http://violante.mycpanel.princeton.edu/Slides/PPF_UTDT.pdf The Great Lockdown and the Big Stimulus: Tracing the Pandemic Possibility Frontier for the U.S. Greg Kaplan Ben Moll Gianluca Violante Slides at: Universidad Torcuato Di Tella, September 9 2020 September 9, 2020
Objectives ✎ US policy response to COVID-19: ✎ Lockdown: workplace and social sector ✎ Stimulus: CARES Act ✎ Goal: quantify trade-offs ✎ Aggregate: Lives versus livelihoods ✎ Distributional: Who bears the economic costs? ✎ Approach: distributional Pandemic Possibility Frontier (PPF) ✦ PPF ✎ Compare policies without taking stand on economic value of life ✎ Seek policies that flatten and shift the frontier KMV - Great Lockdown
✎ Economic exposure to pandemic correlated with financial vulnerability ✎ Calibrate model to U.S. economy and examine counterfactuals ✎ Laissez-faire vs lockdown vs fiscal stimulus (CARES Act) ✎ Smarter policies: (i) targeted lockdowns; (ii) Pigouvian taxes Methodology ✎ Integrated SIR + Heterogeneous Agent model with necessary ingredients ✎ Goods: (i) regular; (ii) social; (iii) home production ✎ Types of labor: (i) workplace; (ii) remote; (iii) home production ✎ Occupation heterog.: (i) flexibility; (ii) social intensity; (iii) essentiality ✎ Two-way feedback: between virus and economic activity KMV - Great Lockdown
Methodology ✎ Integrated SIR + Heterogeneous Agent model with necessary ingredients ✎ Goods: (i) regular; (ii) social; (iii) home production ✎ Types of labor: (i) workplace; (ii) remote; (iii) home production ✎ Occupation heterog.: (i) flexibility; (ii) social intensity; (iii) essentiality ✎ Two-way feedback: between virus and economic activity ✎ Economic exposure to pandemic correlated with financial vulnerability ✎ Calibrate model to U.S. economy and examine counterfactuals ✎ Laissez-faire vs lockdown vs fiscal stimulus (CARES Act) ✎ Smarter policies: (i) targeted lockdowns; (ii) Pigouvian taxes KMV - Great Lockdown
2. Slope of PPF varies with length lockdown ✎ Driven by hospital constraint and eventual arrival of vaccine ✎ Reconcile conflicting views on extent of trade-off 3. U.S. CARES Act: ✎ Reduced economic cost by 20% on average, highly redistributive ✎ Explains rapid recovery in consumption of poor households 4. Taxation-based alternatives to lockdown: favorable mean trade-off but more dispersion in economic outcomes ✦ dimensions not considering today Main Findings 1. Economic welfare costs of pandemic: large and heterogeneous, regardless of the policy response ✎ Large welfare costs for middle of earnings distribution ✎ Laissez-faire vs lockdown: who bears the cost differs KMV - Great Lockdown
3. U.S. CARES Act: ✎ Reduced economic cost by 20% on average, highly redistributive ✎ Explains rapid recovery in consumption of poor households 4. Taxation-based alternatives to lockdown: favorable mean trade-off but more dispersion in economic outcomes ✦ dimensions not considering today Main Findings 1. Economic welfare costs of pandemic: large and heterogeneous, regardless of the policy response ✎ Large welfare costs for middle of earnings distribution ✎ Laissez-faire vs lockdown: who bears the cost differs 2. Slope of PPF varies with length lockdown ✎ Driven by hospital constraint and eventual arrival of vaccine ✎ Reconcile conflicting views on extent of trade-off KMV - Great Lockdown
4. Taxation-based alternatives to lockdown: favorable mean trade-off but more dispersion in economic outcomes ✦ dimensions not considering today Main Findings 1. Economic welfare costs of pandemic: large and heterogeneous, regardless of the policy response ✎ Large welfare costs for middle of earnings distribution ✎ Laissez-faire vs lockdown: who bears the cost differs 2. Slope of PPF varies with length lockdown ✎ Driven by hospital constraint and eventual arrival of vaccine ✎ Reconcile conflicting views on extent of trade-off 3. U.S. CARES Act: ✎ Reduced economic cost by 20% on average, highly redistributive ✎ Explains rapid recovery in consumption of poor households KMV - Great Lockdown
