Issues in Economics Today [9 ed.] 9781260225327, 9781264049271

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ISSUES IN ECONOMICS TODAY, NINTH EDITION Published by McGraw Hill LLC, 2 Penn Plaza, New York, NY 10121. Copyright ©2021 by McGraw Hill LLC. All rights reserved. Printed in the United States of America. Previous editions ©2018, 2015, and 2012. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw Hill LLC, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LWI 24 23 22 21 20 ISBN 978-1-260-22532-7 (bound edition) MHID 1-260-22532-1 (bound edition) ISBN 978-1-264-04927-1 (loose-leaf edition) MHID 1-264-04927-4 (loose-leaf edition) Director: Anke Weekes Associate Portfolio Manager: Kevin White Product Developer: Sarah Wood Marketing Manager: Bobby Pearson Content Project Managers: Lisa Bruflodt, Emily Windelborn Buyer: Sandy Ludovissy Designer: Matt Diamond Content Licensing Specialist: Brianna Kirschbaum Cover Image: ©4 PM production/Shutterstock Compositor: Aptara®, Inc. All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Names: Guell, Robert C., author. Title: Issues in economics today / Robert C. Guell, Indiana State  University. Description: Ninth edition. | New York, NY : McGraw-Hill Education, [2021]  | Series: The McGraw-Hill economics series | Includes index.

Identifiers: LCCN 2019030840 (print) | LCCN 2019030841 (ebook) | ISBN  9781260225327 (hardcover) | ISBN 1260225321 (MHID) | ISBN 9781264049271  (spiral bound) | ISBN 9781264049301 (ebook) | ISBN 9781264049325 (ebook other) Subjects: LCSH: Economics. Classification: LCC HB87 .G83 2021 (print) | LCC HB87 (ebook) | DDC 330—dc23 LC record available at https://lccn.loc.gov/2019030840 LC ebook record available at https://lccn.loc.gov/2019030841 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw Hill LLC, and McGraw Hill LLC does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered

The Economics of Pandemics

Learning Objectives After reading this chapter you should be able to: LO1

Summarize the data regarding the COVID-19 pandemic relative to other outbreaks, epidemics, and pandemics.

LO2

Analyze the impacts of COVID-19 using microeconomic tools.

LO3

Analyze the impacts of COVID-19 using macroeconomic tools.

LO4

Summarize regulatory, monetary, and fiscal responses of the U.S. and world governments to COVID-19.

LO5

Analyze the impacts of COVID-19 on international trade, global supply chains, and foreign exchange rates.

Chapter Outline Basics and Data Microeconomic Issues and Analysis Macroeconomic Issues and Analysis Government Responses International Issues Summary

The first officially recorded case of COVID-19 was detected in Wuhan, China, in late 2019. On January 21, 2020, the World Health Organization’s (WHO’s) first Situation Report was released. In this report, it was clear that the virus was both life-threatening and beyond the scope of previous viruses such as

MERS and SARS. By March 11, 2020, the WHO declared a global pandemic. In only a few months, the case count went from a few hundred to more than 10 million, with over 500,000 deaths. The economic impact was also severe. While the February unemployment rate was 3.5 percent with 273,000 jobs created, the situation quickly deteriorated. By late March, nearly every physical U.S. school and university campus had closed. Most states issued stay-at-home orders, allowing only essential businesses to operate. Economists who estimated the risk of recession in the United States to be minimal, were, within two weeks, convinced that annualized RGDP would decline by 20 percent or more in the second quarter of 2020. Americans reacted by purchasing record amounts of food and basic supplies, while emptying stores of N95 masks, hand sanitizer, and toilet paper. Though this was a perfectly understandable reaction individually, collectively it put more people at risk of infection because of in-store crowding. The response from government leaders, many of whom were adversaries in the impeachment trial of President Trump, collaborated to address various aspects of the pandemic with four separately negotiated and nearly unanimously passed pieces of legislation. The Federal Reserve also moved swiftly. It utilized many of the same Great Recession–tested policies. Yet, none of this was sufficient to stave off a 30 percent drop in major stock indices or dampen the likelihood of a recession. This chapter begins by laying a foundation of definitions and data. It provides perspective regarding the degree and rapidity of spread, while comparing the COVID-19 pandemic to other 20th- and 21st-century contagions. It proceeds to explain the micro and macroeconomic consequences of COVID-19 and the actions of U.S. and world leaders to control the associated spread and mitigate the economic consequences. It concludes by examining the international consequences of such an economic shock.

Basics and Data Definitions We’ll begin by distinguishing among the terms used by leading health organizations and the media to describe the spread of infectious diseases. Spread occurs in many ways and in various severities. An outbreak is a sudden increase in the number of cases infecting a limited geographic area. An epidemic mirrors an outbreak but applies to a larger area or population. During outbreaks and epidemics, the number of cases exceeds normal expectations. An epidemic develops into a pandemic when spread expands across several countries or continents impacting large populations. The WHO prepares, detects, and responds to severe, global health emergencies. In the United States, the Centers for Disease Control and Prevention (CDC) also serves this function.1 During times of pandemic, these entities are the leading sources of health guidelines and case data. Private research institutions like Johns Hopkins University and the University of Oxford assemble, aggregate, and regularly update this information as well as that from local sources on public dashboards. With all these data available, it can be overwhelming to know which sources to trust, how underlying data points are used in the media, and which organizations have the most current data. The WHO refers to this phenomenon as an infodemic, or an excess of information in varying levels of accuracy that makes it challenging to find dependable sources. COVID-19 was clearly the most widespread pandemic to occur in the digital age. Though updates were instantaneous via steaming newscasts, visualizations, and app-based news, it was difficult to tell a coherent story from these fragmented sources. When new infectious diseases are discovered, the WHO adds them to the International Classification of Diseases (ICD). In 2015, it also released updated best practices for naming new human infectious diseases. These guidelines advocate for using specific descriptive terms that are easy to pronounce and can be shortened into acronyms. Official names may also include the year of discovery and a sequential identifier. The guidelines emphasize using a causative pathogen if it is known. With COVID-19, the causative pathogen is a coronavirus. The term novel (meaning new) illustrates that it is a strain of coronavirus that wasn’t known prior to the outbreak. As officially reported by the WHO, coronavirus disease 2019, abbreviated as COVID-19, is the official name of the disease. The virus that causes COVID-19 is formally referred to as severe acute respiratory syndrome coronavirus 2 (SARS-CoV2).2 The WHO tracked COVID-19 and previous health emergencies using situation reports and health dashboards that it developed in conjunction with releases from national health agencies. The reports were posted each day detailing the total confirmed cases, total deaths, classification of transmission, and the days since the last case was reported in each geographic region and country. Because the state of COVID-19 was changing so rapidly, the WHO occasionally revised its methodology to acknowledge this reality. One notable revision included China’s shift from classifying cases as “clinically diagnosed” to “suspected” and “confirmed,” which caused some negative cases to be discarded. Another important technical modification occurred in mid-March 2020 when the data reporting window changed from ending at 09:00 CET to 00:00 CET. This change resulted in an overlap between two situation reports on consecutive days.

Aside from methodology challenges, the WHO and others were relying upon cases that had to be suspected by an individual doctor and tested and confirmed by a laboratory. After validation, each case was reported to and documented by the local health department, which was then published by a national health agency. Only then was case data available in a form that could be aggregated across countries. This process occurred in every country and took many days. Therefore, it is critical to recognize that cases reported on a certain day at an aggregate level may not reflect the number of new cases on that particular date.

Data and Characteristics How It Started The first suspected cases of COVID-19, detected in Wuhan City in the Hubei Province of China, were reported to the WHO on December 31, 2019. Based on experience with other coronaviruses, experts believe that the virus may have animal origins that crossed into humans and continued to spread through human-to-human contact. The National Health Commission of China attributed these first suspected cases to exposures in a seafood market (sometimes referred to as a wet market) in Wuhan City. In the following weeks, additional cases were reported, SARS-CoV-2 was officially identified, and the first imported cases emerged in Thailand, Japan, and South Korea. On January 21, 2020, the first COVID-19 Situation Report was released by the WHO. It reported the number of confirmed cases and key facts from the initial infection period. Every day during the late winter, spring, and summer of 2020, reports were released. Although the first cases were officially recorded in late December 2019, a study of satellite imagery suggested that the hospital parking lot congestion near Wuhan and internet searches for COVIDrelated symptoms, both began to spike in August 2019. While unconfirmed by Chinese officials, many alleged that the first cases may have been known prior to December 2019.

How It Is Characterized COVID-19 is commonly characterized by fever, exhaustion, dry cough, and shortness of breath. Others may experience achiness, a sore throat, loss of taste or smell, or a runny nose. The WHO estimates that 80 percent of people who contract COVID-19 recover from it without treatment, yet one in every six people develop serious illness and breathing problems that require medical intervention. COVID-19 is easily transmitted among people via moist droplets exiting the mouth or nose of infected people. If someone sneezes, coughs, or even merely exhales and the droplets are inhaled or transferred to the faces of other people, they may contract the disease. The CDC estimates that symptoms can appear 2 to 14 days after exposure. Those at the highest risk of serious illness based on the CDC's “strongest and most consistent evidence” include adults over 65 and anyone of any age with a serious underlying health condition—including, but not limited to, heart and lung conditions, obesity, Type 2 diabetes, and kidney disease. Specifically, a study of 5,700 New York City hospitalizations noted that 56.6 percent were hypertensive and 41.7 percent had a BMI over 30, with nearly half of those having a BMI over 35. One-third were diabetic. All of these were over their respective numbers in the general population.

How It Spread What initially began as imported and localized cases linked to the Wuhan City market quickly began to infect clusters of people who had not traveled there. Some cases were linked to people who had close

contact with someone with a known case. Community spread, where the source or contact with COVID-19 was unknown, occurred as well. Although social distancing and shelter-in-place, or even lockdown, measures were implemented across many countries to slow infection rates, once community spread began, cases grew exponentially. As time passed, it became clear that some countries were confronted with the disease more quickly than others, and each responded differently. Figure W.1 shows the exponential growth in cases using Day 1 for each country as the day of the 10th recorded infection. The number of cases on the yaxis is expressed using a logarithmic scale to display the wide range of data in a compact way. Logarithmic scales show exponential growth more effectively than linear ones because when something rises at rapid rates, low-end trajectory detail is captured.

FIGURE W.1

COVID-19 cases by country.

Source: World Health Organization (WHO),

www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports.

Although China’s initial infection curve was quite steep, once the disease spread to countries such as Italy, Spain, and Iran, they faced similar patterns. The United States experienced slower case growth at first, but once testing became more accessible, the curve changed dramatically. While it followed the trends of other European countries, the pace of infections did not slow as quickly. By mid-March, U.S. cases had exceeded that of all other countries in absolute terms. In contrast, some countries were impacted much later than others. For example, in Brazil, cases didn't begin to escalate until May. Nevertheless, by July, the absolute case count in Brazil was second only to the United States.  The interpretation challenge of Figure W.1 is knowing when cases peak and exponential growth ceases. Both China and South Korea surpassed this point in early March when their curves flattened. For reasons explained later, South Korea did so with a much lower number of confirmed cases. Another thing to consider when examining case growth is a country’s population and the proportion that is elderly because older adults are at a higher risk of infection and serious complications from COVID-19. Based on the data in Table W.1, in terms of total population, the United States, Brazil, and Spain have the highest rates of infection, but they have far smaller populations compared to China. When analyzing the infection rate relative to global cases, the United States, Brazil, and Russia were hit the hardest. As we’ll explore momentarily, these data rely entirely on testing accuracy and

availability. Another factor that contributed to Italy’s infection rate was the elderly nature of its population.3

Table W.1 Key characteristics of significantly impacted countries, July 1, 2020. Percentage of

Percentage of

Percentage of

Rate (%)

Global Infections (%)

Population over 65 (%)

Population over 85 (%) 

1,392.7

0.006

0.82

12.0

0.7

Japan

   126.5

0.015

0.18

28.4

4.8

South Korea

     55.5

0.023

0.12

15.8

1.5

Iran

     81.8

0.278

2.20

  6.6

0.4

Russia

  141.7

0.462

6.32

15.5

1.5

Italy

   60.4

0.398

2.32

23.3

3.7

United Kingdom

   66.5

0.470

3.02

18.7

2.5

Spain

   46.8

0.533

2.41

20.0

3.5

France

   67.0

0.235

1.52

20.8

3.4

Germany

   82.9

0.235

1.88

21.7

3.1

Brazil

211.7

0.646

13.21  

  9.6

0.9

United States

327.2

0.786

24.85  

16.6

2.0

  Population

Infection

Country

(millions)

China

Source: World Health Organization (WHO), 

www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports; The World Bank,

data.worldbank.org/indicator/sp.pop.totl; United Nations, 

population.un.org/wpp/.

South Korea began to experience exponential case growth in late February. As shown in Table W.2, by March 24, 348,582 (or 1 in 159) people were tested. Italy was similarly positioned with 1 test for every 203 people. In contrast, the United States, which started to see exponential growth in the first days of March, had conducted 349,146 tests by March 24. For a population of 327.2 million people, this yielded only 1 test for every 937 people. However, the absolute count of tests in the United States increased rapidly. By May 1, more than 6.5 million tests had been completed (1 in 50 people). South Korea’s success was attributed to quick, early, and dense testing that was sufficient to effectively contain the spread before cases became unmanageable.

Table W.2 Per capita tests by country, May 1, 2020. Population

Total Tests

Tests per Capita

Total Tests

Tests per Capita

(millions)

(March 24)

(March 24)

(May 1)

(May 1)

  55.5

348,582

1 in 159

623,069

1 in 89

Italy

  60.4

296,964

1 in 203

1,398,633

1 in 43

United

327.2

349,146

1 in 937

6,551,810

1 in 50

Country South Korea

States Source: Korean Centers for Disease Control and Prevention (KCDC), 

www.cdc.go.kr/board/board.es?mid=a20501000000&bid=0015; Ministero della Salute, 

www.salute.gov.it/portale/news/p3_2_1_1_1.jsp?lingua=italiano&menu=notizie&p=dalministero&id=4656; The COVID Tracking Project from The Atlantic,  covidtracking.com/data/us-daily.

Shown in Figure W.2 on March 1, 97 percent of the 2,977 global deaths occurred among people from the Western Pacific Region with all but 104 being deaths in China. By April 1, deaths grew to over 40,000, and by May 1, they were over 224,000. What is remarkable about the four panels in Figure W.2 is the dramatically different geographic distribution of deaths. The region that had constituted 97 percent of deaths on March 1 constituted only 9 percent by April 1 and only 3 percent by May 1. By May 1, 62 percent of the deaths occurred among people from the European Region, with another 31 percent among people in the Region of the Americas. By June 1, Europe and the Americas accounted for 92 percent of global deaths.  

FIGURE W.2

Deaths by region.

Source: World Health Organization (WHO), 

www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports.

Table W.3 shows the characteristics of recorded deaths from COVID-19 in key countries. In the United States, CDC data showed that 92.5 percent of deaths occurred among people ages 55 and older. In Italy, Spain, and Germany more than 95 percent of fatal cases were found in people 60 years and older. Death data also showed that well more than half of COVID-19 deaths occurred in males.

Table W.3 Deaths by sex and age, July 1, 2020 (or latest)*. Countries Characteristic Sex

United States  

Italy  

Spain

Germany

United Kingdom

South Korea

 

 

 

 

Countries Characteristic

United States

Italy

Spain

Germany

United Kingdom

South Korea

Female

46.5%  

42.0%

43.4%

44.7%

44.9%

46.5%

Male

53.4%  

58.0%

56.6%

55.3%

55.1%

53.5%

Age

 

 

 

 

 

 

92.5%**

95.4%

95.2%

95.3%

93.4%

92.9%

60 and older

*Spain, Italy, and the United Kingdom posted this data in arrears.  **55 and older Source: Centers for Disease Control and Prevention (CDC), 

www.cdc.gov/nchs/nvss/vsrr/covid_weekly/index.htm; Ministero della

Salute, https://www.epicentro.iss.it/en/coronavirus/bollettino/Report-COVID-2019_25_june_2020.pdf; Ministerio de Sanidad,  www.mscbs.gob.es/profesionales/saludPublica/ccayes/alertasActual/nCov-China/documentos/Actualizacion_120_COVID-19.pdf; Robert Koch Institut,  www.rki.de/DE/Content/InfAZ/N/Neuartiges_Coronavirus/Situationsberichte/2020-07-01-de.pdf;jsessionid=8BE5EED723BE2E33A5ADDB0BA26BC847.internet051? __blob=publicationFile; Office for National Statistics,  www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/deaths/datasets/weeklyprovisionalfiguresondeathsregisteredinenglandandwales; Korean Centers for Disease Control and Prevention (KCDC), 

www.cdc.go.kr/board/board.es?mid=a20501000000&bid=0015.

U.S. deaths not only indicate that those at the highest risk of serious illness are older, the aforementioned information on comorbidities is also significant. Because many of those conditions (hypertension, obesity, and Type 2 diabetes) are disproportionately found in African Americans, some health professionals and preliminary data pointed to higher rates of infection as well as mortality in that population. In particular, 23 percent of recorded COVID-19 related deaths (by June 12) in the United States were among African Americans—a level that is 8.6 percentage points higher than the group’s proportion of the U.S. population. In 2017, CDC data showed that approximately 33 percent of deaths among Africans Americans were attributable the COVID-19-associated comorbidities. This is three percentage points greater than that for the overall population.

Other Outbreaks, Epidemics, and Pandemics Since the late 19th century, the world experienced numerous outbreaks, epidemics, and pandemics. The critical pandemics from the 20th century and the publicized coronaviruses and influenzas of the 21st century are detailed in Table W.4. Although fever viruses (such as Zika, Ebola, and West Nile) result in fatalities, they have been better contained. Therefore, the focus of this section is on viruses with respiratory impacts.

Table W.4: Characteristics of influenza and coronavirus diseases. Common Name (Virus) Spanish

Estimated

Estimated

Estimated

Global

U.S.

Type of Virus

Years

Severity

Global Cases

Deaths

Deaths

Influenza A

1918–1920

Pandemic

500,000,000

50,000,000

675,000

Influenza A

1957–1958

Pandemic

Unknown

1,100,000

116,000

Influenza A

1968–1969

Pandemic

Unknown

1,000,000

100,000

Flu (H1N1) Asian Flu (H2N2) Hong Kong Flu (H3N2)

Common

Estimated

Name (Virus) SARS

Estimated

Estimated

Global

U.S.

Deaths

Deaths

Type of Virus

Years

Severity

Global Cases

Coronavirus

2003–2004

Epidemic

8,096

774

0

Influenza A

2003–2020*

Outbreak

861

455

0

Influenza A

2009–2010

Pandemic

12,469

(SARSCoV) Avian Flu (H5N1) Swine Flu (H1N1/09) Avian Flu

700,000,000–

151,700–

1,800,000,000

575,400

Influenza A

2013–2017

Outbreak

1,567

615

0

Coronavirus

2012–2020

Outbreak

2,519

866

0

(H7N9) MERS (MERSCoV) Source: Centers for Disease Control and Prevention (CDC); World Health Organization (WHO). H1N1: 

www.cdc.gov/flu/pandemic-resources/1918-pandemic-h1n1.html.

H2N2:

www.cdc.gov/flu/pandemic-resources/1957-1958-pandemic.html.

H3N2:

www.cdc.gov/flu/pandemic-resources/1968-pandemic.html.

SARS:

www.cdc.gov/dotw/sars/index.html.

H5N1:

www.who.int/influenza/human_animal_interface/2020_01_20_tableH5N1.pdf?ua=1.

H1N1:

www.cdc.gov/flu/pandemic-resources/2009-h1n1-pandemic.html.

H7N9:

www.who.int/csr/don/05-september-2018-ah7n9-china/en/.

MERS:

www.emro.who.int/pandemic-epidemic-diseases/mers-cov/mers-situation-update-january-2020.html.

In economic terms, MERS, SARS, and the Avian Flu (H7N9) didn’t have significant, long-standing impacts in the United States because they didn’t result in widespread U.S. infection or death rates. Drawing upon the work of economic historians, it is useful to compare the economic impact of the other viruses in Table W.4. One interesting aspect of these viruses is that other major economic events coincidentally occurred during the same time periods yet were not causal to the aligning recessions. For instance, H2N2 in 1957 coincided with a recession precipitated by Federal Reserve action.

