Despite warnings from government and health officials, some states are choosing to begin reopening their economies this week by ending lockdown restrictions. On this episode of the Capitalisn’t podcast, hosts Kate Waldock and Luigi Zingales lay out the economic reasons why that could end badly.
Luigi: Hi, Kate. Are you going to the beach tomorrow?
Kate: Don’t even joke about that. I love beaches. I wish I could go to the beach. It’s one of my favorite things to do, but not only are the beaches closed, it’s also 40 degrees outside.
Luigi: Yeah. But of course, I’m not talking about New York, I’m talking about Georgia. If you lived in Georgia, it’s going to be a gorgeous weekend, and the governor of Georgia just announced that it has opened its beaches.
Kate: Yeah. Apparently, they’re also opening hair salons, tattoo parlors and, in a couple of days, restaurants and movie theaters. I called up a friend in Georgia, and my friend is dying to go to their hair salon.
Luigi: It’s funny that she has those priorities, because you’re too young to have friends who dye their hair. When I am in these Zoom cocktail parties, women of my age, the only thing they discuss is where to do their roots.
Kate: I didn’t realize that you were going to all these Zoom cocktail parties. I feel a little uncool. I haven’t been invited to a single Zoom cocktail party. But no, my friend is actually a dude. Yeah, guys get haircuts much more often than girls do.
Luigi: In this episode, we’re going to talk about the decision of some states to reopen ahead of the rest. Is this a good decision? And when you say good, is it good for them? Is it good for the rest of us? How do we think about it?
Matt Hodapp: Who are these cocktail parties with, Luigi?
Luigi: Even our producer is interested in my Zoom cocktail parties.
Kate: From Georgetown University, not invited to cocktail parties, this is Kate Waldock.
Luigi: And from the University of Chicago, celebrating a lot of Zoom cocktail parties, this is Luigi Zingales.
Kate: You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.
Luigi: And, most importantly, what isn’t.
Kate: Before we get into the states reopening, I think we should talk about whether people care about reopening, whether they want states to reopen. There have been some polls done, and apparently, 45 percent of respondents in the US think that the total economic costs of the lockdown and the continued stay-at-home orders are higher than the cost of the coronavirus itself.
Luigi: Yeah. For full disclosure, some of the statistics come from the Financial Trust Index that Chicago Booth and Kellogg organize together.
What is interesting in that survey is that, yes, on the one hand, a lot of people are concerned that the economic cost of the lockdown is bigger than the cost of the disease itself. On the other hand, they seem to be quite open to having some general restriction of movement in order to fight the disease. And, on the third hand . . . I forgot that there was a third hand. On the third hand, they’re completely scared about applying any form of surveillance, electronic surveillance.
So, we’re going to talk about many of these things. But in particular, let’s think about the diversity in the country. We know that, on average, Americans tend to be more concerned about reopening quickly, but there is a big variation, right?
Kate: Yeah. A lot of this variation seems to be driven by partisan lines. Apparently, 48 percent of Republicans are worried that the US will take too long to reopen, and that’s only 19 percent of Democrats.
Luigi: It’s hard to generalize, but if you think there are more Republicans in Georgia than in New York City—that is probably true—you probably think that the majority of Georgians are in favor of speeding up the process. In a sense, you could argue that what the governor is doing is following people’s will.
Kate: Yeah. But then there is the question of, should we be leaving the pandemic response up to the people’s will?
Luigi: That’s a very deep and important question, because on the one hand, you are afraid that people are not properly informed. On the other hand, who should do the trade-off? At the end of the day, we discussed in a previous episode, it is a trade-off between lives and livelihood. And I think that that trade-off should be done by a popular vote, and not necessarily by some technocrat.
Kate: There are so many factors here. Like you said, there’s the information factor. Do people know exactly what’s going on? Are people fully informed about the risks that they face? I would tend to think that, especially when the government doesn’t even know the risks that we face, it’s impossible to expect people to be properly informed.
Plus, there is the element of myopia. Are people making decisions for themselves just maximizing the short run, not necessarily the long run? I personally would love to go for a walk right now. That’s all I ever want to do. And I find myself doing it on occasion. Even though I know that I ought not to because it’s dangerous, I just can’t help myself.
