As I wrote a couple of years ago, I don’t post here anymore. I just have a couple of updates for people who subscribe and may be interested in my work.

1. I upgraded my personal website to the 21st century.
2. I have a new book! The Fear of Too Much Justice: Race, Poverty, and the Persistence of Inequality in the Criminal Courts is coming out on June 20 from the New Press. My co-author is Stephen Bright, a legendary death penalty lawyer (with a 4–0 record in Supreme Court cases), longtime director of the Southern Center for Human Rights, and one of my professors at Yale Law School. You can read more at the book website or you can pre-order it via the New Press site (or directly from your favorite retail monopolist, of course).
3. I used to tweet about everything I wrote, but I may stop doing that as Twitter continues its descent into oblivion. So the best way to keep track of what I write is probably to subscribe to my Medium page here. If you don’t want to give Medium your information, you can get an RSS feed of my stories, or you could bookmark the page itself. Or you could follow me on Facebook. I will try to put a quick post there if I write something that is published someplace else.

U.S. Department of Treasury

1500 Pennsylvania Ave., NW

Washington, D.C. 20220

                                                                                                        October 11, 2022

Dear Secretary Yellen:

We are a group of economists with expertise in oil markets, international trade, and political economy, writing to express our support for the proposed price cap on Russian seaborne oil exports.

As envisaged by the G7, the price cap would set a maximum price that Russian oil could be traded in conjunction with G7 services. This price, set in dollars, would be substantially below the world price, yet above the marginal cost of production in Russia. To use US, UK, EU, and allied financial services (such as insurance, credit, and payments), market participants will need to attest that all qualifying purchases are at or below this threshold.

Given the importance of participating countries for global finance and for shipping, compliance with this cap will create pressure for a lower price on Russian oil moved by tanker. While we do not expect all trades will be performed under the price cap, its existence should materially increase the bargaining power of private and public sector entities that buy Russian oil.

The price cap maintains economic incentives for Russia to produce current volumes. In April 2020, when the price of the Brent benchmark was close to $20, Russia continued to supply oil to world markets, because that price was above the cost of production in many or most existing Russian oil fields. Russian has little or no available onshore storage, and since shutting down and restarting oil fields is expensive and risky, it was more profitable for Russia to continue producing in the presence of low prices. The price of Brent now is around $96 per barrel, but Russia receives significantly less due to the “Urals discount”. This discount is caused by the perceived stigma of buying Russian products for some customers; they decline to bid for Russian oil, which reduces effective demand and lowers the price that the remaining customers need to pay.

The oil price cap proposal would effectively institutionalize the Urals discount and consequently further lower the dollar value of the Russian government’s primary revenue stream.

Under its Sixth Package of Sanctions, the European Union has already adopted a complete ban on using European financial services to transport Russian crude and petroleum products to any destination, along with a complete embargo on EU imports of Russian oil. These measures are due to go into effect on December 5^th.

If the EU implements these measures without a price cap, we would expect the supply of oil to the world market to decline – and benchmark oil prices (e.g., Brent) to rise.

The US and its allies are likely better off with a price cap on Russian oil, and we are encouraged that the EU is making progress on including the price cap in its next round of sanctions. If the world price of oil rises and the cap is effective, Russia will not receive any windfall. And the cap stands a good chance of lowering Russian revenue even if formal participation is limited – by strengthening the negotiating position for anyone willing to buy Russian oil.

According to the IEA, Russian oil exports were 7.6 million barrels per day in August, down only slightly (390 kb/d) from pre-war levels. With revenue from coal and natural gas exports likely to decline and not rebound soon, the Russian government needs substantial oil revenue (in dollars) to pay its bills and keep the ruble from collapsing. The price cap as proposed gives the Russian government the incentive to continue to supply the world market but reduces the revenue available to fund their brutal war in Ukraine.

For these reasons, we support the implementation of the price cap and are hopeful that you and your international colleagues will make progress implementing it soon.

Yours sincerely,

Simon Johnson, Sloan School of Management, MIT

Daniel Berkowitz, Department of Economics, University of Pittsburgh

Severin Borenstein, Haas School of Business, University of California, Berkeley

Steve Cicala, Department of Economics, Tufts University

Kimberly Clausing, UCLA School of Law

Anastassia Fedyk, Haas School of Business, University of California, Berkeley

Jason Furman, Department of Economics and John F. Kennedy School of Government, Harvard University

Luis Garicano, Visiting Professor of Economics, Columbia Business School

Yuriy Gorodnichenko, Department of Economics, University of California, Berkeley

Ryan Kellogg, Harris School of Public Policy, University of Chicago

Christopher Knittel, Sloan School of Management, MIT

Michael Kremer, Department of Economics and Harris School of Public Policy, University of Chicago

Lukasz Rachel, Department of Economics, University College London

Kenneth Rogoff, Department of Economics, Harvard University

Carl Shapiro, Haas School of Business, University of California, Berkeley

Robert S. Pindyck, Sloan School of Management, MIT

Rick Van der Ploeg, Department of Economics, University of Oxford

[Letter updated on October 13, 2022; adding Michael Kremer]

The plan is based on sound economic and fiscal assumptions and allows for the implementation of policy initiatives without tax increases.