Spanish Flu (H1N1) The most severe global pandemic since the beginning of the 20th century was the Spanish Flu. This strain of H1N1 is believed to have originated in birds, and within the United States, it was first detected among military personnel. It had a high mortality rate in healthy people and those under 40 because it was the immunological reaction to the virus that killed people, meaning that those with stronger immune systems were more likely to die. The spread was magnified by mass movements of soldiers toward the end of World War I. During this time, epidemiology, clinical testing, and economic data collection were not well developed, so it is difficult to draw conclusions from this pandemic. An additional complication was that the Spanish Flu occurred right as World War I was coming to an end. Leading historians and economic historians have used print newspapers to estimate the impacts. They specifically point to losses in revenue among most businesses; increases in activity among pharmacies and doctors; and decreases in labor supply, production, and productivity due to illness and death. Correia, Luck, and Verner (2020) studied the manufacturing sector, a primary driver of the economy in the early 1900s, and found

employment declines of 23 percent, a 1.5 percent reduction in the employment–population ratio, and an 18 percent fall in output. They also found gradual declines in bank assets and durable goods like cars, while observing increases in nonperforming loans. They found that the economy didn’t fall as hard and recovered more quickly in areas with sustained social distancing strategies.

Asian Flu (H2N2) In early 1957, an H2N2 flu strain infected the United States, and while the initial cases were contained, a second surge of infections arrived that summer. Young children, pregnant women, and the elderly were most severely impacted. H2N2 was characterized by fever, cough, and pneumonia. A vaccine was quickly developed, which lessened the health and economic impact. Though there was a coincident recession, a 2006 working paper from Canadian researchers Steven James and Tim Sargent demonstrated that the likely cause was Federal Reserve action to increase interest rates in an attempt to slow inflation. They did note that widespread employee absenteeism due to illness may have been a contributing factor.

Hong Kong Flu (H3N2) H3N2 infected the United States in September 1968 as a result of U.S. troops rotating from Vietnam. The disease was characterized by chills, fever, and upper respiratory issues. Infants and the elderly were the most susceptible. A vaccine was created to fight the virus, but it wasn’t available until after cases peaked. Again, a coincident recession, this one beginning in late 1969, occurred but was attributed to fiscal and monetary policy actions related to the Vietnam War.

Avian Flu (H5N1) H5N1 is a type of bird flu that rarely occurs in humans. While the first human case of Avian Flu was detected in 1997, an outbreak began in 2003, and isolated infections still occur. Humans may become infected when they are in close contact with a sick or dead bird. H5N1 is characterized by fever, cough, sore throat, and severe respiratory issues. It tends to infect children and young adults most seriously. Although this virus is ongoing yet somewhat limited in terms of cases, in 2005, there was global apprehension toward the possibility of a pandemic. This was attributed to the virus’s swift ability to change its genetics, the fear of widespread human transmission, and its high fatality rate. That November, President George W. Bush, alongside the Department of Health and Human Services (HHS), issued a letter unveiling The National Strategy for Pandemic Influenza. Among other preparations for a future pandemic, whether H5N1 or not, it established national guidelines for these kinds of medical emergencies. After this release and the CDC’s predictions that the potential of an H5N1 pandemic could kill 89,000 to 207,000 Americans, major companies began making work-fromhome plans.4 Manufacturers of personal protective equipment (PPE), which includes medical masks and gloves, increased production. Many firms distributed PPE and Tamiflu to employees and turned to medical advising firms for health and safety training. Ultimately, in the United States, the significant consequences of H5N1 included implementing safer regulations regarding poultry production and educating consumers on proper poultry preparation. There were certainly economic impacts, but they were not causal to the Great Recession of 2008. Such repercussions included high latex prices, increases in pharmaceutical drug production, and dramatic decreases in profits for poultry companies.

Swine Flu (H1N1/09) H1N1/09 first infected the United States in April 2009. It was a new strain of H1N1, the type of Influenza A associated with the Spanish Flu, but it was comprised of strains from swine, birds, and

humans. The symptoms of H1N1/09 were almost identical to those of a usual flu—cough, fever, sore throat, aches, and a runny nose. However, unlike a typical flu, the virus primarily infected children, young adults, and middle-aged people due to a lack of antibodies against it. Most of the deaths occurred among those younger than 65. H1N1/09 spread incredibly quickly and infected approximately 61 million people in the United States in the first year alone, making it the first global pandemic since H3N2 in 1968. To help control infections, a vaccine was developed, and limited supplies became available in October 2009. Researchers estimated that between 11 and 27 percent of the world’s population was infected in the first year of the pandemic. Although there were more estimated cases, the fatality rate was relatively low and closely mirrored the number of annual flu season fatalities. Unlike some of the other viruses described, H1N1/09 continues to circulate widely but is now considered a regular flu because its vaccine is part of the seasonal flu shot. In terms of economic impact, some pork producers filed bankruptcy due to the virus’s connection to pigs and Asia’s ban of pork imports from the United States. Many businesses provided PPE kits to their employees and cross-trained personnel to enhance workplace agility. PPE and pharmaceutical sales surged despite the recession as antiviral drugs like Tamiflu and Rapivab were used to fight H1N1/09. Because this pandemic occurred in the midst of the Great Recession, these impacts were magnified by the state of the economy at the time.

Measurement Problems COVID-19 would not have been a globally disruptive force if the infection mortality rate (IMR), also called the case fatality rate (CFR), had not been so high. This rate is the percentage of confirmed cases that result in death. The numerator is the deaths attributable to the disease, and the denominator is the number of confirmed cases. For a typical flu, the IMR is between 0.1 percent and 0.2 percent. The widely transmitted Spanish Flu IMR was 2.5 percent. While other viruses resulted in even worse IMRs, for instance, H5N1 had an IMR of 60 percent, it did not exhibit human-to-human transmission. There are two significant problems associated with the measurement of IMRs: the accuracy of the numerator and the denominator. Not every COVID-19 death occurred in a hospital after a diagnosis, so those cases were never confirmed. For instance, in Italy, the disease hit an older area where many people lived alone and died without a diagnosis nor an autopsy. Therefore, data from Italy suggested that the deaths caused by the disease may have been seriously undercounted. As another example, The Wall Street Journal reported that the number of weekly deaths during 2020 in the United Kingdom and New York City aligned with historical averages for the first 12 weeks of the year (through March). However, during the 12th through the 19th week (mid May), deaths in those locations were nearly double historical averages. Official statistics only attributed half of the increased deaths to COVID-19, which implies that there were many more deaths resulting from the disease that were never counted.  In addition, it was difficult to establish the denominator of the IMR when there were large numbers of asymptomatic and moderately symptomatic cases. When test kits were limited, they were reserved for the most severe, suspected cases. Through most of March, even those who firmly believed they were infected and were ultimately correct, had difficulty accessing tests. The result was that the denominator was likely understated as well. Though the degree to which the IMR overstates or understates its true level is theoretically ambiguous, the impression of most in the public health community is that the denominator issue is more problematic than the numerator issue. At the time of this writing, it was too early to know precisely what the IMR for COVID-19 would be. In early May, it ranged between 4 and 15 percent for countries with some of the highest infection rates. The global IMR was about 7 percent, meaning that COVID-19 was a pandemic with both a high infection rate and a high IMR. It is likely that the ultimate estimate

of the IMR for COVID-19 will be under 10 percent, but there is little doubt that it will be more than the typical flu.  Another problem exists when rates of growth are rapid and not precisely known. All during the late winter and the early spring of 2020, case and death counts dominated the news. By early April, 95 percent of the U.S. population was under a stay-at-home order. Those orders were justified by the degree to which U.S. case rates were increasing exponentially. For instance, if a pandemic causes cases to increase at 2 percent per day (after the first 100 cases), after 100 days, there would be 724 cases. If the rate is 5 percent, the case count would be more than 13,000. At 10 percent, the case count would be nearly 1.4 million. Finally, at 15 percent, there would be more than 117 million cases. From the first WHO Situation Report to late March, the daily rate at which the case count rose averaged 13 percent. This rate slowed to 4.6 percent during the month of April and to approximately 1.8 percent in June. That is the problem when you extrapolate present data into the future. Extrapolation is the mathematical technique of taking present data and extending it to the future. Interpolation is the mathematical technique of filling in data between two known observations. Suppose there were 100 cases on a Friday and 500 cases on the following Monday. But suppose further because there was sporadic weekend reporting, you don’t know how many cases there were on Saturday and Sunday. You could use interpolation to estimate the case counts on those days. If you wanted to know what the case count would be the next Friday or the Friday after that, you would use extrapolation. During early portions of the COVID-19 pandemic, case counts were growing at 2 percent per day, and at others they were growing at 30 percent per day. Extrapolating using the 2 percent estimate yields a very low endpoint, whereas using the 30 percent estimate yields a very high endpoint. The Trump administration and the governors who were issuing stay-at-home orders were operating under a high level of uncertainty. Whenever the rate of growth is unknown, predicting an outcome through extrapolation can yield very different estimates.

Microeconomic Issues and Analysis Applying the Supply and Demand Model COVID-19 provided interesting applications of the supply and demand model and at least one, truly weird observation. Straightforwardly, the supply and demand relationships for many goods were affected greatly by their associated determinants. As you may recall, the determinants of demand change how much of the good is wanted as well as how much someone is willing to pay for it. Let’s begin by using hand sanitizer as an example. On the demand side, the population of potential buyers dramatically increased. People who seldom purchased hand sanitizer were suddenly on the hunt. The good wasn’t in fashion per se, but taste played a major role because conditions were such that many people wanted it. Because prices largely stayed at normal levels (to avoid price gouging accusations), shortages quickly ensued. Consumers responded by finding substitutes. They made their own sanitizer from rubbing alcohol. These recipes usually required a complement, aloe vera gel. The same forces influencing demand were present for face masks. Medical professionals substituted N95 masks with surgical masks and used fabric masks and shields to extend the life of their PPE. For the general public, complements to the fabric masks included filtration layers (coffee filters, vacuum bags, and outdoor shop towels). The fabric masks and face shields also served as a complement to medical professionals’ typical PPE because they usually wore it in combination when their stocks ran low. Another interesting application of the model applies to what people did when faced with a change in income. Families who lost their employment-related income may have purchased more instant ramen noodles, while families who maintained their income (and received a stimulus check on top of it), may have used it to purchase extravagances. Recall that when a decrease in income causes an increase in demand, the good is inferior, whereas when an increase in income causes an increase in demand, the good is normal. The determinants of supply were also in evidence for many goods. For PPE, traditional production was not sufficient to satisfy demand. The number of sellers increased in nontraditional ways as people pulled out their sewing machines to increase the quantity of fabric masks. Technology, in the form of 3D printers, was used to shift production from usual outputs to face shields. Although the price of other potential outputs wasn’t a significant force for hand sanitizer because most firms were donating it, output prices likely played a role in the market for face masks. Relative to masks, the price of inputs (cloth, elastic, and thread) was relatively low, which increased the supply of masks somewhat quickly, especially when subsidies, in the form of donated materials from hospitals, were provided to quilters. Though people’s reactions to COVID-19 fit well within the supply and demand model’s basic predictions, one observation stood out for a short period of time. When you learn about supply and demand, it is drawn like the left panel in Figure W.3. That is, the diagram only includes the first quadrant because the price is always positive and the quantity exchanged is always positive. On April 20 and 21, 2020, the price of oil (for delivery in one month) went negative (−$40.32 per barrel). The right panel of Figure W.3 shows that the model can easily adapt to that possibility. Still, it is important to understand what that implies. For one afternoon and much of the next day, producers had to be willing to pay consumers to take oil from them.5

FIGURE W.3

Supply and demand model.

Shortages, Price Gouging, and Price Ceilings While some of the economic consequences of COVID-19 emanated from people following the advice offered by the CDC, others are inexplicable. For instance, when the focus was on hand washing techniques, soap and hand sanitizer quickly disappeared from stores. Less obvious was the surge in toilet paper demand. During the month of March 2020, grocery stores were crowded with shoppers buying everything they thought they might need for a long period at home. Simple economic theory suggests that an increase in demand will be immediately dealt with through an increase in the price of the good. In Figure W.4, the demand for a hypothetical good increases from February to March. In a typical, unrestricted market, price would increase.

FIGURE W.4

An increase in demand.

However, there are laws in almost every state against price gouging, which occurs when a seller takes advantage of an unexpected change in the demand for a product by raising its price. The most obvious application of price gouging laws relates to weather-related emergencies. In some states, there are limits on the degree to which prices can rise for certain goods in these circumstances. In other states, sellers cannot raise the price of these goods at all. Imagine that a state allows for a small increase in price. In that case, a price ceiling (a legal limit on the price) is imposed. This is depicted in Figure W.5. At the price ceiling, there is a shortage because the buyers’ desire for the good (QD) exceeds the amount that firms wish to sell (QS). A shortage is the difference between quantity demanded and quantity supplied, and it is an inevitable outcome of a price ceiling.

FIGURE W.5

A price ceiling.

As a result, these anti-gouging laws change how goods are rationed. In a purely market system without any such laws, those willing to pay the most for hand sanitizer, toilet paper, or ground beef would get them. Under anti-gouging laws, those who make the purchases first get the goods. The other consequence is that retailers are not motivated to stock as much of the good. As a result, there is a smaller total quantity available. The reasons we saw empty shelves in the toilet paper and hand sanitizer aisles were many. Retailers may have decided not to raise prices because they knew that their state would eventually prosecute them for price gouging. They also may have chosen to run out of these goods rather than damage their reputation by raising prices. Many stores, particularly large retail chains, imposed quantity limits on their customers. This was likely their attempt to limit the ability of individuals to hoard goods for the purpose of reselling them at exorbitant prices.

Incentives for Innovation, Finding Substitutes, and Resource Reallocation Innovation When the pandemic was in its earliest stages in the United States, a widely available, immediate-result test had not yet been approved. Such a test would have allowed community health professionals to quickly identify who had the virus and isolate them. Instead, states isolated everyone using stay-athome orders. Once it was apparent that a test was needed, there was too little time to create one, manufacture the tests in sufficient quantities, distribute them to the appropriate sites, and administer them to people. One of the obstacles was also regulatory. Any medical device (including a test) must be proven to the satisfaction of the Food and Drug Administration (FDA). Unless the test is self-administering and self-

reading, the FDA must certify the labs that can administer it and read the results. The SARS test—the test used in the early days of COVID-19—was neither widely available nor entirely accurate. Though both are coronaviruses, they are different enough that a SARS test will give a problematic percentage of false negatives early in an incubation period. Two broad types of tests were developed specifically for COVID-19: one that looked for the virus itself (in the form of a particular antigen, ACE2) and one that looked for specific antibodies. The latter test was only effective well into the incubation period. The FDA, using its authority under an emergency declaration, hastened the approval process for both tests. Within the span of a month, testing ramped up from 100 per day to hundreds of thousands per day. That also resulted in shortages of swabs and reagents (the chemicals that react with the material on the swab to yield a test result). The scientific ability to develop a test and train people to administer and read it requires the capital and motivation of corporations. Though it took more time than anyone would have liked to develop the COVID-19 rapid test, Abbott, Roche, and other pharmaceutical companies reacted quickly. Regarding treatments and vaccine development, time is the biggest challenge. The search for treatments focused on medications that were already in existence. Specifically, hydroxychloroquine is used to treat malaria and a variety of autoimmune diseases, whereas Remdesivir, a broad-spectrum antiviral, is used to treat Ebola, SARS, and MERS. Although physicians can prescribe these medications for anything they wish, they expose themselves to criticism and liability if they prescribe medications off-label—meaning they are not approved for the particular disease. In the case of hydroxychloroquine, it was quickly demonstrated to have done as much harm as good in treating COVID-19, and this served as a powerful disincentive to use unproven treatments. Remdesivir was quickly tested for use in COVID-19 patients employing a double-blind system and was shown to be effective in shortening recovery times by 30 percent. It was then approved by the FDA under that same emergency declaration. Developing an entirely new treatment or vaccine takes many years because the drugs must go through full FDA testing. The first step in that process is intended to evaluate the safety of the drug or vaccine as well as to establish the therapeutic window (the levels of medications that work safely). The second step looks for effectiveness and side-effects. Both steps can be time consuming and frustrating. For instance, the AIDS virus was discovered in the early 1980s, and to this day, despite billions in spending to find a vaccine, no such vaccine exists. The grim reality of drugs and vaccines is that pharmaceutical firms spend billions of dollars searching for solutions to problems, and sometimes there is no payoff. With vaccines, there is another time-consuming problem. Unlike medications that are tested in people with a disease, vaccines are tested in people who are not infected to see if they acquire immunity. That means we must wait for them to potentially become exposed naturally. That period is usually measured in months. One morally and ethically challenging workaround is to vaccinate people and then purposely expose them to the virus. This shortens testing but is normally considered unethical because the test subjects could be harmed.

Finding Substitutes and Reallocating Resources Aside from the innovations that were motivated by COVID-19, individuals were motivated to find substitutes themselves, and several industries reallocated resources and facilities to produce other goods.

Hand Sanitizer When COVID-19 first hit the United States, the EPA was quick to issue a list of products that met its criteria for use against SARS-CoV-2. As early as the first week in March 2020, hand sanitizer, a popular item on this list, was selling out across the United States even though there were fewer than

100 confirmed U.S. cases. Purell found that the resulting spike in demand was much more intense than that of SARS or H1N1/09. Despite operating production facilities at full capacity for weeks and implementing purchase limits for consumers, the shelves were quickly bare. Nielsen consumer data found that hand sanitizer sales increased 470 percent year over year for the week of March 7, 2020, while online sales skyrocketed over 1,700 percent. When the supply of traditional hand sanitizer was completely exhausted, people substituted it with their own homemade hand sanitizer made from aloe and rubbing alcohol. That didn’t last long. During the week ending March 14, hand sanitizer was largely gone from stores, but rubbing alcohol and hydrogen peroxide sales surged 277 and 212 percent, respectively. Aerosol disinfectants like Lysol and multi-purpose cleaners, like Clorox disinfectant wipes, experienced steep sales increases of 519 and 243 percent, respectively, as people made a substitution yet again—this time to a broader product category. They stopped sanitizing their hands and started sanitizing the surfaces they touched. All these products quickly sold out as well. While most were back in stock by summer, nontraditional manufacturers intervened by reallocating their resources. More than 100 distilleries across the United States used their production lines to make hand sanitizer instead of the whiskey, vodka, or gin that they’d normally manufacture. While there are typically regulations prohibiting nontraditional firms from selling hand sanitizer, the FDA provided full support. From donating the sanitizer to labeling it “alcohol-based hand wash,” distilleries found ways to reallocate their production capacity to alleviate the shortages in high-risk areas. In addition, luxury fragrance manufacturers; beauty brands; and perhaps less-obvious firms, like paint manufacturers and even children’s craft companies, produced hand sanitizer or allocated their assembly lines and liquidfilling machines to other firms.

Face Masks and Shields Medical-grade masks, once reserved for health professionals and others requiring air filtration to safely perform their day to day activities, became generally popular. There are two main categories of medical-grade masks: surgical masks and N95 respirators. Surgical masks are designed to block larger particles and droplets when someone is actively coughing or sneezing. Originally designed for industrial work, respirators filter small particles like smoke and airborne viruses. N95 respirators have at least 95 percent filtration efficiency and have been used since the mid-1990s for medical purposes. Because of their filtration capabilities, they protect the medical professional from getting infected by a patient so long as they are worn properly. 3M, the primary manufacturer of N95 masks, began experiencing surges in demand in mid-January 2020. In response, it more than doubled monthly global output from 50 million to 135 million masks. But it wasn’t enough given that HHS estimated that U.S. health care workers alone would need 300 million each month. It was estimated that the national stockpile only had 12 million. Honeywell and other firms jumped in to help make these masks, but it wasn’t as simple as it might sound. Threequarters of the masks that 3M made, alongside the majority of the masks made by other manufacturers, were produced in China where there were already global supply chain issues. Moreover, N95 masks are made from a specialized material, melt-blown fabric (a thin-stranded fabric made from melted plastic fibers), that suddenly became scarce. Combatting the problem began with retooling factories that made filters, diapers, and feminine hygiene products for mask material production. However, the melt-blown fabric required specialized capital that was not only expensive but took five months to manufacture. The N95 fixed-capital problem led medical professionals to substitute to surgical masks. While not as protective, it provides at least some amount of barrier for those on the front lines.

