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Ryan Bourne and Diego Zuluaga come back to the show to talk about how both fiscal and monetary policy are changing drastically to respond to COVID-19.

Aaron Ross Powell
Director and Editor
Trevor Burrus
Research Fellow, Constitutional Studies

Ryan Bourne occupies the R. Evan Scharf Chair for the Public Understanding of Economics at Cato. He has written on a number of economic issues, including: fiscal policy, inequality, minimum wages, infrastructure spending and rent control. Before joining Cato, Bourne was Head of Public Policy at the Institute of Economic Affairs and Head of Economic Research at the Centre for Policy Studies (both in the UK). Bourne has extensive broadcast and print media experience, and has appeared on BBC News, CNN and Sky News, CNBC, and Fox Business Network. He writes weekly columns for the Daily Telegraph and a fortnightly column for the UK website ConservativeHome.

Bourne holds a BA and an MPhil in economics from the University of Cambridge, United Kingdom.


Diego Zuluaga is a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives, where he covers financial technology and consumer credit. Before joining Cato, Zuluaga was Head of Financial Services and Tech Policy at the Institute of Economic Affairs in London. Originally from Bilbao in northern Spain, Zuluaga holds a BA in economics and history from McGill University, and an MSc in financial economics from the University of Oxford.

Ryan Bourne and Diego Zuluaga come back to the show to talk about how fiscal and monetary policy are changing drastically to respond to COVID-19. We are operating in a world of radical uncertainty. We are still unsure of how many people have been infected by the novel coronavirus. Every uncertainty affects how the stock market responds. However, it is reasonable to expect the American economy to boom back strongly in 1–3 years.

How is the COVID-19 recession different than the 2007–2009 financial crisis? What industries are hurt the most by COVID-19? How do you define an economic recession? Is the market a discovery mechanism? Should individuals receive direct support from the government?

Further Reading:

When the Waterbed Bursts, written by Diego Zuluaga

The Unprecedented Stock‐​Market Reaction to COVID-19, written by Scott R. Baker

Minimum Wage Laws Will Weaken Recovery, written by Chris Edwards and Ryan Bourne

Tech Goes Viral (with Alec Stapp), Building Tomorrow Podcast

Libertarianism and the Coronavirus Pandemic, written by Andy Craig

Exploring Wealth Inequality, Free Thoughts Podcast



00:07 Trevor Burrus: Welcome to Free Thoughts, I’m Trevor Burrus.

00:09 Aaron Ross Powell: And I’m Aaron Powell.

00:10 Trevor Burrus: Before we get to today’s episode, I’d like to remind our listeners that if you enjoy Free Thoughts, and you think other people might enjoy Free Thoughts, please rate and review us on Apple Podcasts. Now, to today’s episode. Joining us today is Ryan Bourne, the R. Evan Scharf Chair of the Public Understanding of Economics at Cato, and Diego Zuluaga, Associate Director of Financial Regulation Studies at the Cato Institute Center for Monetary and Financial Alternatives. Welcome back to the show, gentlemen.

00:35 Ryan Bourne: Good to be with you.

00:36 Diego Zuluaga: Thank you.

00:37 Trevor Burrus: Now, we’re all remote, and under the quarantine lockdown. I think Diego is in the UK right now, correct?

00:43 Diego Zuluaga: Yes, that’s right.

00:45 Trevor Burrus: And so, everyone’s going through this, and that’s what we’re gonna discuss today, the sort of economics and policy elements of this lockdown. So, we’re also surely going to enter a depression, although one of you probably can remind me the actual definition of a depression versus a recession, but a worldwide one, in the wake of this shutdown. How does this compare to previous recessions?

01:08 Ryan Bourne: Well, it depends on what time scale you’re talking about. What’s clear is this, this is an absolutely huge unprecedented economic shock, the likes of which we haven’t lived through, perhaps, since the Great Depression, when you look at the fall in activity. So, at the moment, there’s been a fall in day‐​to‐​day activity, somewhere above 30%. So, 30% of goods and services are not being produced, or another way of looking at it, 30% of goods and services that would usually be consumed are not being consumed.

01:42 Ryan Bourne: Now, in terms of the impact of that on GDP, because GDP is an annual measure, it really depends on what the duration of this first stage of the pandemic, how long that lasts. If that were to last just for three quarters… Sorry, one quarter, so three months, for example, you’d be looking at a downturn across this year of about eight and a half percent. Now that’s bigger than the financial crisis, but a lot of economists would imagine that because this is, to a certain extent, a temporary phenomenon, some of that activity would bounce back in the next year. So the central expectation, I think, of many economists, is that when you look at this over a couple of year period, we’re probably likely to lose about 4% of annual GDP, annual output, so a recession equivalent to about two‐​thirds of the size of the financial crisis.

02:42 Ryan Bourne: Now, of course, the big unknown factor here is that, even after this lockdown is lifted, it’s not clear how much immediate rebound there’s gonna be, because it’s highly likely that people are gonna want to continue social distancing all the time there’s not a vaccine for this virus, to avoid becoming infected. So, I’ve always been much more pessimistic than many of the Keynesian leaning economists who kind of think all governments have to do is protect the supply capacity of the economy today, and then ensure demand is sufficient after lockdowns are lifted, because I think even after lockdowns are lifted, there’s gonna be a long tail of this. And, as a result of changes in supply and demand, that are gonna occur as a result of that pandemic, actually there will be a bit of a trade‐​off, from providing relief to try and keep the economy preserved as it was in March 2020, and the new economy we’re moved towards. So, I expect this to be a drag‐​on activity for the next two to three years.

