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 Slides at: http://violante.mycpanel.princeton.edu/Slides/PPF_UTDT.pdf

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

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

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

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

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

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

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

Epidemiological Model

✎ ❙t: susceptible ✎ ■t: infectious ✎ ❘t: recovered ✎ ❊t: exposed = latent virus, not yet infectious ✎ ❈t: critical = in ICU, may ultimately die ✎ ◆t: population = ❙t ✰ ❊t ✰ ■t ✰ ❈t ✰ ❘t ❴ ❙t ❴ ❊t ❴ ■t ❴ ❈t ❴ ❘t ❂ ☞t

■t ◆t

☞t

■t ◆t

✵ ✵ ✵ ✵ ✕❊ ✕❊ ✵ ✵ ✵ ✵ ✕■ ✕■✤ ✕■✭✶ ✤✮ ✵ ✵ ✵ ✕❈ ✕❈✭✶ P✭❈t❀ ❈♠❛①✮✮ ✕❘ ✵ ✵ ✵ ✕❘

❚

❙t ❊t ■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

Epidemiological Model

✎ ❙t: susceptible ✎ ■t: infectious ✎ ❘t: recovered ✎ ❊t: exposed = latent virus, not yet infectious ✎ ❈t: critical = in ICU, may ultimately die ✎ ◆t: population = ❙t ✰ ❊t ✰ ■t ✰ ❈t ✰ ❘t       ❴ ❙t ❴ ❊t ❴ ■t ❴ ❈t ❴ ❘t       ❂       ☞t

■t ◆t

☞t

■t ◆t

✵ ✵ ✵ ✵ ✕❊ ✕❊ ✵ ✵ ✵ ✵ ✕■ ✕■✤ ✕■✭✶ ✤✮ ✵ ✵ ✵ ✕❈ ✕❈✭✶ P✭❈t❀ ❈♠❛①✮✮ ✕❘ ✵ ✵ ✵ ✕❘      

❚ 

     ❙t ❊t ■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

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

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

Households

✎ Period utility: ❯❬❝❀ ✢s✭ ❴ ❉✮s❀ ❤❪ ❱ ❬✢❵✭ ❴ ❉✮❵✇❀ ❵r❀ ❤❪ ✎ ❝: regular consumption ✎ s: social consumption ✎ ❵✇: workplace hours ✎ ❵r: remote hours ✎ ❤: home production ✎ ✢s❀ ✢❵: disutility of infection risk ✎ Budget constraint of healthy household working in occupation ❥ ❴ ❜ ❂ ✭✶ ✜✮✇ ❥③ ❵✇ ✰ ✣❥❵r ✰ r ❜❜ ✰ ❚ ❝ ♣ss ❞ ✤✭❞❀ ❛✮ ❴ ❛ ❂ r ❛❛ ✰ ❞ ✎ ❜: liquid assets ✎ ❛: illiquid assets ✎ ✣❥ ✷ ❬✵❀ ✶❪: flexibility of occupation ❥ ✎ ✤: transaction cost ✎ Sick households (= ❈, in ICU): cannot produce, gov’t provides ❝ and s

KMV - Great Lockdown

Households

✎ Period utility: ❯❬❝❀ ✢s✭ ❴ ❉✮s❀ ❤❪ ❱ ❬✢❵✭ ❴ ❉✮❵✇❀ ❵r❀ ❤❪ ✎ ❝: regular consumption ✎ s: social consumption ✎ ❵✇: workplace hours ✎ ❵r: remote hours ✎ ❤: home production ✎ ✢s❀ ✢❵: disutility of infection risk ✎ Budget constraint of healthy household working in occupation ❥ ❴ ❜ ❂ ✭✶ ✜✮✇ ❥③

• ❵✇ ✰ ✣❥❵r
• ✰ r ❜❜ ✰ ❚ ❝ ♣ss ❞ ✤✭❞❀ ❛✮

❴ ❛ ❂ r ❛❛ ✰ ❞ ✎ ❜: liquid assets ✎ ❛: illiquid assets ✎ ✣❥ ✷ ❬✵❀ ✶❪: flexibility of occupation ❥ ✎ ✤: transaction cost ✎ Sick households (= ❈, in ICU): cannot produce, gov’t provides ❝ and s

KMV - Great Lockdown

Lockdowns

• 1. Social sector lockdown: Mandated decrease in ❑ utilization in s sector

❨s ❂ ❩s✭✔s❑s✮☛s◆✶☛s

s

❀ ✔s ❁ ✶

• 2. Workplace lockdown: Mandated maximum (share of) workplace hours

❵✇ ✔ ✔❵✭❵✇ ✰ ❵r✮❀ ✔❵ ❁ ✶ ✎ Full lockdown: ✔s ❂ ✔❵ ❂ ✵ ✎ Lockdowns reduce infections because ☞t ❂ ☞✭❈st❀ ▲✇t❀ t✮ ✎ Lockdowns affect same behavioral margins as pandemic ✎ Direct effect of lockdowns on flexible workers depends on technological subtitutability between inputs

