Kevin Murphy on the Economics of COVID-19

Well, good morning, everybody and welcome to Dimensional Thought Leader Series. I'm Mark Gochnour, I'm the head of Global Client Services. And I'll be joined today by Gerard O'Reilly, our co-CEO and CIO. Now just in terms of what's coming as part of the Thought Leader Series in the next couple of weeks, next Tuesday, we'll be joined by Robert Novy Marx, and then we'll do a deeper dive into the data. Take a look at some of the different variables out there, like intangibles, think about how that can impact expected returns. And then the following Tuesday, we'll be joined by Darryl Duffy. He is a professor at Stanford and he's also an independent member of our mutual fund board here at Dimensional. And he'll be reviewing some of the work he's done around interest rates, the bond market and the impact of Fed decisions. So a lot of wonderful things coming here in the next couple of weeks. Now in terms of today, we have a very special guest joining us, Professor Kevin Murphy from the University of Chicago. An incredibly well respected, incredibly well, very talented economist, I should say. And he's gonna be sharing some of the work that he's been doing around the costs, the trade offs that we have to make as a society around the COVID-19 virus. So a lot of really, really good information to get into here today. And Gerard, welcome. Thank you. It's good to be back in the studio with you. Good to be back. For our webcast. I know this particular webcast with Professor Murphy, you've been especially excited about for today. Absolutely, for two reasons. One, the topic is very interesting, very, very relevant to what lots of companies and people are dealing with right now. The other is I've seen Professor Murphy present on a number of occasions. I'm always astounded by how good and great a job he does but I always take away some real nuggets of wisdom from his presentation. So both of those get me very, very excited. So today we have Professor Kevin Murphy, who's the George J. Stigler distinguished service professor of economics at the University of Chicago Booth School of Business. Now he's won many awards over the years. In 1997, he was awarded the John Bates Clark medal, which is a prize awarded every two years to the best American economist under the age of 40. In 2005, he won a MacArthur Fellowship, also known as a Genius Grant, and he was the first professor at a business school to do so. The professor has work that spans many decades and many different topics. He takes economic principles and applies them to real world problems. He's worked on topics such as unemployment, such as inequality, such as climate change, such as valuing medical research. Truly a great breadth of topics. Now, his work is characterized by great originality and also a really deep command of the tools that economists use. I've had the pleasure to interact with many of his colleagues over the years, and they all describe him in very much the same way; brilliant, very brilliant, unusually brilliant. And that's saying something given who his colleagues are. So today, we're very fortunate to be joined by the professor. And the professor is going to talk to us about some of the COVID-19 related policies and their economic impact. So welcome, Professor Kevin Murphy. And I see you're joining us from your workshop today. Is that right? Yeah, this is my office space that I have inside my workshop. We have a woodworking operation here that builds basically custom furniture and you might guess there's probably the biggest demand these days is for desks from all the people who have moved home from the office and want a better desk than they had the day before. There are some things that are booming businesses these days. I would say my woodworking business doesn't fall in that category, but that aspect of it is seems to be doing pretty well. Very interesting, I've heard professor that in every piece, you purposely introduce a flaw to make it unique, is that true? Well, I like to make that excuse for when somebody finds a flaw, but no. A big part of it is really trying to capture some of the natural beauty of the wood. And we don't try to make that pristine piece that you might get somewhere else, we try to do something that brings out some very natural beauty. And that often means leaving some of the natural flaws that are in the wood there, or leaving a piece a little bit curved, or something that adds a unique touch texture to it. So I would say that's mostly true. Very, very interesting. Well, you're a man of many talents, and today, you're going to be talking to us about some of the work that you've done recently in a paper that you published recently with some of your colleagues about the kind of economic effects of COVID-19 policy. So what have the impacts been so far? How do we measure? How should we think about these questions? Yeah, well, let me start with just a little bit of background and a little bit of how we started thinking about this problem. Actually, you mentioned earlier that Bob Topol and I have done some work, looking at the value of health and longevity. And one of the things we noticed is, if you measure it over, say, the 20th century, the improvements in health in terms of longer and better and healthier lives, basically rival the growth of material wealth in terms of overall person's well being. So when you think about what makes people better off, you wanna think about well, yes, things like having more goods and services and a more enjoyable life is important. But health is right there along with it. And we used to talk about a kind of hypothetical choice, which is I would take you back 100 years in time and I would let you take either the health you had today back. So you would have today's longevity, but you'd have to go back to say, the 1900s' living standards. Or I would allow you to take the wealth you have today, but you would have to go back to the life expectancy and health conditions of the early 20th century. And our numbers suggested that was a tough choice, and suggested that health was right there along with economic growth, in terms of what motivated, what really made people better off. And I think the experience of this pandemic kind of brings us to that same point. Pandemics are a big deal. And when I used to give that talk on health, I used to talk about pandemics and they show up, we might think of them as major pandemics, basically once a 100 years type event. They're very, very significant in the sense that if you go back to the 1918-1919 flu, it was like erasing 20 years of economic progress for that one year that we suffered through the Spanish Flu at the time. And therefore, pandemics, when you put them on the scale with other potential natural disasters are right there, probably the leading one that I would say we