Vaccines aside, the solutions to combating COVID-19 — screening, personal risk management, contact tracing, to name a few — are based on a deeper principle. Specifically, the primary economic tool at our disposal for fighting the economic consequences of pandemics is the collection and use of information about infectious people. I believe, therefore, that our preparation for dealing with inevitable future pandemic threats must involve building our information infrastructure and the decision-making skills to make use of it.

In my first book about the brutal economics of COVID-19, The Pandemic Information Gap, I speculated that we would need to invest heavily in supranational institutions to deal with pandemics. From the vantage of 2020, that seemed like the only option. Pandemics always start somewhere, and therefore we need to ensure that the right people know about the onset as soon as it happens. And those right people must also have the authority to act on that information — even if it means that the rights (say, of movement and trade) of those most immediately affected are subverted for the global good. 

This is always a tough call. Sovereignty is something we default to, and some proposed pandemic solutions are seen as moving us in the opposite direction. But faced with an unprecedented global negative externality, do we have a different option? 

Now that we are further down the track, I have to admit that I find myself backing away from regarding a supranational authority over other interests as a necessity; instead, I see this option as being potentially desirable. That is not much of a shift in thinking, but the reason for it is instructive. I now believe there are ways to deal with the pandemic information problem at a national level. I say this knowing that we cannot necessarily rely on individuals to do the right thing at the right time, and knowing that we might not make the needed investments in information infrastructure quickly enough.

Nonetheless, there is a practicality to my suggestions. As evidence, I want to revisit an economic tool we use to solve other information problems: The worldwide network of central banks.

Financial vs. Viral Contagion

There is something about the ebb and flow of the financial system that causes scientific minds to see the system as a puzzle to be solved. The system has periods of relative stability followed by a rise in optimism or buoyancy followed by pessimism and the bursting of bubbles. Sometimes this involves stocks, bonds and the familiar turf of financial markets. At other times, similar patterns have impacted housing, toys and tulips.

To a physicist, the economic boom followed by the seemingly inevitable bust looks like the law of gravity at work: The fabric can be stretched, but it will bounce back into place. That did not stop Isaac Newton from investing in what was later known as the South Sea bubble of 1719. For Newton, the investment resulted in a financial loss of today’s equivalent of many millions of pounds. Bad investment decisions aside, Newton’s interest in physics and investing was fitting, for many physics models have connections with economics. Indeed, the first Nobel Laureate in Economics, Ragnar Frisch, famously used wave dynamics to model business fluctuations.

To Robert May, one of the founders of mathematical epidemiology, the wake of the 2008 financial crisis reminded him of the way infectious diseases develop into outbreaks:

"An increasing amount of work draws analogies with the dynamics of ecological food webs and with networks within which infectious diseases spread. For the latter analogy, one can view the dodgy financial devices as newly emerging infectious agents. Indeed, the recent rise in financial assets and the subsequent crash have rather precisely the same shape as the typical rise and fall of cases in an outbreak of measles or other infection."

He went on: “One basic question, of course, is how to prevent a problem that arises in one bank from cascading through the entire banking system. Here, insights from medical epidemiology have been helpful, and indeed the word ‘super-spreader’ is now used often.” To May, the association between epidemiology and various aspects of financial crisis was clear.

It is a stretch to consider the ups and downs of financial prices and economic activity as having a similar pattern to fluctuations in the number of cases during a pandemic. There is a boom and a bust to those cases, but generally speaking, typical pandemic paths do not mimic market patterns. However, there is an interesting linkage between epidemics and financial instability. This can be described with the concept of contagion.

Optimism that leads to booms is like a contagion that can afflict even someone like Isaac Newton. Pessimism is similarly like a contagion, compelling people to suddenly change their minds about the market — sometimes like Wile E. Coyote when he has already passed the edge of a cliff. 

It is therefore tempting to think in terms of critical mass: When there are many optimistic people, those people convince others to view things the same way; when some investors turn pessimistic, it takes a while for people to realize that something is wrong and then run for the exits. We saw this play out in late 2020, with a dramatic rise (again) in the price of Bitcoin — an asset that involves such an abstract foundation that its value is often merely based on the opinions of others. This is similar to other odd bubbles in history, such as those for tulips centuries ago when single bulbs rose to prices ten times the annual income of typical workers. When that bubble burst, investors at least had a tulip in hand.