KMV - Great Lockdown

Lockdowns

• 1. Social sector lockdown: Mandated decrease in ❑ utilization in s sector

❨s ❂ ❩s✭✔s❑s✮☛s◆✶☛s

s

❀ ✔s ❁ ✶

• 2. Workplace lockdown: Mandated maximum (share of) workplace hours

❵✇ ✔ ✔❵✭❵✇ ✰ ❵r✮❀ ✔❵ ❁ ✶ ✎ Full lockdown: ✔s ❂ ✔❵ ❂ ✵ ✎ Lockdowns reduce infections because ☞t ❂ ☞✭❈st❀ ▲✇t❀ t✮ ✎ Lockdowns affect same behavioral margins as pandemic ✎ Direct effect of lockdowns on flexible workers depends on technological subtitutability between inputs

KMV - Great Lockdown

Lockdowns

• 1. Social sector lockdown: Mandated decrease in ❑ utilization in s sector

❨s ❂ ❩s✭✔s❑s✮☛s◆✶☛s

s

❀ ✔s ❁ ✶

• 2. Workplace lockdown: Mandated maximum (share of) workplace hours

❵✇ ✔ ✔❵✭❵✇ ✰ ❵r✮❀ ✔❵ ❁ ✶ ✎ Full lockdown: ✔s ❂ ✔❵ ❂ ✵ ✎ Lockdowns reduce infections because ☞t ❂ ☞✭❈st❀ ▲✇t❀ t✮ ✎ Lockdowns affect same behavioral margins as pandemic ✎ Direct effect of lockdowns on flexible workers depends on technological subtitutability between inputs

KMV - Great Lockdown

Remaining Model Ingredients

Firms ✎ Monopolistic intermediate-good producers ✦ final s,❝ goods ✎ Baseline: flexible prices (extension: sticky prices) Investment Fund ✎ Illiquid assets = shares of an investment fund ✎ The fund owns ❑ and equity of intermediate producers in ❝❀ s sectors Government ✎ Issues liquid debt ✭❇❣✮, spends ✭●✮, taxes and transfers ✭❚✮ ✎ Central bank absorbs the additional debt needed to finance CARES Act

✦ market clearing conditions KMV - Great Lockdown

Outline I

• 1. Model
• 2. Parameterization
• 3. Results
• 4. Conclusions
• 5. Linked Slides

KMV - Great Lockdown

Key Aspects of Parameterization

• 1. Epidemiological block

✎ SEIR parameters: epidemiological and clinical studies

✦ SEIR parameters

• 2. Occupational parameters

✎ Flexibility measures by occupation: O*NET, ATUS

✦ occupation flexibility details

✎ Sectoral employment intensities in ❈ and ❙: OES, CPS

✦ occupation sectoral details

✎ Earnings and liquid wealth by occupation: SIPP , CPS, SCF

✦ exposure vs vulneability

• 3. Two-way feedback: virus ✩ economic activity

✎ Economic activity ✦ virus: drop in ❘✵ after lockdown

✦ feedback: activity ✦ virus

✎ Virus ✦ economic activity: VSL literature

✦ feedback: virus ✦ activity KMV - Great Lockdown

Outline I

• 1. Model
• 2. Parameterization
• 3. Results
• 4. Conclusions
• 5. Linked Slides

KMV - Great Lockdown

Laissez-faire vs Lockdown Dynamics

Apr Jul Oct 2021 Apr Jul 0.00 0.02 0.04 0.06 0.08 0.10 0.12

(a) Monthly Death Rate (%)

Laissez-faire Full Lockdown

Apr Jul Oct 2021 Apr Jul 50 40 30 20 10

(c) Labor Income (CF: C-intensive, Flexible) (%)

Laissez-faire Full Lockdown

Apr Jul Oct 2021 Apr Jul

Month

50 40 30 20 10

(e) Labor Income (SF: S-intensive, Flexible) (%)

Laissez-faire Full Lockdown

Apr Jul Oct 2021 Apr Jul 25 20 15 10 5

(b) Output (%)

Laissez-faire Full Lockdown

Apr Jul Oct 2021 Apr Jul 50 40 30 20 10

(d) Labor Income (CR: C-intensive, Rigid) (%)

Laissez-faire Full Lockdown

Apr Jul Oct 2021 Apr Jul

Month

50 40 30 20 10

(f) Labor Income (SR: S-intensive, Rigid) (%)