03:47 Trevor Burrus: So, this is a little bit interesting though, compared to, say, the Great Depression, which we won’t have to get into all the different causes of that, but we have this sort of exogenous shock that hits everything, as opposed to this idea that I think a lot of libertarians like, economists in general, that recessions and maybe even depressions, are about reallocating resources to where they should be allocated, and so maybe they’re occasionally good. But is this different, because maybe these resources were not misallocated and the economy was booming, and then it just gets absolutely crushed by this surprising exogenous shock.

04:24 Diego Zuluaga: I think that’s right. The noticeable thing, or the distinctive thing, about what’s going on right now, is not so much that the recession was induced, because we have lots of historical examples of recessions that have been induced by misguided government policy, or by changes in the price of certain inputs that make it challenging for industries to continue to operate in the way that they did previously, but this one has been deliberately induced, with a view to eliminating economic activity, so that countries can contain the spread of the virus. And so, the focus has been, since then, on keeping the structure of the economy as closely to what preceded it as possible, in the expectation that that way things can restart as smoothly as possible, in the aftermath.

05:11 Diego Zuluaga: But as Ryan was noting, the longer we go, the more likely consumer preferences are likely to change, the more likely it is that businesses, even if they get payroll, and utility, and rent support, in the way that a lot of countries have enacted, that they will still be unable to carry on their normal business in the future. I’ve seen some expectations by investment banks that are around 80% of retail businesses may close, as a result of this, of course. There’s a lot of churn in the retail sector anyway, but that’s still an enormous closure rate that they might expect in the future. And so, even if we try to hibernate for however long this lasts, two months, three months, depends on the country, you will still have to have a reallocation of resources, and there will be a loss of intangible capital, and supply relationships, and human capital associated with it.

06:03 Ryan Bourne: Yes, I agree with Diego on that, and there’s two other points worth making on this. A business cycle is something that’s expected by most businesses and you kind of have to plan to a certain extent for downturns and have contingencies and think about that. Foreseeing a pandemic, a global pandemic is a lot more difficult. Now one could imagine major airlines, for example, might have had to plan for substantial disruption to air travel. There’s sometimes events that lead to that type of thing occurring. The eruption of the volcano in Iceland, I can’t remember exactly when it was, but certainly is an example of that.

06:45 Ryan Bourne: But it seems a bit of a stretch to presume that your local Indian restaurant could have foreseen a global pandemic, and have taken out some form of insurance to protect against the loss of business that they’re seeing. The second point I’d make here is that in a generalized recession yes, some industries do tend to be more affected than others, but quite quickly that contagion spreads. The direct consequences of this have been much stronger for certain industries. And Diego mentioned retail, but you can also think of hospitality, entertainment industries, basically any industry where there’s lots of social contact between customers and employees of businesses or crowds. So this is very, very different to the type of ordinary recessions that we might see.

07:40 Aaron Ross Powell: The shift afterwards. So, let’s bracket for a second, the worries about what we call cultural changes of people maybe being hesitant even as restrictions are lifted to actually go back and do the kind of economic things that they used to do. But setting that aside, because it seems like at some point in the future, we will get over those. A lot of these industries that are really hurt are ones that seemed like they will come back, right? There will be interest in restaurants again. It’s not like we’re gonna culturally shift to not being interested in restaurants, and there will be interest in staying in hotels, again. And I’m curious what you think of one of the speculations that I’ve seen about the long‐​term effects of this is consolidation in those industries. Because all of the mom and pops, the small businesses are the ones that really, they don’t have the cash reserves or the infrastructure to ride this sort of stuff out, so they’ll close. And the bigger players, the chains, the massive hotel conglomerates are the ones that will still be around and they can buy up all of the empty real estate and left over materials for pennies on the dollar, and so the long‐​term result is not fewer restaurants, but more chain restaurants.

09:02 Diego Zuluaga: I think that’s a perfectly plausible possibility of what will happen. In an ideal world, you want to have businesses close that don’t satisfy what people want, so that whatever resources they’re using can be re‐​deployed to areas that are more productive. The danger that often has been the case with government policy during recessions, for example, the Great Depression is a salient case where the Federal Reserve keeping money very tight for years meant that a lot of perfectly viable businesses closed. The danger is that when you have that kind of situation, the costs of re‐​allocating resources exceed the benefits from having new people, new businesses take up the old resources, and that’s a net loss to society that ideally we want to avoid.

09:50 Diego Zuluaga: In terms of consolidation, I think a lot of industries are likely to see it if nothing else, because now this pandemic has shown that there is a risk in a lot of business operation that perhaps haven’t been taken into account by companies, but I don’t know that necessarily this will be less the case the bigger you are. Some of the biggest businesses in the world have been affected by this, and particularly because they are large and they try to optimize their capital structure; how much they borrow, how much equity they hold, how much cash they keep in the bank.

10:22 Diego Zuluaga: They’re often operating on very tight margins, and this disruption has really took them over the edge. And a lot of the government intervention since have been to try and provide liquidity to bridge the gap so that these businesses can continue business afterwards. We can have a discussion as to whether that’s on that desirable or not. But you might have small businesses where people hold more time catch for longer or the programs work more effectively, or people can re‐​deploy themselves more easily. And so you might have churn at all levels of company sizes.