The stockpile was estimated to hold 30 million surgical masks, which was still far less than the 300 million per month projected U.S. need. HHS estimates that China produces 95 percent of the world’s surgical masks, which again proves problematic from a supply chain perspective. Even with production facilities for other goods shifting their lines to surgical masks, the components primarily come from China. These production disruptions, combined with increased demand from both medical professionals and the general public, quickly led to shortage and resource exhaustion. It wasn’t long before substitution emerged again. Two products emerged as a result of resource reallocation: fabric masks and face shields. Fabric masks are not as effective as their medical-grade equivalents, but they still serve as a physical barrier against droplets expelled from someone who may be infected. Some hospitals requested donations of fabric masks and provided specifications to individuals who made them. Meanwhile, other firms sold fabric masks online at a low cost. Individual quilters, small businesses, and even large companies took excess fabric, clothing, and other cloth inputs to produce pleated masks with elastic straps. For many small businesses and even large manufacturers, this alternative output kept revenue flowing when sales for usual outputs like athletic uniforms, denim, and mattress cases declined. Face shields were another option for medical professionals. They can be worn over N95 or surgical masks to help them last longer because particles aren’t directly exposed to the mask. Businesses as well as individuals with 3D printers made the clear shield, forehead band, and strap. Large production facilities were quickly able to make the designs and adapt their equipment to produce and donate these shields to hospitals.

Ventilators Perhaps the most critical, high-demand good during COVID-19 was the ventilator. These devices provide airflow to those who are unable or struggling to breathe. In mid-March 2020, the Centers for Medicare & Medicaid Services (CMS) and the National Institutes of Health (NIH) estimated that there were between 12,000 and 13,000 ventilators in the national stockpile. Research by John Hopkins found that there were approximately 131,000 existing (nonpediatric) ventilators in U.S. hospitals. To meet demand in 2019, medical device firms were producing about 700 ventilators per week combined. In the second quarter of 2020, they had increased production 10-fold to help meet demand. Based on research from the Society of Critical Care Medicine using HHS estimates, U.S. ventilator demand alone was estimated to reach up to 960,000 units over the course of the pandemic. Although those ventilators wouldn’t all be used simultaneously, far more than usual demand and capacity were anticipated. Because the medical device industry’s production wasn’t enough, President Trump invoked the Defense Production Act. This act allows the president to require other firms to reallocate production capacity. It is typically used as leverage but can be used by a president to compel firms to produce particular goods and share technology with each other. It also allows a president to dictate the price paid by the government for the specified goods. The usual invocation allows the affected companies to make a limited profit, but the law does not require it. During COVID-19, General Motors (GM) and Ford were obligated to produce ventilators, and medical device manufacturers were required to provide them the necessary specifications, software, and components. This automaker–medical-device-firm partnership helped the medical device companies combat their fixed-capital problem. The FDA also loosened guidelines to aid in the effort. The automakers were likely motivated to perform as directed because automotive production had stopped.

Individual Industries Airlines One of the first industries hit hard by COVID-19 was the airline industry. The clearest view of the loss in that industry can be seen by the dramatic decline after the beginning of Spring Break season (first weekend in March). At that point, people were flying at just below record 2019 levels. Figure W.6 shows that as the week progressed and for the rest of the month, airport screenings (by the Transportation Security Administration, TSA) dropped from more than 2 million per day to 90,000 per day by Easter weekend. Those flights that were still being conducted were doing so at deep discounts in response to a drastic decline in demand.

FIGURE W.6

TSA screenings by date 2019 and 2020.

Source: Transportation Security Administration (TSA), 

www.tsa.gov/coronavirus/passenger-throughput.

Cruise Lines By the second week in March, much of the cruise industry suspended operations. Even then, it wasn’t until a month later that all cruise ships at sea were allowed into port. Many of those ships had COVID19 positive patients aboard, and some people had already died. At this writing, cruise lines indicated that they were not planning to resume operations until at least Fall 2020. It was decided that departures from New York and San Francisco would be suspended even longer.

Restaurants and Grocery Starting in the second week of March, but accelerating rapidly throughout the country, restaurants and bars served customers only via takeout, drive-thru, and delivery. March retail sales among restaurants and bars declined 25 percent. Given that the category includes establishments with regular drive-thru (fast food) and delivery (pizza), this was an enormous hit to an industry with a high failure rate. One area of the restaurant business that increased was direct and third-party delivery via UberEats, DoorDash, GrubHub, and Postmates. Private analytics firm Earnest Research found that, in aggregate, sales increased upward of 13 percent (year over year) in the week ending March 18, 2020, when many

restaurants were closed. Once smaller establishments were permitted to open for delivery and takeout, third-party delivery sales rose 33 percent. While those sales surged, restaurants felt the impact of the fees and commissions charged against them when these types of orders were placed. Before the pandemic, third-party delivery was viewed as a simplistic growth strategy for restaurants. With the pandemic, many started their own direct delivery services to provide incremental revenue and reduce third-party costs. This was a response not only to continued stay-at-home orders, but also to long-run expectations that delivery would become more common after the pandemic. Because usual restaurant customers have to eat somewhere, many were forced to rediscover their kitchens. Grocery sales increased 27 percent in March 2020 (from the prior month). As a result of that change in eating habits, there were periods of time where certain types of food were increasingly difficult to find. With schoolchildren at home, many stores were continually selling out of peanut butter, pasta meals, and frozen pizza. People also shifted their grocery purchasing habits online in two different formats: online ordering/delivery and meal kit delivery. Rakuten Intelligence, which tracks nearly all online merchants except Amazon, found that online grocery sales from March to April increased at least 113 percent from 2019. Likewise, meal kit delivery services increased in popularity. Blue Apron and Hello Fresh experienced increased demand and stock prices. However, meal kit delivery likely didn’t experience as dramatic increases as online grocery delivery due to its higher permeal cost. For most people, meal kit delivery only becomes cost effective when it is compared to regularly eating at restaurants.

Other Retail Other retail outlets saw significant declines in sales as well. However, one area where sales increased before subsequently cratering was electronics retailing. Office professionals that relocated to their homes needed computers and peripherals. Many consumers also realized that they required an extra refrigerator/freezer to store the food they had purchased. Soon thereafter, though, sales at these outlets plunged. Best Buy, the largest electronics retailer in the country, furloughed nearly all of its part-time workforce in April after experiencing a surge in sales during March.

Financial Services The financial services industry (banking, insurance, investments, etc.) experienced different impacts depending on the part of the industry in which they specialized. As shown in Figure W.7, companies that facilitate stock trades saw a near tripling of activity. However, mortgage applications declined by one-third during March. Simultaneously, existing home sales fell by 8.5 percent. April’s numbers were even worse. Even though banks were considered an essential service in every state, most operated exclusively via drive-thru service rendering many types of business impractical.

FIGURE W.7

S&P 500 volume.

Source: Yahoo Finance, 

finance.yahoo.com/quote/%5EGSPC/history/.

Rental Housing The rental housing market was affected by a different problem: people failing to pay their rent. According to the National Multifamily Housing Council, the rate of on-time payment for April’s rent declined from 82 percent (in 2019) to 69 percent.6 Many state governors suspended evictions (which was largely irrelevant because the courthouses were closed). It is unclear whether the tenants who chose not to pay on time realized that there were no provisions by those governors to forgive rent. From the landlord’s perspective, many had borrowed heavily to buy or build apartments, and the fear was that these real estate providers could face bankruptcy. The short-term rental market was dramatically affected as well. It was estimated that Airbnb reservations fell 80 percent during Spring Break season. Airbnb took the approach of offering full refunds to anyone who had booked before mid-March. Normally, individual hosts dictated their cancellation policies. Airbnb committed to spend $250 million to reimburse hosts and developed a $10 million fund to help them pay their mortgages. Hosts were also included in the small business relief and unemployment assistance stimulus packages passed by Congress. In addition to providing guidance to them on keeping their businesses viable, Airbnb shifted its business model to focus on online experiences, extended stays (one month or longer), and stays for frontline employees. In contrast, Expedia, through its VRBO division merely asked and encouraged its property owners to offer full credits or full refunds. It only directly promised to refund its own fees. Despite these efforts, many hosts experienced far fewer bookings due to declines in leisure travel.

Utilities Similar to the eviction prohibitions mandated by governors, 26 states asked utilities to pause disconnections and 24 states banned them. Twelve states banned the disconnection of telecommunication (including the Internet), arguing that these connections were required for students who were trying complete assignments. Just like rentals though, the mandates simply delayed the bills.

On the other hand, some Internet providers increased sales because professionals needed bandwidth to simultaneously accommodate working from home while children engaged in remote learning (or Netflix). Many of those same providers, including the cellular companies, expanded data offerings to accommodate low-income users. Access to hotspots and open Internet options were expanded in some cities as well as near libraries, universities, and public schools.

Oil and Natural Gas A final area that was dramatically impacted by COVID-19 was that for energy. The impact was partially coincident to a price war between Saudi Arabia and Russia. OPEC members, which were barely recovering from the fracking-induced price cuts of 2015–2020, were desperately trying to sell enough oil to meet their national budgets. Saudi Arabia, which had been cutting its own production to stabilize prices, lashed out in March with a threat to fellow oil producers. If Russia and others would not decrease production, Saudi Arabia would respond by increasing production. They followed through on their threat. The result was a significant decline in demand (associated with COVID-19) and a substantial increase in supply (associated with this spat). Crude oil and natural gas prices hit all-time lows. The only reason gasoline did not follow suit was because of gasoline taxes and higher refining costs. The situation reached ridiculous levels on April 20, 2020, when the May delivery price of West Texas Intermediate crude oil turned negative. Throughout mid-April, the price of gasoline (in low-tax states) was at or below $1.00 per gallon and the per-BTU price of liquefied natural gas (LNG) was equal to that of coal ($2.50 per BTU). For perspective, in late Summer 2018, LNG was above $13 per BTU; three times that of coal.

Public Goods As you may recall, a purely public good is one for which there is no rivalry nor exclusivity. In the context of COVID-19, public goods that are frequently mentioned are basic research into viruses and the usefulness of national stockpiles of critical goods. Basic research differs from translational research in that the former has no clear marketable outcome while the latter does. Basic research into a coronavirus would tell us what it looks like (genome), how it replicates, how it spreads (from animal-to-human and human-to-human), and the animals that it infects. There are many scientists whose narrow specialty focuses on these issues. Who pays for this? Usually governments fund basic researchers and their questions. This is necessary because until SARS, there was almost no practical or economic interest in why a bat might be harmed by a coronavirus. When there is an economic interest, translational researchers are called into action. These researchers are frequently funded by private laboratories or pharmaceutical companies. They take the knowledge gained by the basic researchers (published in academic journals) and create tests for diseases, vaccines for viruses, and cures and treatments. These have economic value because someone can earn a profit selling them. Government funding of basic research is necessary because there is almost no profit in basic research, yet it’s needed for translational research to take place. In that sense, basic research is like the military or the flood wall in St. Louis. It is expensive, you usually don’t need it, but when you do need it, it is too late to create it. The same can be said for national stockpiles of critical goods. Since the 1970s, there has been a strategic petroleum reserve. It existed because it was very expensive to store petroleum in case of a global emergency (potential war), which meant that no private business would create it. The same principle is true of medical supplies. In the case of COVID-19, the national stockpiles of N95 and surgical masks, medical gowns, and ventilators was drawn upon. The existence of a national stockpile of anything is a public good because everyone gets the benefits of a reduction in uncertainty regardless

of whether they pay for it. Further, there is no rivalry for that reduction in uncertainty. This is not to say that when there is a need to tap that stockpile that the resources in it are public goods. Once that happens, there is clearly rivalry and exclusivity (as was seen in the scramble for N95 masks and ventilators).

Macroeconomic Issues and Analysis To understand the macroeconomic impact of COVID-19, it is necessary to have a baseline. The fourth quarter 2019 GDP estimate showed that the economy was growing at 2.1 percent. While that was a significant decrease from 2018, it was better than the rates of growth following the Great Recession. Regarding employment, as can be seen in Figure W.8, weekly unemployment claims in 2019 were between 207,000 and 236,000, a dramatic decrease from their Great Recession highs. The unemployment rate was similarly low, 3.5 percent in February 2020 (a 50-year low).

FIGURE W.8

Unemployment claims 2007–2020.

Source: U.S. Department of Labor (DOL), 

oui.doleta.gov/unemploy/claims.asp.

In the case of unemployment data, recall that the Bureau of Labor Statistics (BLS) conducts two surveys: one of individuals and one of employers. The survey of individuals is conducted after the middle of the month and references the prior week.7 The survey of employers is conducted to gauge how many jobs were created or eliminated during the month. Both surveys are then released on the first Friday of the next month. Those who were looking for early evidence of the economic impact of COVID-19 were confronted by the limitations related to how these data are collected and reported. In the case of GDP estimates, the Bureau of Economic Analysis (BEA) produces its advance estimate (the first estimate) of quarterly GDP one month after the conclusion of the quarter. Even then, the advance estimate uses past patterns to predict the impact of several variables. In particular, there are substantial gaps in the quarter’s third month with data lacking on consumption spending for services, trade, and inventories. In the next two months, better data are brought to bear.

Financial Markets One of the earliest economic indicators of the impact that COVID-19 would have was the rapid descent of major stock indices across the world. As can be seen in Figure W.9, taken relative to their 2019 close, major stock indices were as much as 35 percent lower in late March 2020.

FIGURE W.9

Major stock market indices relative to January 1, 2020.

Source: Yahoo Finance, 

finance.yahoo.com.

Moreover, the stock market was more volatile. Figure W.10 shows the S&P 500 (blue), five-day moving average (black) and the one-standard deviation8 bands (gray and gray hashed). The vertical gap between the gray and gray hashed lines is a measure of backward-looking volatility. A forwardlooking measure of volatility, the Chicago Board of Options Exchange Volatility Index9 (called the CBoE VIX), showed that uncertainty was rising. A typical VIX value from 2019 was in the mid-teens and ranged from 12 to 24. On March 16, 2020, it hit 82.69. Notice that the backward-looking measure of volatility decreased as April progressed. The VIX also declined during this period.

FIGURE W.10

S&P 500 volatility.

Source: Yahoo Finance, 

finance.yahoo.com.

To understand why these financial indicators matter to everyone, not just investors, you need to recall what determines the value of a share of stock. Fundamentally, a share of stock is determined by investors’ collective views of a company’s future profits. A company with larger and/or growing future profits will be worth more than a similar one with smaller and/or shrinking profits. Any economic shock (such as the financial crisis of 2008 or COVID-19) will have impacts on profit expectations. Thus, a portion of the decline in the stock market in early 2020 reflected the fact that profit outlooks dropped as a result of COVID-19. That isn’t the end of the story, though. Investor uncertainty about the state of the economy in 2021 was also a factor. A rapid recovery would diminish profit expectations for a short period. A prolonged recession would diminish profit expectations for much longer. The lack of consensus regarding the recession’s length led to significant swings in the market. On March 9, 12, and 16, 2020, the stock market paused trading for 15 minutes because there was a drop of more than 7 percent in a major index. The largest single-day point drop in the Dow Jones Industrial Average (DJIA), nearly 3,000 points, occurred on March 16. The top six daily point drops in the DJIA (and 13 of the top 15) all occurred between February and June 2020 (with all but one between February and March). Similarly, eight of the top nine daily point gains occurred during that same period. The cause of this volatility has many sources, and some of them are more tangible than others. For businesses that operated during this period, there was considerable uncertainty regarding the productivity of employees who worked from home. We will not know for some time whether employee productivity among those who worked from home was at or near its previous level. Another source of concern was the fact that for many businesses, their supply chains extended into affected areas or countries. If you cannot get key components to production, having an open facility doesn’t mean you have a productive facility. As we’ll explore later, Apple quickly realized that its supply chain would inhibit its ability to sell its products. Companies found that their productivity was no better than the weakest part of their supply chain. Diminished profit expectations caused American individuals and institutions to sell their stocks in favor of safer securities. As a result, the markets for safer instruments were flooded with funds. That flight to safety had several impacts. The safest of safe assets, U.S. Treasuries, saw their yields plummet. As can be seen in Figure W.11, at one point, yields on three-month and six-month Treasuries were negative (−0.05 percent) or barely positive (0.02 percent).

FIGURE W.11

Interest rates on U.S. Treasuries.

Source: Board of Governors of the Federal Reserve System, 

www.federalreserve.gov/releases/h15/.

Generally speaking, stocks and bonds are substitutes to one another in that bonds generally carry a lower level of risk than stocks. Bonds (or shorter-term notes) can be purchased and will pay a certain amount at maturity. For that reason, short-term bonds operate as a lower-yield, lower-risk alternative to stocks. An investor, seeking to sell their risky portfolio of stocks would be putting money into the bond market, lowering yields. Theoretically, (and practically given the two days in March 2020 with negative yields on three-month notes), it is possible that the lender would have to pay the borrower. In this case, investors are so afraid of risk, that they are willing to pay to avoid it. Before the Federal Reserve stepped in to stabilize the municipal bond market (the market that a state, city, or public university might use to borrow), rates began increasing sharply. Of the bond markets, the ones with the most risk are those where the underlying borrower might suffer significantly as a result of a recession. The variable rate portion of the municipal bond market (where yields reset frequently and as a result transfer risk from the lender to the borrower10) showed remarkable instability during March 2020. Some rates more than tripled at their weekly reset from 1.3 percent to 5.2 percent. The Federal Reserve’s action quickly calmed this market by purchasing or pledging to purchase $80 billion in municipal bonds. Despite the uncertainty and perhaps because of the Federal Reserve's rapid response, major stock market indices recovered the vast majority of their Spring 2020 losses. The second quarter of 2020 was the strongest quarter in two decades. In particular, led by Amazon and Apple, the NASDAQ established new records in June 2020. 

Employment COVID-19 did not really begin to show its remarkable impact on the unemployment rate until the employment report of May 8, 2020. The April 3rd report for March unemployment reflected the week of March 10 through 16, 2020. Recall that the general stay-at-home orders began being issued on March 19. Restaurant and bar closures (to dine-in patrons) began the week before. As a result, though the March unemployment rate rose dramatically from February (from 3.5 percent to 4.4 percent), it was not until the April report that the full impact was seen. The increase to 14.7 percent was the

largest one-month increase in the unemployment rate in U.S. history. In May, the number decreased to 13.3 percent, and in June, it continued to fall to 11.1 percent. Even then, the impact may not have been fully captured by those startling figures. The BLS surveyors used several techniques to capture the effect of people who were not sick or caring for someone who was sick, yet also not working because of COVID-19. Estimates suggested that despite these efforts to appropriately account for this issue, another 3–4 percent of the workforce was misclassified as “employed but not at work” in May. By June, this misclassification was reduced to 1 percent. For similar, but slightly different reasons, the payroll survey of employers initially counted a staggering loss of more than 700,000 jobs in March. In the next report, this figure was corrected to 3 million lost jobs almost entirely due to employers who were unable to answer the March survey because most nonessential businesses were closed. Even that adjusted number paled in comparison to the 22 million jobs lost in April.  The one statistic that provided the timeliest data on the grim nature of the employment situation was the weekly filings for initial unemployment claims. These data are reported on Thursday mornings for the prior week and are the first indicator of sudden changes to the employment situation. Figure W.12 shows the stark increase that took place starting on Friday, March 21, 2020. That report showed claims rising from 281,000 the prior week, to 3.3 million the next, and 6.8 million the week after that. Over the next four weeks, a total of 20 million additional claims were filed. And, in the four weeks after that, 10 million more claims were made. Throughout June, claims stabilized at 1.5 million per week.

FIGURE W.12

Unemployment claims 2019–2020.

Source: U.S. Department of Labor (DOL),

oui.doleta.gov/unemploy/claims.asp.

Two other employment statistics were dramatically impacted by COVID-19. Both the labor force participation rate and the employment–population ratio plummeted in March and April 2020. By June, these measures had only partially recouped their losses. Many economists acknowledged the significance of these data because each are slow to rebound after a recession. The magnitude of the drops also signals a lengthy recovery because people who became unemployed as a result of COVID-19 may never return to the labor force when they may not have otherwise left it until retirement. 

Real Gross Domestic Product The long-term loss of real gross domestic product (RGDP) won’t be precisely known for many months and perhaps even years. The earliest data was released with the advance estimate in late April 2020 (a decline of 4.8 percent). This estimate was revised in May and June to show a loss of 5.0 percent (on an annualized basis) in the first quarter.  In terms of the composition of RGDP, recall that the expenditures approach sums consumption, investment, government spending, and net exports. Government spending was higher than the previous quarter but not by much because almost none of the stimulus packages passed during March and April had any opportunity to make an impact. Both imports and exports declined (15.7 and 9.0 percent, respectively). Consumption fell 6.8 percent. Business investment in plant increased 2.6 percent and investment in equipment decreased 16.6 percent. After 2.1 percent growth in the fourth quarter of 2019, that 5.0 percent decline isn’t the worst the United States has ever experienced. There have been six individual quarters in U.S. post–World War II history that were worse (1949:1, 1953:4, 1958:1, 1960:4, 1980:2, 1982:1, and 2008:4). The problem was that this was just the leading edge of the ultimate impact of COVID-19. Most projections for the second quarter were that RGDP would decline (on an annualized basis) by between 20 and 30 percent. The Wall Street Journal’s panel of business economists put the figure at 25 percent. The Congressional Budget Office put it at 40 percent. If those projections are anything close to accurate, that will be at least twice as bad as the worst quarter in recent history (1958:1; 10 percent decline). While the 5 percent U.S. contraction was bad, Table W.5 shows that Europe and China fared worse. France’s economy contracted at a 21 percent annualized rate, while Germany and the United Kingdom, countries that were on the verge of a recession prior to the pandemic, contracted at 9.9 and 8.2 percent, respectively. For the entire European Union, RGDP declined 14.4 percent. In China, the rate of decline was 6.8 percent. Japan, though not as severely impacted by the virus itself, saw a 2.4 percent contraction, but this was already on top of a fourth quarter decline of 7.1 percent. 