Laissez-faire Full Lockdown

✎ Lockdown ✦ second wave, but fewer deaths ✎ Lockdown ✦ longer, deeper contraction and ❲-shaped recovery

✦ lockdown path ✦ laissez-faire dynamics ✦ lockdown dynamics ✦ lockdown decomposition KMV - Great Lockdown

Laissez-faire vs Lockdown Dynamics

Apr Jul Oct 2021 Apr Jul 0.00 0.02 0.04 0.06 0.08 0.10 0.12

(a) Monthly Death Rate (%)

Laissez-faire Full Lockdown

Apr Jul Oct 2021 Apr Jul 50 40 30 20 10

(c) Labor Income (CF: C-intensive, Flexible) (%)

Laissez-faire Full Lockdown

Apr Jul Oct 2021 Apr Jul

Month

50 40 30 20 10

(e) Labor Income (SF: S-intensive, Flexible) (%)

Laissez-faire Full Lockdown

Apr Jul Oct 2021 Apr Jul 25 20 15 10 5

(b) Output (%)

Laissez-faire Full Lockdown

Apr Jul Oct 2021 Apr Jul 50 40 30 20 10

(d) Labor Income (CR: C-intensive, Rigid) (%)

Laissez-faire Full Lockdown

Apr Jul Oct 2021 Apr Jul

Month

50 40 30 20 10

(f) Labor Income (SR: S-intensive, Rigid) (%)

Laissez-faire Full Lockdown

✎ Large drop in income for S-intensive occupations even in laissez faire ✎ Lockdown ✦ further drop in income for C-intensive occupations

✦ lockdown path ✦ laissez-faire dynamics ✦ lockdown dynamics ✦ lockdown decomposition KMV - Great Lockdown

Pandemic Possibility Frontier (PPF)

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40

Deaths (% of Population)

2 4 6 8 10

Economic Welfare Cost (Multiples of Monthly Income)

Laissez-faire US Lockdown 12-Month Lockdown 1 7

• M
• n

t h L

• c

k d

• w

n

Mean p25-p75 p10-p90 p5-p95

✎ Large average economic costs and big dispersion ✎ Heterogeneity in economic costs exacerbated with longer lockdowns ✎ Very non-linear trade-off: role of ICU constraint and vaccine

✦ ppf by occupation KMV - Great Lockdown

Distribution of Economic Welfare Costs

Earnings Decile ✎ Largest economic costs in middle of distribution ✎ Transfers (bottom) vs Rigid labor (middle) vs Flexible labor (top)

✦ welfare cost distribution KMV - Great Lockdown

CARES Act Shifts Down the PPF

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35

Deaths (% of Population)

2 4 6 8 10

Economic Welfare Cost (Multiples of Monthly Income)

US Lockdown L a i s s e z

• f

a i r e US Policy 1 7

• M
• n

t h L

• c

k d

• w

n 12-Month Lockdown Mean w/o Fiscal Support p10-p90 w/o Fiscal Support Mean w/ Fiscal Support p10-p90 w/ Fiscal Support

✎ CARES Act: stimulus checks, pandemic UI, PPP , retirement withdrawals

✦ CARES Act details ✦ CARES Act dynamics ✦ components of CARES Act ✦ CARES Act by income quartile ✦ components by income quartile KMV - Great Lockdown

Distribution of Economic Welfare Costs

Earnings Decile ✎ Big impact of CARES Act on households below the median

✦ welfare cost distribution KMV - Great Lockdown

Consumption Dynamics

Apr Jul Oct 2021 Apr Jul

Month

30 20 10

(a) Labor Income (%)

Bottom Quartile 2nd Quartile 3rd Quartile Top Quartile

Apr Jul Oct 2021 Apr Jul

Month

20 15 10 5

(b) Consumption (%)

Bottom Quartile 2nd Quartile 3rd Quartile Top Quartile

✎ US Data: biggest ② drops, but fastest ❝ recovery at bottom

✦ US data

✎ CARES Act redistributed toward low-income households with high MPC

✦ components of CARES Act by income quartile KMV - Great Lockdown

Smarter Alternative Polices

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 2 4 6 8 10

(a) Comparison

Mean: US Lockdown Mean: Lockdown w/ C Sector Exempted Mean: Social Consumption Tax Mean: Workplace Hours Tax

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 2 4 6 8 10

L a i s s e z

• f

a i r e 17-Month 12-Month 21-Month 2-Month

(b) Lockdown w/ C Sector Exempted

Mean p10-p90 p25-p75

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35

Deaths (% of Population)

2 4 6 8 10

L a i s s e z

• f

a i r e 17-Month 12-Month 21-Month 2-Month

(c) Social Consumption Tax

Mean p10-p90 p25-p75

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35

Deaths (% of Population)

