Zugzwang!

In the past week, I watched a BBC interview with Anders Tegnell, who is the Chief Epidemiologist in Sweden. He is taking his country on a different path, refusing to implement a lockdown to achieve social distancing in the face of the COVID-19 pandemic. The logical question is why he has decided this, and the BBC asked him that.

Tegnell pointed out that closing Sweden’s schools could force 20-25% of the workforce home to care for the children that are not at school. Then, assuming those workers are evenly distributed across all sectors, you would lose up to 25% of the health care workers, which he maintains Sweden cannot afford to lose. It’s an interesting counterargument. Tegnell does not argue that other countries ought to make the same choices he has for Sweden, but that each nation has to decide where to place its bets and live with the consequences.

Right now, as Andrew Cuomo often points out, there are three bottlenecks at play in COVID-19 medical response:

1. Supplies of personal protective equipment (PPE);
2. Staffing: the availability of health care workers at various skill levels;
3. Hospital intensive care unit (ICU) beds and ventilator equipment.

Based on study done in February 2020, it does not appear that Sweden has the surge capacity at the ICU level to handle a steep increase in COVID-19 patients. It is this kind of consideration that has made other countries, including most of the United States, implement shelter-in-place orders and minimize social contact across household units. All the same, losing 20-25% of your health care workers is also a substantial hit.

This is illustrative of a larger pattern that we will see over and over again during the coming year. Not only do we face multiple constraints, but they influence one another. Without adequate surge capacity, we have more patients in hospital with greater severity of illness. This exposes the health care workers to greater risk, which is amplified if we can’t provide them proper PPE. If we lose functioning health care workers to the disease, we further reduce hospital capacity, starting down a vicious cycle.

All this discussion has only considered immediate public health issues. The lockdown also has secondary consequences on physical and mental health. It fans out into the economy. We have experienced over 16 million new unemployment claims in the past three weeks. Having workers come off their employers books is particularly troubling, because there is no assurance they will have an employer to which to return. Even if the employer survives, management may not want to return to pre-crisis staffing levels.

Governments will find themselves in situations where all the choices are bad. In chess, such a situation is called zugzwang, a German word meaning move-compulsion. You have to make a move, but any move you make leaves you worse off. You can’t satisfy all the constraints.

Which is worse, to keep people moving around and let Grandma die, or shelter in place and let the economy die? Yes! Both alternatives are terrible. The scale of the perils makes it hard to get your mind around them and discuss them intelligently. Governor Cuomo said, “We’re not going to put a dollar figure on a human life.” But, as The Economist observed, when he said that, he just did assign a dollar figure: infinity.

Yet by brushing trade-offs aside, Mr Cuomo was in fact advocating a choice—one that does not begin to reckon with the litany of consequences among his wider community. It sounds hard-hearted but a dollar figure on life, or at least some way of thinking systematically, is precisely what leaders will need if they are to see their way through the harrowing months to come. As in that hospital ward, trade-offs are unavoidable.
— Leader, The Economist, 2 Apr 2020

Governor Cuomo is not alone in arguing against assigning a dollar value to a human life. I have met other adults over my lifetime who have expressed similar ideas. It is not a universally held belief, but it is quite common. Let’s restate this position as the preservation of human life is incommensurable with other policy objectives. This is an ethical position; acceptance of it, as Cuomo does, or rejection of it, as The Economist does, is informed by a person’s basic moral beliefs and the way that person makes decisions. Some American citizens accept the belief; others do not. The country belongs to all of us, and we must be able to come to a common decision how to go forward collectively. It’s a difficult circle to square, requiring political creativity.

People who become doctors and nurses tend to have strong preferences for the maintenance of life. They are going to provide recommendations that weight the risks of health care issues higher than the risks of economic consequences. The function of the executive is to consider the recommendations — and the biases — of the various experts and make sensible decisions.

If you do put a dollar figure on a human life, it should be a high dollar figure. Not only do individual lives matter, but, because we are a Western culture, we believe that human lives are means and not ends. We are very reluctant to call upon people to make sacrifice of themselves for corporate societal objectives.

These issues illustrate the immediate possibilities for getting into zugzwang on emergency response decisions. Additionally, there are all kinds of possible second-order effects as the dominoes fall. What if the virus runs wild in a rural area that is part of our food supply, and which is also a health care desert? According to NBC, there are 161 rural agricultural counties in the US with six ICU beds among them.

The COVID-19 crisis has economic effects on both supply and demand. The demand-side effects produce behaviors that are very similar to those of a classic financial crisis. No one knows what’s coming. People and firms who are directly affected, such as those in the restaurant, retail and travel businesses, can’t continue to spend. The rest of us want to stay liquid as a risk response, so we don’t want to spend. Liquidity means cash or dollar-denominated items readily convertible into cash. As we hang onto cash, the money multiplier shrinks and the economy seizes up.

The central bank can’t control the money multiplier. In normal times, the bank can influence it, but these are not normal times. The voice of the virus is louder than the voice of the central bank manipulating the federal funds rate, which my Intro Macroeconomics teacher used to call “the interest rate at which the Federal Reserve doesn’t loan to other banks” (Ah, the good old days). As economic activity crashes and actors increase liquidity, the money multiplier goes into free fall. Decision makers don’t care what the cost of capital for a project is; they don’t want to tie up cash so they defer the project. Lenders tighten up standards because the overall risk picture is worse. Return of capital, which can no longer be assumed at prior levels of confidence, becomes a higher priority than return on capital.

The Fed does control the monetary base, and it is an entirely responsible action to increase the monetary base to make up for the shrinking multiplier, acting as a brake on economic decline. If the Fed had done this in 1930, the Great Depression likely would never have become great.  But:

Begin with the end in mind.
— Stephen Covey (1932-2012)

We will come out of this pandemic. When we do, and economic activity resumes, how does the Fed work the monetary base back down? If the Fed does not do so, we will have a nosebleed inflation. Or worse, massive residual unemployment and a nosebleed inflation.

Treasury Secretary Steven Mnuchin at least appears to apprehend the importance of cash, which is much closer than accounting to real life. Many small businesses are under-capitalized; it is very hard to raise capital when you are starting a business. The common recommendation is for the business to have enough cash reserves to cover 3-6 months of expenses. Many business owners would simply laugh at that. A poll of 500 small business owners and operators in March found that over half of them could not keep the lights on for one month without cash coming in.

Households are no better off. While the often-repeated factoid, “Almost 40% of Americans can’t cover a $400 emergency expense,” is not accurate, the accurate statement is that, in 2018, only 61% of respondents said they could cover such an expense with cash on hand. Another 27% indicated they would have to either sell an asset or borrow to cover the expense, while the remaining 12% said they would have no resource available to meet the expense. And in 2018, the headline US unemployment rate was hovering around 4% and there were plenty of willing lenders available.

In a crisis, lead time is a critical resource. You need lead time to ramp up production of COVID-19 test capacity. You need lead time to stop making consumer goods and switch over to making medical devices. You need lead time to set up a financial assistance program and roll it out to the banking people who must implement it. To squander lead time is an act of criminal negligence.

A good plan violently executed now is better than a perfect plan executed next week.
— General George S. Patton

Even with the effects we can foresee, the picture is not pretty. The more we are forced into crisis-paced responses today, the less freedom of action we will have tomorrow. There are many ways to get into zugzwang. By definition, there are no good ways out.