Universal Basic Income (UBI) leaves the decisions on how its recipients use it with each individual. This might be characterized as the Individualist Model. It has many advantages over our existing approach.

A UBI would eliminate all government discretion over who receives assistance and how much they receive.  Every adult citizen would receive that same amount monthly (and every legal child would receive the same smaller amount). The government could not favor one group over another on any bases other than age. This removes political considerations from defining and administering the payments. Every birth and death in the country is recorded in a county hall of records and every legal immigration is recorded with the United States Citizenship and Immigration Service (USCIS). Thus, the records upon which payments would be based already exist. Using them would remove my need every year to submit a certified document to my pension plan stating that I am still alive. No special measures or supplements would have been needed to address the personal income shocks of covid-19.

One carveout would be required for medical insurance. Every person or family should be required to use part of its monthly UBI to buy a health insurance policy that at a minimum includes catastrophic care coverage. At the launch of UBI and this insurance mandate, insurers would not be allowed to refuse coverage to people with preexisting conditions and the government would cover the actuarial estimate of the extra cost of such conditions.

As the UBI would replace Social Security pensions, another modification would be for the unlikely case that the UBI would be less than ones current Social Security pension (which in 2017 was $13,824 for someone who retired at age 65). So, for such a person who has already retired or is, say, within five years of retirement, their UBI should not be less than their existing Social Security pension. But a UBI of $1,500 per month ($18,000 per annum) for everyone seems reasonable, which would make this case mute.

Those with a welfare state mentality argue that people can’t be trusted to spend such income wisely (from their perspective). I reject such thinking. There are among us, of course, those individuals with addictions and mental illnesses who are indeed not capable of making their own decisions and thus caring for themselves. Our laws and practices already provide for such special cases and would continue to supersede the rights of such individuals to make their own decisions about the uses of their UBIs.

But can we afford it? Today’s American population is about 330 million, of which about 80 million are under the age of 20. To get a rough sense of what is possible, if we replaced today’s safety net expenditures of 2.9 trillion with a UBI to the 33% poorest (110 million people, of whom 25% or 26 million are under 20 years old) in the U.S. in 2019 each person could received about $26,000 per year or about $2,200 per month. If children (those under 20) are paid half what is paid to adults, existing safety net expenditures could finance about $15,000 per child per year and $30,000 per adult if a UBI is given to the lowest third of the population in terms of income. For a family of four this would be an annual income of $90,000, which is above the median household income of about $64,000 in 2019, and is clearly excessive.

But a UBI must be universal. It must be paid to everyone for several simple reasons. Most importantly, it would eliminate the disincentive to work in the existing programs, which end if a person’s income rises above a specified level. With a UBI, every additional dollar of income joins an irreducible UBI. Every additional dollar earned make the recipient that much better off (the UBI amount plus the earned income). This is a very important feature. In addition, it would remove any political question over the level of income at which it should be withdrawn. It would be paid to everyone regardless of their income.

But paying the UBI to everyone, not just the lowest one third, would triple its cost. Can we afford it? Clearly those who pay taxes will have to pay more to cover this additional cost. But as the additional cost is to cover payments to these taxpayers, they would not pay more on net (depending on the nature and structure of our tax systems).  For reasons of equity and tax efficiency I have long advocated a flat tax, meaning the same marginal tax rate for everyone paying taxes. “My-political-platform-for-the-nation-2017” I would go even further and replace income taxation (both corporate and personal) with a flat rate, comprehensive consumption tax.  When a flat rate tax, whether income or consumption, is combined with a UBI, the net result is mildly progressive. Low income people pay no tax on net and in fact receive net income via the UBI (what Milton Friedman called a negative income tax). Middle income families might break even (receive a UBI sufficient to pay for their extra taxes) and for higher income families their extra taxes would be greater than their UBI, hence a progressive average tax rate system even with flat marginal rates.

A UBI with a flat rate consumption tax would enormously simplify our tax and welfare system while improving the financial incentives to work and returning more control over our lives to individuals from the state. Covid-19 dramatically demonstrates that the time has come to replace existing welfare systems with a Universal Basic Income (UBI).

