COVID and the Curves. 16.04.20
Welcome to The Plague Pit issue number 6.
This is the first of several guest issues I’ll be posting between my own contributions from time to time. There’s a guest issue coming up shortly on ‘Plagues in Literature’ and another on what it’s like to be a homeless person during the pandemic. In issue 6, I’m delighted to introduce my Wall Street correspondent, Mr Fabio Savoldelli, who has kindly sent us this.
The Plague Pit is shining a light on the difficult choices that lie at the heart of medicine. COVID-19 will also illuminate a horrible, but immutable truth about economics.
All economics, at the core, is about exchange. You can never have “enough” of anything people want to satisfy everyone. The roots of the popular definition of economics as “a dismal science” are actually horrid, (1) but the fundamental meaning (see “You Can’t Always Get What You Want” by London School of Economics alumnus Mr. M. Jagger) applies now.
As a result of the concept of exchange all economics is rife with “curves” illustrating choices available. One may wish to dig 100 feet of ditch a day, and thus would face the classic “capital versus labour isoquant curve.”
“Isoquant” = “constant quantity” = (in this case) 100 feet per day. This can be done completely manually. To do this one would hire 20 persons, each person happily digging away at 5 feet per day, and at the end of the day the 100 feet are dug. This would require almost no “capital,” just the cost of the spades, but a lot of labor.
One could reduce that labor through the addition of a JCB digger (“backhoe” here in New York) and with the digger need only 12 people. This reduces labor markedly, (8 people) but increases capital spent: JCB’s are not inexpensive. (2)
One could get a second JCB and likely reduce staff by 5 people, so have two diggers and seven people. Note that the first digger reduced labor by 8, while the second only by 5. If we get a third JCB, the reduction in labour would be even less than 5 people. We only have seven people on our works site, and if we fire 5 them it is hard to run three diggers with two people…
But not impossible: one could devise a robot to run the third digger. Capital costs will skyrocket, but labor involvement will decline.
This is exactly what is happening in Japan (3) where labor is expensive. Fundamentally, every owner, and every economy, will find a combination of labour and capital that “works” for them. In some countries labor is lower cost, and capital expansive. In others (Japan) labor is expensive. The tradeoff curve looks something like this:
Economists, if we are good at anything, are good at curves like the one above.
But what happens when we are trading off lives for economic growth? That is the hideous choice facing policy makers around the world. The contrast is stark.
President Trump is correct when he states “We have to open our country again. We don’t want to be doing this for months, and months and months”. (4) Obviously we do not. No one “wants” that. The economic damage is clear, and the deep recession also has human cost (5,6) as recession is linked to expanding suicide and depression.
This being America, Texas Lieutenant Governor Dan Patrick took an extreme view. He is willing to risk death to restart the economy, no less. “No one reached out to me and said, ‘As a senior citizen, are you willing to take a chance on your survival, in exchange for keeping the America that all America loves for your children and grandchildren? And if that’s the exchange, I’m all in.” (7)
In America it is only the State Governors that can order all business to stop, not the President. New York Governor Cuomo eloquently outlines the “lives first” argument: “Because you cannot put a value on a human life. Nobody cares how long it takes to get the economy up and running if you actually saved lives.” A fine sentiment, but will he really keep Manhattan closed because there is infection in Buffalo, 416 miles away (about the distance from London to Edinburgh)? Governor Cuomo went on to say “…it’s a false choice to say public health or restart the economy. Nobody’s going to make that choice, and by the way, if you have to make that choice, it’s public health.”
Actually, somebody is “going to make that choice.” And it is going to be Cuomo in New York and 49 Governors in state capitals from Sea to Shining Sea.
Bending the (trade off) curve, losing less lives per unit is the question now, baring a “silver bullet” of a miraculously found vaccine. More on the new curve in another note.
Fabio Savoldelli
(1)https://www.econlib.org/library/Columns/LevyPeartdismal.html
(2)https://plant.autotrader.co.uk/classified/advert/jcb/excavators/202004068870359
(6)Lin, Y. H., and W. Y. Chen. 2018. Does unemployment have asymmetric effects on suicide rates? Evidence from the United States: 1928–2013. Economic Research-Ekonomska Istraživanja 31, no. 1:1404–17
Mr. Savoldelli is an Adjunct Professor of Finance at Columbia University, teaching the Hedge Fund course in the MBA program. Previously, he was Chief Investment Officer for Optima Fund Management, a fund of funds. An industry veteran, Mr. Savoldelli was Managing Director & Chief Investment Officer at Merrill Lynch Investment Managers Alternative Strategies, CIO for the Americas at the Chase Manhattan Private Bank and Deputy CIO & Head of Fixed Income and Foreign Exchange at Swiss Bank Corp. Mr. Savoldelli received a DBS from the London School of Economics and a BA in Economics from the University of Windsor in Canada.