should be worried about. And so when this one came around, you knew the cost of it were gonna be hard, we're gonna be high. But we didn't quite know how we're going to bear those costs. And like most things that happen in the world, you can either decide to take your medicine in terms of direct costs associated with what happened. In this case that would be suffering with reduced life expectancy, more deaths, more health costs. Or we could try to mitigate those things through our actions. And what economics tells us is given the high cost associated with loss of life, what economists often call the value of life, willingness to pay to avoid death, it was clear that the pandemic was gonna have a big impact. What was not so clear was whether that impact was mostly going to be in terms of lives lost, or mostly in terms of economic disruption. That's sort of a choice that we as a society have to make. And given the magnitude it was gonna be an important choice, and it was something that was going to play out. And one of the goals of economics is to try to understand the choices that we make. You can think about it from two points of view. One, what we call positive economics, that is try to predict what's going to happen. That is what is economics tell us about how people are going to respond? We can also talk about what we call normative economics, that is trying to say, what should we do? What should the response be? What public policy decisions, for example, makes sense? What we tried to do in this paper and this is a paper I did jointly with Bob Topol, who I'd worked with earlier on the value of health and longevity work, also with Casey Mulligan, who's also a professor at the University of Chicago, who I think many people are aware of has done a lot of macroeconomic work on the costs and benefits of various government policies and who is a major contributor to much of what I'm going to talk about here today. So let me ask, any questions on that you might have? So in terms of your analysis so far, how are those costs stacking up? Is more coming from the life side of things, or more coming from the economic side of things? And I have a graph, and that's very, very good question. So we've prepared a graph. Let me try to talk a little bit about it. This, you can think of as a bar chart that tries to track the cost to the US of the pandemic. They're added together. So the left hand axis measures the cumulative cost. Since early March, there were very little costs either direct or indirect before that, so this is really the cost of the pandemic in the US to date. And that's in billions of dollars. So that 1,000 up there at the top would represent a roughly a trillion dollars worth of cost. And this runs through early May. So we've incurred roughly a trillion dollars in cost according to these calculations. Okay, most of those costs show up as the red bar. That is the cost associated with the adjustments we've made to adapt to and deal with the pandemic. The blue bars represent our estimates of the direct cost of the pandemic in terms of lives lost. One thing that's on here, and it's part of the economic cost is that out of pocket costs with things like hospitalization and things like that, it turns out that those numbers are very tiny on this scale. That is on this scale in terms of the cost borne by the economy as a whole, the actual direct medical costs are really quite small. And that's gonna be true for most of the discussion we're gonna have. When you think about costs and benefits, the big costs are number one, cost of lost lives, that's the blue bars. And the cost of the other efforts, primarily reduced output and reallocation of people's time that's occurred in order to avoid having more of those blue bars, okay? So professor, would it be fair to say then, that some examples of those might be lost time in the workforce, lost schooling? What are some examples of what goes into the red bar there? Yeah, there's some very important ones. Probably number one would be people no longer working, that is no longer producing output in the marketplace that they would have previously. So they're at home rather than at work. And you might say, well, geez, doesn't that mean they're getting more enjoyable time at home? Unfortunately, home, they're restricted, their activities outside of work are also restricted at this point, right? That is, it's not like everybody decided, hey, let's go on a grand vacation here, right? It is many people are at home. If they're working from home, they're probably less productive than they would have been in the marketplace in the first place. Or they're home, which means they're not working. When they're not working, they're also not doing what they would like to otherwise be doing. That is people have distanced themselves not just from work, but from many other activities. And you can see that if you look at like how much people have gone to the movies, or how much people have gone out, just look at cell phone data on how much people are moving around, you can see that there's been a dramatic reduction in the activities that people have, not just the activities of going to work. A second one that you mentioned, which is really important, is we tend to think of this red bar as mostly just cost that work's suffering today, the things we're not doing now that we might otherwise wanted to have done; go to the movies, go out to a restaurant, consume whatever goods or services that we're no longer consuming. But some of these costs are actually much longer term costs. And this is something I think we don't wanna forget. That a big cost that we're bearing, for example, is that many of the investments that we would otherwise be making. For example, investments in the human capital of people in the population have stopped or slowed substantially. One of the most important one of those is students. That is, particularly for children in elementary and secondary schooling, they are not getting the human capital investment now that they would have otherwise been getting. And we tend to not think about that as terms of a cost. But losing a year of schooling is approximately like losing about seven to 10% of your lifetime earnings ability. That is, it's going to take you a lot to make up for what you lose, and those costs are biggest for the students coming from the least advantaged backgrounds. The students who are gonna get much less at home that's going to replace what they would have otherwise gotten in the marketplace. So don't forget the fact we have a lot of kids at home that's limiting what they're learning. And having those kids at home is also limiting the ability of many parents to go to work because they're now home having to take care of those kids. So closing schools, while maybe not a big reduction in current productivity in terms of measured output