10:56 Ryan Bourne: Yes, so I’d agree with Diego on that. Just two points. First of all, I don’t accept the premise of the question, I don’t think, Aaron. Because in certain activities, such as going to movie theaters, for example, for years, there have been the build up of alternatives to that. Many more people watching movies that are now released directly to streaming services like Netflix. One could imagine that this accelerates that trend, and actually we might not see a return of as many movie sectors, even after this has past. But it’s also worth remembering. It depends on the set you’re looking at on the terms of impact on consolidation.

11:32 Ryan Bourne: One of the businesses that has been most affected, it has been like a dagger to the heart of its business, this pandemic, is Disney. Now if you look at Disney, the main activities of that company are the running of theme parks, the delivery of new movies to theaters in particular, sponsorship and oversight of certain sports and delivery of cruises. Now every single part of that business is gonna be completely rocked. Disney has to a certain extent, diversified by releasing last year, its streaming service. But if it hadn’t done that, its revenues would be plunging to near zero right now. Could have made some money off its back catalog of movies, but it’s very small in terms of the proportion of revenue that it would be attaining day to day.

12:21 Ryan Bourne: So I don’t think it’s necessarily true. We can make the general observation that this will necessarily be worse for small businesses and lead to more consolidation because certain large businesses in those sectors that we mentioned earlier are completely being rocked by this.

12:37 Trevor Burrus: It’s interesting ’cause in the big picture, like this conversation is, it’s part of the way we believe in the market; that the market is a discovery mechanism. So I think I’d like to… Diego, you mentioned this idea of extending liquidity and this question of maybe restaurants will fundamentally change going forward, because people’s preferences will change and so the question of an efficient restaurant will be one that can operate with half the capacity that they used to have. And that might be true for 10 years, the foreseeable future, but we don’t wanna block these processes by which the investment in new types of capital, use of capital, for the purposes of people’s demand, satisfying demand, that investment doesn’t need to be blocked. So talking about that liquidity question, is it a difficult one for libertarians? And the question of saying, you know, do we need to give these businesses a little bit of a life raft and then turn the economy back on. Or should we kind of avoid that?

13:35 Diego Zuluaga: Sure. So first of all, the moral case, so to speak, for liquidity support is that in most cases, while the lockdowns… Sorry, while the declining economic activity was already starting before the government mandated lockdowns, the real sharp decline in economic activity began when governments mandated that people stay at home and mandated the closure of all non‐​essential businesses. And so when you have the government mandating that, making people unable to carry on business as usual there’s an expectation, at least by some people, that the government should then provide ways by which these people can find… Can sustain themselves for the period of time the emergency lasts. It’s as if the government had instituted a program that was a benefit to all and it had to pay for people’s cost‐​of‐​living for a period of time.

14:28 Diego Zuluaga: Now, it’s a very uncomfortable position for libertarians because we don’t like necessarily government to be in such a position as to mandating the conduct of people’s lives. But these are exceptional circumstances and they demand exceptional measures in one form or another. On the economics of it, the textbook would say that if you have a viable business that is temporarily under strain because of some sort of exogenous factor or war or something along those lines, that there would be a case for extending it liquidity, because it can continue doing business and so to speak, this is a temporary situation. Maybe people’s expectations are misplaced and losing it would be more damaging than the… Than the benefits from the resources spend, whatever they may be, in providing the liquidity plus the re‐​allocation in the future. And for a lot of businesses, I think for some period of time, that is true. But of course as time passes, businesses go from being viable and the relationships that they have from being valuable, to deteriorating over time. And so regardless of what their initial viability may have been, the case may change. And that’s a question that is difficult to gauge at this stage, but it also clearly will become more relevant as time passes with these lockdowns.

15:56 Aaron Ross Powell: This raises the question about the debate on how the government should be providing financial support during these times. So on the one hand, you could have the government providing these loans to small businesses to basically keep them economically viable until this gets until this rides out. And as part of that, they can then continue to pay the salaries of their employees, even if those employees are… Their productivity has basically dropped to zero. The other option is to support the people directly through something like either the stimulus checks we got or a guaranteed minimum income or more robust unemployment benefits, that if you lose your job. But it seems like both of those then, understanding what you’re saying have significant risk.

16:46 Aaron Ross Powell: So on the providing money support to businesses, you get into the situation of: How long are these businesses viable? Are you propping up businesses that shouldn’t have been around? Are you preventing the restructuring of the economy that we need for long‐​term growth? But on the other end of things, it seems like you’re encouraging people to not be productive in the sense that you’re encouraging them to stay home or at least incentivizing them to work less, which then means that whatever economic activity there would have been, isn’t really happening because there’s not going to be any businesses that can find employees to do it. So, how do… Is one is one better? And how do we deal with those trade‐​offs? And I guess, is there a third alternative that would get around some of those problems.

17:34 Diego Zuluaga: Right. I think it’s a question and a very hard one to answer at this stage. I think the implementation is really what tilts the balance in favor of one or the other. What we’re seeing in the US is that a lot of the programs that are being implemented are, first of all, setting a precedent for Federal Reserve involvement in basically all credit markets in America. But also government back stopping of all economic activity that is dangerous to the extent that it can continue into the foreseeable future. Because of the design of these programs as well, they were hastily designed. The goal is to get funds to people as quickly as possible, rather than do proper screening and underwriting of any lending that happens. And of course, a lot of these programs involves forgiveness for businesses. There’s also likely to be a lot of fraud.

