In Medias Res

What I’ve got so far:

  1. Everything’s on the table. The likelihood that your preexisting ideology or priorities are an entirely adequate match to what this situation truly requires of us is close to nil. “In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists.” ”• Eric Hoffer
  2. That said, your life experience will give you insights. Privilege your experience over your ideology and nominal priorities.
  3. All disasters are local. Concentrate on your meaningfully immediate environment, which in this case will be the local market for medical resources. For most of the US, that will be our MSA. For those outside an MSA (metropolitan or micropolitan) that will be their county; and for some it will be the group of counties that feed into the one hospital in the region.
  4. Deprioritize pandemic news from outside your local area. There are people in the massive NY/NJ/MA outbreak that I worry about, but what happens there will only modestly resemble what happens in the KC MSA, not least because of the difference in population density, which can approach 20x.
  5. Mitigate or avoid your own risk (including the risk you pose to others) by both following the hygiene advice we’ve all heard and minimizing your physical interaction with anyone outside your immediate household. Internalize Râ‚€ = b × k × d, where Râ‚€ is the reproduction number of the virus, b is the probability of infection given contact with an infectious person, k is the contact rate, and d is the infectious duration. While the nominal Râ‚€ of COVID-19 is ~3, your personal Râ‚€ can be driven to < 1 by your own behavior.
  6. The general form of the challenge confronting us is abrupt wide variation in formerly relatively constant phenomena. In Talebian terms, we have migrated from “mediocristan” to “extremistan.” The multiplicative nature of a novel viral pandemic, especially by comparison to the relatively predictable seasonality of influenza viruses, has a thick-tailed (power law) probability structure and complex payoffs (notoriously ranging from large numbers of nearly asymptomatic cases to abruptly life-threatening “cytokine storm” reactions). For detail, see The Fourth Quadrant: A Map of the Limits of Statistics.
  7. So we find ourselves at serious risk of running out of ventilators, ICU beds, and even hospital beds generally, to say nothing of supplies (but see “all disasters are local,” above), raising the prospect of significant second-order mortality among those unable to obtain adequate care for entirely unrelated illnesses and injuries.
  8. In this connection, many prior customs, techniques, tools, and materials are being revealed as highly dysfunctional and, if all goes sufficiently well, will be swept into the dustbin of history. The bad news for me is that my earlier fears about easily-bottlenecked processes have been realized. But we may look forward to significant adaptation, including deregulation of medical services.
  9. Similarly, a large number of purported fixes and remedies will fail. Folk remedies, in particular, seem likely to be disastrous, and this blog’s audience needs no persuasion that attempts at central planning will fail thanks to the Hayekian local knowledge problem. In that connection, and to quote something I wrote a few years back: “John Gilmore famously said that ‘the Net interprets censorship as damage and routes around it.’ The future adaptation of representative democracies will depend on our capability, as individuals, to interpret endemic institutional dysfunctionality as damage and route around it.”
  10. The relatively vulnerable are closer to the center of the network: affluent, living in high-density major cities, well-traveled, extroverted, socially active, with large numbers of regular contacts (even if mostly in a “bubble” as per Murray’s notorious quiz). But some are the alienated and defiant who reject risk avoidance or even risk mitigation tactics (or attempt folk remedies instead), ordinarily associated with …
  11. The relatively invulnerable, who are at or near the edge of the network: impoverished, living in rural or low-density metro areas, untraveled, introverted, socially isolated, rarely in face-to-face contact with others. Many of these people have mental health issues and associated substance abuse problems. But the relatively invulnerable are also the intelligent and conscientious who promptly adopt appropriate risk management strategies.
  12. The post-pandemic preferences of the relatively invulnerable will have massive economic and cultural effects. I expect a reasonably quick partial recovery from the economic shutdown, but full recovery may take several years. Many of the “third places” which have done well over the last few decades will not regain their patronage, and as of early April 2020, we can only guess which ones. Fond hopes of some of my co-religionists aside for a sudden revival, I believe church attendance and involvement will be well down in the aftermath, and will not significantly grow until the next “Awakening,” which per Strauss and Howe should occur at mid-century. Until then, believers will be culturally marginalized and congregations will be smaller—but comprised of relatively fervent, active members.
  13. Geopolitical risks are heightened, especially US-China tensions, and if Xenakis’ “58-year hypothesis” holds, this very year will see an echo of the Cuban Missile Crisis.
  14. The most important output of this process—and it is a process, with inputs, providers, outputs, recipients, etc—will be a collective lessons-learned database, comprised of both tacit and explicit knowledge, and somehow transmitted to future generations.

From the Cosmos to Strings: Parallels of Economics to Physics

The first macroeconomic model of the U.S. economy consisted of 20 boxes of punched cards at 2000 cards per box that I would wheel on a dolly stacked five feet high to the main frame computer center where it took about three days to get results back.

Mathematics is the language of physics. Graduating with a BS in mathematics in the 1960’s, I faced a choice between my two minors, physics or economics. Some famous physicists had already declared that the quest for a unified mathematical explanation of the cosmos and its smallest building blocks was at hand. In economics, the attempt to build a mathematical macro model of the U.S. economy and fully integrate it with the micro economic mathematical models of human behavior represented a new frontier. I chose economics.