2 4 6 8 10

L a i s s e z

• f

a i r e 17-Month 12-Month 21-Month 2-Month

(d) Workplace Hours Tax

Mean p10-p90 p25-p75

KMV - Great Lockdown

Outline I

• 1. Model
• 2. Parameterization
• 3. Results
• 4. Conclusions
• 5. Linked Slides

KMV - Great Lockdown

Messages

• 1. Economic costs of pandemic: large and heterogeneous, regardless of

lockdowns

• 2. Distributional PPF is useful for quantifying trade-offs:

✎ Aggregate tradeoff between lives vs livelihoods ✎ Distributional tradeoff over who bears economic burden

• 3. Non-linear PPF: reconciles conflicting views on aggregate tradeoff
• 4. Exposure correlated with vulnerability ✮ scope for fiscal policy
• 5. US CARES Act:

✎ Shifts PPF inward: reduces economic costs w/0 increasing deaths ✎ Faster recovery of spending for low income households

• 6. Pigouvian schemes alternative to lockdowns improve aggregate trade-off

KMV - Great Lockdown

Muchas Gracias!

KMV - Great Lockdown

Outline I

• 1. Model
• 2. Parameterization
• 3. Results
• 4. Conclusions
• 5. Linked Slides

KMV - Great Lockdown

Distributional Pandemic Possibility Frontier

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35

Deaths (% of Population)

2 4 6 8 10

Economic Welfare Cost (Multiples of Monthly Income)

US Lockdown Laissez-faire US Policy 17-Month Lockdown 12-Month Lockdown Mean w/o Fiscal Support p10-p90 w/o Fiscal Support Mean w/ Fiscal Support p10-p90 w/ Fiscal Support

✦ back to intro KMV - Great Lockdown

Some Dimensions we Abstract From

• 1. Differential impact of the epidemic across age groups

(Glover-Heathcote-Krueger-RiosRull, Bairoliya-Imrohoroglu, Brotherhood-Kircher-Santos-Tertilt, ...)

• 2. Differential impacts of the epidemic across gender

(Alon-Doepke-Olmstead Rumsey-Tertilt, ...)

• 3. Impact of the epidemic on deaths from other causes
• 4. Input-output linkages in production

(Baqaee-Farhi, ...)

• 5. Firm balance sheets, liquidity provision to firms

(Buera-Fattal Jaef-Neumeyer-Shin, Elenev-Landvoigt-VanNieuwerburgh, ...)

• 6. Costly destruction of viable employment relationships
• 7. ...

✦ model ingredients KMV - Great Lockdown

Background on Lockdowns in SIR Models

✎ Some vocabulary:

• 1. Basic reproduction number:

❘✵ ✿❂ ☞✵❂✕■

• 2. Effective reproduction number:

❘❡

t ✿❂ ❘✵ ✂ ❙t❂◆t

• 3. Herd immunity threshold:

❙✄❂◆ ✿❂ ✶❂❘✵

• r

❘✄❂◆ ❂ ✶ ❙✄❂◆ ❂ ✶ ✶❂❘✵

• 4. Final size of disease:

❙✶ ❂ ❡❘✵✭✶❙✶✮ ✎ Two key features of SIR models:

• 1. Infections ✧ if ❘❡

t ❃ ✶ or ❙ ❃ ❙✄ and ★ otherwise

• 2. Epidemic “overshoot”: total infections > herd immunity, ❙✶ ❃ ❙✄

✎ Results on lockdowns := ❘✵ ★ ✎ Even temporary lockdowns reduce total number of infections ✎ But total number of infections ✕ herd immunity threshold ✎ Best lockdowns-only can do is eliminate epidemic “overshoot” ✎ If lockdown too short or too tight, get 2nd wave

✦ back KMV - Great Lockdown

Background on Lockdowns in SIR Models

✎ Some vocabulary:

• 1. Basic reproduction number:

❘✵ ✿❂ ☞✵❂✕■

• 2. Effective reproduction number:

❘❡

t ✿❂ ❘✵ ✂ ❙t❂◆t

• 3. Herd immunity threshold:

❙✄❂◆ ✿❂ ✶❂❘✵

• r

❘✄❂◆ ❂ ✶ ❙✄❂◆ ❂ ✶ ✶❂❘✵

• 4. Final size of disease:

❙✶ ❂ ❡❘✵✭✶❙✶✮ ✎ Two key features of SIR models:

