Yale’s Tobin Center addresses economic challenges of pandemic
Yale economists Steven Berry, the Jeffrey Talpins Faculty Director of the Tobin Center for Economic Policy, and Zack Cooper, the Tobin Center’s associate faculty director, are advising policymakers and legislators during the COVID-19 pandemic. Berry, the David Swensen Professor of Economics, and Cooper, associate professor of public health and economics, recently shared their ideas and insights with YaleNews.
The Tobin Center seeks to advance policy relevant research. The country faces an unprecedented moment where smart policy is critical to health and the economy. What has the center been doing in response to COVID-19?
STEVE BERRY: We have a range of COVID-19 projects. Big picture, our major goal has been to synthesize the evidence coming out of the economics community and translate it for legislators and policymakers. There is near unanimity among mainstream economists that the “first rule of pandemic economics” is to fight the cause of our economic problems: the COVID-19 virus itself. The scale of the effect of COVID-19 on the economy is shocking. The best estimates we have are that we’re seeing a 35% contraction in GDP. That translates to roughly $19 billion per day in losses for each day the economy is closed. That is why we’ve been saying that, in our collective view, given the scale of the economic and social harm COVID-19 is inflicting, it is imperative to that the federal government invest huge amounts — likely hundreds of billions — directly into efforts to address COVID-19. This would be a significant increase over what we’re spending now.
ZACK COOPER: Steve is exactly right. The big challenge we’re facing right now is determining how to create the conditions in the country for a safe reopening. We know that getting the economy open, say, 30 days faster would save us on the order of half a trillion dollars. Some have framed reopening as a debate between economists and public health academics. This couldn’t be further from the truth. What we’ve been arguing is that precisely because the economic costs of social distancing and COVID-19 are so high, we need to be spending way more on ramping-up testing, contract tracing, masks, and on the medical innovation that will support the reopening of the economy.
Were our priorities off? Should we have spent $2 trillion on stimulus?
BERRY: The money in that stimulus bill was absolutely critical to address the economic suffering caused by the enforced shutdown. And our colleague Giuseppe Moscarini has done some excellent work to identify how the money should be spent. However, little of that $2 trillion was aimed at safely reopening the economy, it was almost all financial aid to affected people and firms. In essence, it is treating the symptoms, not the cause.
Right now, we are using social distancing to stop the spread of the pandemic. Going forward, we need to be spending much more on testing, on the development and production of vaccines and treatment, so that we create the conditions to safely relax social distancing.
Ivan Werning at MIT has a good analogy that I think really makes this point well. If we knew that there was an asteroid coming towards the earth and we had four months to act, the solution would pretty clearly be marshalling the funds to destroy it. We’d need to address the economy, of course, but the priority would be the asteroid. The same applies to COVID-19. I understand that we have 12 to 18 months before a vaccine is online. In the meantime, we have to focus on fighting the virus directly.
What does fighting the virus mean in practice?
COOPER: I think it’s investment and federal leadership together in four areas: 1) driving the production of COVID-19 screening tests on a massively larger scale; 2) driving the production of masks and PPE; 3) investing in the development of a vaccine; and 4) investing in treatments for COVID-19 that lessen symptoms so we can open the economy without the health system becoming overwhelmed. It’s also developing a conditions-based plan for reopening the economy.
The big concern for me, the big concern for both of us, is the fact that most of the deaths from the 1918 flu pandemic came during the second wave. What this means is that now isn’t the time to let up. Now is the time to really scale-up our public health infrastructure. If we open the economy without proper safeguards in place, without sufficient public health investment, we’re going to face an unacceptably high risk of a second wave. If we have a second wave and we need a second large-scale lockdown, it would be a body blow to the economy, to say nothing of the devastating loss of life that would ensue.
BERRY: There really is a pretty overwhelming case for a massive increase in COVID-specific federal funding. We’ve also called for a World War II style Production Board to steer our efforts to scale-up the production of the testing, and masks, and treatments that we’re going to need.
There are a few really good plans out there to open the economy — there’s a plan from Duke and the American Enterprise Institute, one from the Center for American Progress, Nobel-winning economist Paul Romer has described what a testing-centric plan might look like. The common theme across all these proposals is a massive ramp-up in testing. We’re going to need to be carrying out, at a minimum, several hundred thousand COVID-19 tests per day to open the economy. That is significantly higher than our current production levels. We’re going to need a plan to increase our capacity and increase it quickly.