18:24 Diego Zuluaga: And finally, the nature of the political process makes it so that bigger businesses are able to lobby before more funds and so even with a the small business administration, which was meant to help inject $350 billion worth of loans into the small business sector. A lot of that money has gone to some of the largest business applicants and some of them are related to big franchise brands that weren’t the primarily intended beneficiaries of this these. So all of those things complicate the effectiveness of this and also don’t necessarily follow the spirit of the program. I am generally partial to support… Direct support to individuals because it tends to facilitate the adaptation and the reallocation of resources over the medium term that we like to see. But also you could have grants to businesses in the same way, assuming that these are all viable, and let them spend it as they see fit, rather than have these intricate loan programs, some of which, some of which are forgiveable and other are not and so on.

19:33 Ryan Bourne: Yeah, I’m actually more sympathetic to the idea of the support for businesses, but I think Aaron set out the alternatives well. There is a big near‐​term economic cost to letting good businesses go‐​to‐​the‐​wall. And although Diego is right in that direct support to individuals would facilitate the most rapid adjustment to the new economy, there wouldn’t be that trade‐​off in terms of relief of keeping newly unviable businesses alive. That would come with a big near‐​term cost that I think could have risked severe economic contagion and potentially financial contagion as well. But what you can’t really do, and which Congress tried to do, was to do both. So they tried to get as much money out of the door. They introduced this Paycheck Protection Program, which is loans that are then forgiven if firms keep people on their payroll. And at the same time, they introduced much more generous unemployment insurance, adding on a $600 per week addition to ordinary state level unemployment benefits for people laid off as a result of COVID-19. And the problem there is that these two programs, to a certain extent, are now working against each other. Firms that are in difficulty, naturally, because the business people wanna keep their business alive, are seeking to, all the problems that Diego mentioned not withstanding, apply to the SBA for loans from this paycheck protection program.

20:58 Ryan Bourne: And they know that, if they keep their workers on, most of that loan will be forgiven. Now, at the same time, the unemployment insurance for many workers means that being unemployed and claiming unemployment insurance is financially preferable in the near‐​term to being kept on by your employer, from being kept on to payroll. So what we’re starting to see in the media is stories develop where an employer discusses with its employees, particularly small businesses, that it’s applying for the loans through this paycheck protection program. And the employees are getting angry at their employer because they know that if they were able to obtain unemployment insurance instead, they would be financially better off.

21:44 Ryan Bourne: So as a result of trying to do both, of walking and chewing gum at the same time, to a certain extent, the federal government is making the recovery more difficult, because more individuals are choosing, or prefer to be on, unemployment insurance. And that means that even if lockdowns are lifted in the near‐​term, the supply of available employees for many businesses that have been struggling won’t be there. And in the nearer term, of course, the more employees badger their employers to lay them off, the less of those paycheck protection program loans that will be forgiven. So employers are being put in an incredibly difficult situation where, for the viability of their own business, they wanna keep as many people on as possible if they’re able to obtain one of these loans, but the employees of the business quite often have a financial incentive to be laid off.

22:43 Trevor Burrus: Now we’re seeing governments around the world… I think maybe America takes the cake in this as usual, with unprecedented levels of spending. I think I’ve seen some estimates that show we might have a $6 trillion deficit this year. How does that compare to, say wartime deficits as a percentage? And does this concern you in the long run having essentially tripling what would usually be our deficit in a year?

23:10 Ryan Bourne: Well, you’re essentially then talking about, if I’m doing the mental arithmetic quickly in my head, a budget deficit over 20% of GDP, and wartime sometimes they go up much higher than that. So it would be significant… It would be the most significant budget deficit outside of war time. And as a consequence of that, of course, you build up the accumulated debt. And I believe I’m right in saying that most people estimate that as a result of this, the debt‐​to‐​GDP ratio will exceed 100% of annual GDP, such that this will be the highest debt level that has been accumulated, certainly since the Second World War.

23:54 Ryan Bourne: So that kind of puts it into context. Of course, the broader context here, is that over the next few decades, as a result of aging and the acceleration of demographic‐​related spending on social security and Medicare, as a result of those two programs, the federal government has these huge contingent liabilities that it’s on the hook for. And so when previously we’ve had debts of this level, particularly after World War II, many countries tolerated much higher inflation in the subsequent decades to try to inflate away some of that debt. That becomes much more difficult when you’re sailing into commitments that are either inflation proof or real demands on government activity. So it’s much, much more difficult to inflate away the debt that is being accumulated today, given what we’re gonna see in the next few decades. And I think it’s very highly likely that as soon as this is over, after a couple of years, we will see a big discussion about emergency tax rises and quite significant tax arises for a short time.

