Coronavirus Updates

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With lockdowns easing and COVID-19 infections rebounding in many countries, policymakers and corporate leaders face a profoundly uncertain future for which historical data and precedents may not be reliable guides.

Against that backdrop, Randall S. Kroszner, deputy dean for Executive Programs and the Norman R. Bobins Professor of Economics, led a discussion with Mervyn King, former governor of the Bank of England and coauthor with John Kay of Radical Uncertainty: Decision-Making beyond the Numbers. This virtual event was hosted by Booth’s campus in the heart of the City of London and marked the first in Booth’s Road to Economic Recovery series on COVID-19.

Kroszner, a former governor of the Federal Reserve System, told the audience one of his takeaways from King’s book was that making rational choices under uncertainty was not a “simple card game where you know what the probabilities are.”

King agreed, saying it was time to move away from the classical economic idea that everyone is assumed to know the subjective probabilities of any given event. COVID-19 was a case in point.

For example, said King, he and his coauthor wrote their book in summer 2019, and in it they warned that people should expect an epidemic resulting from a virus that did not yet exist.

“But that didn’t mean we had the power of foresight and could make statements that the probability of a virus coming out of Wuhan in December 2019 was 17 percent or 32 percent or any other number,” King said. “There’s no basis for making that statement. The essence of our book is that we say, ‘Don’t pretend that we know more than we do.’”

Avoid the Data Trap

King said decision-makers should focus on collecting data that would help them understand key aspects of the problem. However, he cautioned against what he called “bogus quantification.”

He cited the 1980s HIV/AIDS crisis in southern Africa. The World Health Organization built a complex computer demographic model. Robert May, the late renowned scientist, pointed out that it used the average number of sexual contacts per person per year as a key parameter without stipulating whether that was 100 contacts with the same person, in which case the epidemic would die out, or 100 contacts with 100 different people, which would mean it would spread like wildfire. “Homing in on the key numbers that matter is of fundamental importance,” King said.

Focus on Resilience

Kroszner said CEOs facing uncertainty right now wanted to know what lessons they should learn. King said they should focus on resilience and robustness rather than just cost minimization or profit maximization. “It’s all very well to minimize your costs in normal times. But if a sudden event comes along and you fail to survive it as a business, then you’re gone,” he said.

“It makes sense to ask, ‘How would we cope with a pandemic?’ and forget the probability. Just as in the financial crisis, we had allowed the banking system to go into 2007 with little resilience. When there was a shock, it couldn’t withstand it.”

Have a Clear Narrative

Kroszner said one lesson he took from his time at the Fed was that Chairman Bernanke was open to criticisms that certain solutions were not addressing the problem. “He made sure people understood there’s a framework, but there’s also the flexibility to pivot.”

King said that there is now a common belief that central banks are “the only game in town” because of their ability to cut interest rates and inject stimuli. But he said when people are worried about contracting a virus, lower borrowing costs are unlikely to encourage consumers to visit shops and restaurants.

The focus should also be on governments’ ability to use taxpayer resources to replace businesses’ lost revenues, contingent on how effectively the country is coping.

“Governments need to have a clear narrative to navigate a path between two very unattractive rocks. One is the rock of a large number of infections and deaths, and the other is the rock of a very large cost in terms of lost economic output. We have to navigate it, discovering through trial and error what works and what doesn’t work.”

This virtual event was the first in Booth’s Road to Economic Recovery series on COVID-19. Watch the full presentation below, and visit the Road to Economic Recovery website to stay updated on future events in this series.


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