Table W.5 Comparing fourth quarter 2019 and first quarter 2020 RGDP. Country United States

Fourth Quarter (%)

First Quarter (%)

2.1

−5.0

Japan

−7.1  

−2.4

China

6.0

−6.8

Germany France

0.0

−9.9

−0.4  

−21.0  

United Kingdom

0.8

−8.2

European Union

0.4

−14.4  

All of this data caused the National Bureau of Economic Research (NBER) to declare that a recession began in March 2020. 

Government Responses Attempts to Control COVID-19 When COVID-19 emerged, countries and states reacted differently and some responses were more effective than others. Louisiana had a disproportionately high number of infections compared to other states largely because it allowed the Mardi Gras parades in New Orleans to occur. That single decision likely led to widespread infections among those who attended. Similarly, a February 19, 2020 Champions’ League match between Atalanta and Valencia in Milan, Italy, had an impact. The virus quickly spread to Spain as fans and participants returned home. Even before that, travel restrictions were imposed in some areas. On January 31, the United States banned travel of noncitizens who had been to China in the last 14 days. A similar ban was implemented from Iran one month later. On March 11, travel was banned from continental Europe and was quickly extended to Britain and Ireland. Despite initial criticism for overly restrictive travel, in retrospect, it is clear that the travel constraints came too late. Asymptomatic travelers brought the virus around the world before it was clear that such transmission was possible. In the week of March 21, several states implemented stay-at-home orders. By the beginning of April, more than 95 percent of the U.S. population was under one. The social distancing attempts around the world, fostered mostly by stay-at-home orders, were credited with “flattening the curve” of new infections but likely began weeks too late. Each country that imposed limitations did so with varying degrees of strictness. Using the Oxford University Index of Stringency, China and South Korea were initially the most severe. Figure W.13 maps those restrictions for early 2020. As soon as the aforementioned Italian soccer match ended, Italy dramatically elevated the stringency of its rules to the levels seen in China. It was not until a month later that the United States imposed tough limits and even then, its orders were less stringent compared to those in Europe and Asia. The goal of most European and North American orders was simply to reduce the opportunity for spread so that at its worst, the health care systems in the respective countries would not be over capacity. Except in northern Italy, that limited goal seemed to have been met. However, it simply meant that hundreds of thousands died rather than millions. The country with the most effective response was South Korea. It was hit early and responded quickly. However, it was done in a way that Americans would be likely to treat as a severe violation of personal privacy. The contact tracing of individuals was so detailed that the infected were asked to identify everywhere they had been down to the details of where they sat on the buses or trains that they took at particular times. Moreover, cellular location data was used to plot their paths. All of that highly personal information was posted on publicly available websites so that everyone could determine whether they could have come in contact with someone who was infected. People who were even potentially infected were subsequently tested for the virus.

FIGURE W.13

Oxford University Index of Stringency.

Source: University of Oxford,

www.bsg.ox.ac.uk/research/research-projects/coronavirus-government-response-tracker.

Monetary Policy Figure W.14 summarizes the monetary and fiscal policy actions taken during early 2020. The Federal Reserve was every bit as bold and swift as it was in 2008, while Congress and the president showed extraordinary cooperation on fiscal policy. The Federal Reserve’s first references to COVID-19 were not until its March 3rd statement justifying a reduction in the target federal funds rate (the market-determined rate at which banks borrow from one another to meet obligations imposed on it by the Federal Reserve) by one quarter of a point to between 1.25 percent and 1.5 percent. Twelve days later, it reduced that rate to between 0 and 0.25 percent. The Fed also eliminated the reserve requirement and pledged to coordinate its efforts with the major central banks of the world (European Central Bank, Bank of England, and Bank of Japan). A day later, it cut the discount rate (the rate at which banks with excellent credit can borrow from the Federal Reserve) to 0.25 percent. A day after that, it began loaning money to corporations (directly and indirectly) and coordinating with the agencies that regulate and insure deposits. Two days later, it began coordinating with smaller central banks in an effort to stabilize exchange rates and facilitate financial transactions between countries. A few days later, it committed the Federal Reserve to purchasing an unlimited amount of mortgages and commercial loans to steady those lending markets. At the end of March, the Fed created lending facilities to stabilize the municipal bond market. In April, it implicitly acknowledged its mistake of 2008 by going in the opposite direction of mark-to-market. In Fall 2008, the Federal Reserve imposed the mark-to-market rule to ensure banks had enough Tier 1 assets (the core capital of a bank) to operate when the value of them was declining. Instead, the Fed lowered the leverage ratio from 9 percent to 8 percent, which made it such that small community banks could meet the requirement more easily.

FIGURE W.14

2020 timeline of monetary and fiscal policy.

The Federal Reserve’s main goal in the actions it took was to “maintain liquidity” of particular financial assets. The Fed often needs a translator, so what that phrase really means is this: The Fed promised to ensure there were buyers for the specified securities (corporate paper, municipal bonds, etc.) and if there were not, the Fed itself would purchase the excess financial instruments. This provided a buffer against uncontrolled swings in bond yields/interest rates. As can be seen in Figure W.15, all of those actions combined to more than completely undo the 20month process that the Federal Reserve had engaged in to steadily unwind its bloated balance sheet. The actions taken by the Federal Reserve during the Great Recession swelled its holdings from $860 billion to a massive $4.5 trillion by late 2014. Starting in early 2018, it began raising interest rates and letting securities it had purchased in the previous decade mature. That helped trim the portfolio to under $3.8 trillion by late 2019. When the economy slowed, it started loosening monetary policy such that it began March 2020 with $4.1 trillion in assets. When COVID-19 began threatening the world economy, the Fed didn’t hesitate. In March and April 2020, it added $2.5 trillion (yielding a total of $6.6 trillion) in assets. For perspective, from Ash Wednesday to Easter, the Federal Reserve matched all of the quantitative easing it had engaged in from 2011 through 2014 when it had set records thought previously impossible. In May and June, an additional half trillion was added.

FIGURE W.15

Federal Reserve holdings.

Source: Board of Governors of the Federal Reserve System,

www.federalreserve.gov/data.htm.

Between the $2.8 trillion of fiscal policy and the $3.0 trillion in monetary policy, policy makers injected three and one-half times ($5.8 trillion vs. $1.6 trillion) more money than had those that

battled the Great Recession. The theory of monetary policy is that this new money in the economy will increase the ability of consumers and firms to borrow because of lower interest rates. This monetary transmission mechanism is debated because in times like the ones created by the COVID-19 recession, it is quite questionable whether anyone will borrow given income-related concerns. Nevertheless, if it works, a lower interest rate increases borrowing for investment and consumption and that increases aggregate demand. If it doesn’t work, it is called the liquidity trap.

Fiscal Policy The federal government’s fiscal policy response to COVID-19 came in phases. Some of the fiscal policy actions are best understood as responses to the health consequences, while other portions helped mitigate the economic consequences. The first response, the Coronavirus Preparedness and Response Supplemental Appropriation, was $8.3 billion. Of that, $4.7 billion was for a combination of efforts of the CDC, Biomedical Advanced Research and Development Authority, and the National Institute for Allergy and Infectious Diseases within the NIH. The imagined expenditures were for tests and research for vaccines and treatments. The second law, the Families First Coronavirus Response Act, was the first of the fiscal policy actions to limit the economic damage. The direct outlays from the act were a small portion of the estimated cost of the bill. Its $192 billion price tag resulted from a $95 billion increase in mandatory spending. In addition to these provisions, there was another $94 billion decrease in income taxes resulting from the delay in the filing deadline. These figures were the combined result of providing fully paid sick leave for up to two weeks for people who were infected or subject to quarantine; two weeks of twothirds pay for those who had to care for someone sick or quarantined; 12 weeks of two-thirds paid sick leave (or expanded FMLA) for those who could not work because their children were no longer physically attending school and/or their day care was closed. Though these costs were directly incurred by employers, they were able to subtract them from their payroll tax obligations. Essentially, businesses were able to provide documentation of these extra costs instead of paying their own taxes. The third law, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was the single largest example of fiscal policy in American history. At $2.5 trillion, it was roughly 10 percent of GDP. Its components are shown in Figure W.16. The 2009 Obama-era stimulus package (the American Recovery and Reinvestment Act) was $787 billion, or 5.5 percent of GDP. There were loans, grants, and appropriations in the package with some loans (particularly to small businesses, independent contractors, and gig workers) that were easily and likely to be converted to grants.11

FIGURE W.16

Distribution of CARES Act spending.

Source: The Wall Street Journal, www.wsj.com/articles/whats-in-the-2-trillion-senate-coronavirus-bill-11585185450; coronavirus-stimulus-bill-11587511763.

www.wsj.com/articles/whats-in-the-new-

Among the grants, there were stimulus checks of up to $1,200 per adult and $500 per child. There were also grants to supplement state unemployment compensation checks up to $600 per week. In addition, there were funds for states allowing independent contractors and gig workers to apply for Pandemic Unemployment Assistance. The usual April 15th deadline for filing and paying 2019 personal income taxes was extended to July 15th. Finally, states received modest grant dollars in an effort to help them with shortfalls in revenues resulting from the shutdown of their local economies. Direct loans were available for larger corporations that would allow them, with hope, to bridge the gap in their operations between a healthy first two months of 2020 to the third and fourth quarters. In particular, the hospitality industry (large hotel chains, for instance) were hypothesized as needing the ability to plug revenue holes for the busy early summer travel season. The airlines, which were decimated during the truncated Spring Break season, were given $51 billion to remain operable. The economic justification for these loans was that corporations were carrying a significant debt load. A sudden decline in revenue for these corporations could have triggered an equally sudden spike in corporate bankruptcies. Preventing that was seen as an important step in providing stability. Among the usual criticisms of fiscal policy, particularly discretionary fiscal policy, are the recognition, administrative, and operational lags. Recall that these are the names given to the time it takes to recognize that a recession has begun, agree to a course of action, and execute the authorized policies. In U.S. history, there has never been a recession like the one caused by COVID-19. A Wall Street Journal monthly survey of prominent business economists routinely asks for an assessment of the likelihood of a recession in the next year. In late 2019 and early 2020, it moved in a narrow range between 20 to 30 percent of economists agreeing that one was likely. In its April 2020 survey, nearly all of them thought the recession would not only happen but that it would be severe. The average estimate of RGDP decline (annualized) was 25 percent. The recognition lag regarding whether there would be a recession was clearly not a factor though the depth of it was unknown at the time. Moreover, the administrative lag (which might be described as a political-agreement lag) shrank as well. It took Congress only 27 days from President Obama’s inauguration to the signing of the

American Recovery and Reinvestment Act in 2009. Even then, they had two months from his election to his inaugural, and his party controlled both houses of Congress. It only took 21 days (all in March 2020) for a highly polarized Congress to negotiate and pass the four aforementioned pieces of COVID19 legislation. The operational lag was and will be longer than that, but not necessarily that much longer. Upward of 60 million taxpayers with bank information on file with the IRS had stimulus payments deposited into their accounts less than 20 days after the bill passed. The extra unemployment benefit supplement ($600 per week) started being paid at about the same time. Because most states do not recognize independent contractors or gig workers in their unemployment systems, they were not prepared to handle unemployment checks for people who had not been employed in a typical fashion. Thus, though the operational lag was shortened significantly for many, new challenges emerged—not the least of which was that many state unemployment systems’ 1980s-era computers were attempting to handle as many claims in a week as they had previously handled in a year. Whether those stimulus payments had the desired effect will be the subject of intense economic research for years and perhaps decades to come. Just as monetary policy is uncertain in its effectiveness, fiscal policy is also questionable regarding whether it accomplishes its goals. An increase in government spending and/or a cut in taxes is supposed to increase aggregate demand. Whether that happens depends on what people do with the money. For these reasons, the efficacy of these policies is an empirical issue.

International Comparisons COVID-19’s economic victims were just as differentiated as its individuals. As previously summarized, between the monetary and fiscal policy responses, the United States was able to respond aggressively. Table W.6 demonstrates that other countries were not in the same position. The United Kingdom had a truly modest economic response with little fiscal policy, whereas other countries took more aggressive actions. The European Union’s collective response (prior to July 2020) of 4 percent of GDP was augmented by its member nations. Germany and France were more aggressive than Italy and Greece, in large part because the latter two were already having fiscal difficulty with their debts. On top of the COVID-19 challenge, Japan had already slipped into recession because of a massive increase in taxes, meanwhile Europe was the cusp of near-zero growth.

Table W.6 International fiscal and monetary policies. Percent of National GDP Country

Fiscal Policy

Monetary Policy

Debt (%)

12%

14%

  82

Japan

20%

      3% + Loan Guarantees

236

United Kingdom

1.4%

      6% + Loan Guarantees

  87

4.9% + EU 4%

EU 8% + Loan Guarantees

  64

France

   4% + EU 4%

EU 8% + Loan Guarantees

  97

Italy

 1.4% + EU 4% 

EU 8% + Loan Guarantees

132

Greece

   3% + EU 4%

EU 8% + Loan Guarantees

182

United States

Germany

Source: International Monetary Fund (IMF),

www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19; CIA World Factbook,

www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html.

Another significant difference between the United States and other countries involved the actions of the respective central banks. Whereas the Federal Reserve initially announced $2.3 trillion (ultimately more than $3 trillion) in commitments and increased its balance sheet by almost all of that amount in 45 days, the other world central banks did not commit to nor engage in anything close to that in terms of percentages of GDP. Those central banks preferred loan guarantees to key economic constituents. The European Union’s fiscal policy actions (prior to July 2020) were rather muted relative to those that were passed by the United States and Japan. Member nations saw a 4 percent of GDP increase in spending that came almost entirely in the form of loan guarantees designed to prevent default on key fiscal debts of member countries. Similarly, the monetary policy actions were somewhat less. For example, the European Central Bank focused on loan guarantees and $1.5 trillion in purchases of public and private securities to lower long-term interest rates.

International Issues Operations and Supply Chain Challenges As you may have noticed in the other sections of this chapter detailing critical pandemic goods, the global economy is dependent on both operations and the supply chain. To understand the reasons, let’s revisit the concepts of absolute and comparative advantage from international trade. Recall that absolute advantage is the ability to produce a good better, faster, or more quickly than a competitor, whereas comparative advantage is the ability to produce a good at a lower opportunity cost of the resources used. The lower opportunity cost associated with comparative advantage is the cornerstone of international trade. It is the reason the United States imports large quantities of electronics, transportation equipment (mostly automobiles), chemicals, machinery, electrical equipment, and manufactured commodities—in short, almost everything. Instead of producing large amounts of those goods domestically, the United States focuses on the areas where it has a comparative advantage. For that reason, the United States domestically produces and therefore exports primarily electronics, transportation equipment (mostly aircraft), and services (financial, medical, educational, etc.). However, trade isn’t entirely globalized for every good in all circumstances. Countries tend to limit trade for legitimate (national defense, national identity, environmental impact, and immoral labor practices) and illegitimate (protection of jobs) reasons. Beyond the legitimate reasons, so long as another country has a comparative advantage, more goods are produced more cheaply for everyone by outsourcing and engaging in trade—that is, until a global pandemic. In 2019, the United States imported over $452 billion of Chinese goods, which comprised nearly onethird of total U.S. imports. Clearly, China is a primary U.S. trading partner. To get those goods from China to the United States, the global supply chain is used. A supply chain consists of processes that facilitate the movement of goods from the manufacturer to their end user (in the case of finished goods) or to another manufacturer (in the case of raw materials or components for work-in-process goods). Operations is the actual conversion process to transform resources into products. For instance, the global supply chain transports your new Apple product from its final packing point in China to your doorstep. It also moves components and raw materials from one production facility to another. Operations is the process by which those raw materials are used to make the logic board inside of your new product. Apple alone works with over 300 Chinese supplier facilities that participate in the supply chain and operations processes. Just imagine if you multiply that complexity across all products that are manufactured in and imported from China. From active pharmaceutical ingredients and PPE to electronics and key ingredients in packaged food, nearly every facet of the supply chain was disrupted by COVID-19. Operations issues stemmed from declines and reallocations in both labor and capital in China and other countries before the virus widely infected the United States. Labor was affected by the stay-at-home orders throughout many countries in cases where people either contracted the virus or had to care for someone who was infected. In many cases, active employees and the machinery in facilities were deployed to increase production of other critical goods. For example, Foxconn, Apple’s key manufacturing partner, retooled one of its largest facilities in China to produce masks. It addressed a critical global need—but at the expense of decreasing production of its usual outputs. Remember, some of these outputs are inputs to other finished goods, and that affected the production of them as well.

Let’s use another simple example to illustrate these impacts—the common headache. Tylenol is composed of acetaminophen, the active ingredient, and other inactive ingredients. Acetaminophen is manufactured in China, while the inactive ingredients are mixed with it and formed into pills in India. After the onset of COVID-19, the shipping and manufacturing of active ingredients like acetaminophen became delayed. Once they got to India, more problems ensued because of strict lockdown conditions. More broadly, nearly half of all generic drugs sold in the United States are made in and imported from India, with active ingredients sourced from China. Even short-term problems in either one of these countries’ operations or supply chains can create larger problems in the United States and other developed countries. Aside from operations disruptions, supply chain interruptions resulted from water- and air-based transportation limitations. During COVID-19, cargo ships struggled to dock due to restricted port entry, and in many cases, these ships couldn’t make crew changes due to travel restrictions. Likewise, with decreased commercial aviation, air cargo capacity decreased dramatically. Permission to operate additional flights and staff crews became a significant hurdle for distributors to overcome. Consequently, air freight costs skyrocketed. Adding to these complications was low-inventory-holding approaches. Just-in-time inventory management is a common strategy that reduces storage costs by holding relatively low levels of stock. In a fully functioning supply chain, delivery frequencies and quantities are dynamically adjusted to respond to supply and demand. However, sudden widespread surges in demand and equally sudden decreases in supply caused by the preceding transportation complications led to shortages. On a practical level, the economically sound reasons to import goods compounded with the changing operations and supply chain variables led to shortages in brick-and-mortar stores and backorders and delivery delays in online channels. E-commerce, in particular, had never been challenged to this extent. Reliance on the global supply chain forced the largest retailers to suspend expedited shipping and prioritize only essential goods. This had an impact on customer expectations as well. Once Chinese factories returned to normal operations, masses of shipping containers were back in the transit pipelines to their destinations. Unfortunately, canceled orders for nonessential goods from the United States, and other countries that were infected after China, weren’t ready to receive them. The result was that these shipping containers were left at key transit points closer to popular destinations to help shorten the lead time once orders were reinstated. COVID-19 certainly surfaced the consequences of globalized operations and supply chains on the economy, but what does this mean for the future? Economists and businesspeople alike are already discussing long-term strategies to manufacture and reserve a greater portion of PPE and pharmaceuticals domestically. This is due to a broader interpretation of the national defense argument to limit international trade. Other suggestions to combat these challenges in the long run include maintaining larger quantities of inventory, better allocating facilities across different regions, and developing more robust risk management plans.

Exchange Rates Whenever there is a significant world event that jeopardizes economic stability, financial markets are some of the first to react. That reaction almost always involves a flight to safety. Economic safety comes from assets with little chance of economic loss. Time and again—from the Asian financial crisis of the late 1990s, to the aftermath of 9/11, to the financial crisis of 2008, to the COVID-19 pandemic— the flight to safety has involved shifts to U.S. dollar-denominated safe assets—specifically, U.S. Treasuries. To buy a U.S. Treasury, you need U.S. dollars. That means holders of assets denominated in other currencies must first sell them in exchange for that currency and then trade it for dollars.

A change in the desire to hold any currency will, in the absence of countervailing government actions, produce changes to exchange rates. Figure W.17 shows that relative to their January 1, 2020, levels, the pattern held for the major currencies of Europe, the United Kingdom, China, Japan, and South Korea (euro, pound, yuan, yen, and won, respectively). Though the pound declined the most at 12.5 percent, it partially rebounded in the 20 days that followed. It, as well as the South Korean won, remained 5 to 7 percent below January 1, 2020, levels by May. Only the yen maintained its value.