This note provides my assessment of the financial viability of Stacey Abrams’ budget plan for the state of Georgia through fiscal 2028. This assessment was carried out at the request of the Stacey Abrams campaign for Georgia’s governor.

Stacey Abrams’ budget plan is fiscally prudent. The plan is based on sound economic and fiscal assumptions and allows for the implementation of Abrams’ proposed policy initiatives without the need for tax increases.

The most important assumption underlying the budget plan is the projected growth in tax revenues, which in turn depends on the state’s economic outlook. Between fiscal 2023 and fiscal 2028, Abrams expects state tax revenues to grow by 4.6% per annum, in nominal terms. This projection incorporates changes in the state’s tax code resulting from the implementation of House Bill 1437 during the budget horizon. Following its initial implementation in 2024, the tax cuts by House Bill 1437 are triggered only after specified budget benchmarks are achieved, which is not expected until fiscal 2028.

The anticipated growth in tax revenues between fiscal 2023 and fiscal 2028 is consistent with the 4.9% per annum growth in Georgia’s tax revenues over the past quarter century and 7.4% per annum growth over the past decade (see Table 1 below; all figures are in current dollars). This is consistent with reasonable expectations for the continued robust growth of Georgia’s economy. For example, in a recent economic forecast, Dr. Rajeev Dhawan, Director of the Georgia State University Economic Forecasting Center, expects personal income growth of close to 6% per annum through calendar year 2024, and gross state product growth of about the same during the period.

It is important to note that the national and Georgia economies are not expected to suffer a severe recession during the budget horizon, although the economy’s growth is expected to materially weaken through calendar year 2023. However, the impact of the weaker economy on nominal tax revenue growth is mitigated in part by the expected high inflation during the next two years. Inflation is projected to steadily moderate, but it is unlikely to be quickly fall back in line with the Federal Reserve’s inflation target of 2% (measured by the national core consumer expenditure deflator).

Abrams’ policy initiatives would be incorporated into the budget by fiscal 2027. The costliest proposal is to increase salaries for teachers and law enforcement. For teachers, the cost is spread over four years, with the first $2,750 increase in annual pay occurring in fiscal 2024. By fiscal 2027, the entire proposed $11,000 annual salary increase would be in place. The budget cost for these higher salaries increases from just over $400 million in fiscal 2024 to $1.6 billion when fully implemented in fiscal 2027. Law enforcement salaries increase by $6,000 in fiscal 2024 and again in fiscal 2025 at a budget cost of $155 million by fiscal 2025. The cost of Abrams’ proposed expansion of Medicaid coverage is also significant, estimated at $297 million in FY 2024 and growing between $16 million and $18 million yearly after that.

Given the expected tax revenue growth in Abrams’ budget plan and the amount of the state’s current undesignated reserves, the costs of Abrams’ policy initiatives are adequately funded through the budget horizon. In other words, the state will have enough revenue to cover her policy initiatives while also maintaining an adequate reserve with no tax increases.

In addition, there is a substantial cushion provided by currently available reserves. According to the State Accounting Office FY 2022 Report on Revenues and Reserves, the state ended Fiscal Year 2022 with a General Fund balance of $11.82 billion, of which $5.24 billion constitutes the revenue shortfall reserve, which is constitutionally capped at 15% of prior year revenues. This leaves $6.58 billion in undesignated reserves, which are available for appropriation. The Abrams budget plan assumes that the undesignated reserve will fund the gas tax suspension through December 2022 (costing $1.6 billion), that the Abrams proposed tax rebate is implemented ($1 billion), and that the Abrams FY 2024 budget initiatives are funded ($1 billion).

The undesignated reserve will then total roughly $3 billion, allowing for $900 million to fully fund Abram’s budget initiatives in FY 2025 through FY 2027. In FY 2028 the budget will no longer be supplemented with undesignated reserve revenues.

While there is significant uncertainty in any economic and budget projection, the Abrams budget plan for Georgia is appropriately prudent and does not rest on overly optimistic revenue assumptions. The Abrams budget plan strikes a reasonable balance between fiscal prudence and expanding the state’s support for a range of initiatives, without raising taxes.

Sanctions imposed in response to Russia’s invasion of Ukraine are not degrading Russian energy production capacity or putting enough pressure on Russian financial markets.

