Short questions about coronacrisis
In this task, please answer the following questions related to the economic and econometric aspects of the COVID-19 pandemic.
(a) (10 rp) When fighting an "ordinary" recession, it is sufficient for the government to pay out transfers to households only. However, in the current recession, transfers to firms (or tax cuts for them) are also required. Explain why.
Usually, transfers to households are sufficient to support aggregate demand as the households spend the transfers on goods and services; this generates revenue for firms, and the firms keep employing workers. In an epidemic-based recession, however, households are restricted in spending transfers, as people are restricted in leaving their apartment and, for example, can not physically go to a restaurant. It is harder for transfers to become firms' revenue. Thus, to prevent bankruptcies and keep employment, direct transfers to firms (at least those that can not quickly transform their business into an online one) are needed.
(b) (10 rp) In the first weeks of the epidemic in Europe, there was a dramatic surge in demand for essential goods like toilet paper. Usually, a substantial rise in demand for a particular product leads to a corresponding increase in the producer's stock price. However, the stock prices of major toilet paper producers rose little, if at all. Explain why.
The net present value of the companies' expected dividends was affected little by the surge in demand, as people just moved the demand for toilet paper from the future to the present. People did not start to use more toilet paper.
(c) (10 rp) Measuring even a seemingly "simple" quantity like the number of COVID-19 deaths is not simple. A substantial number of cases may fail to be counted, and the deaths may be erroneously attributed to something else. Some people argue that measuring so-called excess mortality, i.e., the difference between the total number of deaths in a certain period of 2020, and the total number of deaths in the same period of a previous year, may help. Researchers found1 that excess mortality in Italy in March 2020 relative to March 2019 is roughly twice the reported number of COVID-19 deaths. Does this imply that the reported number of people who died from the COVID-19 disease really underestimates the actual number by a factor of 2? Why?
1Ciminelli, G, and S Garcia-Mandicо (2020), "COVID-19 in Italy: an Analysis of Death Registry Data", working paper.
(c) It is quite obvious that great excess mortality in 2020 must be somehow related to the COVID-19 pandemic, but it is far from clear that the COVID-19 disease causes all the new deaths. For example, because the capacity of health care systems is limited, COVID-19 patients may have crowded out other patients from hospitals, and those other patients may have started to die more because of that. Similarly, the pandemic caused severe stress that may have had a severe negative impact on health independently of the coronavirus. Thus, one can not attribute all excess mortality directly to the COVID-19 disease.
This part illustrates the difficulty of measuring causal effects in economics and social sciences.