Main Findings 1. Economic welfare costs of pandemic: large and heterogeneous, regardless of the policy response ✎ Large welfare costs for middle of earnings distribution ✎ Laissez-faire vs lockdown: who bears the cost differs 2. Slope of PPF varies with length lockdown ✎ Driven by hospital constraint and eventual arrival of vaccine ✎ Reconcile conflicting views on extent of trade-off 3. U.S. CARES Act: ✎ Reduced economic cost by 20% on average, highly redistributive ✎ Explains rapid recovery in consumption of poor households 4. Taxation-based alternatives to lockdown: favorable mean trade-off but more dispersion in economic outcomes ✦ dimensions not considering today KMV - Great Lockdown
Outline I 1. Model 2. Parameterization 3. Results 4. Conclusions 5. Linked Slides KMV - Great Lockdown
❚ ❴ ■ t ■ t ❙ t � ☞ t ☞ t ✵ ✵ ✵ ❙ t ◆ t ◆ t ❴ ❊ t ✵ � ✕ ❊ ✕ ❊ ✵ ✵ ❊ t ❴ ■ t � ✕ ■ ✕ ■ ✭✶ � ✤ ✮ ■ t ❂ ✵ ✵ ✕ ■ ✤ ❴ ❈ t ✵ ✵ ✵ � ✕ ❈ ✕ ❈ ✭✶ � P ✭ ❈ t ❀ ❈ ♠❛① ✮✮ ❈ t ❴ ❘ t � ✕ ❘ ❘ t ✕ ❘ ✵ ✵ ✵ Two key features: 1. Death probability of ❈ t ’s depends on ❈ t ❄ max ICU capacity ❈ ♠❛① 2. ☞ t ❂ ☞ ✭ ❈ st ❀ ▲ ✇t ❀ t ✮ : infections depend on social ❈ , workplace ▲ ✦ lockdowns in SIR models Epidemiological Model ✎ ❙ t : susceptible ✎ ❊ t : exposed = latent virus, not yet infectious ✎ ■ t : infectious ✎ ❈ t : critical = in ICU, may ultimately die ✎ ❘ t : recovered ✎ ◆ t : population = ❙ t ✰ ❊ t ✰ ■ t ✰ ❈ t ✰ ❘ t KMV - Great Lockdown
Epidemiological Model ✎ ❙ t : susceptible ✎ ❊ t : exposed = latent virus, not yet infectious ✎ ■ t : infectious ✎ ❈ t : critical = in ICU, may ultimately die ✎ ❘ t : recovered ✎ ◆ t : population = ❙ t ✰ ❊ t ✰ ■ t ✰ ❈ t ✰ ❘ t ❚ ■ t ■ t ❴ ❙ t � ☞ t ☞ t ✵ ✵ ✵ ❙ t ◆ t ◆ t ❴ ❊ t ✵ � ✕ ❊ ✕ ❊ ✵ ✵ ❊ t ❴ ■ t � ✕ ■ ✕ ■ ✭✶ � ✤ ✮ ■ t ❂ ✵ ✵ ✕ ■ ✤ ❴ ❈ t ✵ ✵ ✵ � ✕ ❈ ✕ ❈ ✭✶ � P ✭ ❈ t ❀ ❈ ♠❛① ✮✮ ❈ t ❴ ❘ t � ✕ ❘ ❘ t ✕ ❘ ✵ ✵ ✵ Two key features: 1. Death probability of ❈ t ’s depends on ❈ t ❄ max ICU capacity ❈ ♠❛① 2. ☞ t ❂ ☞ ✭ ❈ st ❀ ▲ ✇t ❀ t ✮ : infections depend on social ❈ , workplace ▲ ✦ lockdowns in SIR models KMV - Great Lockdown
1. Flexibility: substitutability between remote and workplace hours ✎ Effective labor supply = ▲ ❥ ✇ ✰ ✣ ❥ ▲ ❥ r 2. Employment intensities in social versus regular sectors , ✭ ✘ ❥ s ❀ ✘ ❥ ❝ ✮ ✛ ✛ � ✶ ❏ ✶ ✛ � ✶ ✐ ❑ ✶ � ☛ ✐ ✘ ❥ ✛ ◆ ❥ ✛ ❨ ✐ ❂ ❩ ✐ ◆ ☛ ✐ ❀ ◆ ✐ ❂ ❀ ✐ ✷ ❢ s❀ ❝ ❣ ✐ ✐ ✐ ❥ ❂✶ 3. Essential occupations: not affected by workplace lockdown Occupations (j) High Flexibility Low Flexibility High intensity in ❈ Software engineer, architect Car mechanic, miner High intensity in ❙ Event planner, social scientist Waiter, shop assistant Essential Police, nurse, supermarket clerk KMV - Great Lockdown
Occupations (j) High Flexibility Low Flexibility High intensity in ❈ Software engineer, architect Car mechanic, miner High intensity in ❙ Event planner, social scientist Waiter, shop assistant Essential Police, nurse, supermarket clerk 1. Flexibility: substitutability between remote and workplace hours ✎ Effective labor supply = ▲ ❥ ✇ ✰ ✣ ❥ ▲ ❥ r 2. Employment intensities in social versus regular sectors , ✭ ✘ ❥ s ❀ ✘ ❥ ❝ ✮ ✛ ✛ � ✶ ❏ � ✶ � ✛ � ✶ � ✛ � ✐ ❑ ✶ � ☛ ✐ � ✘ ❥ ◆ ❥ ✛ ❨ ✐ ❂ ❩ ✐ ◆ ☛ ✐ ❀ ◆ ✐ ❂ ❀ ✐ ✷ ❢ s❀ ❝ ❣ ✐ ✐ ✐ ❥ ❂✶ 3. Essential occupations: not affected by workplace lockdown KMV - Great Lockdown
✎ Budget constraint of healthy household working in occupation ❥ ❴ ❜ ❂ ✭✶ � ✜ ✮ ✇ ❥ ③ ❵ ✇ ✰ ✣ ❥ ❵ r ✰ r ❜ ❜ ✰ ❚ � ❝ � ♣ s s � ❞ � ✤ ✭ ❞❀ ❛ ✮ ❛ ❂ r ❛ ❛ ✰ ❞ ❴ ✎ ❜ : liquid assets ✎ ❛ : illiquid assets ✎ ✣ ❥ ✷ ❬✵ ❀ ✶❪ : flexibility of occupation ❥ ✎ ✤ : transaction cost ✎ Sick households (= ❈ , in ICU): cannot produce, gov’t provides ❝ and s Households ✎ Period utility: ❯ ❬ ❝❀ ✢ s ✭ ❴ ❉ ✮ s❀ ❤ ❪ � ❱ ❬ ✢ ❵ ✭ ❴ ❉ ✮ ❵ ✇ ❀ ❵ r ❀ ❤ ❪ ✎ ❝ : regular consumption ✎ s : social consumption ✎ ❵ ✇ : workplace hours ✎ ❵ r : remote hours ✎ ❤ : home production ✎ ✢ s ❀ ✢ ❵ : disutility of infection risk KMV - Great Lockdown
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