There were a number of good responses to my previous post, which asked why the death rate in Italy was 100 times higher than in Scandinavia. One answer was that Italy got its cases earlier, and thus patients have had more time to get seriously ill. This hypothesis is supported by the fact that the ratio has already fallen to more like 50 to 1.

But that’s probably not the entire story. France and German cases track each other extremely closely:

And yet France has 91 deaths while Germany has just 8.  In this case, I assume that France has a larger share of infected people who are over 70 years old.

When comparing Scandinavia and Italy, I suspect at least three important factors:

1. The Nordics who are infected tend to be healthy people who traveled to Italy, whereas the Italian deaths are mostly among elderly people who are less likely to travel.

2.  Italian people infected with the virus have had the virus for a longer period of time, as noted above.

3.  A larger share of infected people in Scandinavia have been tested.

Another possible factor is worse medical care in Italy due to hospital overcrowding, although I suspect that’s only a marginal factor thus far.

The lesson here is that extreme events usually have multiple causes.  This is also true in economics.  If extreme events had single causes, then presumably they’d occur much more often.  In my book on the Great Depression I argued that there were multiple policy errors, on both the supply side and the demand side.

People younger than me won’t remember Beamon’s Leap, but I do:

While Beamon received mostly accolades, there also were detractors. The critics harped on the conditions — a following wind of 2.0 meters per second (the maximum allowable velocity for a record), a lightning fast runway and, most important, the thin air of Mexico City. Beamon’s defenders point out that the other competitors, which included the world record co-holders, had the same factors going for them and they didn’t jump close to Beamon.

What a killjoy!!

PS.  Trump should immediately remove the travel ban from China.  We are now in far more danger from visits by Canadian tourists than visits by Chinese tourists.  This should be done even if the original ban was entirely justified (which seems plausible.)

PPS. Over at Econlog, I discuss Boris Johnson’s recent policy changes, and also explain my claim that the US will never experience hundreds of thousands of deaths from coronavirus.

PPPS.  It’s early, but there is some evidence that Norway and Denmark are beginning to get a handle on the crisis.

Left uncontrolled, the coronavirus would probably kill about 0.5% of a country’s population. (Assuming 1% mortality and 50% infected.)
One of my more innumerate commenters doesn’t think that’s very many. But 1.7 million dead Americans is actually kind of a big deal. Most would be over 70, but perhaps 100,000 would be under 70. And since when do 70 year olds not matter?

Of course there won’t be 1.7 million dead Americans from the virus, maybe not even 1% that many. And that’s because we’ll take measures to prevent that outcome. And those measures will likely cause at least a brief recession. (A longer slump will depend on monetary policy choices.)

I look at the data each day, and today’s the first time I’ve seen a tiny sliver of evidence of a slowdown in the virus in Europe. The growth rate finally seems to be slowing in a few countries (especially Scandinavian), from the roughly 33% daily growth rate of recent weeks. Of course East Asia still leads the developed world in controlling the spread of the virus, and the tropical regions still have low totals (albeit rising.) And there have been previous false dawns, so it will take a few more days to ascertain whether the growth rate is actually about to slow.

I’m still confused by the fact that the mortality rate in Italy is 100 times higher than in Scandinavia (7% vs. 0.07%). Commenters always give me explanations when I raise this point, but the explanations are the sort of thing that would explain a 2 or 3-fold difference, not 100-fold. And yet there must be some reason.  Presumably one of my commenters is right, even if the explanation seems implausible.

PS.  I am including Finland as one of 5 Scandinavian countries, although I believe it is actually Nordic, not Scandinavian.

PPS.  I have a new column at The Hill on the Fed and the epidemic.

PPPS.  I was really glad to hear that Walmart and other firms will be opening testing facilities, as our pathetic government is unable to even tie its own shoe laces.  The Pelosi/Trump spending deal seems like a nothingburger, at least in terms of stimulating the economy.  Perhaps it can be justified on egalitarian grounds, as lots of low-income people will suffer during this period.

Here’s Tyler Cowen:

Obviously lower interest rates — ceteris paribus — do indicate the government should borrow more, but as Scott Sumner frequently reminds us: “Never reason from a price change.”

Most of all, it seems that rates, including long rates, have declined because of a flight to safety.  The price change itself is ambiguous, but if you buy that interpretation we should be spending more, and borrowing more, to invest in safety.

I mostly agree with Tyler’s post, but a few cautionary notes. Let’s start with the first paragraph, which I believe many people are likely to misinterpret. It does not imply that, “Normally lower rates would lead you to want to borrow more, but there may be weird cases where it does not, for “never reason from a price change”: reasons. Just the opposite is true. Consider the following slightly different claim:

Obviously lower interest rates do not indicate the government should borrow more, because as Scott Sumner frequently reminds us: “Never reason from a price change.”

Why does adding “ceteris paribus” matter? Because now we are moving along a demand curve for loanable funds, rather than contemplating a shift in the demand for loanable funds. But here’s the problem, interest rates never change, ceteris paribus. If other things are equal, the interest rate won’t change. Thus the fact that interest rates changed is an indication that ceteris is not paribus. Hence the first half of Tyler’s sentence is basically meaningless; it gives us precisely zero guidance as to whether we should borrow more. It’s like saying “other things equal we should consume more oil when prices are low.” True, but meaningless, as oil prices are usually low due to declining demand, as is the case right now

When interest rates fall because the supply schedule shifts right, then there is a presumption that society should borrow more. More often, rates fall because the investment schedule shifts left, in which case there is a presumption that society should borrow less. But even in that latter case, where society should borrow less, it’s possible that the government may want to borrow more, especially the federal government.

[State and local governments are more like private companies, responding to many of the same incentives. Thus borrowing by local governments in the Sunbelt to build schools and infrastructure for new housing developments probably fell in 2009, as the housing market crashed.]

