How to Avoid an Economic Catastrophe
A dialogue on protecting against the coronavirus while getting Americans back to work
Paul Romer, University Professor at New York University and co-recipient of the 2018 Nobel Prize in Economics, recently spoke with Manhattan Institute Vice President Brandon Fuller about how the United States can get Americans back to work amid the ongoing Covid-19 crisis. Romer recently coauthored an oped on this topic with Alan Garber, a physician and health economist who is the Provost of Harvard University. Below is an edited version of the Romer/Fuller discussion.
Brandon Fuller: In your recent op-ed with Alan Garber, you write that the Covid-19 pandemic has precipitated both a health crisis and an economic crisis but that the strategies we are adopting to deal with the two crises are “contradictory and risk catastrophic, long-term failure.” What do you mean by that?
Paul Romer: Our public-health strategy is focused on social distancing or isolation. This mandates that a large fraction of the labor force stay home. The recession, or possible depression, we are going to face is because there are so many people who are not working. Recall that the unemployment rate at the height of the Great Depression was about 25 percent. If we’re telling 60 percent to 80 percent of the workforce to stay home for a prolonged period, we could see a decline in output that is more serious than what we experienced in the 1930s.
The economic strategy, on the other hand, is currently focused on cash transfers to people, which helps in a bookkeeping sense: people who might otherwise be in default can pay their mortgage. But cash transfers aren’t going to get people back to work when public-health measures are focused on keeping people at home rather than manning the restaurants, shops, firms, factories, and other establishments that normally generate goods and services in response to new spending. If this continues for long, let alone 12 to 18 months, it will be an economic catastrophe.
Fuller: So how do we avoid economic catastrophe and preserve public health? How do we bridge the gap between the concerns of those who feel that each new stay-at-home order moves us closer to economic ruin and the concerns of those who are calling for aggressive social distancing to avoid a sharp increase in virus-related deaths?
Romer: Alan Garber and I advocate a two-pronged approach: first, regular, widespread testing and second, a surge in the production of personal protective equipment.
The goal of social distancing is to reduce the probability that infected people contact uninfected people. If we don’t have a clear idea of who is infected and who isn’t, this means that everybody has to be distant from everybody. If we know who’s infected, we can place infected people into quarantine and, if necessary, treatment, and then let everybody else continue to interact with one another.
We need widespread, regular testing to figure out who should be in quarantine and who should be allowed, at least provisionally, to get back to their regular lives: back to work, back to producing, earning income, and spending. Since there is always a chance that someone who tests negative will get infected later, we need to test repeatedly. We may want to aim to test health-care workers every day because their risk of infection is relatively high. For the general public, we might have a goal of testing once per month or once per week depending on what capacity our system for testing can ultimately sustain.
Fuller: And the second prong?
Romer: The second prong involves producing more and better personal protection equipment (PPE): masks, face shields, gloves, and protective suits for example. If we mobilize, I think we could have ubiquitous testing sooner than most people think. But until we do, we need a way to let some people do their jobs with minimal risk that they will be infected by someone else or, in the event that they are infected but not symptomatic, infect others. This is obviously true for health-care workers but it is also true that, for example, grocery-store workers could all be wearing protective equipment to reduce risk of infection or transmission.
For tens of billions of dollars—a fraction of what Congress is considering for economic stimulus—we could, within weeks, produce a lot more PPE if we create the right incentives. We can also motivate improvements to PPE as we ramp up production: for example, rewarding producers who come up with protective suits that are much more comfortable, much less cumbersome to put on, and much easier to take off safely, with minimal risk of infection. If you have enough of this equipment, an independent government agency could start to collect data on how people use it and what the infection rates are for different products. We can then make more informed decisions about what equipment works best, what equipment is necessary, and which producers should receive bonuses or prizes for developing better products.
Ultimately, we want tests to be ubiquitous and PPE to be abundant and inexpensive. Then, no matter how long this outbreak lasts, and no matter how bad the next outbreak is, people can wear surgical masks in public and rely on test results to guide decisions about isolation, without undermining our economy. These measures can make it safe for people to return to ordinary activities, such as flying on an airplane. What Alan and I want to see is the government spending a large fraction of the forthcoming stimulus on investments in tests and protective equipment that can get our public health and economic responses in sync.
Fuller: What about the prospects for contact tracing in the U.S., a practice that, along with widespread testing, appears to be part of the relatively successful approach to limiting the spread of the virus in South Korea?
Romer: Contact tracing involves identifying anyone who is known to have recently come into contact with someone who tests positive for the virus. In some contexts, the monitoring is rather intrusive: for example, reviewing security camera footage, credit-card receipts, and GPS data in cell phones. I think we have to be honest about the political and the normative constraints here in the United States. Doing the responsible thing and informing those you’ve been in contact with of a positive test is one thing, but intrusive and heavy-handed tracking and monitoring will not be acceptable.