On the contrary, the price of Brent crude has risen from $80 at the end of 2021 to $90 pre-invasion and reached $113 per barrel today.

The discount on Urals crude relative to Brent has widened since the invasion, but the net price to Russian exporters has still increased by $5-10 per barrel.

IEA reports daily Russian oil export volume is steady at 5 million barrels per day, so oil revenues are up $50-100 million PER DAY since February 24^th.

Russian gas exports to Europe have not been impacted: “the export value of Russian piped gas to the EU alone amounts to USD 400 million per day”.

Total Russian energy exports are generating $1.1 billion per day according to the IEA. This has increased, not decreased, since the invasion began.

The Russian current account surplus in January 2022 was $19 billion, about 50% higher than usual for that month.

The latest sanctions created a positive terms of trade shock for Russia, with a rise in the price of its exports relative to its imports. The only way to put real pressure on Russian public finances is to buy a lot less oil and gas from Russia. Even better: stop all purchases from and payments to Russia.

Recommendations

1. The US should impose full sanctions, including secondary sanctions, on all Russian oil and gas exports. As a major exporter of refined products made from Russian oil, Belarus also needs to be sanctioned fully.
2. IEA estimates that oil production around the world can be boosted quickly. Additional world supply can add at least 3 million barrels a day if other producers are persuaded to support the US lead. To the extent Russia can sell on grey markets, this will be at a steep discount. World oil supply will remain about the same, but with significantly less revenue for the Russian government to use in destroying Ukraine and threatening the world.
3. These measures will encourage the EU to significantly reduce its use of Russian gas, both immediately and through 2022. Energy conservation and development of alternative supplies should also be pursued as a top priority, as suggested by the IEA and Bruegel (two papers). Reducing gas purchases from Russia is essential for global security and any resumption of regional stability.

I’ve been asked if you can sign up for email notifications when I write stories on Medium. Apparently you can, but the option is a bit buried. (One of the nice things about Medium is the clean interface. One downside of that clean interface is that sometimes you have to go looking for things.)

If you’re on my main page (jamesykwak.medium.com), you have to click on About at the top.

Then you get to this page, and at the bottom there’s a link to an email subscription form.

I hope that helps.

I’ve decided not to post on The Baseline Scenario anymore. I’ve thought about this on and off during the several years that the site has been mostly dormant, but I never pulled the trigger, mainly because this blog still has thousands of email subscribers and an unknown number of followers on Facebook. But I obviously haven’t been into blogging for a long time now, and it feels weird to continue using a platform whose peak was in 2010 and 2011 (when we were regularly listed, with reason, as one of the most important finance and economics blogs on the Internet). As you’ve probably noticed, Facebook, Twitter, and the consolidation of media platforms (the Times, the Atlantic, Slate, Vox, etc.) has killed off most independent blogging. In addition, while Simon and I rarely disagree on anything, we tend to care and write about different things, as evidenced by our latest books—his on investing in science and technology to create better jobs, mine on partisan politics and expanding the welfare state. Both of us also write about issues that have strayed far from the original focus that drew in our core readers—primarily, the financial crisis and financial regulation. For example, the book I’m working on now is about injustice in the criminal legal system.

I owe this blog a lot. Without the blog, there would have been no “Quiet Coup” and hence no 13 Bankers, which got me fifteen minutes of fame, an academic job, and a new career that has lasted a decade so far. There would not have been the day that Larry Summers sent an email to the National Economic Council staff saying that The Baseline Scenario was required reading. I would not have met some good friends, some of whom have gone on to be far more influential than I ever was.

The blog itself will stay up indefinitely, taking up space on the Internet. Simon may choose to post here in the future, so don’t cancel your email subscription if you have one.

I will continue to write, occasionally at least. The primary place I will post things is Medium; you can find me at https://jamesykwak.medium.com/. For a while I’ve been posting articles in both locations, there and here. I just posted an article about this year’s presidential election that you can read on Medium. I’d be flattered if you decided to follow me there. I also have a Twitter account, of course; I spend little time on Twitter (because it’s awful), but links to things that I write get posted there. I have no plans to use Facebook (because it’s also awful).

Good bye, and thank you for reading.

One of Congress’s top priorities this week and next is to pass some kind of funding bill that will keep the federal government operating past December 11. There are basically two ways this could happen. Option A is that Congress could pass a continuing resolution that maintains funding at current levels until, say, the end of January—that is, when we’ll have a new Congress and a new administration. Option B is to pass an omnibus fiscal year 2021 spending bill that determines discretionary spending levels through September of next year when the federal government’s fiscal year ends.

The Democratic leadership apparently is pushing for Option B because—well, probably because they think it’s the responsible thing to do and will make them look good with that tiny but all-important segment of voters who know the difference between a continuing resolution and a proper appropriations bill. But, in doing so, they could be throwing away one of the few levers that Democrats will have to actually accomplish anything during the next congressional term.