And then, finally, there is the issue of whether people are really internalizing the effect that they have on others. If you’re low risk or if you just don’t mind getting sick, you might decide to go outside and not care about spreading the disease, even though that might have a much bigger impact on another person with a different sort of immunological history.
Luigi: I think you’re right, but it seems to me that you’re mixing two slightly different things. On the one hand, are individual choices about whether to stay home or go out the right way to make this decision collectively?
As you pointed out, the answer is no, because there is what we economists call an externality. I impact your probability of getting sick, and I don’t internalize that in my decision. That’s a reason why this should be done collectively through a political decision process, not an individual decision process. This is one of the few cases in which free-market outcomes don’t deliver a socially efficient outcome, and so, we should go for a political decision.
The second is, who should make this political decision? Then there are some practical issues. Should it be made, at least theoretically, through a referendum, or should somebody be appointed to make this decision? And should that be a political figure who responds to an electorate or a technocrat who has very deep knowledge of all the steps?
Let’s assume that this decision is made politically. Let’s say, Dr. Fauci or whoever you want to make this decision for everybody. Or should this be decided by the governor or the president, or some political authority? Or should we do a poll and decide based on the poll?
Kate: I think that pandemics are complicated and ambiguous enough that the decision should be left up to a technocrat who has the best possible information and is trained to be able to utilize that information and has thought about every possible piece of information, including what’s going on in other countries, or including what’s gone on in other pandemics in the past. They have that body of knowledge. I don’t think that most people are acting based on the same sorts of information sets. So, no, I don’t think it should be left up to a popular referendum. Whether or not that’s the case now is a totally different issue.
We have Georgia being one of the first states to open up, and the CDC is in Georgia. And we’ve got directors of the CDC saying, this could get even worse in the fall, and yet, it’s falling on deaf ears. And so, de facto, it seems like it’s up to state governors to decide whether states can reopen.
Luigi: I actually am not so sure that I agree with you. In a sense, of course, technical knowledge is very important. But as we discussed in a previous podcast, at the end of the day, it is a trade-off between lives and livelihood. You yourself did not want to have that discussion, because you didn’t think that that was something that technocrats or economists should make a decision about. But collectively, we have to make this decision. Do you really want to give it entirely to a health official who probably will put 100 percent weight on lives and zero weight on livelihood?
Kate: First of all, not wanting technocrats to be discussing the issue was not why I didn’t want to discuss the issue. I do think that decisions should be left up to the technocrats. I’m just not a technocrat in this issue. This is one of the problems that I think a lot of people are having with economists right now. Economists are pretending that they’re epidemiologists when they’re not. And this is not our battle to be fighting. We’re not experts in it. And so, unless we’re absolutely asked to be opining on something, I would prefer to stay out of it.
Luigi: Sorry, Kate, I think you’re touching on a very important point that I’m very sensitive about, because I think you’re right that economists tend to be too expansionist, and they want to get control over everything. And I think that, of course, we’re not epidemiological experts. However, to the extent we can, like politicians can, listen intelligently to the trade-offs, what we economists can contribute is trying to put this trade-off in monetary terms.
We don’t know what might increase or decrease the number of deaths. That’s what the epidemiologists should tell us. But if we need to compare the number of deaths with the loss in GDP, we have a methodology that is called cost-benefit analysis. You might dislike it, but at least we have a methodology, and we can do that. And then, to me, it’s still up to the politicians to draw the final line, but at least we have a way to compare apples with oranges, which is not easy.
Kate: I still think that’s the job of the CDC or the job of experts. It’s not like the CDC so far throughout history has just been saying, oh, we’re coming up with estimates of R0 and we’re coming up with the most likely flu strain this year, but we’re not doing anything about it. We’re not acting on it. We’re just coming up with those numbers, and then it’s up to economists to figure out the right thing to do.
Making cost-benefit analyses has always been part of their job. And so, because so much of that cost-benefit analysis has to do with specific technical details, I think that they are the ones who are equipped to bring in those GDP numbers at the end. It’s not we who are equipped to bring in those medical numbers and then add the economic parts of it.