My own view is that there is no way we could trace back all contacts of infected people in the U.S. within the last five, seven, ten days. We need to focus on what’s feasible now, here in the United States. A lot more testing is feasible. Ubiquitous testing can help the United States overcome a lack of contact tracing. This is not to say that infected people needn’t inform friends, family, and co-workers with whom they’ve had contact. They absolutely should, and they and those they’ve exposed should self-quarantine at home.
Fuller: So ubiquitous testing and plentiful personal protective equipment are the keys to getting people back to work and restoring economic normalcy. How do we get from where we are today—short on tests and protective equipment—to where we need to be? How can policy induce more tests and more and better equipment?
Romer: There’s an interesting constraint here involving perceptions of price-gouging. We may need just to accept the fact that many people get very upset when they see what they think of as price-gouging. And many firms don’t want their reputation damaged because they are accused of it. Economists know that this is inefficient, but it’s just the reality. But it’s also important to understand that a firm making N95 masks will need to scale production dramatically. At something close to normal prices, it is unlikely that a firm will buy the additional capital equipment necessary for a many-fold increase in their production capacity, only to meet a temporary surge in demand. Firms won’t be able to recover their costs from capital equipment.
So I think we have to be creative about using things like the Defense Production Act and having the government do what it has done to mobilize resources during past wars. I think we need to be realistic that very high prices will not be politically or socially acceptable, government will need to be creative, and find other ways besides a temporarily high price that can make it attractive for firms to undertake a surge of production. For example, the government might pay for the cost of the capital equipment needed to expand production and then lease it on a month-to-month basis to the firm so that the government bears the risk of a quick end to the crisis that makes the excess capacity obsolete.
Fuller: And what about the rapid expansion of testing for coronavirus?
Romer: We need to remove obstacles to the development of tests and accelerate their deployment. One option is for government to pay test providers per test, paying more for tests with lower false positives and false negatives. This, along with spurring the production of personal protective equipment, would have the advantage of directing stimulus funds to the parts of the economy that we need to expand in order to address the public health crisis. We may also need to be creative about intellectual property. Suppose an entrepreneur has a way to miniaturize a PCR (polymerase chain reaction) test and scale it out to every Walmart. We don’t want protracted negotiations over IP to get in the way of this advance. One way to avoid haggling over compensation related to IP would be for the government to offer indemnity and tell firms to ignore patents or IP and then to devote funds to settling claims from existing IP holders when the crisis is over.
Fuller: Quoting from your op-ed with Alan Garber: “A conventional fiscal response on the scale we need to avoid a depression will require trillions of dollars of government spending. Investment in protective equipment and tests would be a far less expensive, better way to stimulate the economy than giveaways and transfers.” Can you elaborate?
Romer: Our fiscal response to the economic crisis should focus first and foremost on putting people to work doing the things that we desperately need to do to address the public-health crisis. Public spending should focus on stimulating the design, production, and distribution of protective equipment; on stimulating the development and deployment of coronavirus tests across the country. We should be paying people to do things that are actually helpful, that will actually make it possible for everyone else to go back to work and produce things and earn income.
With ubiquitous testing and ample protective equipment, everybody could go back to the restaurants, could go back to the bars, they could fly in airplanes, things can get back to normal—but the new normal will involve people wearing masks and testing regularly. This would also buy us the time we need to develop a safe vaccine, and I view the safety of any coronavirus vaccine as paramount, given the public-health threats that anti-vaxxers pose in the United States. Safety concerns that give anti-vaxxers an opening could prove costly and counterproductive.
Giving people checks and extending financing to firms and municipalities will avoid a wave of cascading defaults that could overwhelm our court system, but it’s critically important that we tailor our fiscal response to measures that will allow people to get back to work. We cannot afford to have critical sectors of the economy on lockdown for months on end.
Fuller: Some of your work has focused on the central role that cities play in economic life. You are an urbanite yourself, living in New York City—now the epicenter of America’s coronavirus crisis. How do you see the crisis changing cities and urban life?
Romer: Urban vitality is based in part on the subtle observations of social norms, and I think we could see a lot of changes in that regard. Masks might become a fashion accessory. Wearing gloves might become the default. It is possible that we will see effective technologies that make use of ultraviolet light to suppress the virus. As trying as the crisis is, it will almost certainly unleash innovations and change social norms. We should have ended the traditional handshake a long time ago. Perhaps the crisis will kill it altogether. If so, good riddance. I think this crisis might lead to better norms and social conventions about protecting the health of others—a very small silver lining to the serious challenge we’re facing.
Fuller: Does the pandemic make you more or less optimistic about the benefits of urban agglomeration?
Romer: The fact is that the intense interaction that cities allow is immensely productive. I think what we’re going to learn from this is that there are a variety of ways to continue to interact frequently while minimizing the risks of transmitting viruses. I doubt that this is going to slow down the growth of cities. I think the underlying economic reality is that there is tremendous economic value in interacting with people and sharing ideas. There’s still a lot to be gained from interaction in close physical proximity because such interaction is a large part of how we establish trust. So I think that, for the rest of my life, cities are going to continue to be where the action is.
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