State Capacity

1) The benefits of mass testing

We have seen how some countries, territories and even cities have managed to reduce the contagion rate by COVID-19 to zero. The director of the World Health Organization, Dr. Tedros Adhanom Ghebreyesus, congratulated the government of Singapore for using a government-wide approach to the crisis and mobilizing all state resources to contain the infection. While in the small town of Vò in Italy, a team from the University of Padua tested all the inhabitants, approximately 3,000 people, and avoided in that town the disaster that shortly after hit the rest of the country (h/t: Deepak Lamba Nieves). Perhaps this methodology can’t be carried out in countries with a large population, but Professor Neeraj Sood, from the University of Southern California, proposes an alternate method, random testing to determine the course to follow (h/t: Raúl Santiago Bartolomei). These are just some of the examples that the government of Puerto Rico should be analyzing at this time.

2) Unprecedented intervention from the Federal Reserve

The Federal Reserve announced that it would be buying U.S. Treasury and mortgage-backed securities in the amounts necessary to keep financial markets running smoothly. In practical terms, this means an almost unlimited injection of liquidity into the financial system: in simple terms, when buying financial instruments, such as Treasury bonds, the Reserve increases the amount of money in circulation. In addition, it announced the creation of several credit facilities, both for companies and for financial institutions, that need short-term liquidity. This is the type of public policy intervention that is up with the times: decisive, far-reaching, out of the ordinary and unexpected.

3) Assistance to Puerto Rico’s economy

The Governor of Puerto Rico presented an assistance plan for the Puerto Rican economy. This plan includes, among other measures: (1) continuing to pay the salaries of public employees (central government and public corporations); (2) extending or postponing the period to pay certain taxes; (3) a $500 grant for people that are self-employed; (4) a $1,500 grant to qualifying small businesses; and (5) a bonus of up to $4,000 for all nurses (h/t: Malu Blázquez). These measures are necessary but insufficient, given the magnitude of the crisis, and the government of Puerto Rico will have to be more creative and willing to take risks. We believe that it is necessary to review the Fiscal Plan certified by the Financial Oversight and Management Board; significantly increase spending on health services; and designate more funds to pay cash grants to both small and medium-sized businesses and individuals.

4) Gridlock at the United States Senate

Democrats and Republicans still disagree on the terms and conditions of the third fiscal stimulus package that could total $1.8 trillion. One of the main issues under discussion is the discretion that the proposed legislation gives the Secretary of the Treasury to determine the companies that will benefit from a federal bailout. Democrats think that the measure proposed by Senate Majority Leader Mitch McConnell, the Coronavirus Economic Aid, Relief and Security Act (CARES), prioritizes aid to corporations over aid to individuals and workers and are demanding that restrictions be imposed on the use of the funds (for example, to prohibit the repurchase of shares) and that clear criteria be included in the law for their disbursement. In addition, they advocate for the inclusion of mandates to compel these companies to reduce their carbon emissions. This is an interesting proposal, if the costs of rescuing these companies are going to be socialized, it is only fair to internalize at least part of the environmental costs that they impose on the rest of society. In response to the Senate gridlock, the Speaker of the U.S. House of Representatives, Nancy Pelosi, presented an alternative measure, the Workers and Families Responsibility Law. The House of Representatives’ proposal, which totals $2.5 trillion, seeks to offer more labor protections, benefits for individuals and aid to small employers (h/t: Rosanna Torres).

5) The need for international cooperation

International cooperation needs to increase, not only regarding public health issues, but also in the economic policy arena. Professor Anne O. Krueger, from the Johns Hopkins’ Graduate School of Advanced International Studies (SAIS), explains the arguments in favor of a multilateral financial response to the economic crisis; our friend Brad Setser of the Council on Foreign Relations explains how foreign exchange lines would work to prevent a possible shortage of dollars in the global economy; and Professor Carmen M. Reinhart, from Harvard’s JFK School of Government, explains why this crisis requires large-scale action around the world.

Quote of the Day

“It’s unthinkable. ‘Everyone knows [the plague] ceased to appear in western Europe.’ Yes, everyone knew that—except the dead men.”

—Albert Camus, The Plague.

From the editor’s desk

The need for a state with the capacity to act effectively during a crisis is the unifying theme of today’s summary. In times like these, only the state has the authority, the legitimacy and the resources to effectively implement the necessary emergency measures. State capacity can decline for many reasons: lack of financial resources; shortage of qualified personnel; the impact of austerity measures; rent seeking; or political gridlocks.

But it seems to us that the main one, in many cases, is simply the indifference of the people in charge. As Camus reminds us, again, in The Plague:

“There have been as many plagues as wars in history; yet always plagues and wars take people equally by surprise…When a war breaks out, people say: ‘It’s too stupid; it can’t last long.’ But though a war may well be ‘too stupid,’ that doesn’t prevent its lasting. Stupidity has a knack of getting its way; as we should see if we were not always so much wrapped up in ourselves.”

This is the end of today’s briefing.
Stay safe and well informed!

Living with Risk Daily Briefing – March 24

Center for a New Economy

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