How do we produce that many tests?
COOPER: I think this is really where economics can complement the ongoing great work on public health. This is something Steve and I are spending a lot of time on right now. I think it’s pretty clear that the Medicare program is paying too little for COVID tests. They’re paying about $40 dollars a test. They chose this $40 rate via the same kind of thinking that they would have used pre-crisis. And because of the way Medicare is paying providers, if I’m a lab — not to say they’re doing this — but I can make more money doing the same type of test for other conditions. This has to change. We need the federal government to raise their reimbursement rates for COVID tests pretty significantly.
The economics here is pretty interesting, I think. Medicare tries to cover providers’ incremental costs, not including the costs of new capacity or of developing new kinds of tests. Usually, that works out, as private payers tend to pay higher prices that end up covering those costs. But right now, we need a huge increase in testing, we need new firms developing novel tests, new firms producing tests. This means that over the next few months, the true costs of increasing production are going to be way higher than the usual way that Medicare calculates incremental cost. We know that some labs have said that the Medicare payment rates don’t cover their costs. If we want the volume of tests we’re going to need, we’re going to need to be paying more per test.
We have argued that the federal government should take three concrete steps to increase testing. First, they should be setting the prices of COVID tests for everyone in the system, and they should be setting a pretty high price — several hundred dollars per test. This would go a long way towards reducing some of the transaction costs we’re seeing slow down testing and would give certainty to firms to invest in the type of capital investment it will take to produce millions of more tests. Second, the federal government should be paying for all the tests that are provided — tests for Medicare beneficiaries, the privately insured, Medicaid beneficiaries, and the uninsured. Everyone. Third, the federal government should be pulling out all the stops to guarantee that we have the supplies necessary — swabs, reagents, etc. — to ramp-up testing. This might involve paying directly for firms’ start-up costs, or invoking the Defense Production Act.
BERRY: This is such an important point. The problems here are really the type of textbook market failures I teach about in my intro micro class. We’re just seeing them play out on this unbelievably important stage. We did some back of the envelope estimates and you can pretty easily get into a world where the value per test is really thousands of dollars to the wider economy. These types of positive externalities — wider benefits to society that aren’t usually reflected in our payments — need to be factored into the government’s payments. Because we need huge numbers of tests over a short period of time, we need the federal government to change reimbursement rates and, probably, to directly coordinate and subsidize the production chain. This likely means, for example, the government using the Defense Production Act to drive production.
What are other COVID-19 related projects are the Tobin Center, and economists at Yale in general, working on?
BERRY: Many things!
We are supporting several efforts that respond to urgent policy needs. The Tobin Center is fielding incoming requests from government and connecting them with Yale experts, analysts, and students on issues from streamlining unemployment system delays to survey design to performing crisis projections for human services and emergency management programs. There are great Yale projects on predicting real-time economic statistics from online sources. Yale economists are joining with Yale public health and medical faculty to consider the economic benefits of public health investments.
We are also funding new applied research to help improve the government’s policy response. For instance, in past economic crises, small businesses have not taken advantage of subsidized loan and other support programs at the levels economists and policymakers would hope. We are supporting a national survey and intervention seeking policy insights into barriers that prevent small businesses from participating in these programs. This research will help us share with policymakers the best, most cost-effective ways to increase participation. In connection, Tobin is also supporting a special deep-dive version of this work to support local small businesses with the City of New Haven and the Yale Law School, which can help businesses navigate legal barriers.
As part of the Yale community, we are supporting the COVID-19 response efforts by Yale’s broader social science faculty beyond economics, forging connections between social science and medical, science, and public health faculty, and standing up volunteer infrastructure to efficiently connect students, staff and faculty with policy-related service opportunities.
It is a great feeling to see so many economists, social scientists, and members of the broader Yale community responding in a deep and thoughtful way to present circumstances.
Note: After this interview occurred, the federal government on April 15 increased Medicare payment rates for COVID-19 tests. Cooper and Berry had advised federal policymakers to make this change. “We were thrilled that the Centers for Medicare and Medicaid Services raised payments for COVID-19 tests,” Cooper said. “Much more to be done, but it is important that they took this step.”
For more information on recommendations from Berry and Cooper, see this COVID-Response they have posted on the Tobin webpage (PDF).