[1] Michael Tanner, “When Welfare Pays Better than Work” CATO Institute, August 19, 2013.

The Vaccine: Who gets it first?

For context, the common cold is caused by coronaviruses (with rhinoviruses being the most common virus) and there are no vaccines for colds. More seriously, because colds are rarely more than annoying, HIV, the virus that causes AIDS, has no vaccine despite almost 40 years of trying to develop one.  While AIDS was fatal for many years there are now treatments that hold it in check, but the vaccine remains elusive.

There is hope that an effective vaccine will be found soon for SARS-CoV-2, the virus that causes covid-19. In fact, six potential vaccines have entered phase one of human trails (the first of three required testing phases). Once a potential vaccine has been developed it must be tested first for its safety (side effects and who is at greatest risk of these side effects) and then for its effectiveness. On average it takes five to ten years to pass these hurdles and be approved for general use. Coronavirus-vaccine-here-are-the-steps-it-will-need-to-go-through-during-development

But the science has gotten better and the authorities have put great urgency on the development of a vaccine for this virus and seem willing to cut a few corners to speed up the testing and approval, though there are risks in doing so. Still “some of Mr. Trump’s top public health advisers have repeatedly cautioned that an effective vaccine might not be ready for widespread distribution for 18 months, and perhaps even longer. Mr. Trump ordered the creation of the Warp Speed program to try to speed that timeline.” Coronavirus-Trump-operation-warp-speed

Trump says the U.S. will have a vaccine by the end of the year (this year, 2020!!), which would indeed be a miracle. But even with a crash program to produce and administer it, it will take several years from approval before enough can be produced and distributed for everyone to be vaccinated. Thus, one important question is who gets it first. Lets-say-theres-a-covid-19-vaccine-who-gets-it-first

Answering that difficult question can be approached in several ways. One is to ask what would be fair. Is it fair to give everyone an equal chance at being first, second and third….? That would require a lottery and would mean that some who would benefit more and thus have a greater need for the vaccine (health care workers being an obvious example) would often be well down the line from say children less likely to get, or at least suffer from, covid-19 in the first place. So, an ethically more defensible criteria would be to establish medically which hierarchy of priorities would save the most lives in the long run.  Perhaps after healthcare workers and first defenders, children should be next so they can get on with their life-altering educations and avoid infecting their parents and grandparents, etc.

The reality, however, is that whoever owns the vaccine will have the largest say in the determination of the priorities of who gets it. Without that incentive only government labs would be working to develop a vaccine and how dreadful that would be. Private pharmaceutical companies are spending multiple millions of dollars in the race to develop “the” vaccine first. Their profit reward will come not only in initial dollars and cents but in the boost to their reputations, which will also reflect how the public sees their pricing and allocation of their product. We are quite used to the fact that hot new products–think of the first iPhones–are relatively expensive and go to those willing to pay the most. As production expands and demand is more widely met, prices come down. Governments are major funders of the research and development going into the search for a vaccine and they will rightly consider themselves entitled to an owner’s reward (first priority). Coronavirus-vaccine-frontrunners-emerge-rollouts-weighed

Policy is further complicated by whether exclusive ownership or more social collaboration (the equivalent of open source code) will produce the best vaccine the quickest.  Governments might give large financial prizes to the best two or three vaccine ideas to those developing them rather than patents to encourage information sharing.  Moreover, there can be more than one winner. The first vaccine approved will not necessarily be the best in the long run. There is a strong case for going forward with several vaccines. This view is put forth in an article by Larry Corey of the Vaccine and Infectious Disease Division at Fred Hutchinson Cancer Center, John Mascola and Anthony Fauci of the National Institute of Allergy and Infectious Diseases, and Francis Collins, head of the National Institutes of Health. Science mag.org/content/early/2020/05/12/science.abc5312

But who gets it first is an unavoidable and potentially very contentious issue.  “After controversial comments by the CEO of a French pharmaceutical company, French Prime Minister Édouard Philippe took the opportunity on Thursday to say that equal access to any vaccine that is developed is “non-negotiable.” Paul Hudson, the head of Sanofi, told Bloomberg on Wednesday that the United States would get the “largest pre-order” of a successful vaccine because it was the first to fund the firm’s research—a statement he later walked back.” Coronavirus-pandemic-vaccine-Sanofi-France-United-States.  But to say that “equal access” is non-negotiable is both ignorant and meaningless, ignoring the obvious fact that production for hundreds of millions of people will take months if not years to distribute.