• 1. Infections ✧ if ❘❡

t ❃ ✶ or ❙ ❃ ❙✄ and ★ otherwise

• 2. Epidemic “overshoot”: total infections > herd immunity, ❙✶ ❃ ❙✄

✎ Results on lockdowns := ❘✵ ★ ✎ Even temporary lockdowns reduce total number of infections ✎ But total number of infections ✕ herd immunity threshold ✎ Best lockdowns-only can do is eliminate epidemic “overshoot” ✎ If lockdown too short or too tight, get 2nd wave

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Background on Lockdowns in SIR Models

✎ Some vocabulary:

• 1. Basic reproduction number:

❘✵ ✿❂ ☞✵❂✕■

• 2. Effective reproduction number:

❘❡

t ✿❂ ❘✵ ✂ ❙t❂◆t

• 3. Herd immunity threshold:

❙✄❂◆ ✿❂ ✶❂❘✵

• r

❘✄❂◆ ❂ ✶ ❙✄❂◆ ❂ ✶ ✶❂❘✵

• 4. Final size of disease:

❙✶ ❂ ❡❘✵✭✶❙✶✮ ✎ Two key features of SIR models:

• 1. Infections ✧ if ❘❡

t ❃ ✶ or ❙ ❃ ❙✄ and ★ otherwise

• 2. Epidemic “overshoot”: total infections > herd immunity, ❙✶ ❃ ❙✄

✎ Results on lockdowns := ❘✵ ★ ✎ Even temporary lockdowns reduce total number of infections ✎ But total number of infections ✕ herd immunity threshold ✎ Best lockdowns-only can do is eliminate epidemic “overshoot” ✎ If lockdown too short or too tight, get 2nd wave

✦ back KMV - Great Lockdown

Market Clearing Conditions

✎ Regular goods market ❨❝ ❂ ❈❝ ✰ ■ ✰ ● ✰ ✤ ✎ Social goods market ❨s ❂ ❈s ✎ Labor market for each occupation ◆❥

❝ ✰ ◆❥ s ❂

• ③✭❵❥

✇✭h❀ ❛❀ ❜❀ ③✮ ✰ ✣❥❵❥ r✭h❀ ❛❀ ❜❀ ③✮✮❞✖❀

❥ ❂ ✶❀ ✿✿✿❀ ✺ ✎ Liquid asset market ❇❤ ❂ ❇❣ ✎ Illiquid asset market ❆ ❂ ❱fund✭❑❀ ✂❝❀ ✂s✮❀ ❑ ❂ ❑❝ ✰ ❑s

✦ model ingredients KMV - Great Lockdown

Epidemiological Parameters

Description Parameter Value Initial basic reproduction number ❘init

✵

❂ ☞init

✵ ❂✕■

✷✿✺ Final basic reproduction number ❘end

✵

❂ ☞end

✵

❂✕■ ✷

• Avg. duration of ■nfectious

❚■ ✮ ✕■ ❂ ✶❂❚■ ✹✿✸ days

• Avg. duration of ❊xposure (latency)

❚❊ ✮ ✕❊ ❂ ✶❂❚❊ ✺✿✵ days Infection fatality rate IFR = ✤✍❈ ✵✿✵✷ ✂ ✵✿✸✸ ❂ ✵✿✵✻✻ ✎ Time trend in transmissions (masks,...): ⑦ ❘t ❂ ✭✶ ✦t✮❘✵ ✰ ✦t ✖ ❘❀ ✖ ❘ ❂ ✶✿✺❀ ✦t = logistic ✎ Herd immunity threshold: ✶ ✶❂❘init

✵

❂ ✻✵✪ ✮ ✶ ✶❂❘end

✵

❂ ✺✵✪ ✎ Vaccine arrival after 18 months

✦ back to parameterization KMV - Great Lockdown

Occupations: Flexibility

✎ O*NET: Share of tasks that can be performed at home (Dingel-Neiman) ✎ ATUS Q: As part of your (main) job, can you work at home? ✎ Systematic variation across 3-digit SOC occupations

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 ATUS (share of individuals who can work from home) 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 O*NET (share of teleworkable jobs)

✎ Two flexibility levels: high flexibility occupation if O*NET share > 0.5.

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Occupations: Social vs Regular Intensity

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Occupations: Exposure vs Vulnerability

• 1000

1000 2000 3000 4000 5000

Median liquid wealth ($)

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

ONET (share of teleworkable jobs) Correlation between Flexibility and Median Liquid Wealth Across Occupations

Weighted Correlation: 0.51

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Occupations: Exposure vs Vulnerability

