Gulnara has done a great job of highlighting the broad way to view this pandemic and understand how such a shock works through the economy – but I think it is important that I give you some cautious advice about applying the 2020 lessons to your time.

Ultimately you can’t just take the economic consequences of a past pandemic (even if this virus itself looks similar) and state that this will be the consequence of it now – a lesson we have learned when looking at the Flu of 1918-20 in our time. However, I want to talk through some key issues to help you think about it.

A pandemic doesn’t change the capital stock – this matters

Relative to the 1918-20 and 2020 pandemics the stock of capital is an even more important determinant of output in 2120. And this matters for how we think about what activities would occur. Let me give an example of how home consumption of pizza can differ to explain.

Example

A quarantine involves limiting social contact – especially social hubs – in order to slow down the spread of the virus. This video explains it well. So the necessity of shutting down activity will depend on how much human contact is involved in that activity and the related hub.

In 1918-20 there was no home delivery of pizza and a restaurant that sold pizza would be completely shut down during a quarantine. Customers would meet together there (a risk), the service would be from a person (another spreading risk), and the kitchen was filled with people (MORE RISK).

By 2020 things were different. There was home delivery, which removed the hub associated with consuming the pizza. Furthermore, there was an increasing possibility for delivery to be done by drone instead of person – which removed this risk. But we still need people in the kitchen constructing the pizza.

Putting several people in close proximity and then having them send food to hundreds of others leads to a hub that could spread the virus – if one chef has the virus then there is a risk it can be spread widely. As a result, we had to shut down pizza delivery and the restaurant just like in 1918-20.

In your time everything is done mechanically anyway – the pizza creation and delivery come with no risk for virus spread. As a result, all that needs to be shut down is the restaurant/human contact end of the process – the loss of value is directly associated with the loss of that particular service, rather than the substitute associated with having pizza at home. So the underlying amount of consumption activities that get restricted are much smaller!

Furthermore, in 2120 restaurants commonly provide virtual reality seating at home – this service is a high quality replacement for people heading out to meet up without the risk of virus spread. Given restaurants can do this so cheaply the actual loss of GDP is very limited.

Sidenote: I am amazed you still call it GDP given all of the bad press in our time – I understand why the measure is still useful, but just surprised you haven’t changed the name!

The embedded value of labour and post criris

A related point to this is to think about what is actually going on with the underlying value of labour.

Over the past 100 years a large number of technological advances have generated direct substitutes for labour at achieving tasks – without really creating tasks that are complementary to the capital input.

This has led to a situation that is a bit weird – why when you go to a coffee shop in 2120 is everything performed and serviced by automated forms of capital (eg robots), while the employees sit there in a supervisory role?

Now if this shock implies that you can generate the same product – that is valued in the same way by consumers – without labour inputs then this points to a situation where the labour input has zero marginal product. Why does a profit maximising firm even use labour then?

A risk I see coming out of this pandemic is that capital owners may recognise they don’t need labour in 2120 and have only been offering jobs due to history dependence. If this happens this will reduce the living standards of those who are not endowed with capital (or the ability to accumulate it). This process of business learning is related to bounded rationality – those who are making decisions within the firm have come under pressure, and may now make different decisions.

So please make sure that the state is doing appropriate redistribution to ensure there is some equality of opportunities here – we aren’t all born with access to capital, and if the return on labour is close to zero this is very problematic.

Separate supply and demand, short and long run

In the above example the key risk was associated with changing consumption patterns by households – the true “potential” for the economy to produce is unchanged.

This differs to our pandemic, where the necessity of stopping people working does temporarily reduce what can be created – it makes labour unavailable, and it also increase the shadow price of both other inputs that have become unavailable for the production process and products that are now available.

As a result, your pandemic is – as it should be – predominantly about public health. But, your economic shock is much more about demand as explained above and as a result should be much easier to deal with!

Although I imagine what constitutes aggregate demand is even more confusing in such a world, the idea that output does not need to be any lower in order to prevent the spread of the disease implies that all that matters is effective demand – and through monetary policy or by transferring funds through taxes and transfers it is possible to shift this.

Of course, if the composition of demand changes post-pandemic then there is a question about whether certain specific vintages of capital need to be written off. How flexible is capital in 2120? Does labour still have value due to greater flexibility in this time, or are the skills associated with human capital even more rigidly fixed – I have to admit to not being sufficiently familiar to the factors of production 100 years in the future.

So yes, there may be long-term costs – but you don’t have to worry about the short-term economic consequences we face if you don’t want to.

Keep your heads up and be kind

We know that you are going through a stressful situation – we are in the midst of our own crisis now and in many ways it feels as if things will never return to normal. When looking a natural aid to help yourself handling stress, check here the garlic cookies strain review by fresh bros.