It would be best if all countries agreed in advance (in a philosophical veil of ignorance) on the principles that would guide the priority of distributing vaccines. The company and country of the winner(s) should get a significant share of the initial (and subsequent) supply and within all countries those most in need for the protection of the broader society should get first priority.

“Secretary of State Mike Pompeo told an Israeli journalist on Wednesday that, ‘We’ll figure out the model for distribution when the time comes.’” Nations-jockey-to-see-who-gets-coronavirus-vaccine-first  As is so often the case these days Secretary Pompeo is wrong. Or as the Economist magazine put it this week: “For a man acknowledged to be highly intelligent, Mike Pompeo has a long history of talking nonsense.”   Mike-Pompeos-politicisation-of-foreign-policy-is-unworthy-of-him

 

 

The order to reopen–who gives it?

Like all of us, President Trump is eager to reopen the economy. Does he have the authority to do so or do state governors? Fortunately, neither can force us to start eating out again, or return to our offices. We remain a country where those decisions rest with each of us individually (or jointly with your boss with regard to returning to your office, shop or factory). That means that those parts of the economy that have shut down will get going again when the affected businesses have taken measures to protect their customers and employees sufficient to regain their customers’ trust that they are safe places to visit. But as I argued last month, that should always have been the basis of social interactions.  “Beating-covid-19: Compulsion-or-Persuasion-and-guidance”

The broad-based, blunt instrument of sheltering at home unless your activities are vital (says who?) is imposing staggering damage to the economy.  The best way to minimize that damage is to restore public trust as quickly as possible that those with it are being isolated and treated.  A blanket shut down of non-essential activities is not the best approach. Each of us in our personal situation can better determine where we feel safe to go than can a government agency.  However, some of us will not give sufficient weight to the dangers of exposing our friends and the general public to the disease if we might have it.  Public policy should educate the public to the dangers of covid-19 and how best to protect ourselves and should minimize the financial incentive to continue working when sick. State coercion (mandatory quarantines) should only be applied to those testing positive for the virus.  This approach will allow all firms and stores to operate whose employees and customers judge them to be safe and will give businesses maximum incentive to make themselves safe.

Covid-19 will be around for at least another year or two until an effective vaccine is available and then distributed to more than 60 percent of the world population. The most effective way to contain its spread in the interim is to undertake widespread, quick, and accurate testing and to quarantine those who test positive with efficient contact tracing.  Adding the newly available tests for antibodies indicating immunity to the virus will identify those who are no longer susceptible to acquiring or spreading the disease. They should be safe in public.  Other corona viruses have created immunity in those who have had them and SARS-CoV-2 is expected to do the same, though this has not yet been established.

The U.S. has belatedly increased its testing for the virus. Initially it impeded the development and supply of test kits. As of April 16, the U.S. has tested 10,266 people per million while Germany has tested twice that. The U.S. by that date had 105 deaths per million while Germany had less than half that.  The Food and Drug Administration (FDA) should get out of the way and allow profit seeking entrepreneurs to flood the market with test kits.  The government should focus its (our) money on a large increase in testing for the virus and quarantining those testing positive and those they contacted and should offer significant financial prizes for an effective vaccine and for the development (or discovery) of effective treatments. Unlike patents as an incentive, this will encourage collaboration and knowledge sharing among those attempting to develop treatments.