FIGURE W.17

Exchange rates, selected currencies.

Source: Board of Governors of the Federal Reserve System,

www.federalreserve.gov/releases/h10/current/.

A look back at Figure W.11 shows where some of the proceeds from those transactions went: U.S. Treasuries. Because of the dramatic increase in the supply of money in U.S. Treasuries, interest rates on the shortest-term notes were near, at, or even below zero. When interest rates are negative, that implies domestic and foreign investors are so concerned about losing money in their investments that they are willing to pay the U.S. Treasury to hold their money. This was on top of Federal Reserve purchases of those instruments.

Summary The COVID-19 virus and the health and economic crises it triggered combined to alter the course of human history. Short of a global war, it is difficult to imagine an event more potentially destructive. As bad as the health consequences were (and will likely continue to be until a vaccine or cure is found and widely distributed), the economic consequences are likely to be at least as impactful and long lasting. COVID-19 precipitated shortages for key goods that were made worse by laws prohibited price gouging. It motivated substitutions in both consumption and production of PPE, which sparked innovation in the medical industry. It shut down entire industries (travel and much of retail). It disrupted industries as varied as crude oil and groceries. Further, it demonstrated the need for public goods such as basic research and the national stockpile of PPE. On the macro side, economists, who dismissed the possibility of another Great Depression, were suddenly predicting rates of unemployment near those experienced in the 1930s. The health-justified shutdown of economic activity triggered the most significant monetary and fiscal policy actions in U.S. history. It caused the fastest decline in global stock prices ever. It shattered economic records: a level of new unemployment filings that were nine times the previous record, negative crude oil prices, deficits in excess of $3 trillion (twice the previous record), a $3 trillion injection of liquidity, and countries experiencing 30 percent declines in GDP. The virus touched almost every person on earth in one way or another.

Key Terms absolute advantage advance estimate aggregate demand basic research case fatality rate (CFR) causative pathogen community spread comparative advantage discount rate employment–population ratio epidemic extrapolation federal funds rate imported cases infection mortality rate (IMR) infodemic interpolation labor force participation rate leverage ratio liquidity trap mandatory spending mark-to-market monetary transmission mechanism

municipal bond opportunity cost outbreak pandemic personal protective equipment (PPE) price ceiling price gouging purely public good quantitative easing reserve requirement shortage supply chain Tier 1 assets translational research

Quiz Yourself 1. Which is the most widespread designation for a disease? a. outbreak b. epidemic c. pandemic d. infodemic 2. If a disease infects someone and it cannot be traced to the source of contact, it is considered a. an imported case. b. community spread. c. a suspected case. d. unknown origin. 3. Regarding COVID-19, the country with the most cases through July 1, 2020 was ______, while the country with the highest infection rate relative to its population was ______. a. China; the United States b. the United States; Japan c. the United States; also the United States  d. South Korea; China 4. The area with the most deaths early in the COVID-19 pandemic (prior to March 1, 2020) was the ______, while the area with the most deaths by June 1, 2020 was the ______. a. Western Pacific Region; European Region  b. European Region; Region of the Americas c. Region of the Americas; European Region d. Western Pacific Region; Region of the Americas 5. Based on the death statistics regarding age and sex, which person is at the highest risk of COVID19-related death? a. a 20-year-old female b. an 80-year-old female c. an 80-year-old male 

d. a 20-year-old male 6. Since 1900, the pandemic with the largest number of infections was likely ______, while the pandemic with the largest number of associated deaths was likely ______. a. Swine Flu (H1N1/09); Asian Flu (H2N2) b. SARS; MERS c. Spanish Flu (H1N1); Swine Flu (H1N1/09) d. Swine Flu (H1N1/09); Spanish Flu (H1N1)  7. In terms of the economic consequences of pandemics, a. COVID-19 had a much greater impact than that of any previous one.  b. COVID-19 had a much greater impact than most of the previous ones except for the Spanish Flu. c. the Spanish Flu had a much greater impact than that of any subsequent one. d. there is no evidence that any of them had an economic impact of any kind. 8. The data available in May 2020 suggested that the infection morality rate (IMR) for COVID-19 was a. greater than that of any disease previously known. b. equal to that of a typical seasonal flu. c. less than that of a typical seasonal flu. d. between that of a typical seasonal flu and 10 percent.  9. If you have data for April 1 and June 1 and want to estimate the May 1 figure, you use ______, while if you want to estimate the July 1 figure you use ______. a. interpolation; extrapolation  b. extrapolation; interpolation c. interpolation; extradition d. extradition; interpolation 10. Homemade hand sanitizer (made from aloe and rubbing alcohol) serves as a(n) ______ to commercial hand sanitizer, while the aloe and alcohol are ______. a. substitute; complements  b. complement; substitutes c. substitute; alternative outputs d. alternative output; complements 11. A law that prevents prices from increasing because of an emergency serves as a ______ and is meant to prevent ______. The result, however, creates a ______.

a. price floor; price gouging; shortage b. price floor; price gouging; surplus c. price ceiling; all profit from being made; shortage d. price ceiling; price gouging; shortage  12. The personal protective equipment (PPE) used by medical professionals was in short supply during COVID-19 because ______, and as a result, these professionals often made ______. a. there were production and supply chain issues; substitutions between mask types and wore face shields  b. of tariffs imposed by the Trump administration; do with only cloth masks c. of tariffs imposed by the Trump administration; substitutions between mask types and wore face shields d. there were production and supply chain issues; do with only cloth masks 13. Which item is the best example of a purely public good? a. mask b. ventilator c. basic research d. translational research 14. Which form of data was among the earliest available in 2020 regarding the economic impact of COVID-19? a. the unemployment rate for March b. the unemployment claims filed in March  c. the GDP for the first quarter d. inventory accumulation in February 15. In late February and early March, the stock market a. declined and became less volatile. b. increased and became less volatile. c. declined and became more volatile. d. increased and became more volatile. 16. During March 2020, interest rates on U.S. Treasuries ______ and ______ -term Treasuries actually turned negative for a short time. a. declined; short  b. declined; long c. increased; short

d. increased; long 17. The unemployment rate in February 2020 was ______, while in April it was ______. a. at a 50-year low; between that recorded in the Great Recession and the Great Depression b. at a 50-year low; above that recorded in the Great Depression c. at an all-time low; just below that recorded in the Great Recession d. at an all-time low; above that recorded in the Great Depression 18. The Federal Reserve’s approach to COVID-19’s economic consequences was a. to ignore it. b. precisely the same as its response to a typical recession. c. precisely the same as its response to the Great Recession. d. even more bold and rapid than its response to the Great Recession. 19. The fiscal policy actions in response to COVID-19 were a. nonexistent. b. precisely the same as they tend to be for a typical recession. c. precisely the same as they were for the Great Recession. d. even more bold and rapid than they were for the Great Recession.  20. COVID-19 exposed a. the problems of international trade when it is focused only on comparative advantage. b. the wisdom of international trade when it is focused only on comparative advantage. c. the problems of international trade when it is focused only on employment. d. the wisdom of international trade when it is focused only on employment. 21. The response of international investors to COVID-19 caused the U.S. dollar to ______ and interest rates on U.S. Treasuries to ______. a. strengthen; rise b. weaken; rise c. strengthen; fall  d. weaken; fall

Short Answer Questions 1. What is the consequence of a price ceiling imposed to prevent price gouging? 2. Using the determinants of supply and demand, provide an application of each determinant to a good associated with the COVID-19 pandemic. 3. Contrast the fiscal and monetary policy actions taken in response to COVID-19 across countries. In addition, compare U.S. actions taken during and after the Great Recession to COVID-19 policy.

Think about This The Trump administration, when distributing the stimulus checks, was compelled to make a choice between getting them out quickly and getting them out correctly. For instance, my mother-in-law passed away in 2019 but received a stimulus deposit because there was not sufficient time to accurately cross-check the data on recent deaths with other records. The Trump administration sided with “quick” rather than “correct.” What other unintended impacts might that have had? Would you have made the same choice?

Talk about This When the extra $600 per week in unemployment compensation was distributed, people who made less than $50,000 per year could (depending on their state) have received more income per week than they did when they were working. This was another trade-off that had to be made given the outdated nature of the state computer systems that handle unemployment compensation. When the economy opened again, these workers took a pay cut by returning to work. Some refused and wanted to wait until those extra payments ended. Should they have been allowed to refuse to work?

For More Insight See “Supplier List,” Apple Corporation,  List.pdf.

www.apple.com/supplier-responsibility/pdf/Apple-Supplier-

Advanced Medical Technology Association, “Tens of Thousands of Life-Saving Ventilators on Deck to Combat COVID-19,” www.advamed.org/newsroom/press-releases/tens-thousands-life-savingventilators-deck-combat-covid-19. Bump, Philip, “Nearly All Americans Are under Stay-at-Home Orders. Some May Have Come too Late,” Washington Post, April 2, 2020,  www.washingtonpost.com/politics/2020/04/02/nearly-allamericans-are-under-stay-at-home-orders-some-may-have-come-too-late. “Lesson 1: Introduction to Epidemiology; Section 11: Epidemic Disease Occurrence,” Centers for Disease Control and Prevention,  www.cdc.gov/csels/dsepd/ss1978/lesson1/section11.html. “Interim Clinical Guidance for Management of Patients with Confirmed Coronavirus Disease (COVID-19),” Centers for Disease Control and Prevention,  www.cdc.gov/coronavirus/2019-

ncov/hcp/clinical-guidance-management-patients.html. “Coronavirus Disease 2019 (COVID-19) Groups and Higher Risk for Severe Illness,” Centers for Disease Control and Prevention,  www.cdc.gov/coronavirus/2019-ncov/need-extra-precautions/groupsat-higher-risk.html. “Past Seasons Estimated Influenza Disease Burden,” Centers for Disease Control and Prevention,  www.cdc.gov/flu/about/burden/past-seasons.html. Correia, Sergio, Stephen Luck, and Emil Verner, “Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu,” available at SSRN: papers.ssrn.com/sol3/Papers.cfm?abstract_id=3561560. Davis, River, “Fall of Natural Gas Prices Speeds Energy Shift in East Asia,” The Wall Street Journal, April 19, 2020,  www.wsj.com/articles/fall-of-natural-gas-prices-speeds-energy-shift-in-east-asia11587290400. Duprey, Rich, “Uber Eats Gains, Grubhub Lags During Coronavirus Pandemic,” www.nasdaq.com/articles/uber-eats-gains-grubhub-lags-during-coronavirus-pandemic-2020-04-09. Garrett, Thomas, “Economic Effects of the 1918 Influenza Pandemic: Implications for a Modern-day Pandemic,” St. Louis Federal Reserve Bank, November 2007,  www.stlouisfed.org/~/media/files/pdfs/community-development/researchreports/pandemic_flu_report.pdf. Huddleston, Tom, Jr., “The History of Hand Sanitizer—How the Coronavirus Staple Went from Mechanic Shops to Consumer Shelves,” March 28, 2020,  www.cnbc.com/2020/03/27/coronavirusthe-history-of-hand-sanitizer-and-why-its-important.html. James, Steven, and Tim Sargent, “The Economic Impact of an Influenza Pandemic,” Department of Finance, Working Paper 2007-04,  www.publicsafety.gc.ca/lbrr/archives/cn000034577651-eng.pdf. Law, Tara, “Americans Bought More Beans, Disinfectants and Oat Milk to Prepare for the Coronavirus Pandemic,” Time, March 26, 2020, time.com/5810811/coronavirus-shopping-data. Maidenberg, Micah, “Fewer Products, Localized Production—Companies Seek Supply-Chain Solutions,” The Wall Street Journal, April 26, 2020,  www.wsj.com/articles/coronavirus-disruptedsupply-chains-that-companies-are-still-fixing-11587893401. National Association of Regulatory Utility Commissioners, “Map of Disconnection Moratoria,” www.naruc.org/compilation-of-covid-19-news-resources/map-of-disconnection-moratoria. Richardson, Safiya, Jamie S. Hirsch, and Mangala Narasimhan, “Presenting Characteristics, Comorbidities, and Outcomes among 5700 Patients Hospitalized with COVID-19 in the New York City Area,” Journal of the American Medical Association, April 22, 2020, jamanetwork.com/journals/jama/fullarticle/2765184, Sterling, Jennifer, “A Closer Look at Avian Flu,” The Wall Street Journal, September 30, 2005, www.wsj.com/articles/SB112747456442249727. Society of Critical Care Medicine, “United States Resource Availability for COVID-19,” sccm.org/Blog/March-2020/United-States-Resource-Availability-for-COVID-19.

Tatelbaum, Julianna, “Fears of US Drug Shortages Grow as India Locks Down to Curb the Coronavirus,” March 24, 2020,  www.cnbc.com/2020/03/24/us-drug-shortage-fears-grow-as-indialocks-down-due-to-the-coronavirus.html. Ziady, Hanna, “Can’t Find What You Want in the Grocery Store? Here’s Why,” April 2, 2020,  www.cnn.com/2020/04/01/business/food-supply-chains-coronavirus/index.html.

Behind the Numbers Centers for Disease Control and Prevention (CDC):

www.cdc.gov

Deaths by Age and Sex History of Diseases Central Intelligence Agency (Fact Book): factbook/index.html

www.cia.gov/library/publications/resources/the-world-

Median age of countries National debt of countries European Union—Eurostat:

ec.europa.eu/eurostat/web/national-accounts/data/main-tables

EU RGDP Federal Reserve:

www.federalreserve.gov

Interest rates in U.S. Treasuries (h15) Exchange rates (h10) Securities holdings and transactions International Monetary Fund:

www.imf.org

Policy responses to COVID-19 Johns Hopkins University—Center for Health Security:

centerforhealthsecurity.org

Ventilator stockpiles in the United States Transportation Security Administration (TSA): Passenger screenings Trading Economics:

tradingeconomics.com

International Quarterly RGDP reports U.S. Bureau of the Census: Exports Imports

www.census.gov

www.tsa.gov

U.S. Bureau of Economic Analysis:

www.bea.gov/data/gdp/gross-domestic-product

RGDP U.S. Department of Labor—Bureau of Labor Statistics:

www.bls.gov/bls/unemployment.htm

Unemployment rate U.S. Department of Labor—Office of Unemployment Insurance:

oui.doleta.gov/unemploy/claims.asp

Unemployment claims University of Oxford—Blavatnik School of Government:

www.bsg.ox.ac.uk

Index of government restrictions World Bank:

data.worldbank.org

Population of countries World Health Organization (WHO):

www.who.int

Cases and deaths (Situation Reports) www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports History of diseases Yahoo Finance:

finance.yahoo.com

Stock indices Stock market volumes CBOE VIX data The COVID Tracking Project from The Atlantic:

covidtracking.com/data/us-daily

Tests performed in the United States

National Health Ministries Korean Centers for Disease Control and Prevention (KCDC): Tests performed in South Korea Deaths by age and sex Ministero della Salute:

www.salute.gov.it

Tests performed in Italy Deaths by age and sex

www.cdc.go.kr

Office for National Statistics:

www.ons.gov.uk

Tests performed in the United Kingdom Deaths by age and sex Robert Koch Institut:

www.rki.de

Tests performed in Germany Deaths by age and sex Ministerio de Sanidad:

www.mscbs.gob.es

Tests performed in Spain Deaths by age and sex

Figure W.1 Text Alternative (Chapter Web) Return to Figure W.1 Horizontal axis of the line-graph represents day (starting with, 10th case), ranging from 1 to 161 in increments of 5. The vertical axis represents number of cases (log10), ranging from 1 to 10000000. The data are as follows: China: The curve begins at 500 cases shows an increasing trend after the 1st day, remaining approximately constant after 51st day. Brazil: The curve begins at 9 to 10 cases on the 1st day, shows an increasing trend after the 6th day, remaining approximately constant after 56th day. Japan: The curve begins at 10 cases on the 1st day, shows an increasing trend after the 6th day, remaining approximately constant after 86th day. United States: The curve begins at 10 cases on the 1st day, shows an increasing trend after 36th day, remaining approximately stagnant after 86th day France, Spain, Italy, Russia, Germany, South Korea, Iran and United Kingdom: The curves begin at 10 cases on the 1st day, shows an increasing trend after the 16th day, remaining approximately constant after 46th day. Note: All data is approximate. Return to Figure W.1

Figure W.2 Text Alternative (Chapter Web) Return to Figure W.2 The data is as follows: A) Death by region on 3/1/20 is shown as: Western pacific region: 2897, eastern Mediterranean region: 43, European region: 31 and other: 6 B) Death by region on 4/1/20 is shown as: European region: 30,089, South-East Asia region: 195, Eastern Mediterranean region: 3,115, Region of the Americas: 3,400, African region: 91, Western pacific region: 3,701 and other, 7. C) Death by region on 5/1/20 is shown as: European region: 138,200, South-East Asia region: 2,174, Eastern Mediterranean region: 7,598, African region: 973, Western pacific region: 6,127 and other: 13. D) Death by region on 6/1/20 is shown as: European region: 180,594, South-East Asia region: 7,743, Eastern Mediterranean region: 12,627, African region: 2,638, Western pacific Region: 7,037 and other: 13. Return to Figure W.2

Figure W.3 Text Alternative (Chapter Web) Return to Figure W.3 A) The graph of quantity versus price for a typical market for oil shows a decreasing demand curve intersecting an increasing supply curve at (P sup asterisk, Q sup asterisk). B) The graph of market for oil on April 20, 2020 shows a decreasing demand curve intersecting an increasing supply curve at (P sup asterisk, Q sup asterisk) in the fourth quadrant.   Note: All data is approximate. Return to Figure W.3

Figure W.4 Text Alternative (Chapter Web) Return to Figure W.4 Two parallel decreasing demand curves with curve on left touching two axes labeled as Demand sub February while demand curve on the right is labeled as Demand sub March. An increasing supply curve intersects Demand sub February at (P sup February, Q sup February) and Demand sub March at (P sub March, Q sub March).  Note: All data is approximate. Return to Figure W.4

Figure W.5 Text Alternative (Chapter Web) Return to Figure W.5 The graph shows two decreasing demand curves, with curve on the left as demand sub February and curve on the right as demand sub March. An increasing supply curve intersects Demand sub February at (P sup February, Q sup February). A horizontal line representing price sub ceiling between P sub February and P sub March intersects supply curve at Q sub S S and demand curve for demand sub March at Q sub D. The supply curve intersects demand sub March curve at P sub March and a point between Q sub S and Q sub D. The horizontal distance between Q sub S and Q sub D on price sub ceiling is labeled as shortage.  Note: All data is approximate. Return to Figure W.5

Figure W.6 Text Alternative (Chapter Web) Return to Figure W.6 Horizontal axis of the graph represents day (starting with, 10th case), ranging from 4 March to May 1. The vertical axis represents number of screenings ranging from 1 to 3000000 in increments of 500000. The data for the screenings are as follows: Screenings in 2019: A zigzag shaped curve begins at 2100000 between 2000000 and 2500000 on 4th of March and remains within the range, ending at 2600000 on 1st May. Screenings in 2020: The curve shows fluctuation between 1900000 and 1500000 between 4th March to 16 March, which further demonstrates a decreasing trend from 1500000 on 16th March to slightly above 0 at April 1, which remains approximately constant till May 1.  Note: All data is approximate. Return to Figure W.6

Figure W.7 Text Alternative (Chapter Web) Return to Figure W.7 Horizontal axis of the graph represents 12 months of year ranging from 17th of April 2019 to 17 of April 2020 in increments of 1 month. The vertical axis represents S and P 500 volume (in billions) ranging from 2 to 9 in increments of 1. The data are as follows: The curve begins between 17th of April 2019 and 17th of May 2019, showing fluctuation between the range of 2 and 4.2 billions of S and P 500 volume, which showing an increasing trend after 17th of February 2020 reaching a peak of 8.4 at March 17, 2020,which is further marked by a decrease in curve to terminate at 5.8 on April 17, 2020.  Note: All data is approximate. Return to Figure W.7

Figure W.8 Text Alternative (Chapter Web) Return to Figure W.8 Horizontal axis of the graph represents 12 months of year ranging from June 1, 2007 to June 1, 2020 in increments of 1 year. The vertical axis ranges from 0 to 700,000 in increments of 100,000. The data is as follows: The curve begins at 300000 on June 6, 2007 increasing to 650,000 on June 1, 2009, which further shows a decreasing trend, terminating at 200,000 on June 1, 2020. All data is approximate. Return to Figure W.8

