Quest for comfort at a time of pandemic and panic leads us to hope our govt has great experts – and listens to them

We needed an antidote to the grim outlook that prompted the RBNZ to reduce the Official Cash Rate to a level that will do precious little for our bank savings and triggered a further decline on the NZX50 that further shrunk share portfolios .

Help.

We were encouraged by a New York Times article by Neil Irwin headed How to Stop Worrying and Love a Falling Stock Market

It’s perfectly natural to be terrified, he assures us – but big losses bring certain benefits, too.

Great.

The fact that stocks are extraordinarily volatile right now … isn’t a problem with stock investing — it’s a feature! If it weren’t for these periods of fear, stocks would trade at levels that offer returns more like bonds or cash. The fancy academic name for this is the “equity risk premium,” but an ordinary saver can simply think of higher long-term returns as the compensation you receive for tolerating volatility.

It’s a good reason not to keep savings that are needed soon in stocks. If you’re looking to pay for a house or car in the short term, that money probably shouldn’t be in an asset that can lose 10 percent of its value in a single day, as stocks did on Thursday.

But for retirement or other long-term savings, the sensible approach is to set an asset allocation that makes sense for your level of risk tolerance and stick to it. And then think of the sell-off of the last few weeks as the kind of episode that isn’t so much something to fear, but a moment of opportunity — even if an unnerving one.

Hmm.  We remain uneasy if not unnerved. 

To look at the economic implications we consulted Simon Wren-Lewis,  Emeritus Professor of Economics and Fellow of Merton College, University of Oxford. whose post at Mainly Macro is headed The economic effects of a pandemic

Wren-Lewis says he was approached a decade or so ago by some health experts who wanted to look at the economic effects of an influenza pandemic. They needed someone with a macroeconomic model to look at the general equilibrium impacts and – lo and behold – in the 1990s he had led a small team that constructed a model called COMPACT.

He and the health experts completed a paper that was subsequently published in Health Economics. They reference to other studies that had been done earlier in that paper.

The least important impact from an economic point of view – he contends – is the fall in production due to workers taking more time off sick.

Even with all schools closed for three months and many people avoiding work even though they were not sick, the largest impact the modelling got for GDP loss over a year was less than 5%.

That is a one quarter very severe recession, but there is no reason why the economy cannot bounce back to full strength once the pandemic is over. Unlike a normal recession, information on the cause of the output loss, and therefore when it should end, is clear.

 But this assumes consumers who have not yet got the disease do not alter their behaviour.  Fat chance, eh?

And so the pandemic can deliver a demand shock that will hit specific sectors very hard, depending on how consumers behave.

That’s because a lot of consumption nowadays can be called “social”, or doing things that bring you into contact with other people – such as going to the pub, to restaurants, to football matches or travel.

Sectors that provide services that involve personal contact such as haircuts – which can easily be postponed – may also be hit.

If people start worrying about getting the disease sufficiently to cut back on this social consumption, the economic impact will be more severe than any numbers discussed so far. One reason it is severe is that it is partly a permanent loss. Maybe you will have a few more meals out once the pandemic is over to make up for what you missed when you stayed home, but there is likely to be a net fall in your consumption of meals out over the year. What I realised when I did the analysis was just how much of our consumption was social.

 This is why the biggest impacts on GDP occur when we have people reducing their social consumption in an effort not to get the disease. However falls in social consumption do not scale up all scenarios by the same amount, for the simple reason that supply and demand are complimentary. If school closures and people taking more time off work increase the size of the supply shock, the demand shock has less scope to do damage. The largest fall in annual GDP in all the variants we looked at was 6%.

Conventional monetary or fiscal policy could only partially offset the fall in social consumption because the drop in consumption is focused on specific sectors. More important (something the modelling did not explore) is what would happen if the banks failed to provide bridging finance for the firms having to deal with a sudden fall in demand.

The banks may judge that some businesses that are already indebted may not be able to cope with any additional short term loans, leading to business closures during the pandemic. 

It is in this light that we should view the collapse of stock markets around the world. In macroeconomic terms this is a one-off shock, so Martin Sandbu is right that the recent stock market reaction looks overblown. But if many businesses are at financial risk from the temporary drop in social consumption, that implies a rise in the equity risk premia, which helps account for the size of the stock market collapse we have seen. (I say ‘helps’ deliberately, as much of the impact will be on smaller businesses that do not find their way into the main stock market indices.)  