Occupation ✣❥ ✘❥

❝

✘❥

s

Empl Share Earnings Liq Wealth Essential ✵✿✶ ✵✿✶✾ ✵✿✸✺ ✵✿✸✶ ✩✹✺❑ ✩✶❀ ✸✵✵ CF: C-intensive, Flexible ✶ ✵✿✺✼ ✵✿✶✷ ✵✿✷✶ ✩✼✾❑ ✩✶✽❀ ✹✵✵ SF: S-intensive, Flexible ✶ ✵✿✵✸ ✵✿✶✾ ✵✿✶✵ ✩✺✶❑ ✩✽❀ ✾✵✵ CR: C-intensive, Rigid ✵✿✶ ✵✿✶✾ ✵✿✵✹ ✵✿✶✸ ✩✹✺❑ ✩✶❀ ✵✵✵ SR: S-intensive, Rigid ✵✿✶ ✵✿✵✹ ✵✿✷✾ ✵✿✷✹ ✩✸✷❑ ✩✾✵✵ Source: O*NET, OES, SIPP

✎ Estimate stochastic processes for household wage dynamics by

• ccupation from PSID

✎ To match liquid wealth we add occupational-specific wedge on liquid rate

✦ back to parameterization KMV - Great Lockdown

Feedback: Economic Activity to Virus

✎ Transmission rate for infections: ☞t ❂ ⑦ ☞t ❈st ✖ ❈s ✗s

☞ ▲✇t

✖ ▲✇ ✗✇

☞

✎ Google COVID-19 Community Mobility Data:

Feb 18 Mar 03 Mar 17 Mar 31 Apr 14 Apr 28 Date 2020

• 60
• 50
• 40
• 30
• 20
• 10

10 20 Workplace Mobility Index Over 90% of population in lockdown Feb 18 Mar 03 Mar 17 Mar 31 Apr 14 Apr 28 Date 2020

• 60
• 50
• 40
• 30
• 20
• 10

10 20 Retail Mobility Index Over 90% of population in lockdown

✎ Estimates of ❘t drop from ✷✿✺ to ✵✿✽ after lockdown ✎ Drop in acrivity of ✺✵✪ ✮ elasticities: ✗s

☞ ❂ ✗✇ ☞ ❂ ✵✿✽

✦ back to parameterization KMV - Great Lockdown

Feedback: Virus to Economic Activity

✎ Parameterize utility shifters as: ✢❵✭ ❴ ❉✮ ❂ ❡①♣

• ✗✵

❵ ❴

❉✗✶

❵

• ❀

✢s✭ ❴ ❉✮ ❂ ❡①♣

• ✗✵

s ❴

❉✗✶

s

• ✎ Maps into VSL calculations: optimality condition for hours worked is

❧♦❣ ✇✐t ❂ ✌✵

❵

• ✗✵

❵ ❴

❉

✗✶

❵

t

• ✰ ✌✶

❵ ❳✐t

✎ Used to estimate monetary compensation for fatality risk ✎ increasing and concave in risk

Greenstone et al. (2014), Lavetti (2020)

✎ Target VSL between $4-10M for fatality rates between 1/1,000 and 1/10,000 per quarter (relevant magnitude for COVID-19)

✦ back to parameterization KMV - Great Lockdown

Lockdown Scenario

Apr Jul Oct 2021 Apr Jul

Month

10 20 30 40 50 60

(a) Workplace Lockdown (%)

Apr Jul Oct 2021 Apr Jul

Month

20 40 60 80

(b) Social Sector Lockdown (%)

✎ Calibrated to obtain decline in workplace and retail activity (Google) ✎ Assumption: no future lockdown in case of 2nd wave

✦ back KMV - Great Lockdown

Aggregates Dynamics: Laissez-Faire

Apr Jul Oct 2021 Apr Jul Month 0.0 0.5 1.0 1.5 2.0 2.5

(a) Reproduction Number

R0 Effective R Apr Jul Oct 2021 Apr Jul Month 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

(b) Infectious (% of Population)

Apr Jul Oct 2021 Apr Jul Month 0.000 0.025 0.050 0.075 0.100 0.125 0.150 0.175 0.200

(c) Monthly Death Rate (%)

Actual No ICU Constraint Apr Jul Oct 2021 Apr Jul Month 50 40 30 20 10

(d) Output (%)

Y Regular Y Social Y Apr Jul Oct 2021 Apr Jul Month 50 40 30 20 10 10

(e) Consumption (%)

C Regular C Social C Apr Jul Oct 2021 Apr Jul Month 20 15 10 5 5 10

(f) Investment and Share Price (%)

Investment Share Price Apr Jul Oct 2021 Apr Jul Month 100 80 60 40 20 20 40 60

(g) Hours (%)

Workplace Hrs. Home Hrs. Apr Jul Oct 2021 Apr Jul Month 30 20 10 10 20

(h) Labor (%)

Labor Productivity Labor Income Apr Jul Oct 2021 Apr Jul Month 2.35 2.40 2.45 2.50 2.55 2.60 2.65 2.70

(i) Government Debt

Quarterly GDP 600 400 200 200 400 Remote Hrs.