The point is that government funding measures are must-pass bills. No one likes a government shutdown, and historically Democrats have been able to pin most of the blame for them on Republicans, dating back to 1995, when Bill Clinton successfully portrayed Newt Gingrich as a zealot who was out to slash Medicare (which he was). If Jon Ossoff and Raphael Warnock come through in Georgia on January 5, Democrats will have majorities in both houses of Congress for the first time since 2010—but such razor-thin minorities that Joe Manchin is already rubbing his hands with glee at the prospect of becoming the most important person on Capitol Hill.

In this context, an omnibus budget reconciliation bill could represent one of the Biden administration’s few real chances to pass anything through Congress. Bills passed through reconciliation are not subject to the Senate filibuster (which isn’t going away, regardless of what you think about it), which means they only need a bare majority. The need to avert a government shutdown creates the pressure to bring people (the so-called moderates) to the table to come to a deal. Now, Joe Manchin isn’t suddenly going to become a sponsor of the Green New Deal because the Democrats have a majority in the Senate—he’s going to extract everything he can in exchange for his vote. But there is still a lot that Democrats could accomplish in an omnibus spending bill: money for the DOJ Civil Rights Division, money for the EPA, money for election protection, money for low-income housing, and so on. This is an opportunity to dictate discretionary spending priorities a full eight months earlier than we would otherwise be able to do. And would you rather negotiate with Manchin or with Mitch McConnell?

And yet the Democratic leadership in Congress seems inclined to give up the potential chance to write their own appropriations bill in January in exchange for a bill that they have to negotiate with McConnell and . . . Donald J. Trump. (The vague new COVID-19 stimulus bill that people are talking about is currently being positioned as a separate piece of legislation—which makes sense because it’s toxic to most Republicans.) It’s almost as if they don’t want the opportunity to govern. Sure, Ossoff and Warnock could lose in January, but we would still be in a stronger position than we are now, with Biden in the White House.

During the next two years, we are going to have precious few chances to pass any kind of meaningful legislation. Why are we throwing one of them away?

Today, the Washington Post’s Outlook section published my article on the future of the American economy in the wake of the pandemic. They invited me to write it because of my earlier blog post on “Winners and Losers.” (Hey, despite all appearances, maybe blogs are still worth writing.)

The article is pretty gloomy. The short summary is that the COVID-19 pandemic will accelerate and reinforce the two primary economic trends of our time: consolidation and inequality. At this moment, I believe that more strongly than when I originally drafted the article two months ago. It seems to me that, as a society, we are caught between two unacceptable outcomes: either we reopen elementary schools (at least) so that parents can go to work, adding fuel to the epidemiological fire that is already burning throughout much of the country; or we keep schools closed and millions of predominantly low-income workers lose their jobs because they have to take care of their children. Choosing between your job and your children is not something that should happen in a supposedly rich society, yet there we are.

A few friends have asked me what I think the solution is. Here are the last three paragraphs of my first draft, which ended up on the cutting room floor:

“Things don’t have to turn out this way. Perhaps the experience of this pandemic—a disjointed health care system, poor people forced by poverty to fight on the front lines of a war, an unemployment rate that could reach 25 percent—could inspire a new New Deal, or a rethinking of the kind of society we want to live in.

“The prospects for a resurgence of social solidarity seem dim, however. Remember, the political legacy of the financial crisis—an example of the dangers of greed and deregulation if there ever was one—was the Tea Party and, arguably, President Donald Trump. It is more likely that the deficits that the federal government has incurred to mitigate the economic damage so far will be used to justify austerity in the not-too-distant future. Robert Rubin—President Clinton’s treasury secretary, and to all appearances still the holder of a veto over Democratic economic policy—already could not resist using pandemic spending to call for action to reduce the national debt in the long term. Republicans will be far less nuanced. Deficits will be the trump card played—by moderate Democrats if necessary—to block universal pre-K, free college, expanded Social Security benefits, or Medicare for All.

“This is the future we are headed for. But there are no immutable laws of economics. We could choose to break up large companies, enable workers to unionize, mandate paid sick leave, and tax rich people to provide capital to young entrepreneurs. If we fail to make a choice, however, COVID-19 will cast a long shadow over our economic future.”

(You see, even when proposing solutions, I can still be gloomy.)

I think the policy solutions are obvious. We need to commit to an all-out-effort to contain the coronavirus—which can be done, as most developed countries, as well as New England, have proven. In the meantime, we have to provide unlimited emergency support, in the form of cash and health care, to people who cannot work, as well as bonuses to the essential workers who keep the rest of us alive. We pay for it by issuing bonds at negative real interest rates—10-year Treasuries are yielding 0.65%, which is about half the market-implied inflation rate—and we pay back those bonds later by raising taxes on rich people and corporations. We need stronger antitrust policies to break up large corporations. We need capital grants—paid for by inheritance taxes—such as those proposed by Thomas Piketty in his new book, to enable people to start small businesses to replace the ones that will be wiped out this year.

