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The Calculus of Lockdown

Lockdowns have become commonplace as a way to prevent or stall a flare-up in Covid-19 infections.  The justification for a lockdown must be more than just saving the life of the 1% or so of those who get infected since there are significant costs placed on the broader community.  These costs can be as minimal as not being able to enjoy a movie or as great as forcing a company into bankruptcy and subsequent unemployment.  A full cost-benefit analysis should be undertaken to justify a lockdown,

Cost-benefit analyses are very difficult to do, as this blog entry by Ryan Bourne of the CATO institute points out https://www.cato.org/blog/cost-benefit-analysis-lockdown-very-difficult-do-well .  But as with many economic questions, while it is difficult to make conclusive inference about the absolute effects of a policy, it is a lot easier to make inferences about changes in policy from one state to another or from one point in time to another.  The Calculus of lockdown is very useful.

When the Covid pandemic first emerged, very little was known about the disease itself.  Just over a year later, we now know that older people are more likely to suffer severe effects while younger people are more likely to spread the virus.  The genetic structure of the virus was quickly deciphered and a number of vaccines developed and approved to protect everyone with the most at risk innoculated first.  Contact tracing has become a science.  In fact, there is an enormous body of knowledge that can be mobilised to generate a picture of what an effective lockdown should look like compared with one year ago. So what should an effective lockdown look like now compared with a year ago?

First and foremost, with the majority of the most vulnerable in the community already vaccinated, the benefit of any lockdown policy is largely negated – saving lives is no longer a justification if there are no deaths to be had!  Second, since the young are more likely to spread the disease, schools, playgrounds and sporting arenas are worth restricting. Third, and most importantly, since the benefits side of the ledger is lower, the costs that the policy imposes on society should also be lower.

This Calculus suggests that policies that aim to extinguish Covid at all costs are not justifiable.

Covid Notepad 3…plus a comment on Brexit

If there was one thing that was certain to flow from the Covid-19 pandemic, it is the volume of fascinating new research into the way people and governments react to the danger that the virus creates.

You may recall that early on in the crisis there were dire predictions of breakdown in the health systems’ ability to cope with ever-increasing numbers of infected patients.  The UK government was reportedly swayed by some damning projections from the ‘Royal Epidemiologist’ at the Imperial College London using their proprietary model.  The model, subsequently, was found to be full of programming bugs, poorly documented, enhanced by piecemeal and elementary in construct. Desperate times call for desperate measures but they also call for an intellectual upgrade in understanding societies’ reaction and policy options.

Here are some constructive discoveries from mathematicians and statisticians around the world…

  1. Ghader, Zhou, Lee, Zhou, Zhao and Zhang (“Observed mobility data reveals social distancing inertia” 2020) got some data on human mobility in the US from mobile phone companies on a mass, anonymised basis.  They calculated the number of trips and average number of miles traveled each day by each person (i) before the onset of the epidemic, (ii) immediately after it became news but before government lockdowns etc were ordered and (iii) after lockdown. They find that not only did the population cut their trips leaving home by 50% when the emergency became news in March 2020, this voluntary ‘social distancing’ took place before any government regulations were imposed.  They further find that the voluntary distancing reached a new average level after 2 weeks and subsequent attempts by government to further limit movement proved futile. The bottom line is that individuals reacted  faster and voluntarily to the Covid epidemic, while policy makers were late and ineffectual
  2. Elie, Hubert and Turinici (“Contact rate epidemic control of Covid19: an equilibrium view” 2020) build on these observations, delivering an elegant upgrade to the standard SEIR model used by the likes of Imperial College.  They posture the common externality where individual action has no marginal effect on virus transmission whereas collectively it does. That is, if I lock myself in a room I dont get sick, I bear a lot of cost BUT the virus rages on outside without me.  However, if everyone locks themselves in a room, we all avoid sickness and suffer costs BUT the virus is eradicated.  In their framework, there is an incentive to self distance voluntarily to not get sick and this naturally spills over to the aggregate endogenously, thereby reducing the spread of the virus.  Their numerical simulations suggest that the probability of infection falls to 62% from 80% in the standard model. They go on to introduce a powerful government to stamp out the virus.  This imposes almost double the social costs on society. The bottom line is that social distancing is a logical response to an epidemic thereby attenuating the viral spread while government restrictions are not very well appreciated by the population.

…a comment on Brexit

Governance, dispute resolution and fisheries, we are told, are the 3 issues impeding a cooperative Brexit. Lets deal with each issue simply and realistically.