✦ back KMV - Great Lockdown

Aggregates Dynamics: Lockdown

Apr Jul Oct 2021 Apr Jul Month 0.0 0.5 1.0 1.5 2.0 2.5

(a) Reproduction Number

R0 Effective R Apr Jul Oct 2021 Apr Jul Month 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

(b) Infectious (% of Population)

Apr Jul Oct 2021 Apr Jul Month 0.000 0.025 0.050 0.075 0.100 0.125 0.150 0.175 0.200

(c) Monthly Death Rate (%)

Actual No ICU Constraint Apr Jul Oct 2021 Apr Jul Month 50 40 30 20 10

(d) Output (%)

Y Regular Y Social Y Apr Jul Oct 2021 Apr Jul Month 50 40 30 20 10 10

(e) Consumption (%)

C Regular C Social C Apr Jul Oct 2021 Apr Jul Month 20 15 10 5 5 10

(f) Investment and Share Price (%)

Investment Share Price Apr Jul Oct 2021 Apr Jul Month 100 80 60 40 20 20 40 60

(g) Hours (%)

Workplace Hrs. Home Hrs. Apr Jul Oct 2021 Apr Jul Month 30 20 10 10 20

(h) Labor (%)

Labor Productivity Labor Income Apr Jul Oct 2021 Apr Jul Month 2.35 2.40 2.45 2.50 2.55 2.60 2.65 2.70

(i) Government Debt

Quarterly GDP 600 400 200 200 400 Remote Hrs.

✦ back KMV - Great Lockdown

Lockdown Decomposition

Apr Jul Oct 2021 Apr Jul 0.00 0.02 0.04 0.06 0.08 0.10 0.12

(a) Monthly Death Rate (%)

Laissez-faire Full Lockdown Social Sector Lockdown Workplace Lockdown Apr Jul Oct 2021 Apr Jul 50 40 30 20 10

(b) Labor Income (CF: C-intensive, Flexible) (%)

Laissez-faire Full Lockdown Social Sector Lockdown Workplace Lockdown Apr Jul Oct 2021 Apr Jul 50 40 30 20 10

(c) Labor Income (SF: S-intensive, Flexible) (%)

Laissez-faire Full Lockdown Social Sector Lockdown Workplace Lockdown Apr Jul Oct 2021 Apr Jul Month 25 20 15 10 5

(d) Output (%)

Laissez-faire Full Lockdown Social Sector Lockdown Workplace Lockdown Apr Jul Oct 2021 Apr Jul Month 50 40 30 20 10

(e) Labor Income (CR: C-intensive, Rigid) (%)

Laissez-faire Full Lockdown Social Sector Lockdown Workplace Lockdown Apr Jul Oct 2021 Apr Jul Month 50 40 30 20 10

(f) Labor Income (SR: S-intensive, Rigid) (%)

Laissez-faire Full Lockdown Social Sector Lockdown Workplace Lockdown

✦ back KMV - Great Lockdown

Economic Welfare Cost Distribution

1 2 3 4 5 6 7 8 9 10

Earnings Deciles

1 2 3 4

(a) Economic Welfare Cost

Laissez-faire US Policy US lockdown 4 3 2 1 1 2

Economic Welfare Cost

0.00 0.05 0.10 0.15 0.20

(b) Lockdown - Laissez-faire

4 3 2 1 1 2

Economic Welfare Cost

0.0 0.1 0.2 0.3 0.4

(c) Fiscal - Lockdown

4 3 2 1 1 2

Economic Welfare Cost

0.0 0.1 0.2 0.3

(d) Fiscal - Laissez-faire

✦ back KMV - Great Lockdown

Production Possibility Frontier by Occupation

✎ ❈-intensive, rigid occupations (green line) hurt most by longer lockdowns

✦ back KMV - Great Lockdown

Modeling CARES Act

Apr Jul Oct 2021 Apr Jul

Month

0.0 0.5 1.0 1.5 2.0 2.5 3.0

(a) Transfers (% of Quarterly GDP)

Check UI

Apr Jul Oct 2021 Apr Jul

Month

10 20 30 40 50

(b) PPP Subsidies (%)

Wage Profit

Apr Jul Oct 2021 Apr Jul

Month

25 20 15 10 5

(c) Withdrawal Cost (%)

✎ Stimulus checks: unconditional transfer of $1,900 to everyone ✎ Pandemic UI: replacement earnings loss by decile (Ganong-Vavra) ✎ Paycheck Protection Program: part wage & profit subsidies (half each) ✎ 401(k) withdrawals up to $100,000: reduction in withdrawal cost