That is not a complete solution to all the problems we faced on January 1, 2020. But it will help hold the line against the changes being wrought by a virus.

The problem, of course, is the politics—not just President Trump and the Republicans, but a Democratic Party controlled by its conservative wing, defined primarily by its insistence on fiscal responsibility, and terrified of doing anything that anyone might call socialist. Perhaps this crisis will push Joe Biden to embrace the progressive agenda of Bernie Sanders and Elizabeth Warren. Perhaps not. That, of course, is the subject of another book.

I think it’s highly likely that the dust will clear eventually and that our economy will come back to life at some point in the next two or three years. I know there are certain disaster scenarios that can’t be ruled out, but I think they are unlikely. I’m not going to guess when things will return to a semblance of normal. Really, no one knows.

The question for now is: what will that economy look like?

A few things, I think, are clear. The economy will not grow back up to its trend line prior to the pandemic. This, for example, from the Center on Budget and Policy Priorities, is what happened after the financial crisis and Great Recession:

Not only did actual GDP fall, but the trend line of potential GDP fell as well, costing the economy trillions of dollars of output. Behind that loss of potential GDP is an enormous human cost. Recessions cause permanent damage to people who lose their jobs and to recent graduates who can’t find jobs.

There will also be a certain amount of psychological scarring that will affect the economy for at least a generation. People buying safety stocks of dried beans and toilet paper may give the consumer goods sector a one-time boost. But those with enough income will save more, depressing demand, and people will also be much more reluctant to start small businesses.

Amazon will be a big winner, of course. A large proportion of the population, particularly among the affluent, already reflexively shopped for everything at Amazon. (I used to, but now I try to find things elsewhere first, basically for political reasons.) The pandemic is pushing more people to try to fulfill all of their consumer needs online, and they aren’t going to stop when the coast clears.

More generally, big chains will expand their domination over the economy. Tens of thousands of small businesses will vanish, never to return, wiped out by weeks or months of zero revenues. Large corporations will have the capital to swoop in and steal their customer base. Family-owned restaurants will be replaced by national chains. Sporting goods stores will be replaced by Dicks. Electronics shops, if there are any left, will be replaced by Best Buy. Bookstores … well, there aren’t many of those left, anyway.

The other winners will be private equity funds with the nerve to buy assets on the cheap. After the financial crisis, investment funds bought up single-family homes in foreclosure, becoming some of the nation’s largest landlords. This time, the bargains will be found in small businesses desperate for capital and commercial real estate hammered by defaulting tenants.

The business sector will become more concentrated. Inequality will increase. The fundamental trends that have reshaped the American economy over my lifetime will accelerate. The survival of capitalism depends on a large enough proportion of the population having a stake in its survival. For how much longer?

By some measures, in the short term, COVID-19 will surely reduce inequality of wealth, and probably inequality of income as well. As a purely mechanical matter, the rich have a lot more money to lose when the stock market crashes and most sectors of the economy grind to a halt.

At the same time, however, this pandemic is throwing into stark relief how unequal the lives of Americans are today. Most of the upper-middle class and rich seem to fall into one of two categories. Those without children in the house trade suggestions on how to fill their time: virtual happy hours, virtual yoga, free streaming opera, binge TV-watching, etc. Those with children in the house trade suggestions on how to keep said children occupied so that we can get anything done or have any time to ourselves: educational apps and websites, home science experiments, live streaming from zoos and aquariums, etc.

There are exceptions, of course. Doctors generally make comfortable livings, and many of them are currently facing difficult working conditions and high risk of infection to save as many lives as possible. But the most difficult thing many rich people have to endure is figuring out how to get a Peapod or Instacart delivery slot, or finding a good recipe for canned tuna.

On the other side of the great income divide, things are very different. Tens of millions of people suddenly lost their jobs and barely have enough cash to buy groceries, let alone stock up on gourmet canned tuna. Remember, 17 percent of adults already couldn’t pay at least one of their bills even before COVID-19 hit. Economic insecurity is so widespread that a large portion of the population is just one shock away from being unable to make ends meet. Well, that shock just hit.

Then there are the people who still have jobs, whom all of us are relying on: people who work in warehouses, distribution centers, delivery services, grocery stores, pharmacies, and hospitals. Many of them go to work, keep our society functioning, and face an elevated risk of infection because they can’t afford to lose their jobs. Amazon warehouses, of course, are so efficient that there isn’t time to wash your hands. And Amazon workers don’t get paid sick leave—unless they test positive for COVID-19 (then they get two weeks), which is virtually impossible given the lack of testing in this country. But Jeff Bezos doesn’t even need to call out the National Guard to force his employees to go to work. As one warehouse employee said, “A lot of people are going to be there for longer. People will take as much OT as they can get, because we’re all poor.”

