"People don't understand exponential growth"

Ori Heffetz  / Photo: Nati Shochat

Behavioral economist Prof. Ori Heffetz explains why many people cannot understand the magnitude of the coronavirus threat, and why it's a nightmare to stay at home in lockdown.

"The world has been transformed overnight," observes Prof. Ori Heffetz, a researcher in behavioral economics who divides his time between the Hebrew University of Jerusalem and Cornell University.

"Just as in Kafka's story, where Gregor Samsa wakes up in the morning and discovers he has turned into a huge insect, we woke up one morning and found that the rules of the game had changed; we had to navigate a new route mid-flight. I returned to Israel on March 6, and there were rumors that everyone who had recently returned from abroad would have to go into isolation. I made a quick calculation and realized that in all likelihood I would be in lockdown until the 20th and wouldn't be able to go with my daughter on her annual school trip, as I had promised. It sounds so funny today - a school trip. Now there’s no school, no routine at all."

Each evening during Heffetz’s self-isolation, the Israeli government introduced stricter and stricter social distancing measures. Leaders around the world wondered how to explain the magnitude of the threat, and whether their citizens would tolerate a strict, Chinese-style lockdown. "What's easier to stomach - if you start with the most extreme restrictions and then ease up, or the opposite? If a government had leaked a rumor that a ‘complete lockdown' was coming, but then afterwards only imposed more moderate measures, citizens would have felt relief. On the other hand, if you start with light restrictions, the impact will feel reasonable and manageable. People get a chance to get used to it, and then you can deliver the second part of the blow, increasing restrictions. Then the harsh measures don’t come as a total surprise, since the point of reference has changed. Different countries seem to be taking different approaches on this matter at the moment."

It's hard to perceive the size of the threat

"It doesn’t come naturally to us, to understand exponential growth. People have a problem imagining it. The Israeli prime minister tried to explain exponential growth. He told people that in another month and a half there could be millions infected. But - how can that be, when yesterday there were only 100? Until a short while ago, nobody in Israel had died from the virus. It's difficult to perceive that in an instant, it can explode. Therefore, most of the public hasn't grasped the scale of it. The gloomy forecasts felt exaggerated - `It won't happen to me.’ "

Why is it so difficult for people to sit at home now and wait until the crisis fades?

"We pay too much heed to the present, rather than the future. Our suffering in this scenario is immediate, and it's clear to us what it is. The benefit of staying home does not feel as obvious, and it is not immediate. There are tangible, drastic, and painful prohibitions today, which we feel immediately. Our ability to sit at home and cope well depends both on our families being healthy, and also on knowing that we can put food on the table for our family. One is able to enjoy this gift of family time only if one doesn’t face financial existential anxieties.

"When you live in poverty or with unmet needs, the `processor' in your brain is constantly busy, because it is continually trying to solve this problem. It is preoccupied. You sit with the children, but your brain is working overtime on how it is going to solve this - `what am I going to do?’ If you have existential concerns, then this time at home can be a true nightmare. We live in a market economy, which means that not everybody has financial security. But in times like these, when individuals can do nothing to improve their financial situation, anything that the state can do to reduce that anxiety has enormous value."

"The government will help"

While the Israeli government was procrastinating for a month before presenting its economic plan, Heffetz wrote an article entitled, "Put the Economy on a Ventilator." Ultimately the crisis will end, he explained, and we will resume hugging and shaking hands. The economy will also resume its growth. But that end of the crisis could come painfully, slowly, hesitantly. This could be a recipe for tragedy. The health crisis is temporary, "but the economic crisis could last for years, if we don't do the right thing."

What do you think about the government's economic rescue plan?

"Our situation is better than it was a week ago, and it's the right direction. This threat is developing very quickly, and decisions have to be made `under fire.’ There was no time to waste, they couldn’t spend a month discussing the optimal plan. There will be holes in it, and money will reach the wrong places, but that’s part and parcel. A team worked on it for several days without sleeping, and put together a response package. Ten billion shekels to the health system - that's money for the front line. It's important to urgently give money to households that suffered a financial blow out of the blue - we're talking about people who can't make ends meet. Some sort of response has also been given to the self-employed, those just over 67, and young people, and this has to be done. Now we have to overcome the red tape and transfer the money as quickly as possible. A war has broken out and we've all been called up to the reserves and deployed in our homes. We have to reinforce the social security system and the way it works."

If it was up to you, what would you do differently?

"I went into a falafel place and asked the owner, `‘what would help you now?’ He said, `we'll take a loan, we'll work hard for two or three years, and somehow we'll manage.’ The self-employed are always at war. They don't sit at home and wait for gifts; they work hard and they understand that now it's going to be very difficult. Business owners say, for example, that what would help them would be to cancel the municipal and local taxes. I think that for the period of the lockdown that is something that the state could do. If it were possible for the state to pay all bills for businesses that were ordered to close, that would be the right thing to do."

The problem from the businesses' point of view is that there is so much uncertainty. It's not clear who will get what, and what they will get. The state must demonstrate that people are actually getting the promised relief. Businesses must have a clear picture of what they are getting and when, and see it happening. The government must make clear that while business owners are obeying orders to close, there is a plan that will keep their business alive. Uncertainty has emotional and economic cost."

These decisions have a high cost

"Fortunately, we arrived at the crisis in good shape. We came into this war with full ammunition in terms of macroeconomics. There is a high cost, but we can't let families be thrown out of their homes because they obeyed the lockdown and were put on unpaid leave. That is not something that we as a society can live with. When their savings run out, a million people would be thrown out into the street? I don't see that happening. The government will step in and help, so why not make that clear now."

