William Poole
March 25, 2020
All of us are trying to make sense of what is going on. A few days ago, in the northern hemisphere, we enjoyed the spring equinox; the previous such celestial event was the winter solstice, December 21, 2019. There were some news reports about a new virus in China at that time but few of us paid much attention. Now, only three months later we are confined to our homes, unemployment is surging, airliners are parked. Has the world changed irrevocably forever? Let’s think abstractly to get away from the details of the daily news.
Humans are social beings and cannot live independently. As adults, we may have a good supply of food in the freezer and toilet paper in the pantry, but we cannot survive for more than a few months on our own. Stretch the horizon to 6 months, say, and we are likely as helpless as a newborn baby. The Trump administration’s two-trillion dollar package seems oblivious to this fact. What we desperately need is not a check in the mail but resumption of production. GDP last year was about $21 trillion; Government checks cannot total $21 trillion, and even if they could they would not restore production.
The stock market is extremely volatile, and by that I mean up and down and not the trader’s euphemism for down. Based on the S&P 500 index, last week (Friday over Friday) the market declined by 15 %. Friday the 13th had been a day of hope as the market rose by over 9 %. As of this writing, equity futures were limit down at the open last night and are now down by “only” 0.9 % or so. How can we make sense of our situation?
A human being, sometimes acting alone, sometimes as a family member and sometimes as a member of a collective organization such as a for-profit or nonprofit firm has objectives. One might be to assist his/her firm in profit maximization. We operate in an environment of constraints. That is a fundamental feature of the economist’s model—maximization (or optimization) of objectives under constraints. Over millions of years, humans have changed the constraints. Cave man could not fly; the modern woman can cross an ocean in a few hours when planes are flying.
We now face an invisible constraint—the coronavirus. We cannot see it. We must control it if we are to resume production of goods and services, which we must. The secret is no secret: it is the magic of the market.
Already, according to the Wall Street Journal, a California company I had never heard of—Cephead—has a test about to be on the market that returns a result in 45 minutes. Cephead will ramp up production as rapidly as it can. The Journal also reports that Thermo Fisher, another testing company, will soon be producing 5 million tests a week, and that LabCorp is ramping up testing capacity from its current 20,000 per day.
Let’s talk about greed. Will these companies earn profits from their tests? A dictionary definition from a website says that greed is “intense and selfish desire for something, especially wealth, power, or food.” I like to add, “with utter disregard for the welfare of others.” I have no idea how intense is the desire of these testing companies to produce tests, but I hope the desire is extremely intense.
Making a profit and even a large profit on tests is just fine by me. A large profit will provide the capital for testing companies to ramp up production quickly. Does anyone doubt that these companies will be able to increase production more rapidly than Congress can pass legislation to increase government production of tests? If the private companies miscalculate, they will bear the risk of producing too many tests, or too many surgical masks and gowns.
No one knows the speed with which our scientists will be able to develop a vaccine and/or an anti-viral drug to defeat the coronavirus. It could happen quickly. If so, we will return to normal, possibly sooner than anyone dare hope. Possibly not, of course.
What the Trump administration ought to be discussing, and sharing with us, is how government can get out of the way of the market. What are the administration’s plans to accelerate test approvals? How can the administration best let the market deploy the tests to speed the return of the U.S. economy to full production?
Emphasizing “the government checks are almost in the mail” does nothing to calm our anxieties about when we can go back to work and when our kids can go back to school. This is the uncertainty behind the volatile stock market. Mr. President, we need a plan.
President Trump retains the ability to command. Can he inspire trust? Does his history of tweeting untruths affect our attitudes? For one example, on January 22, in a CNBC interview, he said, “We have it totally under control,” Trump told “Squawk Box” co-host Joe Kernen in an interview from the World Economic Forum in Davos, Switzerland. “It’s one person coming in from China. We have it under control. It’s going to be just fine.” A few days ago, he tweeted, “I always treated the Chinese Virus very seriously, and have done a very good job from the beginning, including my very early decision to close the ‘borders’ from China - against the wishes of almost all. Many lives were saved. The Fake News new narrative is disgraceful & false!” I suggest that the reader look at the Wikipedia article on the history of Trump statements that at a very minimum come close to the edge of untruth.
Can Mr. Trump lead Mexico after attacking Mexicans? Does his current insistence on calling the virus the “Chinese virus” encourage China to cooperate with us? What do Chinese-Americans think of this term? He has belittled many Republican leaders. Does that encourage their full-throated cooperation? Does Mr. Trump understand that this history damages his ability to persuade? To lead?
In his March 11 address from the Oval Office, Mr. Trump said, “This is not a financial crisis, this is just a temporary moment of time that we will overcome together as a nation and as a world.” How does Mr. Trump expect those he has insulted to interpret “will overcome together?”
Think further about optimization under constraints. This model does not assume that people never mistakes. Without mistakes, there would not have been two world wars in the 20th Century. November 3, 2020 is election day. Perhaps I should talk in a whisper, but here is a question: Can we safely assume that desperate politicians will not make serious mistakes as November 3 looms? What kinds of mistakes might they make?
William Poole
Dr. Poole is Distinguished Scholar in Residence at the University of Delaware and Senior Economic Adviser to Merk Investments. Dr. Poole retired as President and CEO of the Federal Reserve Bank of St. Louis in March 2008.
