The Great Lockdown and the Big Stimulus: Tracing the Pandemic - PowerPoint PPT Presentation

The Great Lockdown and the Big Stimulus: Tracing the Pandemic Possibility Frontier for the U.S. Greg Kaplan Ben Moll Gianluca Violante IESR Virtual Seminar September 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) • Compare policies without taking stand on economic value of life • Seek policies that flatten and shift the frontier 1 Kaplan, Moll and Violante (2020)

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 heterogeneity: (i) flexibility; (ii) social intensity; (iii) essentiality • Two-wayfeedback: 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 policy (CARES Act) • Smarter policies: (i) targeted lockdowns; (ii) Pigouvian taxes 2 Kaplan, Moll and Violante (2020)

Main Findings 1. Economic welfare costs of pandemic: large and heterogeneous, regardless of lockdown • Large welfare costs for middle of earnings distribution: fiscal stimulus • Large welfare costs for rigid, social-intensive occupations 2. Slope of PPF varies with length lockdown • Driven by ICU constraint and eventual arrival of vaccine • Reconcile conflicting views on extent of trade-off 3. US CARES Act: • Reduced economic cost by 20% on average, highly redistributive • Explains rapid recovery in consumption of poor hosueholds 4. Targeted lockdowns and taxation-based alternatives: more favorable average trade-off, but more dispersion → dimensions not considering today 3 Kaplan, Moll and Violante (2020)

Outline 1. Model 2. Parameterization 3. Results 4. Conlusions 5. Linked Slides 6. Additional Slides 3 Kaplan, Moll and Violante (2020)

Two key features: 1. Death probability of ’s depends on max ICU capacity 2. : infections depend on social , workplace Epidemiological Model • S t : susceptible • E t : exposed = latent virus, not yet infectious • I t : infectious • C t : critical = in ICU, may ultimately die • R t : recovered 4 Kaplan, Moll and Violante (2020)

Epidemiological Model • S t : susceptible • E t : exposed = latent virus, not yet infectious • I t : infectious • C t : critical = in ICU, may ultimately die • R t : recovered T  ˙ I t I t  S t   − β t β t 0 0 0  S t  N t N t ˙ E t 0 − λ E λ E 0 0 E t       ˙       I t = I t 0 0 − λ I λ I χ λ I (1 − χ )        ˙      C t 0 0 0 − λ C λ C (1 − P ( C t , C max )) C t       ˙ R t 0 0 0 R t λ R − λ R Two key features: 1. Death probability of C t ’s depends on C t ≷ max ICU capacity C max 2. β t = β ( C st , L wt , t ) : infections depend on social C , workplace L 4 Kaplan, Moll and Violante (2020)

1. Flexibility: substitutability between remote and workplace hours Effective labor supply = 2. Employment intensities in social versus regular sectors , 3. Essential occupations: not affected by workplace lockdown Occupations High Flexibility Low Flexibility High intensity in C Software engineer, architect Car mechanic, miner High intensity in S Event planner, social scientist Waiter, shop assistant Essential Police, nurse, supermarket clerk 5 Kaplan, Moll and Violante (2020)

Occupations High Flexibility Low Flexibility High intensity in C Software engineer, architect Car mechanic, miner High intensity in S Event planner, social scientist Waiter, shop assistant Essential Police, nurse, supermarket clerk 1. Flexibility: substitutability between remote and workplace hours • Effective labor supply = L j w + ϕ j L j r 2. Employment intensities in social versus regular sectors , ( ξ j s , ξ j c ) σ   σ − 1 J ) 1 ) σ − 1 ( σ ( Y i = Z i N α i i K 1 − α i ∑ ξ j N j σ , N i = , i ∈ { s, c }   i i i j =1 3. Essential occupations: not affected by workplace lockdown 5 Kaplan, Moll and Violante (2020)

Budget constraint of healthy household working in occupation : liquid assets : illiquid assets : flexibility of occupation : transaction cost Sick households (= , in ICU): cannot produce, gov’t provides and Households • Period utility: U [ c, υ s ( ˙ D ) s, h ] − V [ υ ℓ ( ˙ D ) ℓ w , ℓ r , h ] • c : regular consumption • s : social consumption • ℓ w : workplace hours • ℓ r : remote hours • h : home production • υ s , υ ℓ : disutility of infection risk 6 Kaplan, Moll and Violante (2020)