Governance refers to who controls the quality standards applying to the exchange of goods and services.  The EU wants the UK to follow their standards.  The UK, on the other hand, wants to set their own standards, be they higher or lower than the EU.  It is hard to imagine a compromise on this question since this is the whole point of leaving the EU!

Dispute resolution refers to the jurisdiction that has authority to mediate a dispute.  The European Union wants the European courts to have jurisdiction while the UK wants UK law to apply.  It is hard to imagine a compromise on this question since legal sovereignty, again, is the whole point of leaving EU!

Fish.  British waters are home to fisheries that the EU want access to FOR FREE.  Again, the whole point of leaving the EU is to regain ownership and control of your resources.  The obvious compromise in this disagreement is for the UK to charge the EU for access to British fishing grounds.

Put simply, Governance and Dispute Resolution are the two ‘biggies’ that have no other solution than abandoning the Brexit idea altogether.  The EU and the UK should just accept this and let competitive forces determine the outcome.  The market mechanism has its own way of deciding on quality standards (the economics of price and cost) and dispute resolution (contracts specify the jurisdiction that will apply in the event of a dispute).  After 4 years of ineffective government attempts to fulfill the UK’s decision to leave the EU, finally the market is set to take over.  The market mechanism will quickly and efficiently find a way.

 

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Is Covid 19 an election issue? What is Vegas saying about Trump?

Is a Government’s handling of Covid 19 an election issue?

Several elections have been run during the pandemic.  In most cases, the governing party has sought to portray their handling of the Covid 19 problem as testimony to their credentials.  Singapore’s ruling PAP, for instance, made the Covid 19 issue central to their credibility.  New Zealand is on its way to the polls in September with their Prime Minister’s popularity having been bolstered by the apparent success is eliminating the virus from their fair shores.  The US election happens shortly after.

The election result in Singapore surprised many with a 10% swing away from the Government.  The obligatory post mortem found disenchantment amongst young voters on many issues but the Covid 19 response was virtually absent from any blame.  This suggests that Covid 19 is not an election issue in the minds of voters.  This stands to reason, actually, since the Covid 19 event is purely external to any Government policy choice that had been made prior to it appearing.  There are many ways to deal with the emergency – lock down, test extensively, sponsor research etc etc – and voters expect their Government to act responsibly but it may be that this cannot be exploited by the ruling party as an election issue.  The fact is that the same or similar reaction would have taken place regardless of who is in power at the unfortunate time of the pandemic.

That voters neither apportion credit nor blame on the particular Government in power for how they deal with Covid 19 should be a wake up call for New Zealand Prime Minister Jacinda Ardern and the Presidential twins Joe Biden and Donald Trump.  Ardern could suffer an embarassing swing against her and be ousted from office while Biden cannot paint a general picture of Trump’s incompetence based on Covid 19 – after all, the virus is not Trump’s fault.  Blaming China, on the other hand, may well resonate with the US electorate…

What is Vegas saying about the US Presidential election?

As of today, the Presidential betting favours Biden over Trump.  Biden’s odds of winning are odds-on 8/11 while Trump is 7/5 against (data courtesy of oddschecker.com). Those of you astute enough to analyse the implied probabilities from these quotes will notice that there is something wrong with this market.  Biden’s probability of winning is 0.579 while Trump’s is 0. 417, which if you add the probabilities together comes to 0.996.  The problem is that no self-respecting bookmaker would quote a market that is unfavourable to themselves. The mathematics of bookmaking defines a ‘fair book’ as when the probabilities sum to one whereas bookmakers try to ‘overround’ to make a profit which happens when the probabilities sum to more than one.

My suspicion is that a punter would find it hard to take Trump at 7/5.  You may recall that the day before the 2016 election, Trump was offered at 5/1 while Clinton was 1/11 (the overround on this market being 1.083 or an 8.3% commission for the bookies). In fact, the brainstrusts at the UK bookmaker Paddy Power had paid out the Clinton backers a week early only to have to pay the Trump backers as well upon his upset win.

Vegas won’t write Trump off just yet.

 

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Covid notepad 2 : Observations and opinions

Government v covid 19: I

Suppose you are the leader  of your country and your chief medical officer came to you with one of the following two statements:

A. “We have detected the rampant spread of a new virus that will kill 10% of those who contract the disease.”

B. “We have detected the rampant spread of a new virus that will kill 1 in 10,000 of those who contract the disease who are under 70 yrs old and 1% of those over 70yrs old.”

What do you do? Clearly, statement A is cause for alarm and justifies radical action from both a social and economic perspective.  Statement B is discomforting but hardly cause for policy action that will force sectors such as restaurants, travel and entertainment into forced bankruptcies and pushing the unemployment rate up 10%.  The policy response to Statement B would be to take action to contain the spread of the disease and protect those most at risk.