Luigi: I disagree, because I think that the training of doctors is to minimize harm. This is the Hippocratic Oath. They basically have an objective function that puts 100 percent weight on human lives and zero weight on any economic damage. If that’s your objective function, that’s perfectly fine.
I think that a lot of people, including the ones from Georgia and the ones that are talking, say, no, we use different weights. And I think that those weights are an individual decision, and I can give you the methodology to compare, but how much weight should be given to the people themselves, not the technocrats in health or the ones in economics?
Kate: Look, I have never worked for the CDC or the Department of Health. I don’t know how decisions get made.
Luigi: Unlike me, that has a long tradition of working there.
Kate: Exactly. This is the point that I’m trying to make, which is that I don’t think that they’re going to the hospital and asking a doctor to run some sort of double-blind tests. I think that they have people who are trained in both medicine and epidemiology, as well as statistics and data, and those are the people who make constant trade-offs. They have been doing this for their lives. This is what they are supposed to be doing, and those are the people who ultimately should be forecasting out death rates, who should be doing the cost-benefit analyses and who should be determining policy in this area.
Luigi: To your point, since I do state my opinion that eventually the people should decide, I am concerned about the fact that evidence suggests that the opinion of people is very highly influenced by random phenomena. There is a working paper, and as you know, working papers are not peer-reviewed yet, but there is a working paper that just came out at the Becker Friedman Institute of the University of Chicago that compares the health outcomes of watchers of Tucker Carlson Tonightversus watchers of [Sean] Hannity.
I have to admit I don’t watch Fox News. Apparently, Tucker Carlson was much more concerned about the outcome of the pandemic from the beginning and was talking about it on his show, while Hannity was dismissive, and this had a huge impact on the viewers. So, it seems that people are very much swayed by even random factors, so that’s a source of concern. Should we conclude that watching Hannity is dangerous for your health?
Kate: Look, Luigi, we’re nonpartisan on this show, so I’m not going to come out one way or the other.
Luigi: Anyway, undoubtedly, one of the reasons why the governor of Georgia and the governors of some other Southern states want to open the economy is to get their economies started, especially places like Georgia and South Carolina. The beach season is peaking now. And if you miss that, you miss a lot of revenues.
So, do you think that this will be good for the economy?
Kate: No, it still remains to be seen how much uptick there is going to be. You can open restaurants and you can open resorts, but that’s not going to help if people don’t come. In fact, there are invariably going to be startup costs that you have to spend by getting things reopened again. And if you don’t end up having any customers, then that’ll just be a loss. And so, we don’t know how much people are going to actually consume. My hunch would be that these states are being over-optimistic, especially about tourism, that that’s going to help at all.
Luigi: Yeah, I think that the evidence we have suggests that people, after the initial shock in which they didn’t understand what was going on, they tend to take precautions. Now, these precautions might not be optimal from a societal point of view, but certainly, they started to shy away from restaurants and public places. We have seen the reservations with OpenTable drop in various cities before the order to close down the restaurants.
And if you look at recent surveys, when people are asked whether they are likely to go out to a restaurant if the stay-in-place [order] will be lifted, the overwhelming answer is no. So, the beginning will be very slow. My fear is that the people who try, if they get burned, it will generate even stronger negative reaction, and it will be more difficult to restart the economy the next time around. A false start can be very dangerous, in my view.
Kate: I agree. And I think that there is also this other consideration, the indirect effect of how this will play out in terms of unemployment assistance. A lot of businesses right now are just closed. And so, if you’ve been unemployed because a business closed due to coronavirus, then you can collect your unemployment checks. If you have been furloughed because of that, you can collect your unemployment checks.
But if, all of a sudden, a lot of businesses open up again, and you decide that you don’t want to go back to work in, say, a hair salon, because you’re worried about getting sick and you’re not sure that the business is taking the proper precautions, then in that case you might not be able to collect your unemployment if you don’t want to go to work. It’s kind of an open question.
Right now, you’re eligible to collect Pandemic Unemployment Assistance if you quit your job as “a direct result” of COVID-19, but it’s left up to the states to figure out what “direct result” means. And it’s really unclear as to whether a lot of states will just completely allow the fear of coronavirus to count as a direct result. And so, if this means that businesses open up and now people aren’t going to work because of fear, and they can’t collect their unemployment checks, then this could actually end up being a negative demand shock.