Figure W.9 Text Alternative (Chapter Web) Return to Figure W.9 Horizontal axis of the graph represents 4 months of year ranging from 2nd of January 2020 to 30th of April 2020 in increments of 7 days. The vertical axis represents the percentage ranging from negative 40 to 15 in increments of 5. The data are as follows: The line graph shows DJIA, S and P, NASDAQ, Nikkei, DAX, FTSE and Hanseng beginning at 0 percent on January 2, 2020 showing a decreasing trend after 20th February 2020, which further increases after March 26, 2020 and with each terminating at negative 17, negative 13, negative 5, negative 16, negative 19, negative 24 and negative 13, respectively.  Note: All data is approximate. Return to Figure W.9

Figure W.10 Text Alternative (Chapter Web) Return to Figure W.10 Horizontal axis of the graph represents 4 months of year ranging from January 2, 2020 to April 30, 2020 in increments of 7 days. The vertical axis represents the volatility ranging from 2000 to 3600 in increments of 200. The data is as follows: The line graph shows S and P 500, MA, MA plus and MA negative beginning at 3250 between 2nd to 9th January 2020, depicting a decreasing trend after 20th February 2020, which further increases after 26th March 2020; each terminating at 2800, 2900, 3000 and 2750 on April 30, 2020, respectively.  Note: All data is approximate. Return to Figure W.10

Figure W.11 Text Alternative (Chapter Web) Return to Figure W.11 Horizontal axis of the graph represents 4 months of year ranging from January 2, 2020 to April 30, 2020 in increments of 7 days. The vertical axis represents the interest rates ranging from negative 0.5 to 3 in increments of 0.5. The data is as follows: 3 month, 6 month and 1 year: The line graph beginning at 1.5 on January 2, 2020 shows a decreasing trend after 20th February 2020, which further remains approximately constant between 0.5 and 1.5 after March 26, 2020. 10 year, 20 year and 30 year: The line graph beginning at 1.8, 2.22 and 2.8 on January 2, 2020, shows a decreasing trend after February 27, 2020 and remains approximately constant between 0and 0.5 after March 19, 2020.  Note: All data is approximate. Return to Figure W.11

Figure W.12 Text Alternative (Chapter Web) Return to Figure W.12 The vertical axis represents the unemployment claims ranging from 0 to 8,000,000 in increments of 1,000,000. The data is as follows: The curve begins at slightly above 0 on January 5, 2019 remaining constant till March 5, 2020, after which it shows a sudden increase to 6,900,000 between March and April 5, 2020. Further, it shows a decreasing trend to terminate as 1,500,000 after June 5, 2020.  Note: All data is approximate. Return to Figure W.12

Figure W.13 Text Alternative (Chapter Web) Return to Figure W.13 Horizontal axis of the graph represents 6 months of year ranging from January 1 to June 24. The vertical axis represents the stringency ranging from 0 to 100 in increments of 10. The data is as follows: Brazil: The curve begins at 0 on January 29 with end point at 71 on 10th June, shows an increasing trend after March and remains stagnant thereafter. United Kingdom: The curve begins at 0 on 22th January with end point at 73 on 24th June, shows an increasing trend after 11th March and decreases from 13th May. Canada: The curve begins at 0 on 22nd January with end point at 67 on 24th June, shows an increasing trend after March and remains stagnant thereafter. Italy: The curve begins at 3 on 22th January with end point at 44 on 17th June, shows an increasing trend after 19th February and decreases from 6th May. China: The curve begins at 0 on 4th January with end point at 82 on 24th June, shows an increasing trend after 22nd January, decreases after 8 April and increases again after 6th May. Japan: The curve begins at 0 on 31st January with end point at 28 on 24th June, shows an increasing trend after 5th February, which decreases after 17 June. Germany: The curve begins at 0 on 22nd January with end point at 55 on 24th June, shows an increasing trend after 26th February, which decreases after 6th May. South Korea: The curve begins at 0 on 29th January with end point at 54 on 17th June, shows an increasing trend after 4th March, which decreases after 29th April. Spain: The curve begins at 0 on 29th January with end point at 29 on 17th June, shows an increasing trend after 19th February, which decreases after 13th May. United States: The line graph begins at 0 on 1st January with end point at 69 on 24th June, shows an increasing trend after 11th March and remains stagnant thereafter. France: The curve begins at 0 on 22nd January with end point at 66 on 24th June, shows an increasing trend after 26th February, which decreases after 16th May.  Note: All data is approximate. Return to Figure W.13

Figure W.14 Text Alternative (Chapter Web) Return to Figure W.14 The data for increasing monetary and fiscal policies are as follows: March 3: Federal Reserve lowers federal funds target to 1 to 1.25 percent. March 6: Passage of the coronavirus preparedness and response supplemental appropriation. March 15: FOMC lowers federal funds target to 0 to 0.25 percent; reduces reserve requirement to 0 percent. March 16: coordinates with other central banks, federal reserve lowers the discount rate cut to 0.25 percent. March 17: Federal Reserve announces coordination with FDIC, comptroller of the currency; creates lending facilities for commercial paper, primary dealer credit. March 18: passage of families first coronavirus response act, federal reserve creates money market liquidity facility. March 19: Federal Reserve announces liquidity arrangements with smaller central banks. March 23: Federal Reserve announces unlimited purchases of mortgages, commercial paper, AAA securities. March 27: Passage of the coronavirus aid, relief, and economic security act. March 31: Federal Reserve announces coordination with FDIC, comptroller of the currency; creates lending facilities for commercial paper, primary dealer credit. April 6: Federal Reserve lowers community bank leverage ratio to 8 percent from 9 percent. April 24: Passage of an amendment to the coronavirus aid, relief, and economic security act. Return to Figure W.14

Figure W.15 Text Alternative (Chapter Web) Return to Figure W.15 Horizontal axis of the graph represents 13 years ranging from January 3, 2007 to January 3, 2020 in increments of 1 year. The vertical axis represents the federal reserve holdings (in millions of dollars) from 0 to 8000000 in increments of 1000000. The data is as follows: The line graph shows curves for Traditional security holdings begin at 900000 January 3, 2007 remaining between the range till 2020. Long-term treasury purchases begin at 500000 on January 3, 2009 increasing to 2800000 mid 2019 and 2020 to terminate at 4000000. Lending financial institutions, liquidity to key credit markets, and Fed agency debt mortgage-backed securities purchases showing similar trend of increase from mid 2008-2009 between 1000000 to 200000 depicting an increase between 2009 to 201 which approximately remained constant between 2013 to 2019, before showing a sudden increase post January 3, 2020.  Note: All data is approximate. Return to Figure W.15

Figure W.16 Text Alternative (Chapter Web) Return to Figure W.16 The data is as follows: Large business: 17, Small business: 28, Airlines: 2, States: 6, Individuals-stimulus payments: 12, Individuals-tax deferrals/Extensions: 8, Expanded unemployment: 10, Hospitals and VA: 7, public transit: 1, COVID-19 testing: 1, and other: 8. Return to Figure W.16

Figure W.17 Text Alternative (Chapter Web) Return to Figure W.17 Horizontal axis of the graph represents 4 months of year ranging from January 2, 2020 to April 20, 2020 in increments of 7 days. The vertical axis represents the percentage ranging from negative 15 to 10 in increments of 5. The data is as follows: The line graph shows curves for five currencies beginning at 0 percent, with curve for all currencies decreasing to a range of negative 5 to 0 till February 27, 2020. Further, all currencies show a sudden increase in March with peak of each currency as follows: Euro, 2; Yen, 6; Yuan, 1; Pound, negative 0.5; and Won, negative 2. Further, all currencies shows a decrease between March 19 to March 26, each rebounding back and remaining approximately constant between negative 5 to 1 from March 26 to April 23, 2020.  Note: All data is approximate. Return to Figure W.17

Table of Contents 1. Preface 1. Cover Page 2. Copyright Page 2. Bonus Chapter: The Economics of Pandemics 1. The Economics of Pandemics Introduction 2. Basics and Data 1. Definitions 2. Data and Characteristics 3. Other Outbreaks, Epidemics, and Pandemics 4. Measurement Problems 3. Microeconomic Issues and Analysis 1. Applying the Supply and Demand Model 2. Shortages, Price Gouging, and Price Ceilings 3. Incentives for Innovation, Finding Substitutes, and Resource Reallocation 4. Individual Industries 5. Public Goods 4. Macroeconomic Issues and Analysis 1. Financial Markets 2. Employment 3. Real Gross Domestic Product 5. Government Responses 1. Attempts to Control COVID-19 2. Monetary Policy 3. Fiscal Policy 4. International Comparisons 6. International Issues 1. Operations and Supply Chain Challenges 2. Exchange Rates 7. Summary 8. Key Terms 9. Quiz Yourself 10. Short Answer Questions 1. Think about This 2. Talk about This 3. For More Insight See 4. Behind the Numbers 3. Accessibility Content: Text Alternatives for Images 1. Figure W.1 Text Alternative (Chapter Web) 2. Figure W.2 Text Alternative (Chapter Web) 3. Figure W.3 Text Alternative (Chapter Web) 4. Figure W.4 Text Alternative (Chapter Web) 5. Figure W.5 Text Alternative (Chapter Web) 6. Figure W.6 Text Alternative (Chapter Web) 7. Figure W.7 Text Alternative (Chapter Web) 8. Figure W.8 Text Alternative (Chapter Web)

9. Figure W.9 Text Alternative (Chapter Web) 10. Figure W.10 Text Alternative (Chapter Web) 11. Figure W.11 Text Alternative (Chapter Web) 12. Figure W.12 Text Alternative (Chapter Web) 13. Figure W.13 Text Alternative (Chapter Web) 14. Figure W.14 Text Alternative (Chapter Web) 15. Figure W.15 Text Alternative (Chapter Web) 16. Figure W.16 Text Alternative (Chapter Web) 17. Figure W.17 Text Alternative (Chapter Web)

Guide 1. Preface 2. Cover Page 3. Copyright Page 4. Bonus Chapter: The Economics of Pandemics 5. The Economics of Pandemics Introduction 6. Basics and Data 7. Definitions 8. Data and Characteristics 9. Other Outbreaks, Epidemics, and Pandemics 10. Measurement Problems 11. Microeconomic Issues and Analysis 12. Applying the Supply and Demand Model 13. Shortages, Price Gouging, and Price Ceilings 14. Incentives for Innovation, Finding Substitutes, and Resource Reallocation 15. Individual Industries 16. Public Goods 17. Macroeconomic Issues and Analysis 18. Financial Markets 19. Employment 20. Real Gross Domestic Product 21. Government Responses 22. Attempts to Control COVID-19 23. Monetary Policy 24. Fiscal Policy 25. International Comparisons 26. International Issues 27. Operations and Supply Chain Challenges 28. Exchange Rates 29. Summary 30. Key Terms 31. Quiz Yourself 32. Short Answer Questions 33. Think about This 34. Talk about This 35. For More Insight See 36. Behind the Numbers 37. Accessibility Content: Text Alternatives for Images

38. Figure W.1 Text Alternative (Chapter Web) 39. Figure W.2 Text Alternative (Chapter Web) 40. Figure W.3 Text Alternative (Chapter Web) 41. Figure W.4 Text Alternative (Chapter Web) 42. Figure W.5 Text Alternative (Chapter Web) 43. Figure W.6 Text Alternative (Chapter Web) 44. Figure W.7 Text Alternative (Chapter Web) 45. Figure W.8 Text Alternative (Chapter Web) 46. Figure W.9 Text Alternative (Chapter Web) 47. Figure W.10 Text Alternative (Chapter Web) 48. Figure W.11 Text Alternative (Chapter Web) 49. Figure W.12 Text Alternative (Chapter Web) 50. Figure W.13 Text Alternative (Chapter Web) 51. Figure W.14 Text Alternative (Chapter Web) 52. Figure W.15 Text Alternative (Chapter Web) 53. Figure W.16 Text Alternative (Chapter Web) 54. Figure W.17 Text Alternative (Chapter Web)

Remarks Sample annotation #1. inserting an annotation inseting annotakjslfkjLKD annotation sample 1

This is why this discussion has been an intellectual shortcut. Most economists do not believe that you can measure happiness in the same way that you measure distance or temperature. This means that though you can say you are happier in one circumstance than in another, you cannot say how much happier you are. All is not lost, though, because we can get the same idea through the concept of indifference. The reason no one-semester course textbooks explain the downward-sloping nature of demand using the concept of indifference is that it takes too long and gets you no further in your understanding than the last two paragraphs have. Thus, the shortcut of marginal utility nets the same result in a lot less time and is judged by most teachers of one-semester economics courses as useful. 1

A price increase from $8 to $9 is a 12.5 percent increase because it is the fraction 1/8. It is a 25 percent decrease in quantity because it went from 4 to 3 (1/4). 2

While you may think license plates allow for exclusivity, they do not serve the entire function in that once you have a licensed car, it is very difficult to charge you based on usage. As technology increases, GPS receivers and transmitters may make it possible to charge drivers based on where and when they drive. 1

In the next chapter, we will see that firms with many competitors see their profits disappear because new firms enter, thereby increasing market supply and lowering the price. 1

Though they may be able to charge any price they want at a local farmers’ market, they are not perfect competitors there. In that setting, they are one of a few farmers selling that particular produce. 2

Competing drugs (with different formulations by different manufacturers) entered the market in 2017. 1

Even then, some components are estimates.

2

In 1996, the Boskin Commission established that measuring inflation the original way overstated the true inflation rate by 1.1 percentage points. In response to this criticism and in recognition of these problems, the BLS corrected some of these flaws by going to a two-year cycle on market basket updates.

3

The BLS then constructs a “hedonic price” for these goods. A hedonic price is an educated guess at what the price of the original good would have been given its characteristics. The BLS constructs hedonic prices for clothes dryers, microwave ovens, refrigerators, camcorders, consumer audio products, DVD players, and college textbooks. 4

Social Security uses the end of June CPI to compute the COLA. By law, Social Security checks to individuals cannot fall, which means that if prices fall, the Social Security Administration simply does not increase benefits until the CPI rises to above its previous higher level. Because the June 2008 to June 2009 CPI fell and because the June 2010 level did not rise to the June 2008 level, Social Security recipients received no COLA for two years. The same thing happened in 2015 when plummeting gasoline prices held the CPI down so much that overall inflation was zero. 5

In more recent years, Apple changed its marketing strategy to upgrade speed, size, and features rather than to lower price. 1

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3102645

2

There is a mathematical cross-product term as well, but it is very small when the inflation and real interest rates are low. 1

A one-year 10 percent surtax was added to income taxes in the Lyndon Johnson administration. Some justified this action as an effort to combat inflation. 2

The IRS provides tables to employers that direct them to withhold taxes from employees’ paychecks. These are usually adjusted at the first of the year. These tax cuts altered the tables midyear. 1

In 2006, the Fed abandoned its use of M3 as a useful measure as it was becoming unstable and therefore an unreliable measure. 2

Prior to 2003, the Federal Reserve utilized another key interest rate to signal its intentions, the discount rate. This was the interest rate at which the Fed itself loaned money to banks, usually buying a portion of a bank’s loan portfolio. The discount rate (as the primary credit rate was called then) was below the federal funds rate, but banks were hesitant to use this service too often because it brought with it the potential for extra scrutiny from auditors. 1

Recall from Chapter 6 that indexing is adjusting a dollar amount for inflation. It is called indexing because an index, in this case the consumer price index, is used to perform the adjustment. 2

When inflation occurs and incomes rise exactly in line with inflation, then, unless the tax brackets are adjusted for inflation, people pay a higher percentage of that income in taxes even though the real spending power of their income has remained unchanged. 3

The Organization for Economic Cooperation and Development (OECD) and World Bank definitions of public sector (PS) debt differ. The OECD discontinued its published series. World Bank Gross PS includes all public sector debt (including state/provincial/local). World Bank-Central includes only

the central government debt. These numbers differ greatly in more federal systems (e.g., the United States and Canada) and less in centralized systems (e.g., the United Kingdom). 1

The bank may still take your payment every month, but they are only servicing it. They send that payment to the true owner. 1

Conservatorship involves temporarily placing an entity under the control of another entity.

1

Multifactor productivity, though notably slower overall, showed essentially the same pattern and timing. 1

The zero-coupon bond yield at this chapter’s writing (April 2019).

2

This is the length of time the Social Security and Medicare trustees are required to consider and report upon. 3

The technical reasons for this consideration are beyond the scope of this text; however, from Chapter 7 you understand that higher rates of discount mean that liabilities far off into the future will have a smaller present value. The authors argue that the discount rates on the liabilities are overstated for political purposes to mask the actual size of the problem. 1

See Executive Order 13126, Executive Order on Child Labor, https://www.federalregister.gov/documents/1999/06/16/99-15491/prohibition-of-acquisition-ofproducts-produced-by-forced-or-indentured-child-labor 2

Recently released interrogations of Saddam Hussein show that he failed to comply with these UN directives because Iraq had no such weapons after 1995, but that he wanted the Iranians to believe Iraq was stronger militarily than it was. 1

Current members: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czechia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. Bold = original members 2

There are now 19 countries that are part of the currency union. They are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Estonia, Latvia, and Lithuania were not part of the original 16. Further, millions more live in countries with currencies whose value is pegged to the euro. 1

Gross national income modifies gross domestic product by adding in income earned abroad and makes other relatively small adjustments. For the most part, GNI is a better measure for comparing incomes across development categories. 2

That is not to say that these models are without value. They provided the basis for much of what we know about economic development, but in all honesty, this is an area of economics for which little consensus exists.

1

The extent to which trade exacerbates this is debated because this trend may have been inevitable.

2

This is accurate unless you modify the CPI as suggested in Chapter 6, in which case the real wages for production workers have risen slightly. 1

This is the same argument that some economists use to suggest that government need not regulate workplace safety. Risk takers must be compensated adequately or they would not take the risk. 2

This externality is avoided when life insurance companies differentiate their premiums for smokers and nonsmokers. The degree of the employer subsidy would have to depend on this as well. 1

Effluent is the general term for the stuff that comes out of a smokestack.

1

Because Medicaid’s enrollment is fluid, many more people have Medicaid at some point during the year. 2

0.99 × $1,000 + 0.01 × $100,000 = $1,990.

3

This aspect is actually an artifact of World War II. Because of inflation fears during that time, it was against the law to raise wages to attract workers. Instead, companies increased benefits in the form of group insurance subsidies, and the practice survived the war. 4

States may impose small co-payments to discourage abusive overuse.

5

Workers have the right to continue their employer-sponsored health insurance even after they quit or are fired. The problem is that most employers do not continue subsidizing the premiums, which means people are not likely to be able to afford to exercise this right. 6

If both were perfectly inelastic at different quantities, there would be no market-clearing price.

1

Though technically the cutoff is 133 percent of the poverty line, there is an income exemption in the calculation, which makes the effective percentage 138 percent. 2

While the data on length of stay have not shown a decline, this is misleading because of the aforementioned outpatient substitution. Since the length-of-stay data are based on the number of days a patient stays in a hospital, the procedures that are now outpatient do not count at all. If length of stay for the other procedures had remained the same as it was before the outpatient substitution, then the overall average would have risen substantially since whenever you remove short stays and leave only the longer stays, the average rises. Since the overall average has remained constant, we know the length of stay for longer-stay procedures has fallen. 1

Because of the large innovation costs, this is a poor assumption for the industry at all stages of production but a reasonable one after the drug has been invented and approved.

2

Manufacturers typically will make some economic profits on drugs after the expiration of the patent because of brand loyalty among physicians and patients. Drug company representatives encourage that loyalty with gifts. Sometimes these gifts are as innocuous as drug company pens while at other times they are expensive company-sponsored vacations. 3

This drug was pulled from the market because it was shown to interact in potentially fatal ways with heart medications. 4

In extreme cases, this drug has reduced the risk of esophageal cancer.

1

Chapter 6 shows that because the CPI overstates the effects of inflation, real incomes for the poor did not fall but rose slightly. 2

We assume they are likely to be less competent because cities hire the more competent of their applicant pool first, and these are all gone when it comes time to hire more. 1

Napster is now owned by Rhapsody and operates under a subscription-based model similar to Spotify Premium. 2

While a number of important laws amending and clarifying the Sherman Act have been enacted since 1890, for simplicity and brevity we will consider this one body of antitrust law. 1

Another interpretation of this finding is that it is actually whites who are being discriminated against since, all else being equal, they are defaulting less frequently than African Americans. This implies that they are being turned down too often. 2

This analysis works the same for modeling sex discrimination.