The vague parallels between COVID-19 and September 11 have been drawn a million times already. Then the heroes were first responders who risked their lives to save people. They were also underpaid, but at least many of them knowingly took jobs that involved risk. The people on the front lines today are doctors and nurses, of course, but also millions of low-wage workers (including many in hospitals) who have been drafted into this war and are kept there by poverty and economic insecurity.

Is this the society we want?

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

—Adam Smith, The Wealth of Nations

This is the most famous line from the most famous justification of market capitalism. Smith’s point is that it is individual self-interest that drives the economy. In the next paragraph, he goes on to describe how gains from trade explain the division of labor in a modern economy:

“The certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.”

As I’ve said before, “whenever the butcher, the brewer, the baker, or the invisible hand is invoked, the reader should hear alarm bells going off.” The COVID-19 pandemic provides a particularly stark demonstration of the problems with Smith’s comforting fable and how it is used in contemporary politics.

Market capitalism depends on the happy assumption that everyone has some marketable skills: something that person can do that can be exchanged for money, with which she can then exchange for everything else that she needs to survive. If you believe that premise, then you can criticize poor or unemployed people as lazy good-for-nothings and destroy the social safety net with a clean conscience. This was the philosophical justification behind welfare reform, for example, which placed created work requirements for and imposed lifetime benefit caps on recipients, assuming that all they needed was sufficient incentive to find a job and get to work. Indeed, it is the philosophical justification behind the modern conservative economic platform.

But think about what is happening right now. At this moment, to a reasonable approximation, the only people with any marketable skills are those in health care, manufacturing of drugs and medical supplies, and food production and distribution, and certain critical infrastructure functions (electricity, gasoline, communications, etc.). That’s why tens of millions of people could suddenly be out of work, through no fault of their own.

So what do we do? We help those people. The Federal Housing Finance Agency suspends foreclosures and evictions for homeowners with federally-backed mortgages. States expand and accelerate unemployment benefits. Even the Trump administration proposes sending cash to every person in the country to help them pay the bills. (They also want to create a giant slush fund to help business owners, which I don’t agree with, but that’s not the point here.) We do what we can to make sure that people can stay in their homes, get enough food, and take care of their families.

At any moment in the past decade, there were millions of Americans who couldn’t find work, or couldn’t get enough hours to make ends meet—through no fault of their own. They came from broken households, or poor neighborhoods without good schools, or countries torn apart by war. Or they were disabled fighting in Iraq or Afghanistan, or they suffer chronic medical conditions that limit their ability to work. Or they held full-time jobs that suddenly vanished one day because people in other countries could do those jobs more cheaply. The prevailing attitude to these people—at least judging by the economic policies put in place by the politicians who were popularly elected—was: screw them.

But what happened to them is no different from what happened to most of us in the past week. The only real difference, as far as I can see, is that they were a small enough minority that most people could pretend they didn’t exist, or that their problems were their own fault. Now there are so many of us in the same bucket that we can’t—or don’t want to—say the same thing about ourselves. Sure, I could have become a doctor, which would give me a marketable skill right now, but I don’t think it’s a moral failing that I didn’t.

So the lesson I think we should all take away from this crisis is this: If someone cannot provide for herself and her family in a market capitalist economy, that is not a moral failing on her part. There are always people who struggle to get by, through no fault of their own. Indeed, I strongly suspect that there will be more and more of them in the future, as robots and artificial intelligence get better and better at doing things that were once the sole province of humans. As a society, our duty is to care for the welfare of all of our members—and, yes, that requires action by the government, just as tens of millions of people will soon be relying on government checks.

The problems of market capitalism are always there to see, though many people choose not to look. Perhaps this crisis will open our eyes.

It seems that social distancing is the primary strategy for slowing the propagation rate of COVID-19. That and widespread testing are the key tools for containing an outbreak, for reasons discussed repeatedly in the media.

But does it work? Or, more to the point, how well do different degrees of social distancing work? How strict does it need to be, and how tightly does it need to be enforced? It seems to me that this is an important and at least theoretically answerable question.

Thanks to ubiquitous commercial and government surveillance, there are staggeringly comprehensive databases of exactly where people are at all times. Google has one, for example. Picture for yourself an enormous aerial picture of some metropolitan area with a dot for every person’s location; then picture those dots moving around as time passes. That’s more or less what is available. (Some people are blocking their location data, and some people don’t have personal surveillance devices smart phones. But there are certainly enough people transmitting their location to do the analysis discussed below.)

