Pandemics and scarcity – thinking about grocery prices, overall demand, and understanding policy

With the pandemic news moving quickly Matty convinced me to spend more time on Twitter to keep up with the news (my account is here if you want to follow). I saw some interesting links regarding the economics of COVID-19 which I would like to share and comment on – and I decided to run through all these points on one post .

Here are the topics I cover. Each is titled, so you can scroll down if you are only interested in one these:

  • A jump in the CPI even as demand falls? Consumer prices may rise in the short term, even as expenditure is falling – and this “price level” change is not necessarily indicative of a supply shock.
  • How to visualize the “timeline” of COVID-19 and the economic elements.
  • What does ECON101 think?
  • On humility: During the health crisis public health experts are the primary people able to analyse the issue and help with policy. Economists main role remains defining the trade-offs, but not deciding policy.

I don’t want to state what policies I think are good and which are bad. Instead I just want to share these points, as they are ideas I am using to understand what different policies might be trying to achieve as an interested person.

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Understanding Wellington and toilet paper

Toilet paper has been running out all around the world, with Australian’s genuinely fighting over it in supermarkets – and there has been a big show about it in the news.

This leads to some interesting thought experiments such as:

https://twitter.com/dandolfa/status/1236708527491645440

And yet, here I am in a big Wellington supermarket. It has:

  1. lots of toilet paper,
  2. specials on all the toilet paper!

This doesn’t seem to make sense. If concerns about COVID-19 are driving people to panic buy toilet paper we know that the demand curve has shifted right, and prices should have risen! So what is going on. Lets put our economics hats on and find out 🙂

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Do we need to lower interest rates to battle COVID-19?

There is a lot of talk about a 50bp cut by the RBNZ in a couple of weeks due to COVID-19.  But what does this mean, and why are we cutting interest rates to battle a bad flu?  

In this post I am going to discuss the case for interest rate cuts during a natural disaster, to help to explain what demand shock they are battling and why this cut makes sense. The RBNZ already applied this logic during the Canterbury earthquake in 2011, so it is useful to think about COVID-19 from a similar perspective.

I’d like to thank the people I’ve chatted with about this issue to clarify what is going on – you know who you are, and I appreciate it.  The New Zealand economics community is wonderful!

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What can a cruise ship tell us about COVID-19

The coronavirus (COVID-19) that is spreading through China is a tragedy, and I’d like to send my best wishes to those that are sick and my love to those who have passed on.

However, as yesterday’s quote noted – sometimes we need to temper our warm hearts with cold heads in order to understand social phenomenon and discover truths that lead to the improvement of society.  If we are interested in understanding the risks to a country associated with coronavirus, we need good information on how the virus spreads and the fatality rate, in order to set appropriate policy.   

In that way I’d like to talk about selection bias in the coronavirus figures – how this may overstate the death rate and understate the number of people catching it, and how the cruise ship – as well as being an incubator – may be (in part) a natural experiment which allows us to correct for this bias.  

As my economics PhD thesis consider health related questions, this is an issue I like to think through, and which I think is valuable.

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Regional NZ’s exposure to China shocks

It was interesting to see Gulnara’s post about the coronavirus and the potential implications for the New Zealand economy yesterday. In it she stated that – if we use SARS to understand any potential shock we need to correct for the way New Zealand’s relationship with China has evolved in the intervening years.

Given this we felt that it would be useful for us to share an article Brad Olsen wrote in February 2019 on regional New Zealand and China (which also helped inform Brad’s recent comments on the coronavirus here) – which may shed some light on this issue. The article can be found here, and is reproduced below.

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The economic impact of the coronavirus in New Zealand

In a recent post I discussed the impact on the broad economy associated with the coronavirus.  However, this is only a starting point for thinking about economic impacts – the next question is how we can understand the composition of the shocks, how we can measure this in real time, and how we can consider the areas where policy is relevant.

This is something I want to discuss here.

In that regard the Spin Off just had a good article talking about economic consequences, and interest.co.nz also had a good piece talking to the bank economists.  Finally, Westpac released a bulletin that discusses what they think is important. This is a complement to their pieces as I want to use the same “demand” and “supply” shock analysis as I did in the prior post to bring some of these concepts out.

What I’m discussing below is how I would look at this sort of crisis in real time as an interested observer – I work in research not policy, so I see this as a chance to open up a dialogue with other interested people in the comments below.  Any insights you have would be richly appreciated.

Furthermore, as I just don’t have the data on hand I would like (again I work in research, not as a forecaster, an investment analyst, or a policy person) I can only talk about what I would use – if anyone has been using this data and can discuss trends it would be great to chat about this in comments!

Note: Thanks to Matt Nolan for discussing this with me, and helping me to get the right data sources for this post.

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