"People mistakenly think of the government’s coffers as containing a fixed sum of money, and of expenditures as taking away from that amount. In truth, the money available depends on tax revenues, and those depend on how we will cope with the crisis, and what we will do to support the economy - in order that those who have been put on unpaid leave can get back to work, and so that their workplace won’t have closed down in the meantime. It's good to be mindful of expenditures, but if we are too miserly, the coffers will start shrinking. We have to realize this, and strike a balance. The dream would be to freeze the economy the day before the crisis hit, and then to unfreeze it and return to the same point after the crisis. But that’s science fiction. We can’t do this. The question is how close to this can we get."

"One could consider a policy in which people would continue to receive their salary, and everybody would share some of the burden. Relative to the estimates of the cost to the economy and how much the state is paying from the budget, it doesn't seem like a bad ratio. Should unemployment pay be increased? There is a trade-off between speed and precision. There will be those who have needs that will go unmet, and that's a problem. It's possible that we will need to improve the plan as we move forward."

As of now, the government isn't in a rush to provide this support

"We have scars from past irresponsible macroeconomic behavior, which led to hyper-inflation and the near collapse of the Israeli economy in the 1980s. There is a tradition of fear of inflation here; of fearing that it is not only low demand that is a problem but also high demand. Our DNA has been formed by that episode that almost destroyed us, and led to a situation in which we feel it is most important to protect the coffers. That's fine in peacetime, but at the moment, we are at war. Just as you open the purse during a war, we are protecting lives today and so we have to open the purse a little bit and let go---responsibly, of course. Now is not the time to save and reduce the debt-to-GDP ratio."

The government is asking us to take loans and is demanding tax on the loans

That isn’t entirely clear at the moment, and that’s part of the problem. There is always some policy advantage in not giving exact details, but, in macroeconomic terms, there is no better way to kill an economy than to make the future uncertain. Uncertainty regarding the details and implementation of the government plan must be reduced immediately. It should be stated clearly: `We have expanded entitlements, and they will stay in place for the entire time that you are at home.’ "

In less than a month, about one million people have become unemployed

"We are in a situation unlike any other in Israel’s history. There were wars in which civilians were bombed, but nobody has ever ordered businesses to close and prohibited consumers from going out. By government decree, overnight, revenue fell to zero. I don't understand why the media made headlines out of the one million unemployed, as though it were surprising. What - you expected less? I was surprised that we were only talking about one million people, that is to say, about a quarter of the workforce in Israel. Does that mean that three quarters of the workforce are still working?"

What will Israel's economy look like after the crisis?

If the lockdown will begin to ease after the Passover holiday, then the damage will be relatively limited. If we find that the lockdown has to be tightened and there is no end in sight, that’s a different story. But, ultimately, we overcome everything; there have been wars and there have been problems and in the end the economy recovers. Even in normal times, businesses close every day. That's part of a dynamic economy. Now that has accelerated. In the first month, the weakest businesses will go under, and some of that is okay, it would have happened at some point anyway. In the second and third months, stronger businesses will go under, and that's not okay. Although in a dynamic economy there is always turnover."

Trump's clever move

Heffetz is carefully watching the US, from afar. "Trump declared that what would be considered a success by the federal administration, in terms of the number of dead, is 100,000. What a clever move. Our natural point of reference was China, where the population is five times larger than in the US, and China was supposed to be in a worse situation. So by analogy, the number of dead in the US should be less than 1,000. Ok, so China is a dictatorship; let’s set it aside. If we compare to Germany, then the number of dead in the US should be 3,000. What did Trump do? He threw out a reference point that was astronomical so that we wouldn't compare the US to Germany. We will compare it with the 100,000.

It seems that in the US they rushed to respond so as not to deepen the recession that is on the way.

"It's very good that they were quick to respond, although that speed comes at a price - all sorts of questionable deals have sneaked into the plan, including apparently billions in tax benefits for wealthy real estate owners. But it is clear that the US has learned something from the 2008 crisis. If in 2008 there had not been a determined and unprecedented response by the Federal Reserve and a relatively determined response by lawmakers, we could have found ourselves in a depression. There was a determined response and in the end there was a crisis of six quarters, and then we got back to the longest period of uninterrupted growth in US history. Now too, there are all the elements of a deep crisis. If policy makers procrastinated, it could lead to a deep recession. That could still happen, but countries around the world have moved into action swiftly and put together large aid packages of historical proportions."

When you look at how the crisis is being handled around the world, what especially worries you?

"State intrusion into our lives has grown due to the crisis. If we legitimize state surveillance of citizens, or more market intervention, will the state be so quick to forego the ability to track us? If we monitor the infected today, will we track political activists tomorrow? We are currently under fire and we have to work quickly, but we must also be wary and be certain that we can still roll back the changes. We are seeing state budgets grow, and other expansions of state power that may be fine in an emergency. But when the war is over, things don't always return to what they were."

"On the other hand, good things may also come out of this crisis. We've been given a reminder that our existence here is not guaranteed, and that we are not as strong as we think. We are a vulnerable species and it is worth thinking about preserving our existence on this planet. Maybe the conversation will change, and we will begin to talk about readiness for the next pandemic, and perhaps also about other large challenges like the climate crisis."

Published by Globes, Israel business news - www.globes-online.com - on April 7, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Ori Heffetz  / Photo: Nati Shochat
Ori Heffetz / Photo: Nati Shochat
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