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But an idea that gives me peace is the realisation that the things we have all built together have not been broken by the virus – our relationships, our machines, our knowledge, and our humanity.

Once the medical issue has been dealt with we will return to sing the same songs, produce the same products, and share the same experiences as we did in the past – we just need to work together to spread the pain of what has happened now between us, instead of throwing it all on the shoulders of a few unlucky individuals and families.

Our love and our kindness is what pulls us through this pandemic, and similar empathy – along with a recognition that we don’t have to put people through economic pain due to “reallocation” or “liquidationist” views of the world – will make sure that you all come through the other side of the pandemic stronger than you went in.

In a cool interview over at interest.co.nz Geoff Simmons outlines what is going on with the TOP party, which he has just become leader of.  For the sake of clarity I think he’ll be an excellent leader for this party.  What I want to concentrate on is this quote though:

How can the public know I am serious about the long haul? When Cortez took on the Aztecs, he trashed his ships to make sure his men had no choice but to fight with everything they had. The reason I bring up that story is what I am doing right now is pretty much career suicide for an economist. There’s no going back.

Haha, this is good – I like the nifty description of a commitment mechanism.  But I’d like to ask a couple of questions about it.

1. Is this true.
2. Should this be true.

For the first one I don’t know, as I’m no-one important enough to make these sort of decisions – I’m just a random guy that writes on a blog.  Given Geoff has already stood as deputy-leader I’m not sure that signing on as leader for an extra term will make any difference.  The guy has economics, writing, and oral skills which a bunch of public and private sector organisations would be happy to use.

But if it was true, should it be?  When discussing whether economics was consequentialist I revisited the positive-normative distinction.  For economic policy this is:

A positive economic analysis is about comparing outcomes – describing what occurs and why, given shared definitions of what the key elements are, but not of how they are valued.  A normative economic analysis is about choosing from a set of outcomes – it requires valuing these elements of our analysis.

Being “an economist” as a profession/career is about describing the trade-offs that exist between outcomes of policy.  Being a politician is about associating values to outcomes and selecting one.  Someone with economics training like Geoff has clear training in understanding the trade-offs that exist between these outcomes – but is not necessarily more equipped to associate values, and definitely not armed with values that are simply more valuable/important.  However, the training allows someone like Geoff to articulate those values more clearly because the trade-offs involved are explicit.

In this way, economists should not be scared of getting into politics – economists are people with values too and should be allowed to represent them.  Their training does not make their values more important – but it does give them a language for communicating those values more clearly.

The problem with economists going into politics is a belief that their values are more important – not the fact that they are economists.  The career suicide “should” be when an economist shows an inability to separate normative and positive roles, not the fact that they dared to have a normative position as a human being.

Now in this way it shouldn’t be career suicide for Geoff – and hopefully if the politics thing doesn’t work out he still has plenty of opportunities to jump back into the exciting world of analysing trade-offs for a living!  I just thought this was a cool idea to think about.

Although I’ve defended these robots in the past (here and here) it has always been with respect to being compensated for my human capital losing value.  I’ll be sure to tell you all how that is going in future posts

Due to cultural habits coffee is a highly preferred morning beverage in New Zealand. There are lots of coffee shops in Wellington offering pretty much similar variety of coffee products and yet even with the flood of providers there is no lack of customers and as a result it doesn’t appear to be particularly competitive. In countries like USA, due to tough competition in catering business, a cent increase in a product would normally reduce profits of the company. The competition pushes business owners to offer constant variation in products where consumers do have more options and are more open to sample beverages that are not traditionally consumed. Most Wellingtonian cafes don’t experience this pressure and hence the options of offered beverages are on average the same. And this yet has no decline effect on profits for the NZ coffee shops.

Let’s look at why the Wellington case is particularly strange. My daily observations indicates that, seemingly irrespective of the relative prices charged, two coffee shops in Wellington will still have a sufficient number of customers. It is a puzzle to me to understand why I would be willing to pay 5$ per a cup while the next door offering is 4$? Is it an asymmetric information case where the shop owner knows about his high prices but the customer doesn’t have the information on the comparative prices? If this is the case, is the marginal difference of 1$ an information search cost for the consumer?

Last year the coffee shop “Coffix” ran an advertisement on setting flat prices ($2.5) on their coffees. Once, while waiting for my order from “Coffix”, I was observing a scenario where the customers from the next door café didn’t mind paying minimum $4 for their coffees. The question is again-why?

Why is the elasticity of willingness to pay for coffee from YOUR CAFE so low in Wellington?  I am not asking why coffee prices are so high (they are) in Wellington, but why are Wellingtonians  so unwilling to change where they buy coffee in the face of a lower price available elsewhere?