On April 16 President Trump outlined guidance for the phased reopening of closed businesses and activities that is consistent with the approach outline above.  The government’s traditional public health role is important. But much more discretion should be given to individual case by case judgements about risks and entrepreneurial initiatives about remedies rather than broad based government edicts.

We will not return and cannot be required to return to the public square until we believe it is safe to do so. Individual shops and firms have a financial incentive to find convincing approaches to being safe and will get there quicker than even the best-intentioned government official issuing instructions and mandates. The government has an important role to play in fighting this virus and facilitating our return to normal life, but it should remove impediments it often creates to the private sector’s management of the related risks and the huge and unnecessary damage it imposes on the economy.

Econ 201: CARES Act–Who pays for it?

April 11, 2010

Congress has authorized over 2 trillion dollars (so far) to help those harmed by the partial shutdown of the economy undertaken to slow the spread of the SARS-CoV-2 virus, and to facilitate its rapid recovery when it is safe for people to return to work. The idea is that as the government has requested/mandated non-essential workers to stay home, and non-essential companies (restaurants, theaters, bars, hotels, etc.) have chosen to close temporarily or have been forced to by risk averse customers or government mandates, the government has an obligation to compensate them for their lost income. Above and beyond the requirements of fairness, such financial assistance should help prevent permanent damage to the economy from something that is meant to be a temporary interruption in its operation. No good economic purpose would be served, for example, by lenders foreclosing on mortgage and other loans to workers sheltered in place at home with no income with which to service them. Some of the increased spending quite rightly will go to improve our ability to deal with covid-19 directly (expanded hospital capacity, virus testing capacity, vaccine research and development, etc.)

Obviously, it will be impossible to prevent some amount of waste and corruption from such a huge increase in expenditures. Every rent seeker on the planet has been lobbying Congress to get a piece of the action. In the design of these support programs every effort should be made to carefully target them on the people and activities appropriate to the “above objectives, to remove them and their associated distortions of economic resource allocation when the crisis has passed (i.e., keep them temporary), and to provide watchdog oversight of their implementation. Unfortunately, President Trump is already undermining such oversight. “How-trump-is-sabotaging-the-coronavirus-rescue-plan”  Nonetheless, the objective of minimizing the economic damage of a temporary forced shutdown of a significant part of the economy is appropriate.

The question explored here is who will pay for it and how.  The entertainment output of the economy (restaurants, movie theaters, hotels, vacation travel) is to a large extent non-essential, at least for a few months. If those are shuttered, about 20 percent (my guess for purposes of this analysis) of our economic output and the incomes of those producing them will be lost for the duration of the shutdown. A central goal of the “Coronavirus Aid, Relief, and. Economic Security Act” (CARES Act) is to prevent this necessary shutdown from killing that part of the economy and from spilling over into others. The goal is to enable it to restart as quickly and easily as health conditions permit. Thus, idled workers who would not be able to pay their rent/mortgage, or electric bill, or buy food without help should not be evicted for temporary nonpayment etc. The government might pay them for their lost income directly (unemployment insurance) or it might pay their employer to continue paying their wages for non-work under one program or another, thus continuing their health insurance and other benefits. These details are important but not the subject of this note.  The simplest assumption is that they all receive cash payments sufficient to see them through the shutdown (universal basic income, guaranteed minimum income or whatever you want to call it).

The starting fact/assumption is that the economy’s output and thus income is 20 percent or so lower for the next few months than it was a few months ago. Everyone on average has 20 percent less income, but that average consists of those who continue working as before and those sitting at home earning nothing.  If those unemployed are to receive income support (UBI), those still working and those clipping investment coupons must pay for it.  Paying an income subsidy to the unemployed does not create income, it redistributes it.