 If Wren-Lewis were  running the central bank or government, he would have been talking with banks about not forcing firms into bankruptcy during any pandemic.

Economics can also influence health outcomes, he says – and not just in terms of health service resources.

For a minority of self employed workers there will be no sick-pay and those without a financial cushion will be put under stress. One of the concerns as far as the spread of the pandemic is concerned is that workers will not be able to afford to self-isolate if they have the disease. So if I was in government I would be thinking of setting up something like a sick-leave fund that such workers could apply to if they get coronavirus symptoms.

Wren-Lewis wrapped up by saying the government also needs to think about keeping public services and utilities running when workers in those services start falling ill.

In fact there are a whole host of things the government should now be doing to prepare for a pandemic. It is at times like these that we really need governments to act fast and think ahead. Do we in the UKand US citizens, have confidence that the government will do what is required? One lesson of coronavirus may be never put into power politicians that have a habit of ignoring experts.

Here’s hoping we have the expertise that must not be ignored.

Michael Redddell, at Croaking Cassandra, gives us cause to wonder in a post headed Pretty dreadful  which examines Adrian Orr’s handling of the crisis and makes a case for finding a new RBNZ governor.

Finally, we latched on to statistician Thomas Lumley to find out Why don’t we know the covid-19 mortality rate?

He says many questions about the current pandemic need expertise in microbiology or international freight logistics or sociology or whatever. But his expertise can be tapped to respond to the people who would like to know how bad COVID-19 actually is and

 … what’s your (or your kid, or your grandmother’s)  chance of needing hospital treatment or dying?  This post will try to explain why we don’t know the answer, and aren’t going to know the answer for a while, although there are some questions that sound similar where we do know the answer or will know fairly soon.

The mortality rate (case fatality rate) for a disease is the number of people who die from it divided by the number of people who catch it, Lumley explains.

For the initial outbreak in China we have a reasonably good idea of the number of people who died (at least if you trust the PRC statistics), and the rest have recovered. We don’t know how many people were infected; the health system had more urgent things to do than testing apparently healthy people. The same is likely true for some of the smaller outbreaks in other Asian countries.  In the rest of the world we don’t even know the numerator of the rate, because most of the people who have been sick are still sick and we have to wait to see how many recover and how many die.

He then deals with the challenges of mathematical epidemic modelling and concludes that – in the long run – it will be possible to get a reliable estimate of the number of people who have been infected, because they will end up with antibodies to the virus, and someone will develop a test for the antibodies and apply it to a suitable population sample.

That sort of data goes into the mortality rate estimates for flu: the mortality rate among people who develop classic, serious, flu symptoms is quite high, but there are a lot of people who are infected without ever knowing it — as much as 10% of the population — so the mortality rate among everyone infected is very low. In the same way, the retrospective mortality rate of COVID-19 will likely be lower (by some unknown factor) than the current ratio.

We do have reasonably good information on what happens to people who get sick enough to need medical attention, and  we know how that number grows with good or not so good control efforts. That’s the number that matters if you get sick.

But right now we don’t know as much as we’d like about the structure of the epidemic and how many people will eventually get seriously ill, because we haven’t been able to find and count the subset of basically healthy cases.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We needed an antidote to the grim outlook that prompted the RBNZ to reduce the Official Cash Rate to a level that will do precious little for our savings and triggered a further decline on the NZX50.

Help.

We were encouraged, therefore, to check out a New York Times article by Neil Irwin headed How to Stop Worrying and Love a Falling Stock Market

It’s perfectly natural to be terrified. But big losses bring certain benefits, too, we learned.

On the comforting side of things:

The fact that stocks are extraordinarily volatile right now … isn’t a problem with stock investing — it’s a feature! If it weren’t for these periods of fear, stocks would trade at levels that offer returns more like bonds or cash. The fancy academic name for this is the “equity risk premium,” but an ordinary saver can simply think of higher long-term returns as the compensation you receive for tolerating volatility.

