Saturday, May 16, 2020

E-Book (short) review of "Economics in the Age of COVID-19," by Joshua Gans

I found this e-book a useful short guide to the economics of public decision-making in the middle of a pandemic. The book does not make any grandiose claim, but may be a useful guide to explain the economics of the crisis to students (something I guess many lecturers will have to do if not now, very soon, and for some time).
The book starts by explaining why centralized planning akin to efforts made by governments in wartime ("repugnant" in more normal times) is OK in a pandemic. The reason is that coordination is needed in a very short period of time to stop the economy, except for very few essential services. Markets are usually good at achieving coordination, but not when there is an emergency that needs to be tackled without waiting for market incentives to have their effect on decisions and allocations.
Another teachable lesson is that the typical concave-shaped production possibilities frontier of normal times, between health in the horizontal axis, and everything else (or "the economy") in the vertical axis, experiences some significant changes that explain the policy options and cosntraints that governments face. First, in general, there are now fewer feasible allocations because some activities will no longer be possible. Second, the remaining frontier will no longer be concave because of non-linearities. At some point (for example H in the graph) an increase in economic activity will have to be accompanied by a sharp reduction of health, because of the infectious disease. Third (see second graph), progressing too fast on re-opening the economy can be very costly in terms of spreading the disease: if you don't hold your line on social distancing, the production possibilities frontier further shrinks, because many combinations with reasonable health cease to be available.

The subsequent chapters deal with the importance of testing and other technological challenges for gradual reopening. The pandemic is a knowledge problem in the sense that we do not know who is spreading the disease. We can re-open the economy if that is done by those that we know that are less likely to spread the disease. In most places, that is being done in a very generic way, by for example allowing some activities in some regions gradually, but Ganz advocates for a much more fine-tuned approach.
But before re-opening, the best policy to flatten the pandemic's curve is to pause the economy and at the same time try to keep in place the links and organizations that make it possible. The economy should be expanded with keynesian policies only after the disease is contained.
In general, I am skeptical about books being published in a rush. But this one is not over-ambitious and it is based on previous theory and empirical results. There will be an open peer-review process that will finish with a promised second edition in the fall. It will be an opportunity to check how the first one ages.
Although I missed some paragraphs about the difficulty of cooperation between several government levels, both vertically and horizontally, the final words of the book leave no doubt about the importance of achieving global cooperation:
"To buid the global institutions we need to mitigate the costs of future pandemics, we will need that resolve. There are signs of hope (…). Any victory we have over the next two years needs to come with a warning, The eye cannot be taken off the ball. And if you need any guide from history, remember that we did not get the IMF or the United Nations until we had not one but two world wars."

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