The $2 trillion plus authorized by Congress for these purposes will be debt financed, i.e. the government will borrow the money (adding to its deficit of $1 trillion for 2020 already budgeted).  So, to examine who pays for this program we must start by asking who will buy this additional debt?  In the past the Chinese and Germans funded an important part of our debts (via their trade surpluses with the US.  “Who-pays-uncle-sam’s-deficits”  China’s current account surplus with the U.S. is now negligible and it and most every other country in the world will have the financing of their own covid-19 expenditures to worry about. Those purchasing the additional Treasury bonds will thus be largely Americans who must shift their spending from other things (other investments or consumption) to the bonds and thus to the incomes of the unemployed these programs are supposed to be helping.  To the extent that new bond buyers are diverting their spending on other financial instruments interest rates on such instruments will tend to rise.

At this point very little money has been disbursed under CARES and no new government bonds to finance it have been issued. As individuals and firms miss rent and debt service payments, their lenders are being squeezed for the funds with which they must service those financing them (this is why we call banks financial intermediaries). Utility companies faced with nonpayments by their customers must borrow to continue paying their own employees, etc.  Scrambling for such funds would drive up interest rates in funding markets where it not for the Federal Reserve’s willingness to provide the needed liquidity. Similarly, with regard to the supply of funds to financial markets (the other side of bank’s balance sheets), normal investors are interrupting or even withdrawing funding in order to cover their own income shortfalls. This again squeezes financial sector liquidity and the flow of funds from lenders to borrowers needed to finance the remaining economic activity.

Enter the Federal Reserve.  In order to supply the missing funds–the missing rent and debt service payments–needed to keep the financial system flowing and in balance–the Fed has supplied almost $2 trillion to banks over the last 6 weeks, largely by outright purchases of treasury securities, though it has also opened a number of lending facilities. Bank reserve deposits at the Fed increased about $1 trillion over this period and M2 grew by about the same amount. On April 9, the Fed announced that it was opening or expanding facilities to support CARES Act objectives with up to another $2.3 trillion (leveraged by Treasury financial support to cover losses on any Fed loans provided in support of the CARES Act).  Federal Reserve Press Releases  This includes support for lending by the Small Business Administration (refinancing of SBA loans), the Main Street Lending Program administered by banks, Primary and Secondary Market Corporate Credit Facilities, and the Municipal Liquidity Facility. These are dramatic expansions of Fed credit operations and the details of eligibility of borrowers and of the facilities’ administration are critically important. Ensuring that this massive government intervention in the economy creates the right incentives for a quick rebound in the economy when it can reopen and that these interventions are indeed temporary will be difficult and is very important. But the question I want to address here is whether this monetary financing on such a huge scale will be inflationary.

Simplifying and reviewing, if economic output/income falls by, say 20 percent, and the loss is shared by those working with those temporarily laid off (or idle) by workers lending money to those idled, the Fed need not be involved. However, as is often the case with fiscal policy, it is simply beyond the administrative capacity of the government to launch and coordinate such a redistribution of income quickly and smoothly enough to avoid the disruptions of credit flows described above. Instead, the Fed has printed the money paid to those idled by shuttering 20 percent of the economy. As a result, the idled workers have their regular income (more or less) from newly printed money, and the rest have their regular incomes, but the economy is producing 80 less for them to buy. The “excess” income constitutes the inflationary potential. If this income is voluntarily saved (i.e. a temporary increase in the demand for money), the increased saving would be indirectly financing the spending of the unemployed. It is not unreasonable to expect this to reflect actual behavior for a shutdown of a month or two. But should it drag on for many months the extra saving held in anticipation of a reopening of restaurants and theaters, etc. will seek other consumption outlets and prices will begin to rise.

With luck, the economy will begin to return to “normal” after a few months and the Fed will begin to withdraw its monetary injection as loans and payment delinquencies are paid off from increased output/income. The artificially preserved incomes will increasingly be spent on restored output without significant inflationary consequences.