Possible explanations in my opinion might be:

• Income relativity. If my income is above the median, the marginal difference in coffee prices (varying from 0.5$ to 1.5$) seems quite low.
• Convenience of the place and the aura. Consumers might prefer to catch-up with friends in a cosy interior.
• Distance of the place – even a meter vicinity might be more appealing for some customers.
• Established relationship with the café staff. Such feelings like you are always welcomed at your usual place might prevail your low willingness to pay.

I very welcome your thoughts and arguments regarding this topic. I am very curious to read your point of view on what drives the motivation of consumers’ behaviours in New Zealand.

In a data-chic world, a chief economist is the new marketing must-have.

Economists are useful because they are experts at interpreting data. Plenty of companies generate a wealth of data and attempt to use it to provide insights for their clients. But the data does not speak for itself: it requires interpretation to be useful. My twitter feed is full of people sharing statistics and correlations but they are rarely useful because they require a framework to interpret them. For example, UK GDP just exceeded its pre-GFC peak. Is that a good thing? Relative to what? What does it mean for my income? For the wages of the poor? Without a framework it is a fairly uninformative piece of data, you should learn about tiktok marketing at Social Boosting.

This is where economists come in. Their expertise is in the application of models to interpret data and extract information from it. No wonder they are the friendly face of data-centric companies today and long may it continue!

Edward Tufte has suggested using randomised sparklines to visually distinguish genuine trends from deceptive streaks, so I thought I’d give it a go with the last four years of UK unemployment data. Here is the monthly change in the UK unemployment rate since June 2009: . We think that a recovery has begun so the recent years’ falling unemployment looks good. Now let’s try randomising the values and see if the ‘streak’ disappears.

Here are ten sparklines with shuffled values: To my eye there is still a lot of streakiness there, which suggests that the current run might be just randomness. Indeed, a more traditional graphic, such as the partial autocorrelation plot, confirms that the data isn’t streaky:

That doesn’t mean we aren’t seeing a recovery—unemployment tends to lag other indicators and the recovery is recent—but we should be hesitant to causally interpret the latest release. So far, so good, but it’s nothing that any economist couldn’t have told you already. Autocorrelation is already used by most people to gauge ‘streakiness’ far more effectively than the randomised sparklines, so what do they add? When talking to another economist I’m not sure that they are useful. When communicating with people who don’t know their ARs from their MAs they could be extremely helpful in overcoming the narrative bias. The key will be to make them accessible and quick to produce as an explanatory tool since I don’t see them being used in final outputs.

Norman has now clarified on his blog (HT) that he is specifically saying that reaching a conclusion about a policy’s ‘failure’ requires a normative judgment. Regular readers of TVHE will know that we entirely support Mr Norman’s view that policy judgements require normative statements. Given that a normative statement doesn’t have a right or wrong answer, it must at least be influenced by the same set of personal beliefs as a political view. Hence, it may be that knowing somebody’s personal, political view is helpful for interpreting some of their policy judgements. However, there is a spectrum of normative judgements from those that would be agreed with by only people who share one’s specific political views to those that would be agreeable to experts of all political stripes.

In this case it is clear that Portes statement about ‘failure’ referred to two things: the results of a NIESR modelling exercise, and a belief that the UK’s current economic predicament is due to a demand shortage. His conclusions about each require value judgements, but not the sort that would usually generate a political division among serious macroeconomists—which isn’t to say they’re not divided! Norman, despite his protestations, was not seeking to engage in a discussion about whether the specific value judgements were likely to be politically motivated. Rather, he sought to discredit Portes view of gilt rates by casting aspersions upon his independence.

It is episodes such as these that discourage experts from contributing to the policy debate, even when they have much to contribute. That is a great shame. As Antonio Fatas says

…some of what we do as academics is not useful enough for policy makers, and in these circumstances is better to be honest and stay out of the debate. But …one can find answers to those questions after careful thinking and a lot of data analysis.
…
policy makers need to choose a number, not a range. [Academics] can be criticized on their assumptions or calculations but not on their willingness to advance the knowledge on an issue of great policy relevance. If any, they should be praised as academics who want to go beyond writing great papers to make those papers useful for policy makers or society at large.