Assume for a moment a can opener that we have a good measure of the number of cases of COVID-19 in any geographic area at any time. (We don’t have to know every case; it would be enough if we were testing a random sample of people every day.) Then the analysis is conceptually simple. We need some measure of social distance. Ideally we’d want to count the number of people that each person comes within one meter of for each day, then average that number across the entire population. GPS is only (theoretically) accurate down to about 5 meters, but it can give us a rough idea of how many people could be close to each other at once.  That’s the social distance variable, which we can measure each day. Then we basically need to regress the percentage daily change in the number of COVID-19 cases against the social distance variable, with some sort of lag to account for the fact that cases don’t appear for several days. Given the number of places where there have been outbreaks, we should be able to get some idea of how low the social distance variable has to be in order to flatten out the rate of new infections.

OK, that’s the easy part. Now back to that can opener. The problem is that official case counts depend on three major factors: (a) the underlying rate of infection in the population (what we care about); (b) the number of tests being done; and (c) the selection criteria for those tests. You get very different results if you only test sick people in the hospital as opposed to testing a random sample, even if you do the same number of tests. So the harder question is figuring out how the official case count relates to the underlying rate of infection.

Still, though, this is conceptually just a multivariate regression. On the right (independent variable) side, in addition to the social distance variable, you need a variable for the number of tests, and you need a set of dummy variables for the various testing strategies that different places have employed (i.e., one for the American test-only-the-sick-and-the-rich-and-famous strategy, one for the Korean test-everyone-within-range-of-the-outbreak strategy, and so on). You can probably think of other things you should control for, like the weather (readily available). Again, given the number of outbreaks that have occurred all over the world, there is a decent chance that there is enough variation to actually get results.

There are a couple of problems that the statistically-minded among you have already noticed. One is that once people are trying to implement social distancing, not only will they avoid proximity with other people (which is visible by GPS), but they will also behave differently when they are in proximity with others (not visible by GPS). There are also differences in cultural behavior—handshakes vs. la bise vs. a small bow—that affect propagation. You may be able to overcome that using variation within a single culture (e.g., the United States, where there is plenty of variation in how people in different parts of the country are behaving).

I haven’t the statistical or data management skills to do this myself. And maybe even if it’s done right the margins of error are too big to be useful. But if no one is doing it already, it seems worth trying.

The airline industry is trying to hold up the federal government for $29 billion in grants and another $29 billion in loans. They threaten that if they don’t get the grants they will lay off employees, and that if they don’t get the loans they will use their remaining cash on dividends and stock buybacks.

First of all, the second threat is staggering in its audacity. At current course and speed, the airlines will go bankrupt. When you are in financial distress, the last thing you should do is take your scarce cash and hand it to your shareholders. That meets at least the spirit, and perhaps the letter, of a fraudulent conveyance in bankruptcy law. But it represents the pinnacle of the idea of shareholder capitalism: screw the workers, screw the creditors, just take the money and run.

More importantly: the federal government should not give the airline industry a single penny either in grant aid or in sweetheart loans. I understand the economic challenges here. Thousands of workers are at risk of losing their jobs and not being to pay for food or rent in the midst of the greatest crisis of our lifetimes. To the extent we want to help them, the top priority is to give money directly to them.

It is true that there is some value in preserving the airlines as viable entities rather than letting them go bankrupt. If there were other companies able to take over their assets and workforces and put them to productive use, then by all means they could just fail, but that is probably not the case right now.

If the government does choose to rescue the airlines themselves—and not just their workers—it should do so by buying equity in the companies, at prices that don’t already reflect the possibility of a bailout. (Most of the value that airline stocks have today is probably based on expectations that they can get a good deal out of the crony-capitalist Trump administration.) That way, when the economy someday recovers and people start flying again, the U.S. government—and hence its taxpayers—will benefit, not the people who currently happen to own stock in airlines. And the government should not dilute its ownership by finding creative ways to funnel cash to the industry on favorable terms, as it did with the megabanks in the financial crisis (most notably the third Citigroup bailout). Airline executives and their shareholders have no viable alternative; without a government bailout, their most likely future is bankruptcy and being bought by some private equity firm for a fraction of the face value of their debt (paid to creditors, not shareholders).

Either way, the principle is the same: not one penny of free money.

Our business and household sectors are losing lots of money every day, and will continue to lose money for the foreseeable future. People no longer spend money at restaurants. Restaurant owners can no longer pay the rent or pay back their business loans. Restaurants fire their workers, who lose their paychecks and can no longer pay their rent, or their credit card bills, or their student debt. In an economic crisis like this, the overriding question is: who ultimately bears the losses?