is nonetheless a big cost. And all those costs are being estimated in the red bars, is that accurate statement? Estimated is a great term. That is, putting the exact number on those but we tried to take account of those. Some of the costs we haven't taken account of, are the costs that occur when for example, you have an experienced worker who spent years working at a given company and that company is not gonna come back from the closure. That person is gonna lose what we call an economic specific human capital. That is skills and abilities he had, that he had developed through his association with a given employer for a long period of time, that will be lost as part of the pandemic. Again, that's a permanent loss. Another group suffering a long term loss will be students graduating into the labor market this year. We know for example, from past studies that students who graduate in a poor economic environment don't just suffer in that initial year, but that follows them for a while, or actually quite a while during their career. And so I worry a little bit about those students coming out of both high school and college today who are looking for a job. Their placement and even some of their relatively longer term prospects are gonna be dimmed as a result of this decline in economic activity. So it's pretty clear that when it comes to the pandemic, we don't want to just think about it in terms of lives lost, we want to think about all those other costs. And many of those costs are gonna affect people for a long period of time to come. When you look at some other measures there, Professor, in terms of the economy, unemployment and so on, how bad has it been so far? Well, I got another slide-- Can I jump in, Professor? You know what was coming, but that's okay. I might jump in there real quick. We've had some questions coming, Professor just around the value of life, do you mind giving a quick description of what the blue bar means? Yeah, I mean, people, economists have tried for a long time to measure what we call the value of life. And, your mom might say, or many people might say, well, isn't life priceless. And, I think in a sense, you might agree with that. On the other hand, what we mean by the value of life is measured by what people are willing to pay to avoid risks of death. And you might say, well, geez, I can't go to the grocery store and buy a can of life. So how do you know what it's worth? The answer is there are many transactions that people engage in, that allow you to measure how much they value a reduction in their probability of death. The classic one that economists have used is how much extra you have to pay an individual to take a riskier job, that is, take a job where the risk of death on the job is higher than it is in otherwise comparable types of employment. And if you measure that wage premium, so for example, if you had to pay people $500 to take, per year to take an extra one in 10,000 risk, and that's important to realize. Most of the risks that people are buying when they buy risk, or selling in some sense, is relatively small amounts, like a one in 10,000 risk. What you find you pay $500 for a one in 10,000 risk, well, if 10,000 people were to take that, that would be a total cost of $5 million and we'd have on average, one extra death. That's the kind of experiment people have tried to do. You can also do it with how people respond to money, or for example, health risks, you learn that smoking is more dangerous than you thought before, you see how much they reduce their smoking in response to that information. And you ask how much of a tax on cigarettes would it take to get that same reduction, you can use that same kind of analysis. Using those type of methods, economists have estimated a willingness to pay for a life extension of about $13 million per life. Or in my previous idea, about 100, about $1300 for a one in 10,000 risk of death. That's an estimate of the willingness to pay that applies to private individuals. Now, in the case of something like COVID-19, you have to make some adjustments, because what you really want to think about is, for example, life years lost. And what we know about the COVID-19 crisis is that the death rates are much, much higher for the elderly population than they are for the young population. We'll get back to more of that later. But that's gonna play a role here. So what we did in this figure is scale these kind of based on life years as opposed to lives, which is a very standard way that economists apply this to these kind of data. That's the kind of experiment the data come from. They come from actual choices that people make, and that reveals their willingness to pay to trade off a risk of death with money. Very helpful, thank you. Okay, let's go on to any other questions before we move on. None here. Okay, I'll move on to the labor market. And this is a picture of the changes that we've seen in the labor market. And it's been updated since then, it's pretty close to what we see here. The point I'm trying to make, if we look at the decline in employment, that is a measure of hours worked. If you look at where we were in early March, we were very close to 100, which is kind of the baseline and this comes from data that Casey did. And what you see is we're down about 30% below there, we're down around 70% of where we were. So basically, labor market time is down about 30%. The problem is when you look at like official employment or unemployment statistics, they're going to tend to underestimate this decline. Because, for example, people who are being paid but still working at home, are typically classified as employed because they're getting paid. And in this picture here, you'd want to say, well, they may be getting paid but in terms of producing productive output, they're at home. So there's a lot of people, there's other people who are at home, and while they may be even working as many hours or reporting as many hours, they're less productive than they are in the marketplace as a whole. So the idea of how far are we down, you might say, a true measure of how much labor market participation is down these days, way more, more like 40 million people instead of the smaller numbers you hear quoted out there. So it's a really big contraction, enormous contraction in the economic activity out there. How does that compare to previous recessions, Professor, in terms of the overall magnitude, but also the speed at which this has happened? The speed is enormously quick, right? That is we got from one to the other. Now nothing like this in prior recessions. You look at the previous graph I just had up, the depth of the prior recession, we were down closer to 10%. That dashed line there is where we were in the prior recession. That's the bottom of the 2008-2009 recession. So you can see we've declined about