3

Some economists have found that when they include standardized tests of intelligence, this remaining difference disappears. These tests and their use in this context are hotly debated by economists. The economists who employ the results of the tests believe the tests are truly tests of intelligence, whereas others contend that the tests are racially biased and therefore of no value. 1

A refundable tax credit is one whereby a household can receive more from the federal government in the form of a return than is owed in tax or withheld. The Earned Income Tax Credit (which was greatly expanded in both the Reagan and Clinton administrations) and the Child Tax Credit (which was created in the Clinton administration and doubled in size during the G. W. Bush administration) are both (mostly) refundable. A portion of the American Opportunity Credit (a tax credit to support a college education) is also refundable. 2

For instance, my fraternal grandfather earned a law degree; my father, brother, sister, and daughter (as well as I) earned PhDs. That is highly unlikely to be random. 3

The U.S. Constitution only allowed direct taxes (taxes on income and wealth are direct taxes; sales and inheritance taxes are indirect because they are taxes on sales or transfers) when the total paid by

citizens of the states was proportional to their population. The 16th Amendment allowed for an income tax only. 1

We are defining stability here as the ratio of the standard deviation of real prices to their mean.

1

The poverty line used here is the official poverty line, with which there are many problems. Review the chapter “Poverty and Welfare” to understand this issue. 2

This assumes that at $5.15, the minimum wage was above equilibrium. The evidence is that the equilibrium wage was higher than $5.15 for much of 2004 and beyond, making $5.15 an irrelevant minimum wage. 1

When the difference between equilibrium rents and market rents is wide enough, the only apartments that become available are those whose occupants have died. 2

This is not to say that these landlords have no influence. Through campaign contributions, landlords, particularly the high-profile ones, are able to make their case and have received consideration on a number of development issues of concern to them. Nevertheless, this influence has not led to the undoing of rent control in New York. 1

“Free” is in quotes for two reasons. First, eight states require a textbook rental fee that, in Indiana at least, is between $100 and $200 per student per year. This fee is waived for students qualifying for the Federal School Lunch program. Second, the taxpayer pays for this public education. Thus, “free” should be read as “free to the parents except for any fees that might be involved.” 2

The 3-test version of the SAT may have had an impact as the scores dropped markedly for the year in which it was adopted. The three distinct recentering exercises have also been accounted for in these data. In those exercises, the College Board provided conversion tables to equate one year’s SAT with another. Each time, past SATs were adjusted higher. 3

State law mandated that in such a circumstance the awarding of vouchers would be determined at random. 1

Some larger state universities operate hospitals as part of their medical schools, and the revenue from those hospitals significantly distorts the relative size of the revenue sources. 2

There are several reasons why a student might get less than the full buy-back price. Some include the existence of key codes for online content or custom content. Bookstores almost never repurchase loose-leaf books. 1

The most recent version is available at www.heritage.org/research/reports/2015/09/poverty-and-thesocial-welfare-state-in-the-united-states-and-other-nations. 2

Early studies of the impact of using SNAP cards instead of food stamp vouchers showed a decrease in fraud by 67 percent. More recently, fraud has increased, focused primarily in smaller retail outlets.

3

This phrase was often used by President Clinton as a political mantra.

1

Later in this chapter, you will see that there is an open debate over whether Head Start has had any of these effects. 2

Head Start serves students to age 5.

3

Not all studies of Head Start compare children’s abilities adequately. For instance, if you put a child of educated, financially well-off parents in a dilapidated building with a lousy teacher, you will probably get better results than you will if you put a poor child of a single, uneducated teenage mother in a new building with a great teacher. The home environment is remarkably important. This means that unless you control statistically for home environment variables, you get study results that are not indicative of the effectiveness of the program. Good studies of Head Start must compare “equally situated” children. The standard statistical control mechanism is to analyze siblings where one was in the program and another was not in the program. 1

The formula for 2019 was 90 percent of the first $926 plus 32 percent of the next $4,657 plus 15 percent of the remainder up to a maximum benefit that is computed using the maximum taxable earnings for each of the work years. This formula is adjusted yearly for inflation. For more information, see www.socialsecurity.gov. 2

As you may recall from Chapter 10, “Monetary Policy,” or Chapter 12, “Federal Deficits, Surpluses, and the National Debt,” the federal government owes itself $8 trillion. 3

The degree to which it would help close the funding gap depends on whether you also changed the benefit structure to reflect this change. The maximum AIME is based on the maximum taxable earnings for each relevant year. 1

This chapter is exclusively about federal income taxes. Though state income taxes often start with the federal definitions, there are key differences. 2

The deduction for state and local taxes is capped at $10,000 for a married couple.

3

That represented a $1,000 cut from the amount someone would have owed under the 2017 tax code.

4

Tax cuts to the poor typically result from increasing the earned income tax credit. This credit often exceeds the amount of tax owed by a substantial amount. Many low-income families pay “negative taxes,” so a tax cut to them simply makes this more negative. 1

Iraq first used poison gas on Iranian soldiers and its own citizens, Iranians recruited children to serve as soldiers, the Reagan administration sold the Iranians weapons while using the profits to fund the Nicaraguan contras, and the CIA gave intelligence support to Iraq. 1

The only economic aspect of the decision not to have a team in the second largest city in the United States that makes sense is that the Rams and Raiders rarely sold out the Los Angeles Coliseum. This meant that not only were their games blacked out during that time, but also the network slated to

cover the game could not cover any other game during that time. With no team in Los Angeles, there were no game blackouts and that meant more ad revenue to the networks, which could potentially mean a higher bid for broadcast rights. 2

In 2016 the story was completely reversed. The new owner used the stadium contract with St. Louis to try to force improvements. That contract required that the stadium be in the top 25 percent of NFL stadiums and that if it wasn’t, the city and state would make sufficient renovations so that it was. When the city and state refused, the Rams relocated back to Los Angeles. 3

An exception to this was the refusal of the NFL to let the Seahawks move from Seattle to Los Angeles. This location was too lucrative to just let someone have. 4

“He” is appropriate here as long as big money is associated only with men’s professional team sports. 5

Specifically, of the 29 teams in the NBA, 13 do not make the playoffs and are in the lottery as a result. Like the lotto, each team’s logo is printed on Ping-Pong balls. A team has one ball plus one for each team they were behind in the race to the playoffs. Thus the worst team in the league has 13 of the 91 balls in the hopper. As a result, their probability of getting the first pick is 14.3 out of 100. 6

NASCAR is the governing body of the most notable of several stock car racing circuits. Stock cars are called “stock” because they look vaguely like regular passenger cars that you can buy at your local dealer. 1

Sometimes IPOs are not so small. When AT&T spun off its hardware division to focus on its wireless business, that IPO was very large. 2

Such an entity is called an S-corporation.

1

The United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of the United States and Canada. 2

The United Automobile, Aerospace, and Agricultural Implement Workers of America; the United Mine Workers of America; and the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America, respectively. 3

See Campbell R. McConnell, Stanley L. Brue, and David A. MacPherson, Contemporary Labor Economics, 11th ed. (New York: McGraw-Hill, 2017), Chapter 10. 1

One nonacademic source suggests that Walmart gets so much more work out of an employee that the total number of workers falls when a Walmart comes to town. 1

The Institute for Analysis of Global Security estimates these costs at between $10 billion and $13 billion.

2

Setting aside whether the war in Iraq was really about terrorism, it is unlikely Iraq would have been invaded had there not been the terrorism argument in the background. 3

The monetary damage from Hurricane Katrina and Superstorm Sandy each subsequently surpassed this record. 4

Hurricane Katrina challenged the ability of insurance companies to buy reinsurance for hurricanes because the fear was that global warming had so changed the probability of major hurricane damage occurring in an area that State Farm and others refused to write new policies in states susceptible to hurricanes. After leaving the market in 2009, State Farm reentered the market in 2012. However, to the degree that climate change increases the severity of future hurricanes, reinsurance will become increasingly important. 1

Individual countries have national equivalents to the CDC, like the Korean Centers for Disease Control and Prevention (KCDC) or the Ministerio de Sanidad in Spain, and there are multinational agencies like the European Centre for Disease Prevention and Control (ECDC). 2

In the 2015 release, the WHO stressed that geographic locations, people’s names, animal species, food, cultures, populations, industries, and words that induce fear should not be used to name diseases. These recommendations were a departure from previously named diseases like Middle East Respiratory Syndrome (MERS), the Spanish Flu, swine flu, and bird flu. 3

Where outbreaks began in particular countries, for instance, had an enormous impact on their early case and death rate data. Italy’s first cases were in northern parts of the country among its elderly population, whereas Germany’s first cases were associated with young and otherwise healthy skiers. 4

Your employer’s and your university’s response to the COVID-19 pandemic may have followed a plan written in response to H5N1. 5

There are a couple of things you should note here. The thing being sold was a contract for delivery one month in the future. No actual oil was sold for a negative price. The fundamental reasons that this price could go negative are that it is very problematic and expensive to turn a pump off and then turn it back on, and there were no places to store excess oil. One other potentially negative price, that for raw milk, suffers from the same problem. You can’t make a cow stop producing milk. However, you can dump the milk on the ground. You can’t do that with oil. 6

The National Multifamily Housing Council is an industry association for medium- to high-end apartment landlords (and excluding those who rent homes or subsidized housing). 7

The reference week includes the 12th of the month.

8

A standard deviation is the square root of the mean of the deviation of a value from its average.

9

This is a calculation based on options to buy and options to sell particular stocks or index funds.

10

In a traditional bond, the lender absorbs the interest rate risk. In an adjustable rate bond, the borrower absorbs the interest rate risk. 11

The CARES Act was amended a few weeks after it was adopted to supplement the fund with $484 billion for small business loans and additional funds for hard hit hospitals and testing. Because this was merely an amendment to the CARES Act, it was labeled COVID-19 response “3.5.”

Glossary word Glossary definition for word goes here. origin The point on the graph where both the variables are zero (0,0). y-axis The vertical axis. x-axis The horizontal axis. slope The increase in the value of the y-axis variable for a 1-unit increase in the value of the x-axis variable. x-intercept The value of the x-axis variable when the y-axis variable is zero. y-intercept The value of the y-axis variable when the x-axis variable is zero. economics The study of the allocation and use of scarce resources to satisfy unlimited human wants. scarce Not freely available and lacking an infinite source. resource Anything that is consumed directly or used to make things that will ultimately be consumed. opportunity cost The forgone alternative of the choice made. production possibilities frontier A graph that relates the amounts of different goods that can be produced in a fully employed society. model A simplification of the real world that can be manipulated to explain the real world. simplifying assumption An assumption that may, on its face, be silly but allows for a clearer explanation. unemployment A situation that occurs when resources are not being fully utilized. attainable Levels of production that are possible with the given resources. unattainable Levels of production that are not possible with the given resources. economic growth The circumstance where greater production opportunities exist. generalized growth The circumstance where innovation directly allows for greater production of all goods. specialized growth The circumstance where innovation directly allows for greater production of a particular good yet production of other goods is indirectly enabled. circular flow model A model that depicts the interactions of all economic actors.

market Any mechanism by which buyers and sellers negotiate an exchange. factor market A mechanism by which buyers and sellers of labor and financial capital negotiate an exchange. foreign exchange market A mechanism by which buyers and sellers of the currencies of various countries negotiate an exchange. goods and services market A mechanism by which buyers and sellers of goods and services negotiate an exchange. marginal analysis A form of analysis whereby incremental changes are examined to determine the net impact of those changes. optimization assumption An assumption that suggests that the person in question is trying to maximize some objective. marginal benefit The increase in the benefit that results from an action. marginal cost The increase in the cost that results from an action. net benefit The difference between all benefits and all costs. positive analysis A form of analysis that seeks to understand the way things are and why they are that way. normative analysis A form of analysis that seeks to understand the way things should be. incentives Something that influences a decision we make. fallacy of composition The mistake in logic that suggests that the total economic impact of something is always and simply equal to the sum of the individual parts. direct correlation A higher level of one variable is associated with a higher level of the other variable. causation A change in one variable makes another variable change. counterfactual An educated guess as to what would have happened had a policy or an event not occurred. inverse correlation A higher level of one variable is associated with a lower level of the other variable. supply and demand The name of the most important model in all of economics. price The amount of money that must be paid for a unit of output. output The good or service produced for sale. market Any mechanism by which buyers and sellers negotiate an exchange. consumers People in a market who want to exchange money for goods or services. producers People in a market who want to exchange goods or services for money. equilibrium price

The price at which no consumers wish they could have purchased more goods at the price; no producers wish that they could have sold more. equilibrium quantity The amount of output exchanged at the equilibrium price. quantity demanded The amount consumers are willing and able to buy at a particular price during a particular period of time. quantity supplied Amount firms are willing and able to sell at a particular price during a particular period of time. ceteris paribus Latin for “other things equal.” demand The relationship between price and quantity demanded, ceteris paribus. supply The relationship between price and quantity supplied, ceteris paribus. demand schedule Presentation, in tabular form, of the price and quantity demanded for a good. supply schedule Presentation, in tabular form, of the price and quantity supplied for a good. equilibrium The point where the amount that consumers want to buy and the amount firms want to sell are the same. This occurs where the supply curve and the demand curve cross. shortage The condition where firms do not want to sell as many goods as consumers want to buy. surplus The condition where firms want to sell more goods than consumers want to buy. excess demand Another term for shortage. excess supply Another term for surplus. law of demand The statement that the relationship between price and quantity demanded is a negative or inverse one. substitution effect Purchasing less of a product than originally wanted when its price is high because a lower priced product is available. real-balances effect When a price increases, your buying power is decreased, causing you to buy less. marginal utility The amount of extra happiness that people get from an additional unit of consumption. law of diminishing marginal utility The amount of additional happiness that you get from an additional unit of consumption falls with each additional unit. law of supply The statement that there is a positive relationship between price and quantity supplied. price gouging The negative term applied to the circumstance when firms raise prices substantially when demand increases unexpectedly. price ceiling

Price above which a commodity may not sell. price floor Price below which a commodity may not sell. capitalist economy An economic system where markets, in particular markets for financial resources, are free. socialist economy An economic system where a significant part (but not all) of the decisions regarding the allocation of financial resources is made by a governmental authority. communist economy An economic system where governmental authorities determine the allocation, use, and distribution of financial resources. elasticity The responsiveness of quantity to a change in another variable. price elasticity of demand The responsiveness of quantity demanded to a change in price. price elasticity of supply The responsiveness of quantity supplied to a change in price. income elasticity of demand The responsiveness of quantity demanded to a change in income. cross-price elasticity of demand The responsiveness of quantity demanded of one good to a change in the price of another good. elastic The circumstance when the percentage change in quantity is larger than the percentage change in price. inelastic The circumstance when the percentage change in quantity is smaller than the percentage change in price. unitary elastic The circumstance when the percentage change in quantity is equal to the percentage change in price. total expenditure rule If the price and the amount you spend both move in the same direction, then demand is inelastic, whereas if they move in opposite directions, demand is elastic. perfectly inelastic The condition of demand when price changes have no effect on quantity. perfectly elastic The condition of demand when price cannot change. consumer surplus The value you get that is in excess of what you pay to get it. producer surplus The money the firm gets that is in excess of its marginal costs. market failure The circumstance where the market outcome is not the economically efficient outcome. exclusivity The degree to which the consumption of the good can be restricted by a seller to only those who pay for it. rivalry The degree to which one person’s consumption reduces the value of the good for the next consumer.

purely private good A good with the characteristics of both exclusivity and rivalry. purely public good A good with the characteristics of both of exclusivity and rivalry. excludable public good A good with the characteristic of exclusivity but not of rivalry. congestible public good A good with the characteristic of rivalry but not of exclusivity. network good a type of good for which you need other people consuming it for it to have any use to you. deadweight loss The loss in societal welfare associated with production being too little or too great. profit The money that a firm makes: revenue – cost. cost The expense that must be incurred to produce goods and services for sale. revenue The money that comes into the firm from the sale of goods and services. economic cost All costs of a business: those that must be paid as well as those incurred in the form of forgone opportunities. accounting cost Only those costs that must be explicitly paid by the owner of a business. production function A graph that shows how many resources are needed to produce various amounts of output. cost function A graph that shows how much various amounts of production cost. fixed inputs Resources that cannot be easily changed. variable inputs Resources that can be easily changed. division of labor Workers divide the tasks in such a way that each can build momentum and not have to switch jobs. diminishing returns The notion that there exists a point where, because there are some fixed inputs like plant and equipment, the addition of resources increases production, but does so at a decreasing rate. fixed costs Costs of production that cannot be changed. variable costs Costs of production that can be changed. marginal cost (MC) The addition to cost associated with one additional unit of output. average total cost (ATC) Total cost divided by output, the cost per unit of production. average variable cost (AVC) Total variable cost divided by output, the average variable cost per unit of production. average fixed cost (AFC) Total fixed cost divided by output, the average fixed cost per unit of production. marginal revenue (MR)

Additional revenue the firm receives from the sale of each unit. perfect competition A situation in a market where there are many firms producing the same good. monopoly A situation in a market where there is only one firm producing the good. total cost The sum of fixed and variable costs. perfect competition A market type characterized by many small firms that have no control over price, are selling identical products, each have sufficient information to make good decisions, and face the threat of entry of new firms. monopoly The market form in which there is only one seller. monopolistic competition A situation in a market where there are many firms producing similar but not identical goods. oligopoly A situation in a market where there are very few discernible competitors. concentration ratio A measure of the market power held by the top firms in an industry. For a specific number of firms (n), it is the percentage of total sales in the industry accounted for by top n firms. Herfindahl-Hirschman Index A measure of market concentration developed by adding the sum of squared market shares. normal profit The level of profit that business owners could get in their next best alternative investment. economic profit Any profit above normal profit. short run The period of time where a firm cannot change things like plant and equipment. long run The period of time where a firm can change things like plant and equipment. microeconomics The part of the discipline of economics that deals with individual markets and firms. macroeconomics The part of the discipline of economics that deals with the economy as a whole. gross domestic product (GDP) The dollar value of all of the goods and services produced for final sale in the United States in a year. market basket Goods that average people buy and the quantities they buy them in. base year Year to which all other prices are compared price of the market basket in the base year National average of the total cost of the market basket. price index A device that centers the price of the market basket around 100. consumer price index (CPI) The price index based on what average consumers buy. inflation The percentage change in the consumer price index. cost-of-living adjustment (COLA)

A device that compensates people for the fact that changes in inflation change the spending power of their income. COLA A device that compensates people for the fact that changes in inflation change the spending power of their income. chain-based index A price index based on an annually adjusted market basket. GDP deflator (GDPDEF) The price index used to adjust GDP for inflation, including all goods rather than a market basket. real gross domestic product (RGDP) An inflation-adjusted measure of GDP. labor force participation rate The percentage of the civilian, noninstitutionalized population that is either employed or searching for a job. labor force All nonmilitary personnel who are over 16 and are employed or are unemployed and actively seeking employment. unemployment rate The percentage of people in the workforce who do not have jobs and are actively seeking them. underemployment The state of working significantly below skill level or working fewer hours than desired. discouraged-worker effect Bad news induces people to stop looking for work, causing the unemployment rate to fall. encouraged-worker effect Good news induces people to start looking for work, causing the unemployment rate to rise (until they succeed in finding work). cyclical unemployment State that exists when people lose their jobs because of a temporary downturn in the economy. seasonal unemployment State that exists when people lose their jobs predictably every year at the same time. structural unemployment State that exists when people lose their jobs because of a change in the economy that makes their particular skill obsolete. frictional unemployment Short-term unemployment during a transition to an equal or better job. business cycle Regular pattern of ups and downs in the economy. trough The lowest point in the business cycle. recovery The part of the growth period of the business cycle from the trough to the previous peak. expansion The part of the growth period of the business cycle from the previous peak to the new peak. peak The highest point in the business cycle. recession The declining period of at least two consecutive quarters in the business cycle. depression

Severe recession typically resulting in a financial panic and bank closures, unemployment rates exceeding 20 percent, prolonged retrenchment in RGDP on the magnitude of 10 percent or more, and significant deflation. Producer Price Index A price index based on what firms buy. Personal Consumption Expenditures deflator A chain-based price index that adjusts for the substitution problem. core CPI The consumer price index that has had the impact of food and energy costs removed. core PCE The Personal Consumption Expenditures deflator that has had the impact of food and energy costs removed. productivity The increase in output for the same levels of inputs. labor force productivity The measure of productivity that is expressed as output per labor hour. Multifactor productivity The measure of productivity that is expressed as the output that cannot be explained by an increase in labor, capital, or materials. Total factor productivity The measure of productivity that is expressed as the output that cannot be explained by an increase in labor, capital, or materials. Recession The declining period of at least two consecutive quarters in the business cycle. deflation A general reduction in prices. money Anything that is generally accepted as a representation of value. currency Money that takes on a physical form (cash or coin). barter Direct exchange of a good or service for another good or service. store of value The fact that money preserves value over time. medium of exchange The attribute of money that it facilitates trades. unit of exchange The attribute of money that allows you to compare relative values of goods and services. acceptability The attribute of money that causes people to have a willingness to receive it. scarcity The limited characteristic of money. divisibility The ability to divide money into progressively smaller units. portability The ability to carry money. privacy The attribute of money where transactions are not easily traced. interest rate