25:03 Diego Zuluaga: I share Ryan’s concern and the only silver lining that I can see is that hopefully this experience teaches us that there are unforeseen circumstances in which levels of expenditure that no one had expected may be needed in the short term. And that, therefore, running permanent structural deficits, in the way that most Western countries have done for the last 20 years or so, particularly to sustain the big health care and Social welfare programs that they run that they’re unsustainable. Because you cannot, like Italy, find yourself hit by a national emergency of this kind, which is basically unavoidable and where an increase in spending will happen, and a declining GDP will happen with coming in with public that 130% of GDP and unemployment at 8, 9, 10, 11% of GDP. I’m sorry at 10, 11%. And then expect to come out in a position to deal with that. So hopefully that will prompt a re‐​thinking.

26:10 Trevor Burrus: We’ve also seen a lot of development at the banking sector in the CARES Act. We’ve seen some alteration to mortgages and we’ve also seen a lot of activity from the Fed. Now most of that I don’t actually understand, but Diego, that’s more your area. Is that kind of quantitative easing and whatever else they’re calling these kind of activity and within the banks, is that something that… Is a good idea the way it’s been done?

26:40 Diego Zuluaga: It’s enormous, and so difficult to assess in aggregate at this stage. Part of it may be justified to the extent that changes in expectations and fears of the disease cause financial markets to seize up. And so you ended up with a classic liquidity crisis, which is what central banks have in the past often being called upon to address by injecting liquidity into the system. They purchase assets and therefore, enable transactions to happen, and they prevent big declines in prices and fire sales and a full‐​fledged panic in that way. But the Fed has involved itself, not only in financial markets in the way that it does buying and selling treasury bonds, buying and selling some of the highest quality corporate debt and so on, but by lending to essentially every business of every size in America, either directly or through the bond markets. Because the Fed is providing liquidity to all the facilities that the Treasury Department has set up to help small businesses through the SBA program, through what is called a main street lending facility, which is meant to lend to larger businesses directly, and then to buy bonds that are corporate, commercial real estate bonds which are certainly not without risk and various other instruments.

27:58 Diego Zuluaga: So this intervention is historically unprecedented. At least as far as I’m aware, some of the programs were active during the Great Recession, but there have been a raft of additional programs added since. And the big question is whether the separation between fiscal policy and monetary policy can be maintained in that context because with the Fed getting involved in so many debt markets, yes, the Treasury can put up some share of the capital. And that share of the capital can take tax payer losses. In which case it would preserve the distinction, but ultimately if that buffer isn’t big enough, you find yourself in a situation where the Fed is doing fiscal policy. And obviously, there have been in addition proposals in congress, particularly by Democratic members, to have the Fed engage in monetary financing of the debt to try and deal with some of the indebtedness that will result out of this. So I think on the whole it’s a very concerning set of events and of course having happened in an emergency, it’s bound to lead to an over‐​reaction and setting a precedent that we may regret.

29:10 Ryan Bourne: You said it… You asked, Diego, “Is this a good idea?” Ordinarily, economists would judge macroeconomic policy on the degree to which they smooth over the business cycle, prevent shop volatility in output and GDP, and also whether then in the longer term have a deleterious effect on the sustainable growth rate of the economy. We’re in a very different situation today. The aim of both, the policies that Diego’s outlined there from a monetary perspective but also fiscal policy isn’t really to stimulate the economy. The aim is not to drive up GDP because of course, in order to deal with the public health consequences, the pandemic, we’re deliberately closing down much of the economy. It’s much more to avert this public health crisis becoming a broader financial crisis, whereby if people are unable to pay their bills, they default on their bills, things pass up a chain and then it puts banks and other financial institutions in trouble. So it’s much better to think of these extraordinary measures that are being taken as trying to prevent the floor falling away from the economy rather than trying to stimulate it.

30:27 Ryan Bourne: Now, the real question is, as we rebound into what I suspect will be a robust recovery ’cause I expect we’re a dynamic economy, relatively flexible labor market. I think when things do open in earnest, and I’m talking about after the end of the pandemic here, not necessarily after the end of the lockdown, there will still be a discussion about the degree to which the federal government should stimulate the economy and the Fed should stimulate the economy in various ways. I think that’s an interesting conversation and potentially a very dangerous one because we’re not really gonna understand until we’re out of this crisis what the supply capacity of the economy looks like. And if we would really try to ramp up demand in a world where there are still severe supply constraints we could see quite wild price changes in certain markets, and a lot of resources being allocated very inefficiently as a result. So, that debate will come, but for now, it’s important to realize that the aim isn’t to stimulate the economy, as much as prevent this turning into a longer… A deep depression with bigger scarring consequences.

31:42 Aaron Ross Powell: Given how grim a lot of what you’re describing sounds and how many worries both of you have expressed about not just the short‐​term, but the long‐​term state of the US and the global economy, what’s going on with the stock market right now? We saw when the lockdowns began, and it was clear the pandemic was here, the stock market plunged but it’s now regained a significant portion of those. And we’re recording this on April 23rd and it’ll go out in a week. So there’s a worry that this question will sound terribly dated by that time, but it continues to climb back up. And why is it doing that if the long‐​term economic output is as troubling as what you’ve articulated?