triple in terms of this hours of work measured relative to where we were at the bottom of the recession. So this has been a very quick, very steep decline in economic activity. When you think about this type of an observation, Professor, what are some of the tools and so on that are available to restart the economy? Or how does the economy restart when you have such a quick decline in hours worked? What intuition can we glean there from previous recessions? Yeah, there's a couple things to think about. One is, I think it's important that we get restarted here in the near future. And one of the reasons is, the cost of the decline per day are greater the longer we stay out. That is, in the short term, you can reduce economic activity pretty sharply. But because we can do what economists call intertemporal substitution, that is substitute over time, the costs are not as large as they would otherwise be, because we can make up for lost time when we come back. And indeed you can have sort of a boom when people come back after the period of being out. However, the longer you're out, two things happen. One is that lost output becomes harder to substitute for. That is producing on Tuesday's a pretty good substitute for producing on Monday. But producing six months from now is much less of a good substitute for producing today. So that's part of it. The second is more permanent costs are gonna accrue over that period of time. The idea that we're gonna bounce back and people are gonna go back to what they were doing immediately prior to the contraction declines the longer the contraction goes on. More of those businesses that shuttered, will not reopen the longer we wait. And therefore it's gonna be a more protracted recovery, the longer it lasts. And that's problematic from that point of view. That's why I say, if possible, it'd be great to get started back in the near future, I guess your recent paper talks about some of the various different policies that have been employed. Can you walk us through some of those and maybe with some comments on how they can be used to help us get started back and the various different trade offs that you made in the paper of different scenarios? Yeah, well, let's talk about two things. Before we talk about even how we get back, let's talk about the policies we can use during this kind of mitigation phase. There are really two broad sets of mitigation policies. One is the social distancing and in particular, what we call large scale social distancing. That is distancing, where we try to isolate one individual from another by shuttering down activity. And it's important to recognize that a lot of that shuttering of activities is generated by government action. But a significant part is also generated just by individuals responding. That is individuals cut back, for example, in places and before the government instituted official stay-at-home orders. If you look at air travel, if you look at restaurant visits, if you look at cell phone activity, even in places where those types of measures hadn't been instituted, we saw dramatic cutbacks. Doesn't mean it was independent of government policy however. Remember, people do not have a great amount of experience with dealing with a pandemic. So much of the response that people did, even the private actions were driven by the information they were being given. They were being told that in fact, it's a very dangerous disease, and we were advised to stay home. And a lot of people took that to heart, and a lot of people stayed home and even more stayed home when the policies were put into place. Now the question of what do you do? Can you stay home forever? If you go back to that first graph we had on the board, go back to the first one, that red line that's going up like that, that's gonna get more steep, it's not gonna get flatter if we continue a lockdown policy. That reflects our ability to substitute. And if anything, it's gonna get worse over time. So that curve is gonna get steeper and steeper going forward. So it really appears to us based on our analysis, that such a long term lack down strategy is not really viable. So one has to look for alternatives. And their alternatives are really twofold. One is you need to narrow the scope of any isolation policy for the broad population, why? Because the cost of isolating everybody to prevent transmission is very high, as you can see in that figure, even when there are relatively few infected individuals. So as we've made progress, as we've make progress containing the disease, what you can see is that it would be very advantageous to allow at least some people to become more active. And this is where the differences across people in the severity of the implications of COVID-19 are very important. The current policies we have that have resulted in widespread lockdown have really meant we are quarantining the healthy population as an indirect means to protect the vulnerable populations. And that is not a very cost effective strategy, because you're quarantining effectively hundreds of millions of individuals in an effort to protect a much smaller number of infections from spreading. The places that have been the most successful and the long term viable strategy has to be based on something closer to a screen test and trace type program. That doesn't mean you don't quarantine or isolate no one. Indeed, we think a mixed strategy where you continue to quarantine and isolate the most vulnerable, because their risks of death and severe complications from COVID-19 are probably 20 or more times what it is for the general population. Here we're talking about your elderly and your population with significant comorbidities. I think under any viable strategy, you'd want to keep them sufficiently isolated. But I think what we need to think about is a policy that allows people to return to work and focuses not on preventing the healthy from contracting the disease as much as we do, as much as we need to focus on preventing the infected from infecting others. And that's the reason people turn to a test and trace strategy. You can think about it like in economics, it's like a transaction, right? It's an involuntary transaction. You have the disease, you pass it to me, we just engaged in a transaction, you gave me the disease. There's two ways to prevent that transaction. You can either try to prevent by isolating the healthy people from them running into the infected people. That strategy only makes sense when there's lots of infected people, and therefore the cost of imposing it on everybody in society is worth it. On the other hand, if there are relatively few infected individuals, then it's much more cost effective to focus on the infected side of that equation. And that's why, in the long term, we have to move to a more testing and tracing strategy that starts with the