Luigi: But, I’m sorry to say, the way the CARES Act was designed really creates a strong disincentive to go back to work, especially for waiters. The unemployment insurance is higher than what they’d get as pay, and so they have no incentive to actually go and take any risk. So, I suspect the owners will desperately try to restart the places, but the workers will stay home.
Kate: I don’t think that this is true across the board. We’re all waiters. I think it depends on each state’s minimum wage and each state’s average wage and how they’re interpreting these unemployment laws.
I think that this idea that people are staying home and not working because they’ll make more money that way has been blown out of proportion. There are a couple, I don’t know, I wouldn’t say a couple, there are some circumstances in which this is true, but I think overwhelmingly people would prefer to go to work if it were safe.
Luigi: You said the magic word, if. I think the combination of, I make, if not even more money by staying home, but equal money or almost equal money, and there is a risk going to work, of course I stay home. And that basically makes the restart impossible.
Now, I think that Georgia, in my view, is going ahead too early, so I’m not too worried about this. But in the future, this might be an obstacle.
Kate: Yeah, but that was expressly the point of this assistance, which is that we don’t want people going to work when the pandemic is still raging. And a lot of this unemployment assistance expires after a few weeks, and so it’s not like we need to worry about it permanently having these sorts of dampening effects on reopening.
Luigi: But let’s talk about the more important question. Is it safe for Georgians now to go out? If you were to live in Savannah, would you go to the beach, Kate?
Kate: Ooh, the beach is a tough one because I really love the beach. This is the problem. I’m so myopic. I wouldn’t go to the grocery store and I wouldn’t walk around and talk to neighbors, but I love the beach so much that I might just go to the beach. I wouldn’t trust myself to make the right decision.
Luigi: So, you want a government to constrain yourself from your worst instincts?
Kate: Yes, exactly. Just for the same reasons that I want the government to force me to save for retirement, because I’m not going to do it otherwise.
Luigi: I think that this is a fundamental difference between the two of us. I don’t believe in this role for the government. I think the government should not substitute for our weaknesses. We should make our own decisions and be responsible.
But my concern is, until we have a proper system of testing and tracing, opening up is going to be an inevitable disaster. First of all, a bunch of people will not go out. And if I were in Savannah, I would still stay home because I’m too afraid. And, two, there is a risk that the disease will come back unless we have a good system of testing and tracing. And I don’t see the testing in place.
I was relistening to a speech that Fauci gave on the 7th of April, and he said, “In the next couple of weeks, we’re going to flood you with tests.” Now, it’s more than a couple of weeks, and we’ve not been flooded. I really don’t understand what’s going on, but we’re still low in the number of tests, especially given how widespread the disease is.
Kate: It’s a little hard to know what the right amount of testing should be. One of the lower end Gottlieb estimates said that we need about 750,000 tests per week. And we’re at about 700,000 tests per week across the country, and so it seems like we should be in that ballpark.
The lower-end US testing estimate translates to about 33 tests per day per 100,000 people. And Georgia is at about 38 tests per day per 100,000 people. And so, according to those estimates, maybe they’re doing fine. Maybe they should be allowed to reopen.
Luigi: But let’s try to reason through these estimates, because my understanding is that in order to be safe, you need to make sure that you stop enough infections that the disease does not keep spreading. We know what is, in absence of any measure, the level of spreading of the disease. This is what the experts call R0, which for this disease is on the order of 3.6, something like that. It means that every person, in the 10 days in which they are infected, tends to infect another 3.7 people. If that’s the case, this stuff spreads in an exponential way. We need to bring this number below one, so that every person infects, on average, less than one person, and of course, the disease will eventually die out.
In order to do that, you need to basically catch more than two-thirds of the infections that you are generating. And so, this means either tracing and testing two-thirds of the people who have been in contact with anybody who has been infected, or somehow be able to test so many people that you catch two-thirds of the infected and you stop them. And so, the level of testing, in my view, is very much a function of where you start from in the disease.