32:30 Diego Zuluaga: Primarily because capital markets tend to operate on expectations. And so whatever you see in capital markets often tends to reflect what the view is of the future. And I think as we approached the global spread of the pandemic in mid to late February and early March, first of all, people were very uncertain about how big the spread would be, what the length of shutdown in economic activity would be, how quickly China could recover and that was probably priced in and it was probably priced in with a premium of security. People were leaving risky asset markets and going into government bonds, going into cash in a bid to avoid future fluctuations. And so, when we hit bottom… We, by the way, had the quickest bear market in American history during this period. Once those events have transpired, then expectations are readjusted. And I think some of the correction upwards is a reflection of that. It doesn’t mean that it’s correct, by the way and it doesn’t mean that the market couldn’t go down again, but I think it reflects the greater availability of information in the sense that countries are past the peak, that some countries perhaps haven’t had the health crisis that they expected and also the fact that economic activity in China seems to be picking up even if not as much as official Chinese statistics are telling us.

33:56 Ryan Bourne: Yeah, so I agree with that. A few… It just made me laugh actually when Aaron asked the question, ’cause a few weeks ago, I remember seeing on television there was like a ticker tape at the top of the screen saying, “One of the best weeks for the Dow Jones in goodness knows how many years.” And then at the bottom of the screen, it said, “Unemployment in the US, initial unemployment claims up to 60 million.” And those… Somebody watching that who wasn’t attuned to economics might think there’s a huge discrepancy there. I think it’s worth emphasizing a point that Diego made that we’re operating here in a world of radical uncertainty both about the virus itself, the effectiveness of measures to contain it, how many people have actually had it, whether there are policies alternatives to lockdowns that could see many businesses resume activity safely. Any new information that gets fed into that in a world of quite strong uncertainty tends to lead to big shifts in people’s investment activity, but one point I would make as large as all the effects sound, it’s just worth re‐​emphasizing the point I made in my first answer is that most economists would expect once the pandemic is over that there would be quite a rapid rebound. In economic terms, we are talking about disruption, I think, for one to three years.

35:25 Ryan Bourne: That may sound an awfully long time, but in the grand sweep of history, it’s quite a short time to be dealing with an episode like this and workers still have their skills right now. The factories and offices still exist. They’re not being destroyed as a result of this. It’s true, a lot of economic relationships will be torn to shreds as a result of sustained lockdowns and depressions of activity, as liquidity crises quickly become solvency crises, businesses fail and it will take some time for resources to reallocate, but there’s no reason not to expect when this passes that the American economy won’t rebound strongly. My contention though is that it won’t rebound to where it would have been had the pandemic never existed. I don’t think we’ll be looking a Back To The Future recovery for a variety of reasons, but I don’t think we should overdo the longer term doom and gloom because this is still an incredibly vibrant and dynamic economy and then of course, an economy is made up of people and their ideas and they will still be there after this crisis passes.

36:40 Diego Zuluaga: I agree and I think that’s a very important point and one that we should keep in mind because it has policy implications. Every industry during a moment of crisis will bring itself up as key and fundamentally viable and just affected by short‐​term problems, but not every industry like that is solvent. And there’s a danger that we assume that a business going into bankruptcy means destruction in the way that Ryan described, destruction of assets as would happen in a war. The fact is, as Ryan described, that the factories will remain, the employees will keep most of their skills and be able to use them, and the business will simply go into some sort of… Some of them, of course, sadly will go into liquidation, but most of the larger business will probably be repossessed by the creditors and they would restructure them in a way that makes them viable again. That’s a fundamental part of a thriving market economy and one dangerous outcome out of this might be that we think that the best is to just freeze things every time we have a major crisis happen, that’s not the lesson.

37:43 Trevor Burrus: That’s an interesting analogy. I was gonna bring that up myself about destruction after a war, say in, post‐​war Germany or post‐​war Japan had, absolutely devastating with the destruction of office buildings and capital and those recovered pretty quickly. Well, it seems to be that the question now, which is, we’ve come up a little bit here, it’s how much have… Will things change in terms of people’s behavior, even if these rules change? Let’s talk a little bit about getting out of the lockdown. I know, Ryan, you’ve written a little bit about this. What’s the best way of kind of doing the cost‐​benefit analysis when we’re thinking about how to ease some of these restrictions and comparing it to the economic costs to the costs borne by the disease?

38:25 Ryan Bourne: Well, let me talk about how most economists have done it and then outline where I think there are some problems. What most economists do is they take a epidemiological model of how many people are expected to die if we do nothing in this phase in this virus and then look at the epidemiological models for how many people could be saved with quite suppressive measures and that comes to a large number, usually over a million Americans saved if you have a lockdown compared to doing nothing. Then what they do is they take an economic concept called the value of a statistical life which tends to be obtained by looking at how people make decisions in labor markets about the amount of risk that they’re willing to bear and how much they have to be compensated to deal with that risk, to then work out, how much implicitly people value their lives.

39:19 Ryan Bourne: And when you do that, you come to a very, very big number. I think the federal government uses 9.3 million per life, so what it’s quite common for people to do is take that number, multiply it by the number of lives saved and then say, and that usually comes to a huge number by the way, some studies of depending on how many lives saved come to say eight million, eight trillion sorry, benefit to lockdowns and then, what people, a lot of people conclude from that, is, “Okay, given that huge benefit from the lockdown, we should be willing to tolerate eight trillion worth of one‐​time output losses in order to deal with this virus and that’s over a third of GDP.