infected and tries to limit this extent to which they're going to interact with the healthy population, while allowing the healthy population to go about their business. I'll give you countries that have been very successful in those lines. One would be South Korea, Hong Kong, Iceland. Iceland is a great example, very small country. I think I have a slide for Iceland, and I'll show you the data on what's been happening in Iceland. If you have that slide. This is the Iceland experience. This graph is from the Iceland's official website on COVID-19. The blue is the number of active infections they have, the orange are the recovery. So the sum of those two are the people who've had it up till now. And you can really see the progress they've made, that if they've gone over the, they've gone up and over the hump of the pandemic and they've been able to reduce the number of active infections basically every day for more than a month now. And at the same time have kind of limited the cumulative number of infections. Port and caveat, though, Iceland is not out of the woods. They've contained the pandemic. But if it were ever reintroduced, and they were to not go through the process like they have here of testing and tracing and preventing its spread, they would be subject to a further pandemic. Professor, what are some of the unique things that Iceland has done so far around testing, tracing that differentiates them from other countries? Well, they've done two things and I think combined, they've done them very well. They've isolated the elderly very effectively. So they've been able to say, of those that get infected, we're gonna greatly limit the degree of infection among the most vulnerable parts of the population. That's been an important part, not so much in limiting the spread of the disease, but limiting its impact. It's had much less impact on them. The other one is they've had a very aggressive tracing policy. Basically, when they find a case they've been, they've essentially hired like a private detective to go out and find who else has been infected or potentially infected, and tested and isolated, again, the people that are potentially infected. And we talk about a system called screen test trace in quarantine. Basically, the idea is you screen people based on a criteria, like knowing they've potentially been exposed. You test them to see if they have been exposed and whether they're actively infected. You may have to retest them, if they haven't yet shown it. So you might need more than one test to find it. If you find they've been infected, or even before that, you start tracing who they've been in contact with, going through the same paradigm with them. The goal here is to try to catch the disease from that side, from the infected side. And by doing that, you don't have to be as restrictive for the overall population. Doesn't mean you want to have some restriction. Place like Iceland, for example, and other places, is still gonna have to restrict very large social gatherings. Kind of crazy to have thousands of people get into one place where one person can infect many, many people at the same time. So you still gotta have some overall restrictions, but you can get by we think and we hope, with far fewer restrictions on the broad population so-- How is Iceland, sorry, Professor-- Go ahead. How is Iceland compared to the US in terms of policy, in terms of overall experience and getting over the hump or not getting over the hump? Well, I have a picture for the US if you wanna show the US, I have the US and Germany, I think on a slide. So I have a slide that has the US and Germany. So we are, we're no longer growing in terms of the number of cases. So these are new cases, and so we're starting to trend down but you can see not nearly as rapidly for example as Germany has, okay? Germany has gotten over the hump. Now, the thing to remember about all these countries though, whether we're talking the US and assuming we're successful at beating this back down, and Germany's already been pretty successful, probably not as successful as Iceland has, but nonetheless very successful. It doesn't mean you've beaten the disease, it means you've beaten it back, right? You're still susceptible. You've really not achieved what people call, population level immunity. We're not at the point where the disease can't spread again. So people talk about a second wave or a third wave, whatever people want to talk about. And all these countries here that we're talking about here, are very susceptible to that. Because in terms of the fundamental risks in the population for the spread of disease, they haven't really changed. You can keep it at bay by a system of testing and tracing, for example, as we're doing in many countries, or keep it at bay through the lockdown type policies like we have in the US. However, when either of those policies stop, you run the risk that the disease is going to come back. And unless the disease has run its course, in a sense of spreading widely in the population, and hopefully people have gotten immunity, although that's not even clear here, that long term immunity is feasible. But if it is, that could mean you're actually over the disease. Professor, when you look at these various different policies that have been put in place, and in your paper, you talk about, whether the goal is buy some time or the goal is minimize the impact while getting to long run immunity, how do you categorize the various different policies and actions of governments across those goals? Have you kind of thought about that? Well, I don't think we've decided in the US where we're headed. We've done some short term strategies of a lockdown policy but we've yet to really broadly implement a long term test and trace policy. I don't think of a long term lockdown as a long term policy for that matter, just because the costs are so high and it's so ill-suited to a long term policy. That is if you've had a lockdown in place, and you use that lockdown to drive the disease down, let's assume that downward trend in the US continues to hold, and we get to the point where the disease is beaten back significantly, if all you do is stop the lockdown at this point and that's the end of your policy prescription, then you probably accomplished very little. All you've done is pushed the disease off in time. And maybe you've pushed it off six months, maybe you've pushed it off, whatever. Now if a vaccine or a cure or effective treatment's gonna arrive, buying time might get you something. But if those don't arrive, then you've really accomplished very little. You've succeeded in incurring lots of costs. Remember the cost is running at something like $20 billion a day in that red figure. You've succeeded incurring lots of costs, but maybe very little long term benefits. And we had a couple of plots in