I think Georgia is not as bad as New York, but it has been hit pretty hard. And, to this day, we don’t have a good sense of how many infected there are today in Georgia.
Kate: Yeah, I think that’s a great point. If you look at the numbers coming out of some of these states that are talking about reopening, Georgia had over 1,200 new cases, new positives, just this past Monday, which was the second-highest number of new cases on a daily basis that they’ve had so far. Tennessee had a huge uptick in cases just this past Wednesday, the most ever in terms of new daily cases. Kentucky just saw the largest single-day increase this past Sunday.
And so, even though it might look like in some of these states there is a bit of a downward decline, it’s certainly not like they’re in the clear. It’s certainly not like they’re Wuhan, for example, which didn’t open up until there were 14 days of no new cases at all.
Luigi: The only possibility to open in this situation is if we had a very effective system of tracing, but this is where we are facing a lot of resistance. The Financial Trust Index I mentioned before did a survey and asked people if they’re willing to be traced in exchange for reducing the lockdown by two weeks. And only 34 percent responded positively. When you raise the benefit of a reduction to two months, only an extra 11 percent agree.
Overall, there is 55 percent of the people who are unwilling to be tracked by the government, even if this reduces our stay-in-place order by two months. That’s a lot of resistance against this technology. Can you explain that, Kate?
Kate: Well, just to be clear, by tracing or being tracked by the government, are you talking about sharing cell-phone data with the government?
Luigi: What is becoming increasingly popular, what people have discussed, and I’ve also seen applications arising in Europe, is to use your Bluetooth technology, the Bluetooth on your phone, to figure out who was in your neighborhood. If you were to be found, God forbid, positive, then we know everybody who has encountered you, and these people would be notified, and they themselves need to be tested, and then so on and so forth.
Kate: I mean, in terms of why people are averse to this sort of tracing, I don’t know, Luigi, you’d be able to answer it better than me, because I personally would be thrilled to share this data with the government. I think that it would help a lot right now. And I don’t personally care, because I’m only ever close to one person. But my guess would be, one, people just are uncertain about the technology. It sort of feels like, if you share any cell-phone data with the government, then they’re going to have everything. They’re going to be able to forever trace every single one of my steps.
And so, I think that there is rightly some ambiguity about what this data sharing means. Even if people were fully aware of the limitations of the data sharing, like there wouldn’t be GPS coordinates or anything, it still feels to a lot of people like an invasion of privacy. And I think that Americans, in particular, don’t have much faith in the government and like to think that that sort of data is kept secret.
Luigi: One interesting idea I heard on the Lawfare podcast is that we should distinguish between privacy and civil liberties. We have given away our privacy anyway, in the sense that Google, Facebook, and Apple know everything about us, where we go, basically who we sleep with. This is all traceable these days. Now, the only difference, which is not a minor difference, is that government does not have, at least officially, access to this information. Maybe I’m too cynical, but I think that if the government wants to have access to this information, it will find a way to get it. Once Google or Facebook have this information, the government could get it one way or another.
But the most important thing is what the government could do with that. One example they made about the risk of the government knowing too much about us is that if I visit a relative who is part of a gang, can I be put in jail because I’m part of the gang, because they located that I visited him, or something like that? That could be something that we are concerned about from a civil-liberty point of view. But that could be addressed with some proper legislation in place to limit the use of that information.
And after all, if we are concerned about civil liberties, what is worse than all being confined at home? Since we have lost our liberty in the most severe way already, my view is, with the proper measures in place, this is a useful technology that can dramatically reduce the spreading of the disease, accelerating a return to normal or quasi-normal, which is something that we all want to do.
Kate: Yep, I totally agree. I’m on the side of tracking, I guess we should call it, of Bluetooth tracking.
Luigi: I would never recommend such an experiment, because this experiment might cost a large number of lives, but given that Georgia is experimenting anyway with this opening of the economy, I think a silver-lining opportunity is that we could try to see how we can handle tracing by distributing free cell phones to the poorest part of town, where they would certainly appreciate having a new smartphone, and we can see to what extent tracing can actually save lives.
Kate: Luigi, you said that you support the idea of a popular vote. If you were the benevolent central planner, how would you structure this referendum?