We’ve been through this before. In the 2008 financial crisis, we applied the usual rules of capitalism—unless you were a large bank. Businesses failed and their owners (including shareholders, for corporations) were wiped out. Renters were evicted. Homeowners lost their houses. Investment funds that had bought mortgage-backed securities and collateralized debt obligations lost their money. Workers lost their pensions. Small banks were shut down by the FDIC. Big banks, however, got unlimited cheap credit from the Federal Reserve to stay afloat, thanks the the people we all know.

Will things be different this time? Perhaps. The Trump administration seems more willing than the Obama administration to relax the rules of capitalism—which should not be too surprising with a president who flaunts any and all rules, is more than happy to dole out goodies to his friends, and is unable to add numbers together. I think the megabanks can rest assured that they are still too big to fail and can count on unlimited support from their friends at the Federal Reserve and Treasury—Title II of the Dodd-Frank Act notwithstanding.

The surprise so far as been the decision to suspend foreclosures and evictions of anyone with a federally-backed mortgage for at least sixty days. Fannie and Freddie also are suspending mortgage payments for up to a year. This, as far as I can recall, is more than the Obama administration ever did for ordinary people hit by the collapse of the housing bubble in 2008 and 2009. Again, it shouldn’t be that surprising that Donald Trump is willing to take losses onto the federal balance sheet—it’s not his money, after all. This time, though, it happens to be the right thing to do.

These rules, of course, don’t apply to the private sector. If you are a small business owner who owes rent to your landlord or interest to your bank, there’s no reason to think you’re going to be let off the hook. The same goes for tenants with private landlords. Which raises the question: When the economy is hit by what is essentially an “act of God,” why is it that the owners of capital are kept whole, and the renters of capital have to bear all the losses? It’s not efficient—the economy would be a whole lot better off if people didn’t have to leave their homes and businesses didn’t have to close—and it certainly isn’t fair. Yet that’s the way our capitalist system works.

There is only one entity in the country—and perhaps the world—that can absorb the losses being generated by this crisis: the federal government, with its unmatched ability to borrow money. This time around, the top priority of the government should be direct assistance to the people who need it most—both workers and business owners who need cash to buy food, stay in their homes, and take care of their families. It should finance that assistance by borrowing money—at record-low interest rates—and by taxing the rich people who can most afford to absorb losses. Landlords and lenders will be made whole because of the money their borrowers are getting from the government, but they or their shareholders, to the extent they are rich, will lose money in the form of taxes.

It’s not that complicated. But I doubt our society and political system are equipped to solve this problem.

This post was largely inspired by a friend who I think prefers to remain anonymous.

PPE, as we now know, stands for Personal Protective Equipment, like face masks and gloves. Right now there isn’t enough of it, and that’s one of the constraints on being able to test people, which is one of the biggest problems we face.

The only point I want me make here is this: This is how capitalism is supposed to work. If you’re a for-profit healthcare provider—or any kind of provider that is trying to provide the most value, however defined, with limited resources— you are not going to stock up on enough PPE to handle every possible scenario you might face. This is what management consultants and business school professors have been saying for decades. PPE, like inventory, is a form of working capital. If you can reduce the amount of working capital you need, you can translate that dollar-for-dollar into cash for your shareholders—or, if you’re a non-profit, into clinics for poor people, salaries for your executives, or that next gorgeous building you’re going to put up. Excess working capital is pure inefficiency.

Sure, there’s the risk that you might run out in an emergency. But capitalism works on expectations: If there’s a 1% chance of a $10 million loss, you’re willing to spend $100,000 to prevent it. If there’s a 0.001% chance (according to your latest models) of a $1 billion loss, you’re only willing to spend $10,000 to prevent it. COVID-19 was basically off the probability charts, at least as far as operational preparedness was concerned. This is exactly parallel to the factors that created the financial crisis. VAR models only attempted to estimate the potential risk in scenarios that were, say, 1% likely, and they were excessively optimistic because they were based on historical data from the Great Moderation. Hospital preparedness similarly was based on historical data with no pandemic.

In capitalism, you know you can only prepare for 99% of the scenarios. It’s just not value maximizing to worry about the others. If those others occur, you go bankrupt, dust yourself off, and start again.

But that’s why capitalism is a lousy way to run a healthcare sector.

What should we instead? Well, probably the federal government should have a big stockpile of medical equipment to be used in an emergency. You know, big government.

Brief note from the author: I haven’t written anything about COVID-19 because I have no particular expertise in medicine or public health. But there are some aspects of the crisis that are amenable to economic, statistical, or simply logical analysis. This blog, as a few people may remember, was born during the financial crisis as an attempt to help make sense of what was going on. (Hence the subtitle at the top of the page: “What happened to the global economy and what we can do about it.”) To the extent I think I have anything to say that I think might be useful, I’ll put it up here.

Be safe.