But the CARES Act provides for the forgiveness of loans by firms that kept or that rehire their workers promptly. As the Fed sells its treasuries back to the public (or allows them to mature without replacing them), the Treasury will be issuing the additional debt needed to fund the $2 trillion plus of CARES Act expenditures, including the forgiveness of debt described above. In short, to avoid the inflationary consequences that would normally flow from the Fed’s massive increase in the money supply, the monetary financing must be replaced with fiscal debt financing.  It is hard to see where the money will come from to buy such a large increase debt (some, but not much, will probably come from the foreign financing implicit in an increase in our balance of payments deficits, but the rest of the world is now being saturated with its own debt) without an increase in market interest rates, potentially a significant increase in such interest rates. To the extent that financing remains monetary and pushes up prices, the rising inflation rate will be added to nominal market interest rates compounding the pressure of expanding real debt.  The long looming US fiscal debt problem may be near.

Econ 101: covid-19 resource priorities

U.S. cases of covid-19 (those testing positive for the virus that causes it) continue their exponential growth exceeding 333,000 on April 5 with over 9,500 associated deaths. In a few days some hospitals will run out of the protective equipment and ventilators needed by their staff and patients.  How should the existing stock of these items be allocated to the most urgent and/or “worthy” uses and how should the inadequate supply be most effectively augmented?  Should a central authority (the “government”) choose who gets them or should the highest bidder in the market?  Should new supplies be demanded by the government employing the Defense Production Act of 1950, or should producers respond to the profits of higher prices? Should we follow the socialist or the capitalist approach?

In normal times (which these are not) the demand for hospital supplies is met by a competitive market of producers in response to prices offered by hospitals. In a well-functioning economy these prices reflect the cost of producing them and a modest profit sufficient to attract the desired supply. In this way scarce resources (the supply of any resource, starting with labor time, is limited) are allocated to their most valued uses as measured by what people are willing to pay for them. Because of the rapid and dramatic increase in the need for face masks (N95), and other protective gear needed by doctors and nurses the current supply does not satisfy the demand. This includes both emergency stocks and the flow of newly produced supplies.  Unbelievably some hospitals are preventing doctors from wearing appropriate protective gear at the detriment of their own safety and the future supply of doctors. “Doctors-say-hospitals-are-stopping-them-from-wearing-masks”  In Italy the shortage of ventilators is already causing doctors to deny them to those most likely to die in order to make them available to those more likely to live with their assistance (triage).

How should this inadequate stock of equipment be allocated among those demanding it, all of whom cannot be satisfied?  The two broad classes of approaches to allocating the existing supply until it can be increased are for a government body to determine who needs it most according to some politically accepted criteria or for market suppliers to allocate it to the highest bidders. Many books have been written to document why market allocation (capitalism) has dramatically outperformed government allocation (socialism) thus lifting most of the world’s population out of dire poverty (over 90% by 2009). But what about the emergency situation we are now in with the exponential spread of a new virus that is about ten times as deadly as the annual flu?

“The governors of New York, Texas, Illinois and other states have said they are competing with the federal government and other states in a mad scramble for lifesaving supplies such as surgical masks, N95 respirators, isolation gowns and ventilators that are widely drained or out of stock.” .” “Gouged-prices-middlemen-medical-supply-chaos-why-governors-are-so-upset-with-trump”

The oversight of healthcare delivery in the U.S. resides in the states and municipalities rather than the Federal government. However, the Federal government does support medical research and provides health guidance to the states.  Of the approximately 5,100 hospitals in the United States the Federal government owns about 200, primarily for its military and veterans. It also maintains its own emergency stockpile of medical equipment for its hospitals and to backstop shortages in state and private hospitals. In principle the Federal government could set standards for which of these non-Federal hospitals would benefit most from being allocated ventilators and other equipment from the Federal stockpile if their own supplies become inadequate. It might even dictate how private market supply would be allocated in the event of shortages.

Government allocation carries a larger risk of political and personal corruption factors influencing resource allocation than does market allocation. While the private market is not without corrupt players, the bottom line of needing to attract and satisfy customers who have other options in order to make a profit to stay in business disciplines private suppliers and tends to weed out crooks. A company’s reputation for honesty and product quality is a critical part of its staying in business. Poorly performing companies go out of business, while poorly performing and/or corrupt governments rarely do. New York governor Andrew Cuomo’s request to President Trump for help with its shortage of ventilators and other medical supplies met with pandemic expert Jared Kushner’s rebuttal that the governor was over estimating New York’s needs and that more ventilators should be allocated elsewhere.  Nothing political here. Move along.

