Delaying a decision in order to gather more information has a value in economics called the real option value. Suppose you need to consider when to shut down the economy for a month or more. You know that will have potential costs, but those costs are like an investment in terms of the benefits associated with reducing R0. The decision to shut down will be the same on Tuesday versus Wednesday unless you learn something in the interim. Suppose you are predisposed to shut down on Tuesday, but there is more information to be accumulated.18 Should you wait?
It turns out the answer depends on the type of information you are expecting to receive. As noted by Ben Bernanke, chair of the Federal Reserve during the 2008 financial crisis, if you are expecting news that will justify and reinforce the decision you were already predisposed to make on Tuesday, there is no reason to wait.19 That information will not change your mind. Instead, the reason to wait is if you receive news that will convince you not to shut down. The only information that gives you an option value of waiting to pull the trigger is news that would cause you to remove your finger from the trigger entirely.
As I write this, it is hard to imagine the information governments were expecting to receive that would have caused them not to act on some type of social distancing. If there was hope, it was not articulated nor in the data. Thus, we are left to speculate. My speculation is that waiting was driven by receiving political news rather than scientific or economic news. Governments may have decided not to shut down if they found that a large proportion of the population would resist those efforts. In many cases, this is why governments implored citizens to engage in social distancing in the hope that they could achieve a reduction in R0 without stronger measures. Those stronger measures included legal requirements to stay at home, which could potentially then be enforced with penalties associated with violations.
In summary, it is important to realize that acting decisively is very challenging. It is more challenging depending on the style of government, the transparency of information, and the competence of the decision makers. In the end, most governments eventually made strong moves to reduce R0, and they did so in a manner that, on reflection, was relatively fast compared with decisions of far less consequence. In retrospect, with situations like this, we may always conclude that governments should have acted earlier. The future question that I have yet to hear a good answer for is: What changes are necessary so that it is possible for decisive action to be taken when it needs to be?
Key Points
1. The mathematics of pandemics means that when the basic reproduction number (R0) is greater than one, the outbreak will not naturally end until a large fraction of the population has immunity.
2. The exponential properties associated with infectious outbreaks, like COVID-19, mean that delay in actions—such as social distancing and identifying who is infected and isolating them—can be very costly in terms of much higher numbers of infections.
3. People will, if given the information, engage in some social distancing in order to mitigate their own risk of infection. However, in making those choices, they neglect the impact they may have on others becoming infected. Thus, governments need to act to ensure that such practices actually take place at a sufficient level.
4. The timing of when to act is a very difficult decision because, in the case of a pandemic, many of its properties are not known at the outset, while the costs of suppression are very high.
3
A War Footing
“It is not easy for a free community to organize for war,” wrote John Maynard Keynes in 1940.1 He was commenting on something very obvious: people do not like to be told what to do. Keynes was frustrated by the inability of political leaders to lucidly explain to the public what needed to be done. Resources had to be allocated to the war effort, and, after that, a clear statement of how the remainder would be shared among the public had to be made. Instead, politicians were glossing over both issues with superlatives and no clear plan. Writing, as I am in March 2020, as politicians announce today what they claimed was unthinkable just yesterday (and I mean that literally), I understand where Keynes is coming from even if the magnitude of the problem seems comfortably lower.
Keynes was particularly concerned that the decisions that needed to be made were numerous and interrelated with one another.
Is it better that the War Office should have a large reserve of uniforms in stock or that the cloth should be exported to increase the Treasury’s reserve of foreign currency? Is it better to employ our shipyards to build warships or merchant-men? Is it better that a 20-year-old agricultural worker should be left on the farm or taken into the army?
He pointed out the obvious. A start was to think about which margin to fix—the standard of civilian life or the war effort—leaving the other as the residual. This had to be decided one way or the other. In our present conundrum, when asked, people would surely say that we should fight the pandemic first and adjust the rest. The fact that, in 1940, Keynes was pointing out that it was not obvious what Britain had decided should give us pause.
It is for this reason that having a clear and resolved approach to holding the line on health is warranted. Absent a clear resolve to place public health first, we end up at a point where we have the opportunity to improve the economy and public health. But when political leaders give in to the temptation to try to achieve both too early, they have failed to contain the virus and, thus, have chosen a lower point with regard to public health. That situation calls for strong measures to move back to what might be possible.
It is a striking fact that even the most market-loving, capitalist nations quickly abandoned the decentralized process of allocating resources in the face of World War II. No one expected the military to use markets to decide where to deploy troops and equipment, but the fact that the rest of the economy moved to a war footing in this way is useful to reflect on. In particular, for the most part, even though they may have flirted for a day with relying on strong advice to citizens, governments in the COVID-19 pandemic realized that was insufficient to their ends and ended up with strict and, in some cases, very strictly enforced policies. More authoritarian regimes were a little quicker to act initially, but the lag could be measured in days for most countries.
Why Central Coordination?
Economists claim that markets are the most efficient way of allocating resources and solving the age-old problem of who gets what if there isn’t enough to go around. Markets are quite amazing in this regard, and every economist has their moment of wonder that markets work. The following is by Thomas Schelling:
Most people, whether they drive their own taxis or manage continent-wide airlines, are expected to know very little about the whole economy and the way it works. They know the prices of the things they buy and sell, the interest rates at which they lend and borrow, and something about the pertinent alternatives to the ways they are currently earning their living or running their business or spending their money. The dairy farmer doesn’t need to know how many people eat butter and how far away they are, how many other people raise cows, how many babies drink milk, or whether more money is spent on beer than on milk. What he needs to know is the prices of different feeds, the characteristics of different cows, the different prices farmers are getting for milk according to its butter fat content, the relative costs of hired labor and electrical machinery, and what his net earnings might be if he sold his cows and raised pigs instead or sold his farm and took the best job for which he’s qualified in some city he is willing to live in.