In retrospect, physicists are still searching for a Grand Unified Theory (GUT) of the universe. In economics, mathematics and statistics have widened the disagreement about how the economy works and the proper role of government in economic management.

God and Physics: from Aristotle to Hawking

Aristotle (382-324 BC) described the cosmos of round bodies in motion circling around the earth. It took almost two millennia until the sun-centric Copernican model was popularized by Galileo, who was imprisoned by the Pope, the political enforcer of orthodoxy at the time, in 1633 for heresy, forcing him to recant. But only a half century later, Newton described the mechanics of the universe and sun-centric solar system in Principia Mathematica (1687), which remains the cornerstone of basic physics.

In Newtonian physics, motion and speed are calculated relative to what you are moving away from. Maxwell’s discovery in the mid-1800’s that the speed of light was “absolute” required an explanation that stumped many physicists until the young patent office clerk Albert Einstein, unaware of these efforts, provided the novel Special Theory of Relativity (1905) that if light speed was constant space and time must be relative.

His mathematical model proved over time to provide a more precise description of the movement of heavenly bodies, but the implication of his equations that the universe was expanding violated his belief in a master plan of a “creator,” so he inserted a mathematical cosmological constant (what economic model builders would subsequently call a “dummy variable”) to stagnate it. But other physicists confirmed his original model, which in reverse required a mathematical ”singularity” – a beginning of time with a “big bang” from an infinitely small spec. The Catholic Church approved this model in 1952 as consistent with its orthodox views of a creator.

In 1970 Stephen Hawking proved that the big bang theory was the only one consistent with the existing models of the universe, but he later challenged those models. First, the violent path of destruction and creation over billions of years subsequent to the big bang that ultimately produced the building blocks of life was a “million to one shot”- is ours just one of millions of universes? Second, macro models of the universe broke down at the mathematical singularity, which remains inconsistent with micro models of the very small – in my youth molecules then atoms made up of protons, neutrons and electrons, now subatomic “quarks” and more recently sub-quark vibrating strings.

The scientific method is a slog: to understand the universe, the models must not only be tested empirically but compared to all the potential alternative explanations. Pre-conceived orthodox ideology has at times set the investigation back centuries.

The Progressive Orthodoxy of Mathematical Models in Economics

Macro economics, the desire to understand and control the workings of the economy at large, developed in response to the Great Depression. The roots of the mathematical approach to economic management trace to the founding of the Econometrics Society in 1930. John Maynard Keynes published his General Theory of Employment, Interest and Money in 1935, the title invoking the universality and finality of Einstein’s General Theory of Relativity published two decades prior.

Paul Samuelson’s Foundations of Economic Analysis (1947) provided a mathematical model of micro economic consumer and business behavior. I was a regular reader of Samuelson’s Newsweek columns in high school and used his undergraduate economics text at UMass, where I worked on the first macro economic model of the U.S. economy developed at the University of Pennsylvania by Samuelson’s first PhD student Lawrence Klein.

As a student of former Federal Reserve Board economist Pat Hendershott, I worked on the first Flow of Funds model of the U.S. financial sector. The main frame computer at Purdue University would run the punch cards of a professor’s research overnight, a big improvement. Such macro economic models are “Keynesian” central government centric by design: fiscal and monetary policies are modeled to control the economy, mitigating recessions and unemployment.

But other models haven’t been ruled out. In The Forgotten Depression (2014) James Grant argues that the Depression of 1921 there was no official designating body at the time following the end of the Great War cured itself in 18 months due to official benign neglect. In Grant’s view (and many others, including economists living through it) what made the subsequent Depression “Great” was massive political intervention that prevented the required adjustments.

While the merits and long term effectiveness of “small scale” and “counter-cyclical” measures remain debatable, the merits of the socialist centrally planned economies are not: hundreds of millions died and the remainder suffered economic stagnation while the capitalist world prospered. Only self described democratic socialist Bernie Sanders openly touts the performance of the centrally planned economies, but there isn’t much difference in the government centric policy approach of progressive politicians.

This macro narrative is generally consistent with anti-capitalist progressive ideology of business, workers and consumers dating back to Marx that is accepted by the majority of more recent college graduates. Economic statistical research across a wide spectrum from discrimination and labor exploitation to income inequality and market failure is offered in support, albeit inconsistent with a competitive market system. The competitiveness of the U.S. economy implies that correlation is too often assumed to imply causation without rigorously considering alternative explanations.

Creative Destruction Produces Economic Expansion

Humans owe their very existence to the massive creative destruction of the Cosmos (whether or not by the grace of God) for we are all made from the dust of exploding stars. In the economic sphere, virtually all human economic progress is attributable to capitalist competition and creative destruction, favoring the adaptive over the sluggish. Mathematical models haven’t adequately described entrepreneurial innovation. Progressive intervention to mitigate downside risk of creative destruction, broadly or to specific political constituencies, is highly correlated with stagnation.