Back in March this year, the chief medical officer for every country on earth could justifiably have communicated statement A and the Government could equally have justified the draconian lockdown/shutdown policies that followed.  But now, with the benefit of hindsight, the facts suggest statement B to be the correct one thereby modifying the appropriate policy response…right?  Not so right…

…a second wave of the Covid 19 virus is flaring up in many countries with the response such that partial lockdowns have been commanded in places such as California and Australia.  Borders that were to open remain shut.  Governments globally are openly cautioning that if the pandemic reignites then they will revert to their draconian controls.

As with everything that is repugnant or causes costs on our society (for example crime, pollution, violations of human rights abuses) while the noble objective might be to eliminate covid 19 entirely, the economic cost may well exceed the benefit.  Just as there is an optimal amount of crime in society there is also an optimal amount of covid 19.  Lets hope that this threat to eliminate covid 19 is a scare tactic rather than a genuine policy option.

Government v covid 19 : II

Suppose you are the leader of a country that has successfully eliminated covid 19. You now turn your mind to re-opening your borders. You ask your chief medical officer,

Dear Leader:  What is the chance of covid 19 re-emerging if we open our borders?

Chief medical officer: Absolutely and without doubt I am 100% certain covid 19 will re-emerge no matter what you do

This is arguably the clearest case of ‘Winners Curse’ one could imagine.  Winning the battle against covid 19 simultaneously commits your society to a life of isolation, just like Robinson Crusoe!

New Zealand has achieved this position.  In the 1960s and 1970s NZ was one of the most regulated and closed economies on earth under the Robert Muldoon government.  That isolationist stance didn’t turn out so well, so upon his ouster NZ adopted a radical transformation of policy the country embracing deregulation and free markets.  NZ prospered.

How ironic it is that the country has returned to its autarkic past! The pandemic is forcing the country into isolation once again, with all the lost trading opportunities. What NZ needs is a good dose of Covid 19 to bring them back into the real world!

 

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Covid 19 notepad: Observations and opinions

1. Pandemic preparedness
It is curious how the general media seems to think that every nation should have sufficient medical resources available to deal with the strains of a pandemic. Investing in five times the average daily demand for medical resources in case a pandemic happens is both suboptimal and ludicrous.

The US spends 18% of GDP on health care. If a pandemic requires 5 times this amount of medical resources then the US would be spending 90% of GDP.   Comfortably coping with the rare pandemic event means that the US would almost always have beautiful but empty hospitals , a lot of doctors and nurses standing around doing nothing and little money left for anything else.

Some countries can be criticized for not having a plan to deal with a pandemic but none can be criticized for not having idle resources.

2. Governments are not good at letting go
Lockdown is a hard decision to make but unlocking is even harder. China is tenuously relieving its restrictions in Wuhan with little fanfare while the rest of the world bunkers down. But what is the path back to normalcy? What milestones trigger relief? Very little guidance is coming from governments on these questions.

If you think policy errors have been made dealing with the rise of the pandemic, just wait for the policy errors that are about to happen as the virus abates.  The UK’s 3-year procrastination over Brexit – how to leave the EU? – is the prototype for the pending policy procrastination over Covid 19 – how to restore civil liberties?

Governments are good at passing laws and regulating activities.  They are the wrong people to put in charge of deregulation

3. Air travel will never be the same
It took a decade for the government to allow proper cutlery on aircraft again following 9/11’s policy requiring that airlines use plastic only knives and forks. What is air travel going to look like post-Covid 19?

The main issue for every country in the future will be ‘imported’ cases of the virus.  This means detecting and excluding passengers arriving from another country carrying the virus.  Controlling virus importation will probably require every passenger to present medical proof that they are Covid 19 – negative before checking in.

Once this policy is put in place, how long do you think it will take before the government will let you book an air ticket without a Covid19 negative test in hand at check in? So long as the Covid 19 virus remains in circulation the answer is ‘probably never’.  So here’s a business opportunity – develop a simple yet accurate Covid 19 test and market it through vending machines in airports globally…

On thing is for certain, gone are the days of a quick trip to Bali for the weekend. The days of mass-airline transportation are similarly gone.

4. Autarky

Movement restrictions on labour spill over into movement restrictions on capital and future trade transactions are similarly reduced.  The world is taking a backward step towards Autarky, the extreme case where each economy is self-sufficient in producing what it needs and the gains from trade are left unexploited.  Robinson Crusoe made do on his desert island but pined for civilisation and a friend or two.

Trade could be the biggest resource cost of the Covid-19 in the long run.  The Wealth of Nations just got smaller…

 

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