It’s a good reason not to keep savings that are needed soon in stocks. If you’re looking to pay for a house or car in the short term, that money probably shouldn’t be in an asset that can lose 10 percent of its value in a single day, as stocks did on Thursday.

But for retirement or other long-term savings, the sensible approach is to set an asset allocation that makes sense for your level of risk tolerance and stick to it. And then think of the sell-off of the last few weeks as the kind of episode that isn’t so much something to fear, but a moment of opportunity — even if an unnerving one.

To look at the economic implications we went to The economic effects of a pandemic

The blogger, , says he was approached a decade or so ag by some health experts who wanted to look at the economic effects of an influenza pandemic. They needed someone with a macroeconomic model to look at the general equilibrium impacts.

 

In the 1990s *** had led a small team that constructed a model called COMPACT.  He and the health experts completed a paper that was subsequently published in Health Economics. They reference to other studies that had been done earlier in that paper.

 

The least important impact from an economic point of view – he contends – is the fall in production due to workers taking more time off sick.

 

Even with all schools closed for three months and many people avoiding work even though they were not sick, the largest impact the modelling got for GDP loss over a year was less than 5%.

 

That is a one quarter very severe recession, but there is no reason why the economy cannot bounce back to full strength once the pandemic is over. Unlike a normal recession, information on the cause of the output loss, and therefore when it should end, is clear.

 

But this assumes that consumers who have not yet got the disease do not alter their behaviour.

 

The pandemic can deliver a demand shock, too, which will hit specific sectors very hard, depending on how consumers behave.

 

That’s because a lot of consumption nowadays can be called “social”, or doing things that bring you into contact with other people – such as going to the pub, to restaurants, to football matches or travel.

 

Sectors that provide services that involve personal contact such as haircuts – which can easily be postponed – may also be hit.

 

If people start worrying about getting the disease sufficiently to cut back on this social consumption, the economic impact will be more severe than any numbers discussed so far. One reason it is severe is that it is partly a permanent loss. Maybe you will have a few more meals out once the pandemic is over to make up for what you missed when you stayed home, but there is likely to be a net fall in your consumption of meals out over the year. What I realised when I did the analysis was just how much of our consumption was social.

 

This is why the biggest impacts on GDP occur when we have people reducing their social consumption in an effort not to get the disease. However falls in social consumption do not scale up all scenarios by the same amount, for the simple reason that supply and demand are complimentary. If school closures and people taking more time off work increase the size of the supply shock, the demand shock has less scope to do damage. The largest fall in annual GDP in all the variants we looked at was 6%.

 

Conventional monetary or fiscal policy could only partially offset the fall in social consumption because the drop in consumption is focused on specific sectors. More important (something the modelling did not explore) is what would happen if the banks failed to provide bridging finance for the firms having to deal with a sudden fall in demand.

 

The banks may judge that some businesses that are already indebted may not be able to cope with any additional short term loans, leading to business closures during the pandemic.

 

It is in this light that we should view the collapse of stock markets around the world. In macroeconomic terms this is a one-off shock, so Martin Sandbu is right that the recent stock market reaction looks overblown. But if many businesses are at financial risk from the temporary drop in social consumption, that implies a rise in the equity risk premia, which helps account for the size of the stock market collapse we have seen. (I say ‘helps’ deliberately, as much of the impact will be on smaller businesses that do not find their way into the main stock market indices.)  

 

If *** was running the central bank or government, he would have been talking with banks about not forcing firms into bankruptcy during any pandemic.

 

Economics can also influence health outcomes, he says – and not just in terms of health service resources.

 

For a minority of self employed workers there will be no sick-pay and those without a financial cushion will be put under stress. One of the concerns as far as the spread of the pandemic is concerned is that workers will not be able to afford to self-isolate if they have the disease. So if I was in government I would be thinking of setting up something like a sick-leave fund that such workers could apply to if they get coronavirus symptoms.

 

*** summed up by saying the government also needs to think about keeping public services and utilities running when workers in those services start falling ill.

 

In fact there are a whole host of things the government should now be doing to prepare for a pandemic. It is at times like these that we really need governments to act fast and think ahead. Do we in the UKand US citizens, have confidence that the government will do what is required? One lesson of coronavirus may be never put into power politicians that have a habit of ignoring experts.