40:06 Ryan Bourne: So that’s what many economists do and they stop there. I think there are big problems with that approach and I’ll just quickly go through four of them. The first is that there’s a huge contention about how we should value life for people of different ages. One might say that an 80‐​year‐​old and obviously, that’s the biggest risk group is the over‐​80s from this virus, even, you can work out life expectancy, but one might imagine the, because you’re less able to do particular things after a given age, that the value of life in a kind of economic term, is lower than perhaps for the general population, so some people would adjust by that and use the value of a statistical life year and look at life expectancy at 80 rather than a full life value of a statistical life. The second thing is obviously, there’s huge uncertainty over the number of lives saved by lockdowns, particularly in comparison to a world of social distancing. I don’t think it’s appropriate to model this, the value of a lockdown or the benefits against doing nothing.

41:17 Ryan Bourne: We have alternative seems to me a huge degree of voluntary social distancing, which we were seeing even prior to the lockdown. The third problem is the GDP losses saying, “Oh, because there’s eight trillion of benefits from this, we should be willing to tolerate eight trillion in GDP losses”, it doesn’t account for the fact that when we’re locked down at home, we’re losing a lot of non‐​market liberties too, the ability to see family and friends, the ability to take part in particular sports and they have value, very difficult to value effectively, but they have value too which would lower the GDP losses, we should be willing to tolerate. And just finally, ’cause I know I’m droning on, of course this whole debate quite often frames implicitly, the discussion as lockdown against no lockdown or doing nothing, when in reality there are a huge range of things that we might think about doing in terms of safety protocols in industries, in terms of isolating just vulnerable individuals, in terms of allowing people of certain ages to go out, a whole range of things that we could model.

42:33 Ryan Bourne: And just because lockdowns might be preferable to doing nothing, it doesn’t mean it’s optimal. What the government should be looking to do, if they’re gonna use this cost‐​benefit framework, is try and find the policy set that minimizes the total economic cost of this virus, so that’s the health cost and the economic cost too. So they’re the changes that I would make to reviewing this and when you do that, it’s a much finer balanced discussion. I accept there’s a huge degree of uncertainty that was faced, so I understand why people decided to adopt the lockdowns, but from here, we should be really looking at on what margins can we maintain low risk at a much lower economic cost.

43:15 Trevor Burrus: Well, that seems not different than something that’s been bothering me a bit because it doesn’t seem different. It’s extraordinary times where the cost benefit analysis is still pretty much the same, where there seems to be some group of people who believe like public health experts will be the ones who tell us that it is “safe” and then we flip the switch and turn the economy on again. But public health experts don’t actually know what level of risk is acceptable to people because that’s a personal economic choice, so we need to change our paradigm that we won’t just reopen the economy, it’ll be some people who have, who feel like they have less risk to themselves who need… Can’t work from home, will be more willing to take a risk to get the virus than other people and that’s the conversation we should be having. And then in the face of these lockdown protests with people criticizing them, just let the scientists tell us what to do, that seems like the wrong approach.

44:06 Diego Zuluaga: One thing that’s, sorry, I was just gonna say that one thing that has really impressed me from the outset of this pandemic is the way in which private institutions and companies and just the private side of the economy has been able to come to arrangements that try to mitigate the worst effects and the biggest dangers of these, while at the same time reducing the economic damage cause. So a lot of people will say that it was, of course, it was the Congress acting and passing the CARES Act that really changed things but in fact, a lot of banks were already providing forgiveness and forbearance and dealing with their customers in special ways to try and smooth the impact of this before you had any legislation. Similarly, around the world, you’re seeing employers try and find ways to provide masks and tests and other medical supplies that are needed to work safely, while at the same time ensuring they could go back into business as quickly as possible. So having a situation in which the people who bear the cost are also the ones making the decisions, and that they have an incentive to help the people around them and understanding that that is the case, I think will be very important as we can out of the lockdown.

45:24 Ryan Bourne: Yeah, I agree with Diego on that. Obviously, from an economic perspective, thinking of this, this is a big externality problem. And what I mean by that is, ordinarily, economists think about people optimizing their behavior, but may not on paper take into consideration the impact of their behavior on others when making decisions. So, the usual kind of market failure framework would then have somebody come in and say, “Well, the government needs to act, because rational individuals wouldn’t be acting to try and prevent this spread of this disease to the extent that they should, except for trying to avoid contracting the virus themselves, so therefore, we need government intervention. And perhaps because of how difficult it’d be to impose some type of tax on people interacting, some regulatory suppressive measures are necessary.” What I think Diego showed there is that, as a result of those economic interactions that we make every day, what that framework forgets is that there are very, very strong incentives for people who are meeting regularly, people who are employing people to provide safety protocols that internalize some of that externalities. So, they account for some of that externality, meaning the degree to which you need suppressive regulatory interventions is diminished.

46:54 Ryan Bourne: I think that’s really important. We saw it not just in terms of changes in behavior, with fewer people going on flights and to restaurants even prior to the lockdowns being implemented, but also, we’ve seen it in countries with the lockdowns to a a certain extent too. I was reading today, for example, that in the UK, the government there had assumed a whole bunch of proportions of the populations that wouldn’t comply with the lockdown. And what they found is that people have followed the rules much more strictly than they assumed, which suggests that their models of what people do rationally insufficiently account for that altruistic behavior and that internalization of the externalities that Diego highlighted there.