✦ back KMV - Great Lockdown

Aggregates Dynamics: Lockdown + CARES Act

Apr Jul Oct 2021 Apr Jul Month 0.0 0.5 1.0 1.5 2.0 2.5

(a) Reproduction Number

R0 Effective R Apr Jul Oct 2021 Apr Jul Month 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

(b) Infectious (% of Population)

Apr Jul Oct 2021 Apr Jul Month 0.000 0.025 0.050 0.075 0.100 0.125 0.150 0.175 0.200

(c) Monthly Death Rate (%)

Actual No ICU Constraint Apr Jul Oct 2021 Apr Jul Month 50 40 30 20 10

(d) Output (%)

Y Regular Y Social Y Apr Jul Oct 2021 Apr Jul Month 50 40 30 20 10 10

(e) Consumption (%)

C Regular C Social C Apr Jul Oct 2021 Apr Jul Month 20 15 10 5 5 10

(f) Investment and Share Price (%)

Investment Share Price Apr Jul Oct 2021 Apr Jul Month 100 80 60 40 20 20 40 60

(g) Hours (%)

Workplace Hrs. Home Hrs. Apr Jul Oct 2021 Apr Jul Month 30 20 10 10 20

(h) Labor (%)

Labor Productivity Labor Income Apr Jul Oct 2021 Apr Jul Month 2.35 2.40 2.45 2.50 2.55 2.60 2.65 2.70

(i) Government Debt

Quarterly GDP 600 400 200 200 400 Remote Hrs.

✦ back KMV - Great Lockdown

Decomposition of CARES Act Elements

Apr Jul Oct 2021 Apr Jul 0.0 0.5 1.0 1.5 2.0 2.5

(a) Effective R

No CARES Check + UI Full CARES

Apr Jul Oct 2021 Apr Jul 30 25 20 15 10 5 5

(b) Labor Income (%)

No CARES Check + UI Full CARES

Apr Jul Oct 2021 Apr Jul 60 50 40 30 20 10

(c) Workplace Hours (%)

No CARES Check + UI Full CARES

Apr Jul Oct 2021 Apr Jul

Month

0.000 0.005 0.010 0.015 0.020 0.025 0.030

(d) Monthly Death Rate (%)

No CARES Check + UI Full CARES

Apr Jul Oct 2021 Apr Jul

Month

25 20 15 10 5

(e) Consumption (%)

No CARES Check + UI Full CARES

Apr Jul Oct 2021 Apr Jul

Month

4 3 2 1 1

(f) Share Price (%)

No CARES Check + UI Full CARES

✦ back KMV - Great Lockdown

CARES Act by Income Quartile

Apr Jul Oct 2021 Apr Jul 40 30 20 10 10

Full CARES

(a) Labor Income (%)

Bottom Quartile Top Quartile

Apr Jul Oct 2021 Apr Jul 20 20 40 60 80 100

(b) Total Income (%)

Bottom Quartile Top Quartile

Apr Jul Oct 2021 Apr Jul 25 20 15 10 5 5

(c) Consumption (%)

Bottom Quartile Top Quartile

Apr Jul Oct 2021 Apr Jul

Month

40 30 20 10 10

No CARES

(d) Labor Income (%)

Bottom Quartile Top Quartile

Apr Jul Oct 2021 Apr Jul

Month

25 20 15 10 5

(e) Total Income (%)

Bottom Quartile Top Quartile

Apr Jul Oct 2021 Apr Jul

Month

25 20 15 10 5 5

(f) Consumption (%)

Bottom Quartile Top Quartile

✦ back KMV - Great Lockdown

CARES Act Components by Income Quartile

Apr Jul Oct 2021 Apr Jul 40 30 20 10

Bottom Quartile

(a) Labor Income (%)

Apr Jul Oct 2021 Apr Jul 20 20 40 60 80 100

(b) Total Income (%)

None Check UI Withdraw PPP Full

Apr Jul Oct 2021 Apr Jul 25 20 15 10 5 5

(c) Consumption (%)

Apr Jul Oct 2021 Apr Jul

Month

25 20 15 10 5 5

Top Quartile

(d) Labor Income (%)

Apr Jul Oct 2021 Apr Jul

Month

25 20 15 10 5 5

(e) Total Income (%)

Apr Jul Oct 2021 Apr Jul

Month

25 20 15 10 5 5

(f) Consumption (%)

✦ back KMV - Great Lockdown

Consumption Dynamics by Income Quartile: US Data

−20 −10 10 20 30 Year over Year Percent Change 2019m4 2019m7 2019m10 2020m1 2020m4

Personal Consumption Expenditures Personal Savings Rate

✎ Source: Cox-Ganong-Noel-Vavra-Wong-Farrell-Greig ✎ Consumption of poor recovers faster than consumption of rich

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