Forced to make cruel choices

V. V. Chari is the Paul Frenzel Professor of Liberal Arts in the University of Minnesota Department of Economics and an adviser to the Federal Reserve Bank of Minneapolis.

By V. V. Chari, PhD
In the last five weeks, more than 26 million Americans have filed for unemployment benefits. To put this number into context, note that in February about 160 million Americans were employed. In a matter of a month, well over 13 percent of employed Americans lost their jobs. 

These staggering losses are 10 times bigger than anything we’ve ever seen in American economic history in this short a time. And the economic pain is surely just starting. 

If current rates persist, we could soon be in a situation where upwards of 30 percent of the workforce is unemployed, a number greater than during the Great Depression of the 1930s. But ignoring the virus could lead to the death of millions of Americans. The pandemic forces us to make cruel choices among unhappy alternatives. 

Current public policy can fairly be described as incoherent. The original rationalization for the mass quarantines in which we have engaged was to allow the virus gradually to infect a large fraction of us, in the hope that we would achieve herd immunity. The process was intended to be gradual to prevent the healthcare system from being overwhelmed. 

Ironically, the healthcare system as a whole is extremely far from being overwhelmed. This system is now operating well under capacity, with many hospitals facing bankruptcy because they do not have enough paying patients. Despite this evidence, the current rationale is that we will extend mass quarantines long enough to eliminate all infections, or until we find a vaccine. This policy has horrific costs which we are only now beginning to see. 

The only sensible solution is dramatically to expand testing capacity, to trace potentially infected people and to isolate them. All this can be done along with a drastic relaxation in government restrictions on economic activity. But the number of tests we are conducting has been stable for a week, with no signs that we are willing to invest in dramatic expansions of testing and tracing. The population most at risk consists of old people, especially those with other comorbidities. The political system clearly puts a huge weight on saving older people, who, as always, seem to exercise disproportionate political power. 

Biggest losers

It is worth asking every grandparent how much additional risk they are willing to take to ensure a better life for their grandchildren. Let us make no mistake in understanding that the biggest losers from current policies are the bright 18-year-olds whose lives will be ruined if we enter into another Great Depression. Where are the grandparents willing to ask the political system to change its policies? 

No matter how the virus turns out, it is clear that the new world that we are creating will be very different from the old one. We will have to get used to the idea that economic activity will shift away from restaurants to home-delivered food, from cruises to remote camping sites, from movie theaters to Netflix and Hulu. Some industries will see decline; others, growth. 

The adjustment process will be painful. While this adjustment occurs, we should all anticipate considerable turbulence in our retirement portfolios. The usual advice financial planners give will be even more relevant for retirees: Stay the course and be prepared for large movements in stock and bond markets.

The most important advice for all of us: Maintain social distancing and personal hygiene—and stay safe!

Publication date: 
April 27, 2020
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