The current crisis may be one of those unusual “savings shocks”, where there actually is a presumption that we should borrow more. More likely, it is both a positive saving shock and a negative investment shock, which is why rates have fallen unusually sharply.

Are low rates a time to borrow, because we want to lock in the low rates on 30-year bonds? Maybe. But a few years ago when 30-year yields had fallen to 3%, lots of pundits on the internet said something to the effect that “now’s the time to issue lots of 30-year bonds and lock in those low rates.” They were wrong. Ditto for when rates fell to 2%.

One argument for government borrowing more today is that it can boost aggregate demand. But monetary policy is a far more effective way to boost AD. In the unlikely case where the Fed is out of ammo you might want to allow the Fed to buy a wider range of assets. But let’s say the government decides that’s too risky. What then? In that case you could issue lots of 30-year Treasury bonds and have the Fed buy them with newly created money.

But even in that case there’s no obvious reason to do more fiscal stimulus. The government doesn’t have to increase spending or cut taxes to issue bonds, it can just create a giant sovereign wealth fund and buy up private stocks and bonds with borrowed money. Fiscal policy (deficit spending) should be based on traditional cost/benefit considerations, not a desire to “boost demand”.

Congress will certainly pass some sort of “fiscal stimulus”, and all indications are that it will be far too small to have much impact. What bothers me is not so much that fiscal stimulus would do great harm at the moment (it would not), rather that it leads us to take our eye off the ball. Why is Congress not using this occasion to give the Fed additional tools? Realistically, the Fed is the only institution in Washington that can have a meaningful impact on the future path of inflation and NGDP. Heck, it’s practically the only institution that is not dysfunctional. If you think that Congress is capable of targeting inflation at 2%, then I have a bridge I’d like to sell you.

People keep asking me what the Fed should do. I’ve been answering that question for 11 years, and my answer is always the same:

1. Stop paying IOER right NOW. It was a mistake from the very beginning in October 2008. It’s a contractionary policy, as even the Fed acknowledges. Why would you want a contractionary monetary policy in October 2008? Why would you want a contractionary monetary policy today?

2. Switch to level targeting NOW, at least during the crisis and recovery. Preferably NGDP level targeting, but more realistically price level targeting.

3. Ask Congress for more tools NOW. One possibility is negative rates, but I much prefer the Fed asking Congress for the right to buy a much wider range of assets. Congress should give the Fed this tool NOW. Even if the Fed doesn’t ask for it.

4. The Fed should buy as many Treasuries (and MBSs) right NOW as required to raised the expected price level two years from today to a level 4% higher than today. Not gradually; buy them NOW.  Only buy other assets when you run out of conventional ammunition (which is not likely to happen.)

Notice that I didn’t even mention cutting interest rates. Interest rates are not monetary policy.   If the Fed does what I suggest then interest rates might well increase. Ten year bond yields are much higher in a world with expectations of robust nominal growth than they are in the world we actually live in right now.

The coronavirus has no bearing on the question of whether the Fed can raise inflation expectations (core PCE) to a total of 4% over 2 years (i.e. 2%/year). It’s simply not an issue. The Fed could create 20% inflation if they wanted to.  What the coronavirus problem does do is make a short recession likely this summer, even in a world where prices are expected to be 4% higher two years from today. But with this policy in place, the hit to employment should be relatively mild. Maybe just “mini-recession” levels. If not, then I shudder to think what might happen to animal spirits, and then investment, and then the labor market.

PS.  David Beckworth has a very good post that makes some similar points.  The biggest difference is that David suggests a fallback provision where the Fed would also be able to use a fiscal facility in a crisis.  That would probably work, but I believe it would be much easier to get Congress to give the Fed the option to buy a wider range of assets than to get them to allow the Fed to operate a fiscal facility.  Congress jealously guards its control over the distribution of fiscal largesse.  Also, Dems and the GOP would not agree on the appropriate level of progressivity.

It’s become a cliché that the Japanese yen is a “safe haven currency”, which does well when things are going poorly in the global economy. I’ve never really understood that claim. What makes Japan a safe haven? And why does the yen do well even when Japan itself is the epicenter of the problem, as with the 2011 tsunami? People have offered explanations, but they seem quite weak, very ad hoc.

In the past, I’ve offered an alternative theory, that Japan’s yen appreciated during times of trouble because Japan was at the zero bound. Because the BOJ could not cut rates further, a fall in global interest rates tends to raise Japan’s policy rate relative to the equilibrium interest rate.  This makes Japanese monetary policy tighter.  In contrast, the Fed tends to cut interest rates when the equilibrium interest rate falls (albeit with a lag.) My theory also explains why the rise in interest rates after Trump’s election had the effect of helping Japan, making their monetary policy a bit looser.

How would we test my theory? Suppose another big economy also hit the zero bound, an economy that could not possibly be regarded as a safe haven. Also assume that the currency in that economy appreciated strongly during a global crisis, even though the epicenter of the crisis was in that very economy.

Of course, I’m talking about the eurozone, which is currently at the center of the global coronavirus problem.  The euro is appreciating strongly:

PS.  My previous post may have created the impression that I thought monetary policy in the US was currently appropriate.  Just the opposite is true; policy is far too contractionary.  Right now, I don’t think it’s useful to give monetary policy advice in terms of interest rates, as the equilibrium interest rate is so unstable.  So here’s what I’d recommend:

1. The Fed should ask Congress for the ability to buy a wide range of assets during an emergency.

2. The Fed should eliminate IOR and buy enough assets to push 12-month inflation/NGDP growth expectations up to the policy target.

NO MATTER HOW MUCH IT TAKES.

But then that’s always been my view.

PPS.  File this under “Karma’s a bitch“.