47:48 Aaron Ross Powell: One of the things people seem particularly bad at, and we can see this in a very vivid example in our response to September 11th and terrorism in general, is thinking through the likelihood of, or the risks from exceedingly rare events with high costs, and that we have a tendency, not just governments but individuals, to overestimate how likely these risks are. And so, we’ve been talking about people adjusting to the risk of this pandemic, like you go back out and there’s a risk that you get infected by COVID-19, and how do we weigh those risks. But what potentially worries me in our ongoing response to this is how people respond to the potential risk of another pandemic. It’s been 100 years since we’ve had something arguably on this scale. These don’t appear to happen all that often. But is there a worry that we permanently make changes in the long term, whether that’s reducing global supply chains because we’re worried about international travel, or cutting immigration, or just engaging in deep cultural change that’s based on everyone now thinking that the next pandemic is right around the corner.

49:10 Ryan Bourne: Well, I think there’s almost two different issues there. The history of pandemics appears to suggest that what they do is accelerate political and social trends that were occurring beforehand. And of course, some of that was a re‐​rise of protectionism and these very mercantilistic arguments about trade. And so, I suspect that this sorry episode will be used as a precursor to trying to explicitly repatriate a whole range of supply chains particularly in medical goods. So I do worry about that. And one reason that I worry about that, of course, is that no two pandemics are ever alike, and a tendency through history is to try and fight the last war, almost. Lots of people had thought that there was a risk of a global pandemic for a long time, but they expected that pandemic to be a flu‐​like pandemic. Now, you could do some planning for that, and you could build a stockpile of things like ventilators and masks, and by all accounts, they’ve come in useful, but some of the medical reading from the past couple of days appears to suggest that maybe this virus operates in a way differently to just a respiratory disease.

50:29 Ryan Bourne: So, we could have prepared for a flu‐​like pandemic, but if then a future virus has very, very different characteristics, then the preparation that we’ve done may not be applicable to that scenario. The second point I’ll just make though, is that I don’t think it’s very easy, when it comes to issues like this, to write down in the same way as you can with terror attacks, and you can vary the assumptions based on where you live and what the demographics of the population are like, and you can come to some sort of number of the risk that you might die in a terror attack, and I know that people do lots of that analysis. Here, we’re talking about quite radical uncertainty. We’re still very, very unclear as to how much of this virus is actually in the population, still unclear about the degree to which it leaves permanent lung damage or other damage to people who’ve had even episodes with mild symptoms, and there’s a huge range of uncertainties about what pre‐​existing conditions actually worsen your prospects.

51:38 Ryan Bourne: And of course, not everybody knows whether they have pre‐​existing conditions. So, whilst I think that type of risk analysis is something that we have to infuse in the public debate, particularly around how people interact and which activities reduce risk best, given what we know, it’s worth having a bit of humility and recognizing there’s a huge degree of uncertainty here. So, one can understand why people in this case might be more precautionary than would a full and proper examination of risks in the… In a situation where we have perfect knowledge, how much risk people should be willing to take on.

52:17 Diego Zuluaga: One notable thing to me about this pandemic is that it’s happened at a moment when we have affluence that in the west we’ve had for a while, but around the world has only begun to come in in the last two, three decades. And my own perception of the response is that it reflects the ability to… The fact that we have the resources to deal with the lockdown and keep people home, and we have the information to react relatively rapidly to these events in a way that we didn’t in the past. But I think one potential downside or risk from this is that we become excessively risk‐​averse. This is a trend that scholars had noted for some time in the last couple of decades; Tyler Cowen in The Complacent Class, we also saw it in regulatory policy where there’s a lot of focus on minimizing the adverse side effects and aversion to building and changing environments in a way that might be risky, and so on. And I do worry that culturally, this will reinforce that trend, where this will become precisely, Aaron, as you were pointing out because of the immediate availability bias that we have that… And this is such a striking event that is being broadcast and tweeted constantly at us, that that will reinforce trends that make us precautionary, but in a way that is in the long term damaging to our own progress and the development of future healthcare, as well as other kinds of well‐​being enhancing activities.

53:53 Ryan Bourne: I think there might be two potential different schools of thought as we come out of this. One of them was actually, I saw in an essay by Marc Andreessen a few days ago, and I think what some people would take away from this is, “My God, we have been complacent on a whole range of issues, and actually, lots of our institutions and the regulations that they put out have gummed up much economic activities such that it’s much more difficult to flexibly prepare for these crises but also react to them when they hit.” So I think one potential political movement that you might see as a result of this is actually the opposite of what Diego just said, in that you may get a pushback for quite extensive re‐​invigoration of American frontier capitalism, and that might come in regard to actual government activity, true, but also might mean a quite radical de‐​regulation, as well. Now, I don’t think that’s likely, but I think that could be a political movement you see.

55:01 Ryan Bourne: The other flipside though is that we might see something, like Diego has alluded to, where we do become risk‐​averse, where people say in particular that this episode shows that we should act hugely and destructively now to deal with the climate change issue with quite suppressive measures to suppress economic activity. And I think that’s a tension that we’re gonna see as we come out of this, those two different conclusions about what this means for how we operate as a society, and the implications of policy I think is gonna be quite fraught. And people are already trying to write that history already, [chuckle] whilst we’re in the middle of the pandemic.


55:50 Aaron Ross Powell: Thank you for listening. If you enjoy Free Thoughts, make sure to rate and review us on Apple Podcasts or on your favorite podcast app. Free Thoughts is produced by Landry Ayres. If you’d like to learn more about Libertarianism, visit us on the web at www​.lib​er​tar​i​an​ism​.org.