Another and potentially more damaging potential of government allocation concerns the U.S. government’s “competition” with other countries for the scare supplies. “The White House late Thursday ordered Minnesota mask manufacturer 3M to prioritize U.S. orders over foreign demand, using its authority under the Defense Production Act, or DPA, to try to ease critical shortages of N95 masks at U.S. hospitals.

“The Trump administration has asked 3M to stop exporting the masks to Canada and Latin America, and to import more from 3M’s factories in China, the company said Friday…. At the same time, officials in Berlin criticized the United States on Friday over what they said was the diversion of 200,000 masks that were en route from China…. These are things that Americans rely on,” Trudeau said, “and it would be a mistake to create blockages or reduce the amount of back-and-forth trade of essential goods and services, including medical goods, across our border.” “White-House-scrambles-scoop-up-medical-supplies-angering-canada-germany”

“Canadian Prime Minister Justin Trudeau said his government has been ‘forcefully’ reminding American counterparts that trade ‘goes both ways across the border.’  Thousands of nurses in Windsor, Ontario, he noted, travel to Detroit each day to work in hospitals there. Several of them have since tested positive for covid-19.” These steps are incredibly short-sighted as is Trump’s trade policy in general. As the biggest and strongest country in the word, the U.S. should be engaging with the rest of the world to lead a cooperative approach to fighting covid-19 rather than throwing its weight around because, at the moment, it still can. These are the sorts of behavior that can lead to war.

Following quickly on the heels of allocating the existing stockpile of equipment, is the closely related question of how to increase and allocate the supply going forward as quickly as possible.  Market allocation of the existing stock prioritizes those willing to pay the most as an indication of the intensity of their need (or who has more money to spend, but the wealthy always have a greater impact on allocation whether through government or the market). Established firms aim to maximize their profit over time and will take into account their long run relationship with regular customers when agreeing on prices for the existing supply. This limits so called “price gouging”, but the prospect of higher prices accelerates the market’s supply response. Many governors instead “pleaded for the White House to invoke the Defense Production Act, the legislation that would compel American companies to make critical supplies.” “Gouged-prices-middlemen-medical-supply-chaos-why-governors-are-so-upset-with-trump”

While history clearly demonstrates that market allocation is superior to government command of the economy, it struggles in current emergency circumstances even if or when government interference is removed (such as the government’s interference with market development and supply of covid-19 test kits).  Knowledge is essential for good decision making.  A virtue of market allocation is that knowledge that is impossible  to properly centralize in socialist economies can be exploited in decentralized individual decision making in response to market generated prices that match supply with demand (See F. A. Hayek’s “The_Fatal_Conceit”).  Markets rely on trust that is built in various ways from experience. The Internet reports reviews of products by users. Uber drivers are rated by riders. Company reputations are carefully built and protected.

In the current sudden surge in demand for certain medical supplies the system is overloaded, and hospitals search beyond their usual suppliers. New marketers emerge to help hospitals find new suppliers. The reliability and quality of the supplied products lack market experience and feedback.  Governments can play a supportive role by requiring transparency about product contents and/or performance but can also get in the way if regulations are more costly than their benefits.  “’The dynamic of the market is very weird at this point,’ said Andrew Stroup, a co-founder of Project N95, a nonprofit clearinghouse working to connect hospitals with suppliers. The group has received more than 2,000 requests from health-care institutions searching for more than 110 million pieces of personal protective equipment.”   “Gouged-prices-middlemen-medical-supply-chaos-why-governors-are-so-upset-with-trump”

In the imperfect world we all live in we would do best to maximize the role of private entrepreneurs and firms to develop and supply the best possible products, limiting the government’s role to protecting private property and contract enforcement, and establishing standards that help promote consumer confidence and trust in suppliers. Private, profit motivated producers maximize their profits by best surviving and satisfying the desires of their customers.