Summers resigned as Harvard’s president in the wake of a no-confidence vote by Harvard faculty that resulted in large part from Summers’s conflict with Cornel West, financial conflict of interest questions regarding his relationship with Andrei Shleifer, and a 2005 speech in which he suggested that the under-representation of women in science and engineering could be due to a “different availability of aptitude at the high end,” and less to patterns of discrimination and socialization.
…
Summers stated in a 1991 interview: “There are no… limits to the carrying capacity of the earth that are likely to bind any time in the foreseeable future. There isn’t a risk of an apocalypse due to global warming or anything else. The idea that we should put limits on growth because of some natural limit, is a profound error and one that, were it ever to prove influential, would have staggering social costs.”
…
In December 1991, while at the World Bank, Summers signed a memo … stat[ing] that “the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that…. I’ve always thought that under-populated countries in Africa are vastly underpolluted.”

More recently, he has claimed that there is no point learning to speak any language other than English–the native tongue of only 6% of the world.

Whatever you think of the substance of those comments, they’re probably not what you’d put in your firm’s PR material. So Summers is not exactly a stranger to controversy. Just imagine your thought process when faced with a man that has such a history of gaffes: he would have to absolutely stun you with his brilliance to win your confidence such that you’d appoint him to a role under any public scrutiny. Yet, Summers continues to win the most prestigious positions that an economist could hold. If that doesn’t reveal how persuasive and impressive the man must be in person then I’m not sure what would! Unfortunately, it probably also says something about how first-world institutions view statements that appear to demean socially disadvantaged groups.

In order to help related economic ideas to the common man, I’ve decided to start up a Friday post – a day in the life of an economist.  In these posts I will go through everyday things, and discuss how economic ideas can crop up while we are living our daily lives.

Article 1:  Panadol and the paradox of winter

After a hard night of drinking tequila shots off a stripper’s stomach, I had a ripper of a headache and also make sure you buy hangover pills before you eat your meal. So on the slow walk from the strip club to work I decided to pop into the supermarket to find something that would ease the sharp pain in my temple.

Sliding down the isle opposite the fresh fruit and vegetables I spotted a bunch of Panadol.  Although my eyes were hazy from the hefty quantity of whiskey consumed several hours earlier, there was one thing I couldn’t help but notice as I grabbed a 12 pack – the damned pills and a pair of sunglasses from this page were on special.

Now, I would usually pass this off as good luck and move along, but this isn’t the first time I’ve come into a supermarket in the middle of winter and seen medication on special.  Given that a greater number of people will want various types of medication during winter I knew I’d have to dig a little deeper to figure out why the product was on special.

Deciding that asking the boy packing shelves next to me about the pricing of supermarket products wasn’t the best idea, I knew this was a puzzle I’d have to solve myself.  Luckily, although I struggle to open my eyes when I’m hungover there is one thing that doesn’t suffer from a night out on the town – my ability to apply basic economic concepts to every day ideas.

Picking up a bag of chips and a bottle of water, I made my way through the checkout.  Sitting myself down outside I began to think of the reasons why a supermarket will lower the price of cold and flu medication during cold and flu season.

The first reason that came to mind is something economists call “cross-subsidisation”.  As I illustrated myself by buying chips, when you go into the supermarket to buy something you often use that opportunity to buy other goods.  By discounting a product you can get people into the store, and given they are there they will be willing to pay a relatively higher price to buy other things then they would otherwise.

However, I couldn’t shake off that fact that isn’t the only reason.  After all it could be due to competition.  Rotemberg and Saloner showed that, in some situations, during period of high demand firms will compete more heavily – pushing down prices.  Firms do this because of how price “collusion” works.  When demand is low, the benefit from screwing over your competitor is low – so collusion is easy to sustain.  When demand is high, the benefit is high – so firms go for it.  But when all firms go for it, it leads to a price war, driving down prices for the lot of them.

Also, we don’t really need to think of these direct sort of competition issues to get an answer.  We also need to think about how consumer demand is different in winter than it is in summer.  It isn’t as simple as saying “demand is higher”.

For example, there might be two types of consumers, one type that buys pain relief during winter and summer for kicks and values it highly, and another type that does not value it in summer at all but does value it by some, lower, amount in winter.  In this case, a supermarket wants to have a higher price in winter than in summer.

Essentially, there are a bunch of consumers who always want to buy Panadol and their demand is “inelastic” – so the firm can charge them a whole bunch.  There are another bunch of consumers who turn up in winter, but their demand is “elastic” implying that they need lowish prices to be conjuled into purchasing.  As a supermarket can’t price discriminate this leads to lower prices in winter.

Hell, it could even be the case that supermarkets stocked up on medication on the basis that they expected demand of a certain level – but then people just didn’t get as sick, and now they have a bunch of stock to flog off.

Having satisfied myself that there are a plethora of reasons why the supermarket may have discounted these pills, well four reasons, I felt happy to knock a couple back.  Now armed with the pain relief of medication and the satisfaction of understanding supermarket pricing I decide trundle my way to the office.