Luigi: First of all, you need to have some reliable information transferred to the public and then put in front of the public a trade-off of two feasible paths that experts agree are both feasible, but they have different costs.
I think that there might be a path that says, for example, we give up some privacy and we have tracing, but we reopen earlier, or we don’t give up privacy and we are losing a lot of money along the way, and we reopen later. I think that that’s ultimately a political choice. It’s not a technical choice. I think that most politicians and technocrats try to pretend that there is no alternative, there is only one case. But I think there are alternatives, and I think it would be nice to have the choice and let people choose.
Kate: But to be more specific, who should be running this referendum? Is it done at the state level? And if it is voted, for example, to reopen, is that binding in every county of the state? How would that work?
Luigi: I think that there is an important externality here that people travel across states. I know that in the United States, there is no way to do a federal referendum. There are a lot of possibilities to do local referenda, but not a federal one. But in principle, I see it as a federal referendum. This is something that cannot be decided just by the state of New York, because people go from New York to New Jersey. And so, it would be silly to not incorporate that externality.
The only level at which this has some validity is at the national level. Of course, there is an international level, too. But at least the United States can close borders. The state of New York or New Jersey cannot close borders.
Kate: Right. But you have to trade off the possibility that people will travel around and end up going to the better states or the worst states, or leaving the worst states, with the fact that the risk of this thing is going to be much higher in densely populated areas where people rely a lot on public transportation.
And so, I personally think that one of the issues that’s unfolding in Georgia right now, is that it seems like places like Atlanta, densely populated cities, they don’t have any recourse if they want to pass their own additional, stricter level of public-safety standards above and beyond what Kemp is saying as the governor. They don’t have the ability to do that. And yet, I think that they should have the ability to do that, because it’s more dangerous to be in Atlanta right now.
Luigi: I think that you are right, but you are saying that you can have, let’s say, a referendum at the state level, but then have some areas that can put more strict rules in place. Yes, I think that’s definitely a possibility. But I don’t see why, to some extent, Atlanta needs to force the rest of the state into the rules applying to Atlanta.
Kate: Yeah, look, I still think that technocrats should make the decision. I don’t think necessarily that they’re going to put 100 percent of the weight on human life and zero percent of the weight on the economy, like you said. Maybe it’ll be disproportionately on human life, but still I don’t think it’s going to be 100 percent.
Having said that, that’s not our system. We don’t have the CDC making these decisions. The CDC can’t even make itself be heard at all. And even when they try to warn us about the potential of another outbreak, a worse outbreak in the fall, people just yell at them and then they get upset, so that’s not happening.
But at the very least, I do think that cities should be bound by their own set of rules. They should be able to police themselves. And if a mayor of a city is worried about the threat of a worse outbreak within a densely populated area, then they should be able to impose their own safety standards.
Luigi: I think that one aspect that is emerging here is how difficult it is to make decisions to run a country when we are in a situation where markets don’t work. The beauty of markets is that people make choices independently, and my choice does not impact yours. If you prefer to go to the beach and I prefer to go to the mountains, we don’t need to vote on where we go. You go to one place and I go to a different place. Unfortunately, this disease does require some form of government intervention, and this makes very clear how complicated it is to have a government run any complex economy.
Kate: Yeah. And it makes things even more complicated when you have a head of state who’s saying things like, “Oh, we’re raring to go and we’re going to be open by Easter.” And then, a couple of weeks later, is criticizing the governor of Georgia for wanting to reopen.
Luigi: There is no doubt that President Trump flip-flopping does not help the problem, to use a British understatement. But let’s face it, there are not a lot of good examples here. You go around [the world], I think that Korea and Taiwan seem to be doing well, but in part it is because they had experience with SARS before. But if you look at Western democracies, there is a shortage of very successful leaders.
Kate: Yeah. That’s because we need to be willing to elect more women.
Luigi: Ah, yeah. I think that people have raised this, that governments run by women have done better, from Angela Merkel to the New Zealand government to Denmark, et cetera, there seems to be a correlation. But as we know, correlation is not causation. The actual story could be that democracies that elect women to power are better democracies, and they work better in general, not just in this particular case.