The percentage, usually expressed in annual terms, of a balance that is paid by a borrower to a lender that is in addition to the original amount borrowed or lent. nominal interest rate The advertised rate of interest. real interest rate The rate of interest after inflation expectations are accounted for; the compensation for waiting to consume. present value The interest-adjusted value of future payment streams. internal rate of return The interest rate where the present value of costs and benefits is equal. future value The interest-adjusted value of past payments. Rule of 72 A shortcut that allows you to estimate the time it would take for an investment to double by dividing 72 by the annual interest rate. risk The possibility that the investor will not get anticipated payoffs. default risk The risk to the investor that the borrower will not pay. market risk The risk that the market value of an asset will change in an unanticipated manner. risk premium The reward investors receive for taking greater risk. yield curve The relationship between reward and the time until the reward is received. aggregate demand (AD) The amounts of real domestic output that domestic consumers, businesses, governments, and foreign buyers collectively will desire to purchase at each possible price level. real-balances effect Because higher prices reduce real spending power, prices and output are negatively related. foreign purchases effect When domestic prices are high relative to their imported alternatives, a country will export less to foreign buyers and a country will import more from foreign producers. Therefore, higher prices lead to less domestic output. interest rate effect Higher prices lead to inflation, which leads to less borrowing and a lowering of RGDP. aggregate supply (AS) The level of real domestic output available at each possible price level. full employment The level of unemployment that would exist if cyclical unemployment were zero. demand-pull inflation Inflation caused by an increase in aggregate demand. cost-push inflation Inflation caused by a decrease in aggregate supply. supply-side economics Government policy intended to influence the economy through aggregate supply by lowering input costs and reducing regulation. shock Any unanticipated economic event.

political business cycle Politically motivated fiscal policy used for short-term gain just prior to elections. fiscal policy The purposeful movements in government spending or tax policy designed to influence the path of an economy. discretionary fiscal policy Government spending and tax changes enacted at the time of the problem to alter the economy. nondiscretionary fiscal policy A set of policies that are built into the system to stabilize the economy. Expansionary fiscal policy Changes to tax and government spending intended to increase RGDP. Contractionary fiscal policy Changes to tax and government spending intended to decrease RGDP. aggregate demand shock An unexpected event that causes aggregate demand to increase or decrease. aggregate supply shock An unexpected event that causes aggregate supply to increase or decrease. recognition lag The time it takes to measure the state of the economy. administrative lag The time it takes for Congress and the president to agree on a course of action. operational lag The time it takes for the full impact of a government program or tax change to have its effect on the economy. federal funds rate The market-determined rate at which banks borrow from one another to meet obligations imposed on it by the Federal Reserve. M2 M1 + saving accounts + small CDs. monetary aggregate A measure of the quantity of money in the economy. M1 Cash + coin + checking accounts. inflation targeting A policy whereby a central bank publishes a desired range of a specified inflationary measure and then uses the tools of monetary policy to bring that measure of inflation into that desired range. open-market operations The buying and selling of bonds, which, respectively, increases or decreases the money supply, thereby influencing interest rates. primary credit rate or discount rate The rate at which banks with excellent credit can borrow from the Federal Reserve. reserve ratio The percentage of every dollar deposited in a checking account that a bank must maintain at a Federal Reserve branch. monetary transmission The process by which the use of a monetary policy tool impacts the overall economy. liquidity trap A situation where zero or near zero interest rates do not stimulate borrowing. corporate paper

Short-term debt offered by large corporations. quantitative easing The process by which the Federal Reserve buys long-term securities in order to decrease longterm interest rates to directly stimulate business investment and housing markets. mortgage-backed security Financial asset that is the aggregation of mortgages where the holder of the security is paid from the combined mortgage payments of homeowners. monetary authority The general name given to the entity that controls monetary policy in a country. logrolling The trading of votes used to generate sufficient support for projects that are not in the general interest of the country. continuing resolution A bill passed by Congress and signed by the president that allows the government to temporarily spend money in a fashion identical to the previous year. crowding out The opportunity cost of government deficit spending such that private investment is reduced. entitlement A program where if people meet certain income or demographic criteria they are automatically eligible to receive benefits. mandatory spending Budget items for which a previously passed law requires that money be spent. discretionary spending Budget items for which an annual appropriations bill must be passed so that money can be spent. baseline budgeting Using last year’s budgeted figure to set this year’s budgeted figure. current-services budgeting Using an estimate of the costs of providing the same level of services next year as last. budget deficit The amount by which expenditures exceed revenues. budget surplus The amount by which revenues exceed expenditures. national debt The total amount owed by the federal government. off-budget Parts of the budget designated by Congress as separate from the normal budget. Programs that operate with their own revenue sources and have trust funds; Social Security, Medicare, and the Postal Service are examples. on-budget Parts of the budget that rely entirely or mostly on general revenue. operating budget That part of the federal budget devoted to spending on goods and services that will be used in the current year. capital budget That part of the federal budget devoted to spending on goods that will last several years. cyclical deficit That part of the deficit attributable to the economy’s not being at full employment. structural deficit That part of the deficit that would remain even if the economy were at full employment.

functional finance That part of the budget attributable to programs designed to get an economy out of a recession. procyclical Situation that renders good times better and bad times worse. securitize The process of bundling nonfinancial assets (typically mortgages) together and then reselling them as either shares or as financial instruments to investors. interest-only mortgage A mortgage that allows the buyer to pay only the interest portion of the typical payment for the first few years of a mortgage. The mortgage resets to a traditional mortgage after that period, typically at a higher payment. negative-amortization mortgage A mortgage that allows the buyer to pay less than the interest portion of the typical payment for the first few years of a mortgage. The mortgage resets to a traditional mortgage after that period, typically at a higher payment. pick-a-pay mortgage A variety of negative-amortization mortgage that allows the buyer to choose a payment for the first few years of a mortgage. credit default swap Insurance on a mortgage-backed security. short sale A sale of a home where the amount owed is more than the sale price and in which the seller seeks to have the remaining balance for given. mark-to-market An accounting rule that requires banks to revise their balance sheets to reflect the drop in the value of any financial assets they hold. Employee Retirement Income Security Act of 1974 (ERISA) A regulatory system for defined benefit plans. entitlement A program where if people meet certain income or demographic criteria, they are automatically eligible to receive benefits. defined benefit program A pension plan that defines eligibility for retirement and benefits according to a set of rules and a formula. defined contribution program A pension plan in which those enrolled, as well as their employer, contribute to an account according to a formula, and the investment of that account is under the control of the employee. absolute advantage The ability to produce a good better, faster, or more quickly than a competitor. comparative advantage The ability to produce a good at a lower opportunity cost of the resources used. terms of trade The amount of a good one country must give up to obtain another good from the other country, usually expressed as a ratio. outsourcing A firm’s use of contractors to perform services that were previously performed within the firm. off-shoring A form of outsourcing where the services are performed in another country. dumping

The exporting of goods below cost to drive competitors out of business. tariff A tax on imports. quota A legal restriction on the amount of a good coming into the country. nontariff barriers Barriers to trade resulting from regulatory actions. balance of payments The accounting system for how money moves between countries to facilitate the purchase of goods, services, financial instruments, and physical investments. current account The portion of the balance of payments accounting that represents the impacts of trade, shortterm investment payments, and American payments of foreign taxes, foreign payments of American taxes, and the net transfer of private money. financial account Represents the changes in holding of longer-term financial and physical assets by citizens of one country in another country. exchange rate The amount of one currency that must be given up to gain a unit of another currency. foreign exchange The conversion of the currency of one country for the currency of another. fixed exchange rate system Foreign exchange rate system whereby the country (or group of countries) must stand ready to purchase or sell its currency in exchange for foreign currencies or gold so that any excess demand or excess supply is immediately eliminated. floating exchange rate system Foreign exchange rate system where there is no government control over exchange rates. managed float exchange rate system Foreign exchange rate system whereby governments decide the range of exchange rates they will allow the market to create, and act only when either the top end or the bottom end of that range is breached. Gini index A measure of overall income disparity. purchasing power parity Using the cost of a similar market basket of goods across countries to compare an economic variable like gross national income. hard currency A term used to describe currencies like the dollar, euro, yen, and pound whose value remains predictable. GATT General Agreement on Tariffs and Trade, a world trade agreement. WTO The World Trade Organization, an institution that arbitrates trade disputes. NAFTA North American Free Trade Agreement involving the United States, Mexico, and Canada. CAFTA The Central America Free Trade Agreement involving the United States and five Central American countries: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. strategic trade policies

Policies designed to get more of the benefits from trade in a country than would exist under free trade. quota A limit on imports. creative destruction The notion that people need to lose their jobs involuntarily in order to seize better opportunities. carbon tax A tax levied on the amount of carbon emitted from a particular energy source. limited natural resources Resources that cannot be replaced. renewable natural resources Resources that can be replaced. stewardship The management of resources in a fashion that weighs their value through time. sustainability The idea that you should only use renewable resources at the rate at which they can be replaced. externalities Effects of a transaction that hurt or help people who are not a part of that transaction. social cost The true cost of production and consumption of a good that includes the effects on innocent bystanders. common property Property that is not owned by any individual but is owned by government or has some other collective ownership. cap-and-trade The method of reducing a pollutant whereby the government gives to polluters, or auctions, a capped amount of pollution permits and then allows those permits to be sold in a market. Medicare Public health insurance in the United States that covers those over age 65. risk averse A characteristic of a person who would pay extra to guarantee the expected outcome. risk neutral A characteristic of a person who would not pay extra to guarantee the expected outcome. deductible The amount of health spending a year that you have to pay before the insurance company pays anything. Medicaid Public health insurance in the United States that covers the poor. preferred provider organization (PPO) A type of insurance where certain doctors, hospitals, and other providers have negotiated fee reductions in exchange for a preferred designation. primary care physician (PCP) Physician in managed care operations charged with making the initial diagnosis and making referrals. Also called a gatekeeper. co-payment Either a set amount or the percentage of the bill, after the deductible has been taken out, that you have to pay. maximum out of pocket

The most that a person or family will have to pay over a year for all covered health expenses. moral hazard Having insurance increases the demand for the insured good. adverse selection Those in most need of insurance are the most willing to pay for insurance and drive up the price of insurance with their illnesses to such a degree that those people who are not as sick leave the market altogether. mandation The requirement to purchase insurance. single-payer system The government collects (usually very high) taxes to pay for everyone’s health care. adverse selection Those in most need of insurance are the most willing to pay for it and drive up its price with their illnesses to such a degree that those people who are not as sick leave the insurance market altogether. third-party payer An entity other than the consumer who pays part of the costs. patent A right granted by government to an inventor to be the exclusive seller of that invention for a limited period of time. orphan drug A drug that treats someone with a disease that afflicts few people. deadweight loss The loss in social welfare associated with production being too little or too great. private property Land and other physical items that are owned by individuals or a group of individuals. contract Written agreement by which each party is bound to provide other parties with goods, services, or financial consideration in exchange for other goods, services, or financial considerations. intellectual property Written and recorded works, ideas, formulas, and other creative intangible property that are owned by individuals or a group of individuals. copyright A right granted by government to a creator of a written or recorded work to be the exclusive seller of that work for a limited period of time. trademark A right granted by government to a business to be the exclusive user of a phrase, logo, or name of such a business. creditors Entities (such as banks, hospitals, or credit card companies) that are owed money. bankruptcy The legal state that allows debtors to be protected from the actions of their creditors. contingency attorney A lawyer who agrees to take a percentage of any judgment or settlement. The attorney is paid only if the client wins the case. class action lawsuits Suits where similarly harmed people are joined together into one party so as to sue one or more defendants. violent crime

Crime that occurs where harm is done to a victim, aggressive action is taken by the criminal, or threats are made against a victim. nonviolent crime Crime that occurs where someone takes what is not theirs, uses or sells an illegal substance, or engages in fraud. barrier to entry A legal or economic mechanism that prevents firms from competing in an industry. contestable markets hypothesis One firm is all that is necessary for competitive prices to exist as long as that firm is threatened by hit-and-run entry. trust A single company having ownership of all stages of production in a particular industry. labor force participation rate The percentage of the population of a group that is employed or seeking employment. rational or statistical discrimination Unequal treatment of classes of people that is based on sound statistical evidence and is consistent with profit maximization. disparate treatment discrimination Treating two otherwise equal people differently on the basis of race. adverse impact discrimination Doing something that is not necessarily discriminatory on its face but that impacts some groups more negatively than others. affirmative action Any policy that is taken to speed up the process of achieving equality. minimum wage The lowest wage that may legally be paid for an hour’s work. living wage A wage sufficient to keep a family out of poverty. brokering The act of buying a ticket and legally selling it at a price higher than its face value. scalping The act of buying a ticket and illegally selling it at a price higher than its face value. price ceiling The level above which a price may not rise. human capital The ability of a person to create goods and services. net present value The difference between the present value of benefits and the present value of costs. external benefits Benefits that accrue to someone other than the consumer or producer of the good or service. cherry-picking The act of admitting only students who are easy to educate, leaving the harder and more expensive ones for public schools. royalty The amount of money paid to authors. Typically paid on a percentage basis. advance The amount of money paid to authors prior to a book’s publication. This is typically counted against future royalties. poverty rate The percentage of people in households whose incomes are under the poverty line.

poverty gap The total amount of money that would have to be transferred to households below the poverty line for them to get out of poverty. poverty line The level of income sufficient to provide a family with a minimally adequate standard of living. in-kind subsidies Provisions of goods and services in forms other than cash. positive externality The benefits that go to someone other than the consumer or producer of a good. pay-as-you-go pension A system where current workers’ taxes are used to pay pensions to current retirees. fully funded pension A system that has an amount currently invested that is sufficient to pay every benefit dollar it is required to pay in the future. payroll taxes Taxes owed on what workers earn from their work. maximum taxable earnings The maximum of taxable earnings subject to the payroll tax. average index of monthly earnings (AIME) The monthly average of the 35 highest earnings years adjusted for wage inflation. primary insurance amount (PIA) The amount single retirees receive in a monthly check if they retire at their retirement age. retirement age The age at which retirees get full benefits. externalities Effects created by an unregulated market on people other than the buyer or seller. asset substitution effect Government is saving for you; thus you will save less for yourself. induced retirement effect People need to save more if they are going to retire earlier than they would have without Social Security. bequest effect People save more to give larger gifts to their descendants, thus increasing national savings. Social Security Trust Fund A fund established in 1982 to hold government debt, which will be sold as necessary when tax revenues are less than benefits. means test Determination of the amount of one’s government benefit on the basis of income or wealth. withholding Deduction from your paycheck to cover the estimated amount of taxes you are going to owe during a year. adjusted gross income (AGI) Total net income from all sources. capital gains Any profit generated by selling an asset for more than was paid for it. deductions Amounts by which AGI is reduced; the greater of either the standard deduction or itemized deductions. standard deduction

The minimum level of deduction. itemized deductions Deductions for particular expenses on which the government does not want taxes paid. deductible Approved types of expenses for income tax purposes. taxable income Adjusted gross income minus (the greater of either the standard or itemized) deductions. filing status Classification of taxpayers based on household: single, married filing jointly, married filing separately, and head of household. progressive taxation Those with higher income pay a higher rate of tax. marginal tax rate The percentage of each dollar in a bracket that must be paid in tax. horizontal equity Equal people should be treated equally. tax credits Amounts by which you reduce the tax owed. vertical equity People across the income scale are treated fairly with regard to ability to pay. neutral When applied to a tax code, the implication that it does not favor particular forms of income or expenditure. substitution effect Purchase of less of a product than originally wanted when its price is high because a lowerpriced product is available. income effect An increase in price lowers spending power; if the good is normal, this further lowers consumption; if it is inferior, it can increase consumption back toward where it was (or even further). This effect works in either direction. cartel An organization of individual competitors that join to form a single monopolist. natural monopoly Exists when there are high fixed costs and diminishing marginal costs. local substitution The effect of the substitution of one economic activity for another within a community, so the net effect is zero. positive externalities The benefit that a person other than the buyer or seller receives as a result of a transaction. marginal revenue product of labor The additional revenue generated from hiring an additional worker. reservation wage The least amount that a player will accept because it is the next best offer. free agent A player who is able to offer services to the highest bidder. draft The process by which new talent is assigned to teams. salary cap The maximum in total payroll that a team can pay its players. revenue sharing

The process by which some revenues are distributed to all teams rather than simply the teams that generate them. reserve clause A contract clause that requires that players re-sign with the team to which they belonged the previous year. strike An action by labor to deny employers the services of the employees. lockout An action by employers to deny employees access to their jobs. fundamentals Elements that determine stock prices that make long-term economic sense—profit expectations and interest rates. initial public offering (IPO) A company’s first sale of stock to the public in an attempt to raise money for expansion. efficient market All information is taken into account by participants in a market. stock index A weighted average of stock prices in a particular group. bubble The state of a market where the current price is far above its value determined by fundamentals. bankruptcy A legal status entered into when a company or individual cannot pay its debt. creditors The people or institutions to which a company or individual owes money. Chapter 11 Bankruptcy A form of bankruptcy that protects a corporation from creditors so as to get its financial affairs back in order. Chapter 13 Bankruptcy A form of bankruptcy that allows a corporation to sell off all of its assets and pay its debts all in an effort to preserve as much value as possible for its stockholders. principal–agent problem The problem that occurs when the owner of an asset and the manager of that asset are different and have different preferences. marginal revenue product of labor (MRPL) The additional revenue generated from hiring an additional worker. monopsony A market with only one buyer. marginal resource cost (MRC) The increase in total labor costs to the firm of buying increasing amounts of labor. externalities Effects of a transaction that hurts or helps people who are not part of that transaction. vig The expected percentage of any gamble that a casino will keep. reinsurance The form of insurance where one insurance company promises to pay another (larger one) if the first company has a large (usually multiple million dollar) loss from a single event. outbreak A sudden increase in the number of cases infecting a limited geographic area. epidemic

An outbreak that applies to a larger area or population. pandemic When spread expands across several countries or continents impacting large populations. infodemic The phenomenon where an excess of information in varying levels of accuracy makes it challenging to find dependable sources. causative pathogen The viral, bacterial, parasitic, or fungal source of a disease. imported cases Cases in travelers returning from an infected region to a previously uninfected region and introducing it to the area. community spread Spread that occurs when the source or contact with an infected person is unknown. employment–population ratio The ratio of employment in a country to its population. personal protective equipment (PPE) Equipment that is used by medical professionals to protect them from infection by patients as well as to protect patients from infection by medical professionals. infection morality rate (IMR) The percentage of confirmed cases that result in death. case fatality rate (CFR) The percentage of confirmed cases that result in death. extrapolation The mathematical technique of taking present data and extending it to the future. Interpolation The mathematical technique of filling in data between two known observations. price gouging The negative term applied to the circumstance when firms raise prices substantially when demand increases unexpectedly. price ceiling Price above which a commodity may not sell. shortage The condition where firms do not want to sell as many goods as consumers want to buy. purely public good A good with the characteristics if both exclusivity and rivalry. basic research Research into foundational scientific questions without regard to practical use. translational research Research into practical applications of basic research. advance estimate First estimate of quarterly GDP by the Bureau of Economic Analysis. municipal bond A bond issued by a state, city, or public university. federal funds rate The market-determined rate at which banks borrow from one another to meet obligations imposed on it by the Federal Reserve. reserve requirement The percentage of every dollar deposited in a checking account that a bank must maintain at a Federal Reserve branch. discount rate

The rate at which banks with excellent credit can borrow from the Federal Reserve. mark-to-market An accounting rule that requires banks to revise their balance sheets to reflect the drop in the value of any financial assets they hold. Tier 1 assets The core capital of a bank. leverage ratio The percentage of all assets considered Tier 1 assets. monetary transmission mechanism The process by which the use of a monetary policy tool impacts the overall economy. aggregate demand The real amounts of domestic output that domestic consumers, businesses, governments and foreign buyers collectively will desire to purchase at each possible price level. liquidity trap A situation where zero or near zero interest rates do not stimulate borrowing. mandatory spending Budget items for which a previously passed law requires that the money be spent. operations The actual conversion process to transform resources into products. supply chain Processes that facilitate the movement of goods from the manufacturer to their end user (in the case of finished goods) or to another manufacturer (in the case of raw materials or components for work-in-process goods). absolute advantage The ability to produce a good better, faster, or more quickly than a competitor. comparative advantage The ability to produce a good at a lower opportunity cost of the resources used. opportunity cost The forgone alternative of the choice made.