But what expertise is being brought to the RBNZ’s considerations?

We ask because Michael Riddell, at Croaking Cassandra, is reiterating his view that Adrian Orr should be replaced as governor.

Essentially, Reddell is complaining of too little too late, in terms of RBNZ response. But his critique today extends to some of the things Orr said at a press conference this morning.

  • asked if he was anticipating a recession, instead of simply saying “yes”, or “yes, a very serious one” –  surely the only honest answers –  he got into a debate with the journalist, apparently hung up on the (supposed) technical definition of two quarters of GDP falling.  He was prepared to concede “a period of very weak economic activity” but when pushed on a recession he would only fall back on “I don’t know”.  Every one else does.   He did finally concede that on some of the Bank’s scenarios –  really only some? – there would be a recession in New Zealand.
  • asked about his response to suggestions that the Bank had moved “too little too late”, his initial response was “Nothing”.  He simply wouldn’t engage.  And then he tried to make a virtue of MPC’s inordinate delay, claiming –  is the man serious to even raise this? –  that acting earlier wouldn’t have stopped the virus.  Then we got rhetoric about the importance of a medium-term framework for monetary policy –  a strange claim on the morning of an emergency cut –  and the value of fuller information, as if any information will ever be enough or definitive.   He then had the gall to claim that New Zealand was now in the “best possible position”.
  • and finally, there was a suggestion in Parliament a short-time ago (early last week?) that the Bank was trying to pressure banks not to be too negative in their commentary.  It was never actually confirmed, although there is reason to believe they were told-  by the Bank –  to exercise a sense of “social responsibility” in their commentary.   That was exactly the line Orr ended his press conference with today, to all the assembled media.  From an organisation that minimised the issue for so long, that really should have been a lot more alarmed and active earlier on, it is simply an unacceptable stance (more so than ever, since powerful government agencies should be welcoming, scrutiny, alternative perspectives etc – especially in uncertain times like this –  not (ever) trying to get happy-talk coverage.

Reddell concluced:

It was a sadly revealing performance, as to just how unfit for office Orr is.  And of how he and Grant Robertson, Neil Quigley, the rest of the Bank’s Board, and the rest of the MPC have let New Zealand down.

Finally, we turned to statistician Thomas Lumley to learn Why don’t we know the covid-19 mortality rate?

He says there are lots of questions about the current pandemic that need expertise in microbiology or international freight logistics or sociology or whatever.

But his expertise can be called on to responde to the people who would like to know how bad COVID-19 actually is:

what’s your (or your kid, or your grandmother’s)  chance of needing hospital treatment or dying?  This post will try to explain why we don’t know the answer, and aren’t going to know the answer for a while, although there are some questions that sound similar where we do know the answer or will know fairly soon.

The mortality rate (case fatality rate) for a disease is the number of people who die from it divided by the number of people who catch it, he explains.

For the initial outbreak in China we have a reasonably good idea of the number of people who died (at least if you trust the PRC statistics), and the rest have recovered. We don’t know how many people were infected; the health system had more urgent things to do than testing apparently healthy people. The same is likely true for some of the smaller outbreaks in other Asian countries.  In the rest of the world we don’t even know the numerator of the rate, because most of the people who have been sick are still sick and we have to wait to see how many recover and how many die.

He then deals with the problems of mathematical epidemic modelling and concludes that – in the long run – it will be possible to get a reliable estimate of the number of people who have been infected, because they will end up with antibodies to the virus, and someone will develop a test for the antibodies and apply it to a suitable population sample.

That sort of data goes into the mortality rate estimates for flu: the mortality rate among people who develop classic, serious, flu symptoms is quite high, but there are a lot of people who are infected without ever knowing it — as much as 10% of the population — so the mortality rate among everyone infected is very low. In the same way, the retrospective mortality rate of COVID-19 will likely be lower (by some unknown factor) than the current ratio.

We do have reasonably good information on what happens to people who get sick enough to need medical attention, and  we know how that number grows with good or not so good control efforts. That’s the number that matters if you get sick. But we don’t know as much as we’d like about the structure of the epidemic and how many people will eventually get seriously ill, because we haven’t been able to find and count the subset of basically healthy cases

 

 

 

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