our paper that tried to make that clear. And we did a plot of what would happen in terms of long term infections if you had an upfront policy, and then took that policy off. So if you want to show that plot, might be pretty interesting. I think it's, no, keep going. I think it's a couple more, yeah, this one. Can you see it? Go back one, I think it's... Yeah, so this is no intervention versus intervention. It's not the greatest picture, you can see. There's a very light line. Hopefully people can see it there, which is what would happen with, maybe you can highlight for them. That's what would have happened with no intervention. So the interventions occurs, yeah, that's the no intervention line. You can see that with no intervention, we would have followed this S-shaped curve. And the disease would have reached essentially its potential. That doesn't mean 100% of the population. It just means whatever the overall susceptible population was, this is where we would have ended up. And that early intervention would have succeeded in pushing that curve to the right. So that would have pushed the curve to the right, but it had very little effect on where you ended up. Basically, you've delayed the inevitable in this case, all right? Now, if a cure or a vaccine happened to come in during that time window, where you pushed it back, this could have had great value, right? Could mean that we've pushed the bulk of the disease past the day of arrival of an innovation. However, it's hard to, hard to bank on that. On the other hand, if you did a lighter term intervention, that is a intervention closer to when the disease was running much more actively in the population, I think we do that on the next picture, yeah, you can see in this picture, that same line that used to be there, which is still again, I'm gonna apologize for that, hard to see. But you can sort of see that line that would have been there. In this case, we not only delay but we actually prevent much of the long term, some of the long term infection here. It's much more effective at affecting the long term. So I think the economics basically says this, if you want to buy time, early on strategies are very effective. They could be relatively effective at buying you some time, but they don't have much long run impact if, for example, a vaccine or cure doesn't arrive. The alternative to that would be a later term intervention. That is when things are much more aggressively proceeding in the population. A large scale lockdown may make a lot more sense. Professor-- Go ahead. Sorry, I was gonna just ask you. We hear quite a bit about Sweden in this environment, where would they fall in on some of those charts we just looked at? Yeah, I have a chart I put together for Sweden, which is a comparison of new cases in the US and Sweden. And let me talk a little bit about Sweden versus the US. So this is new cases, and this is new cases per million in the population. Sweden is the blue line and the US is the red line. You hear a lot about Sweden, Sweden has been an outlier in terms of policy. Sweden has followed a much less aggressive closure policy. They've allowed significant amount of activity among the younger populations, while attempting but not being completely successful at isolating the older population. So you can see that Sweden has leveled off much like the US has. They haven't really started trending down like the US has in terms of new cases. But they've also done it with far less in terms of social distancing. Those red bars that we had for the US on that first chart would be much smaller in Sweden than they are in the US. They haven't done nearly as well in terms of preventing deaths as some of their Scandinavian neighbors like Norway and Denmark. But on the other hand, they've allowed the disease to progress much further. They've gone a lot further toward achieving some level of immunity if that's possible. So unlike the US, Sweden has in some sense, worked their way through some of the problems. The US has probably more so postponed much of the risks that are out there. And that postponement strategy might be a good strategy if we find a cure or treatment or a vaccine, but we may not have bought much to this point if we have not. So professor, one way of potentially thinking about this, as our viewers and ourselves kind of assess these various different policies, judging them somewhat depends upon the goal. And if the goal in the US was to buy time, they effectively did that. If the goal in Sweden was to limit the impact while getting kind of population immunity, they're on the path to achieving that. Not easy choices at all for policymakers to make, but in some respects, you have to think about the goal when judging the policy and then the effectiveness of any of those policies. Would you agree with that assessment? Yeah, absolutely, that was a key point of our paper. That is, that the policies that you should choose, and the choice among policies really depends on what you think the quote, endgame, would be. That is where you think this process is going to end up. And if you're in the buy time strategy, which let's assume that's the strategy the US is following, then you could justify a initial phase of lockdown to do two things. One is to beat the disease back somewhat. Second is to buy yourself some time to build a strategy. But even if you're in the buy time strategy, at some point, and I would think some point in the relatively near future, you have to switch from a strict lockdown policy applied to the broad population, to one based more fundamentally on testing and tracing, because that's a strategy much more suitable to long term implementation. That is the testing and tracing strategy costs are substantially lower than the costs of the large scale lockdown. And it's hard to see that a large scale lockdown lasting six months, eight months a year would be worth the benefits. That with, we have to switch over and I would say relatively quickly to some type of testing and tracing strategy on a broad level. There still will be restrictions, primarily restrictions for the elderly, primarily the elderly in groups settings like nursing homes. The elderly in private homes have very strong private incentives to isolate themselves and all the evidence is they're doing that and doing that largely fairly effectively. The elderly in more group situations like nursing homes are much more vulnerable. That is much more, much less of a capacity to look after their own interest. If your grandmother lives by herself, she has a much better chance to isolate herself than she does if she lives in a nursing home with hundreds of other or dozens or hundreds even of other elderly individuals. So strict isolation for some groups, but more openness and activity, which really gets us to how do you do that? What ingredients should go