Households • Period utility: U [ c, υ s ( ˙ D ) s, h ] − V [ υ ℓ ( ˙ D ) ℓ w , ℓ r , h ] • c : regular consumption • s : social consumption • ℓ w : workplace hours • ℓ r : remote hours • h : home production • υ s , υ ℓ : disutility of infection risk • Budget constraint of healthy household working in occupation j b = (1 − τ ) w j z ˙ ℓ w + ϕ j ℓ r + r b b + T − c − p s s − d − χ ( d, a ) ( ) a = r a a + d ˙ • b : liquid assets • a : illiquid assets • ϕ j ∈ [0 , 1] : flexibility of occupation j • χ : transaction cost • Sick households (= C , in ICU): cannot produce, gov’t provides c and s 6 Kaplan, Moll and Violante (2020)

2. Workplace lockdown: Mandated maximum share of workplace hours Full lockdown: Such lockdowns reduce infections because Note: lockdowns affect same behavioral margins as epidemic Lockdowns 1. Social sector lockdown: Mandated decrease in capital utilization in s sector Y s = Z s ( κ s K s ) α s N 1 − α s , κ s < 1 s 7 Kaplan, Moll and Violante (2020)

Full lockdown: Such lockdowns reduce infections because Note: lockdowns affect same behavioral margins as epidemic Lockdowns 1. Social sector lockdown: Mandated decrease in capital utilization in s sector Y s = Z s ( κ s K s ) α s N 1 − α s , κ s < 1 s 2. Workplace lockdown: Mandated maximum share of workplace hours ℓ w ≤ κ ℓ ( ℓ w + ℓ r ) , κ ℓ < 1 7 Kaplan, Moll and Violante (2020)

Lockdowns 1. Social sector lockdown: Mandated decrease in capital utilization in s sector Y s = Z s ( κ s K s ) α s N 1 − α s , κ s < 1 s 2. Workplace lockdown: Mandated maximum share of workplace hours ℓ w ≤ κ ℓ ( ℓ w + ℓ r ) , κ ℓ < 1 • Full lockdown: κ s = κ ℓ = 0 • Such lockdowns reduce infections because β t = β ( C st , L wt , t ) • Note: lockdowns affect same behavioral margins as epidemic 7 Kaplan, Moll and Violante (2020)

Remaining Model Ingredients Firms • Monopolistic intermediate-good producers → final s , c goods • Baseline: flexible prices, extension: sticky prices Investment Fund • Illiquid assets = shares of an investment fund • The fund owns K and intermediate producers in c, s sectors Government • Issues liquid debt ( B g ) , spends ( G ) , taxes and transfers ( T ) • Central bank absorbs the additional debt needed to finance CARES Act → market clearing conditions 8 Kaplan, Moll and Violante (2020)

Outline 1. Model 2. Parameterization 3. Results 4. Conlusions 5. Linked Slides 6. Additional Slides 8 Kaplan, Moll and Violante (2020)

Key Aspects of Parameterization 1. Epidemiological block • SEIR parameters: epidemiological and clinical studies → SEIR parameters 2. Occupational parameters • Flexibility measures by occupation: O*NET • Sectoral employment intensities in C and S : OES, CPS • Earnings and liquid wealth by occupation: SIPP , CPS, SCF → exposure vs vulneability 3. Two-way feedback: virus ↔ economic activity • Economic activity → virus: drop in R 0 after lockdown → feedback 1 • Virus → economic activity: VSL literature → feedback 2 9 Kaplan, Moll and Violante (2020)

Outline 1. Model 2. Parameterization 3. Results 4. Conlusions 5. Linked Slides 6. Additional Slides 9 Kaplan, Moll and Violante (2020)

Laissez-faire vs Lockdown Dynamics (a) Monthly Death Rate (%) (c) Labor Income (CF: C-intensive, Flexible) (%) (e) Labor Income (SF: S-intensive, Flexible) (%) 0.12 0 0 Laissez-faire Full Lockdown 0.10 10 10 0.08 20 20 0.06 30 30 0.04 40 40 0.02 Laissez-faire Laissez-faire Full Lockdown Full Lockdown 0.00 50 50 Apr Jul Oct 2021 Apr Jul Apr Jul Oct 2021 Apr Jul Apr Jul Oct 2021 Apr Jul Month (b) Output (%) (d) Labor Income (CR: C-intensive, Rigid) (%) (f) Labor Income (SR: S-intensive, Rigid) (%) 0 0 0 5 10 10 10 20 20 15 30 30 20 40 40 Laissez-faire Laissez-faire Laissez-faire Full Lockdown Full Lockdown Full Lockdown 25 50 50 Apr Jul Oct 2021 Apr Jul Apr Jul Oct 2021 Apr Jul Apr Jul Oct 2021 Apr Jul Month • Lockdown → second wave, but fewer deaths • Lockdown → longer, deeper contraction and W -shaped recovery → lockdown path → laissez-faire dynamics → lockdown dynamics → lockdown decomposition 10 Kaplan, Moll and Violante (2020)