Historically, even natural disasters including pandemics such as the corona virus (I assume it was “natural”) have provided opportunities for creative destruction. Consider, for example, the requirement that university students study online during the pandemic. While traditional colleges aren’t yet offering rebates, we know from experience that without the room, board and administrative costs and with increased productivity of fewer professors, online degrees can be provided for as little as one tenth the cost of the traditional approach.

Progressive proposals for taxpayers to foot the entire bill for the high cost model may be called democratic socialism but are indistinguishable from democratic crony capitalism for the political elite.

Kevin Villani

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Kevin Villani was chief economist at Freddie Mac from 1982 to 1985. He has held senior government positions, has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on how politicians and bureaucrats with no skin in the game caused the sub-prime lending bubble and systemic financial system failure.

Ruin and Recovery

A brokerage note I received recently included the following quote:

What has so often excited wonder, is the great rapidity with which countries recover from a state of devastation, the disappearance in a short time, of all traces of mischief done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.

John Stuart Mill, Principles of Political Economy, 1848

Questions for discussion:

–How well has Mill’s assertion held up over the 170 years since he wrote the above?

–Will American recovery from the Coronavirus follow Mill’s pattern, or is there reason to think that it will be different this time, and not in a good way?

How to fix US empty store shelves in 48 hours

It’s never a pleasant thing to stand up, alone, in the face of a national mania and provide an unpleasant solution. I’ve been putting it off for some time.

Finally, I’ve had it. Nobody who does this for a living seems to be willing to step up to the plate so I guess I’m stuck doing the job. The free-market solution to excess demand over supply is to raise prices. We are not raising prices to end the empty shelves because the government in various jurisdictions has made it illegal to raise prices in the face of an emergency.

Nobody has had the courage to say this. Everyone who has taken a basic economics course in the US knows this. This lack of even discussion on how to fix the empty shelf problem is deeply weird and nobody is talking about the odd silence either.

Update: Kudos to John Stossel who did address this issue (from a different perspective) a few hours prior to my publishing this. His article is here.

SARS-CoV2/COVID-10 Update 3-5-2020 — “As long as you remember to keep breathing and don’t fall asleep, it’s basically just like the flu.”

Issues covered will be on COVID-19 spread, World Headlines, the 3-4-2020 Seattle Public Health Press conference, World Headlind Summary,  Corruption at the WHO, Bad and good news COVID-19 medical developments. the Political/Demographic Implications of COVID-19 for the Gov’t  Elites, and the social media and videos COVID-19 tracking source section.

Top line, There are currently 97,138 confirmed COVID-19 cases worldwide, including 3,351 fatalities as of the March 5, 2020, at he 4:48pm ET time hack on the BNO News corona virus tracking site (https://bnonews.com/index.php/2020/02/the-latest-coronavirus-cases/) There are 80(+) and growing umber of nations including China plus three “Chinese special administrative regions” (Macao, Hong Kong and Taiwan) that have reported COVID-19 infections. China, Taiwan, Hong Kong, Japan, Thailand, Singapore, Italy, Iran, Germany, R.O.K. and the USA all appear to have local, or endemic, spread of the disease. Russia, Egypt, and Columbia appear to have joined the endemic spread list as well due to airports in the UAE and elsewhere picking up air travelers originating from those nations as sick with COVID-19.

WORLD HEADLINE SUMMARY (3/5/2020)

o New Jersey confirms first presumptive case
o NY state cases double to 22
o Seattle closes 26 schools
o Pentagon tracking 12 possible COVID-19 cases
o Illinois reports 5 more cases
o NYC reports 2 more cases, raising total to 4
o Italy postpones referendum vote; death toll hits 148
o WHO’s Tedros: “Now’s the time to pull out the stops”
o Tennessee confirms case
o Nevada confirms first case
o New Delhi closes primary schools
o EU officials weigh pushing retired health-care workers back into service to combat virus
o Italy to ask EU for permission to raise budget deficit as lawmakers approve €7.5 billion euros
o Beijing tells residents not to share food
o 30-year-old Chinese man dies in Wuhan 5 days after hospital discharge
o Cali authorities tell ‘Grand Princess’ cruise ship not to return to port until everyone is tested
o Global case total passes 95k
o Lebanon sees cases double to 31
o France deaths climb to 7, cases up 138 to 423
o EY sends 1,500 Madrid employees home after staffer catches virus
o Trump says he has a “hunch” true virus mortality rate is closer to 1%
o Switzerland reports 1st death
o South Africa confirms 1st case
o UK chief medical officer confirms ‘human-to-human’ infections are happening in UK
o UK case total hits 115
o Google, Apple, Netflix cancel events
o HSBC sends research department and part of London trading floor home
o Facebook contract infected in Seattle
o Microsoft, Google, Amazon, Netflix cancel events and/or ask employees to work from home
o Netherlands cases double to 82
o Spain cases climb 40, 1 new death
o Belgium reports 27 new cases bringing total to 50
o Germany adds 87 cases bringing total to 349

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