into a opening strategy? And one of the things we talked about in the paper is that employers are gonna have to play a big role in that as we see it. Employers are well suited. First off, they have strong incentives to look after the well being of their employees. And their employees have strong incentives to look out for the well being of their coworkers. I mean, they're people they work with, many of them worked with for years. That replicates the kind of incentives that exist in many other situations where we know people who've done a relatively good job of looking out for themselves as well as other people in the population. Professor, then on that particular kind of comment and you think about what's been made available to employers, guidance, CDC, WHO, and so on so forth, do you think there's more that should be made available? What kind of tools can be useful that the government can provide employers to help them in this time to open up the economy, but take care of their employees but also take care of their own businesses? Any thoughts on what might be effective? Yeah, I think a couple of things. One is, on the one hand, I think some guidelines for people. That is, I think, particularly smaller employers don't have great knowledge of what they should be doing, what is expected of them, what potential liabilities might they be facing if they don't behave in a particular way. And providing them with guidelines, I think it'd be very effective. We tend to think about government policy in terms of requirements that they put on people, but we know already from the experience we've seen to date, that what the government is telling people has seemed to matter, at least as much as what the government mandated that they do. So the attitudes the government puts out in terms of you should do this, you're required to do this. Even if they don't have quote, a lot of teeth behind them seem to have a substantial impact on how individuals and companies behave. Second one is I think you've got to allow some freedom here. That is one of the great things about a market system, is people have an incentive to figure out what's best. And they'll make some mistakes, but they'll learn from their mistakes. And finding out what's working and communicating what's working is also a very important role that both the government as well as industry groups can play. That is figure out what people are doing, look for good ideas, find out what's working effectively and what's not. Employers, I think are very open these days to input as to what they ought to do. They know a lot about how to run their business, they don't know a lot about how to deal with a pandemic. So I may be an expert at running my restaurant business or my car business or whatever business I have, I probably know lots of things that other people don't. But being great at running a test and tracing program for my employees who might be infected, I got no clue. I mean it's not why I'm in the business. I'm in the business for something else. So particularly in those smaller employers, they could use a lot of help on that regard. Professor Murphy, do you see that happening in different states differently? Do you see those resources and information being made available to employers, or you think that's something that's yet to come? I think there's some of it out there. I haven't seen enough. I think industry groups, for example, can play a big role. I think the industry groups can help their members through cooperative work. And I know from talking to people that a lot of that's going on. Many of your larger businesses have developed plans. I would assume, we can think about consulting outfits even arising who make that their job, to go out and advise people. Obviously, there's lots of legal issues out there right now about liability. I don't know what's gonna come down on the legal framework in terms of allocating liability, whether it's to the employer or to people who consult with the employers. That also is something that I think somebody with more legal training than I should have to deal with. But I know that's a big concern for many people at this point. It's going to be a slow process, I can guarantee you that. We've seen what's happened so far. I think a graph I just got yesterday, I think I sent it to you, this was on what happened with reopening in some of the states around the country in terms of restaurants. That's sort of the picture of what's happened in the restaurant industry for three of the main states that have reopened; Tennessee, Texas and Georgia. And you can see that they've started to come back, that is restaurant reservations as measured by OpenTable includes both the reservations as well as walk-ins are making their way back, but they're nowhere near, right? So we're up at zero percent decline at the beginning. You can see basically the restaurants closed in all three states. And now they're starting to come back. And Texas I think, is what? They have like a 25% occupancy rate, or is that what they're asking-- That's correct, yes, 25% yeah. They're not there yet. Even the places that are open, a lot of places aren't open, some of the restaurants have reopened, some have not. But the comeback is not gonna be immediate when the restrictions are lifted. It's gonna take some time. But hopefully they'll continue to move, and as some gain experiences, they learn what to do. That's gonna allow other people to come back. One more thing on policy. The one thing I'm a little worried about, is that we'll continue to have policies that discourage people from coming back. One of those is, for example, large scale payments to people to stay out of work. Work by Casey Mulligan, who was one of the colleagues on this paper, I think was very effective in showing how many of those policies extended the duration of the last recession. That is, they were called stimulus policies, but they were actually acting in the opposite direction, of actually slowing the recovery or whatever otherwise would have been. And I think we have to worry about some of that here too, that some of the policies that could be put in place could actually impinge the recovery rather than encourage it. And I think that's a danger that we'd be very smart to try to avoid. Because that to me would mean we'd have a more prolonged recession or a contraction than we need to have. People have talked recently about whether we have a V-shaped recession or I guess it's now called a swoosh, sort of the impact that Nike has had. Looks like a Nike swoosh symbol. But, it's gonna be more like the swoosh and less like the V in my opinion, partly because of the policies that we've put in place and how long we've kept people out. And it's not all about government policy. Part of it is just individual responses. And individuals have strong incentives to protect themselves and they'll continue to do that even after the government tells them they don't have to. Hey, Professor, related to that comment, in your paper you talked about we all have a role as you just highlighted there. Where would you suggest we go as individuals to get good information around the virus things, that we can use that's not politicized or biased by the press? The University of Chicago that . First off, I would say the thing to remember is where we started our discussion, which is, there's a lot of uncertainty here. And if anybody tells you they know the answers, and hopefully I haven't made it sound like I know the answers 'cause I don't either. I think we have some good ideas, we have some input. So I would go looking for input more than I would go looking for answers. I would go looking to people based on their expertise. But remember, they're always gonna tell you about what they know and they're gonna base it on their expertise. So I'm gonna talk to you about the economic side of the question. If you really want to understand the epidemiology, you gotta talk to an epidemiologist. But when the epidemiologist starts talking to you about economics, be careful. Just like when economist starts talking about epidemiology, you should be careful. So I would say go looking for inputs and process those inputs yourself. Don't go looking for answers. There was actually a very good piece on the Wall Street Journal, advising college graduates, I think was just yesterday exactly along this line, saying exactly what I just said, which is, the thing to do when you get out of college is look for data, look for information, but process it yourself. Don't go looking for answers. And hopefully we've given you some of that data here, some of the economic inputs. I think there's a lot economics has to say. It can help us decide between social distancing and testing and tracing in terms of relative cost effectiveness. It can emphasize the importance of thinking about the endgame, can't talk about an optimal strategy at the beginning without thinking about where you're trying to get at the end. I can talk to you about where the incentives of private individuals are a big advantage, and where they run short. For example, much of the elderly are gonna take care of themselves, they're gonna isolate themselves because it's in their interest to do so. Those in group quarters are probably gonna have the hardest time doing that. Those are the ones where policy has to focus. Professor, one of the remarks you made there and you made it jokingly but I think there's a lot of truth to it, is the University of Chicago website. I've been on there a number of times and there's a kind of a COVID-19 section on the website, where from the economics department, there are many, many economics professors all working on the problem, the epidemiologists, and so on so forth. So it's a treasure trove of knowledge. And in some respects that knowledge is being passed up to the policymakers. I know that you, your colleagues have a lot of connectivity into the policymakers and the folks who make decisions and pass on good sound economic thinking, to help them in terms of making decisions. I'm not gonna comment on politics and how that gets in the way. But the information is out there for policymakers to act upon, but it's also out there, I guess more importantly, in my opinion for individuals and businesses to consume and then try to adapt, as people tend to do and overcome whatever adversity is put in front of them. Yeah, one thing I would say that we tried to, emphasized in our paper, that I think also applies to businesses is one-size-fits-all policies generally aren't a great idea, particularly in a situation like this, where both the risks and the costs of restrictions, for example, vary greatly across people in the population. So for example, if I'm a business, the cost and benefits of different policies for my 70-year-old partner in a law firm might be very different than they are for the 27-year-old young associate. They certainly have very different health risks. But I have to somehow find a policy that fits with all their different needs, because it's important, for example, in a law firm, for that young person to still be able to get the input from that senior partner. So you gotta figure out a way to maybe continue to protect the health of your valued senior colleagues, and at the same time, allow your younger people to not lose out of the human capital experience. So there's a parallel within the firm, to that kind of stuff we talked about earlier, the vulnerability of the elderly and the potential loss of valuable resources and human capital investment for the young. So I think employers have to be cognizant of those same ideas. And I think that's why your remarks around flexibility are very well taken, in particular by a person who has to manage a global organization with 1,400 employees to 1,500 employees, that flexibility of allowing employees to make that personal choice about what's right for them. But then also being mindful that we have to keep on doing business and serving our customers and our clients. That flexibility is a very important aspect. Flexibility, input information, all very key to our experience, at least here at Dimensional. Absolutely, the other one is flexibility across different groups because, you have subgroups within your firm that do different activities. And some of those lend themselves more to distance work than others. So again, one size fits all probably isn't gonna work there. And also, they're gonna know a lot more about what their individual groups need. So trying to utilize some of that decentralized knowledge is always valuable, not just for an economy, but also for a firm. Well, Professor, thank you so much for your time here. We could talk to you for probably 85 hours straight with such great information here, but I think we'll turn you loose, go to the other side of the wall there and do some woodworking and some research on some different things. But thanks for joining us today. Thank you so much, it's been my pleasure. Hopefully people got something out of it. Absolutely, excellent information. And everybody else out there, thank you for joining us and finding the time for this. Wonderful, wonderful thoughts. As a follow up to this, we had some requests coming in and we absolutely will be sending you a link to the paper the professor was talking about. We'll also send you a link to the materials and content that Gerard was speaking to at the University of Chicago. It really is a great way to get more informed about what's going on out there, and a lot of the economic decisions that are being made, and how this is helping form policy. So thanks everybody for your time. We look forward to seeing you next Tuesday at 10:30 with Professor Robert Novy Marx.