The links between pandemics and market fluctuations lead many economic policymakers to adopt the language of infectious diseases to explain financial instability. Consider what Andrew Haldane of the Bank of England said in 2009:

"These similarities are striking. An external event strikes. Fear grips the system which, in consequence, seizes. The resulting collateral damage is wide and deep. Yet the triggering event is, with hindsight, found to have been rather modest. The flap of a butterfly’s wing in New York or Guangdong generates a hurricane for the world economy. The dynamics appear chaotic, mathematically and metaphorically.

"These similarities are no coincidence. Both events were manifestations of the behaviour under stress of a complex, adaptive network. Complex because these networks were a cat’s-cradle of interconnections, financial and non-financial. Adaptive because behaviour in these networks was driven by interactions between optimizing, but confused, agents. Seizures in the electricity grid, degradation of ecosystems, the spread of epidemics and the disintegration of the financial system — each is essentially a different branch of the same network family tree."

Haldane was interested in the tendency of investors and others to engage in flight when things start to crash. They leave the system and ‘hide’ in a manner quite similar to social distancing in a pandemic. Haldane’s analogy, however, is not perfect: In the case of market crashes, when more people hide, the economic conditions grow worse, which is the opposite of what happens to health conditions during a pandemic. 

Despite that difference, Haldane’s point is valid. When assessing the probability of instability and risk of widespread contagion, both epidemiology and finance come to the same conclusion: Global interdependence is the source of risk. Therefore, we need ways to break transmission chains so as to calm the waters. Specifically, if the problem is with some institutions that engage in risky behaviours, maybe we need to put a ring around those institutions so that we can protect ‘ordinary’ activities. In other words, we need to reduce interdependencies.

Vaccines aside, the solutions to combating COVID-19 — screening, personal risk management, contact tracing, to name a few — are based on a deeper principle. Specifically, the primary economic tool at our disposal for fighting the economic consequences of pandemics is the collection and use of information about infectious people. I believe, therefore, that our preparation for dealing with inevitable future pandemic threats must involve building our information infrastructure and the decision-making skills to make use of it.

In my first book about the brutal economics of COVID-19, The Pandemic Information Gap, I speculated that we would need to invest heavily in supranational institutions to deal with pandemics. From the vantage of 2020, that seemed like the only option. Pandemics always start somewhere, and therefore we need to ensure that the right people know about the onset as soon as it happens. And those right people must also have the authority to act on that information — even if it means that the rights (say, of movement and trade) of those most immediately affected are subverted for the global good. 

This is always a tough call. Sovereignty is something we default to, and some proposed pandemic solutions are seen as moving us in the opposite direction. But faced with an unprecedented global negative externality, do we have a different option? 

Now that we are further down the track, I have to admit that I find myself backing away from regarding a supranational authority over other interests as a necessity; instead, I see this option as being potentially desirable. That is not much of a shift in thinking, but the reason for it is instructive. I now believe there are ways to deal with the pandemic information problem at a national level. I say this knowing that we cannot necessarily rely on individuals to do the right thing at the right time, and knowing that we might not make the needed investments in information infrastructure quickly enough.

Nonetheless, there is a practicality to my suggestions. As evidence, I want to revisit an economic tool we use to solve other information problems: The worldwide network of central banks.

Financial vs. Viral Contagion

There is something about the ebb and flow of the financial system that causes scientific minds to see the system as a puzzle to be solved. The system has periods of relative stability followed by a rise in optimism or buoyancy followed by pessimism and the bursting of bubbles. Sometimes this involves stocks, bonds and the familiar turf of financial markets. At other times, similar patterns have impacted housing, toys and tulips.

To a physicist, the economic boom followed by the seemingly inevitable bust looks like the law of gravity at work: The fabric can be stretched, but it will bounce back into place. That did not stop Isaac Newton from investing in what was later known as the South Sea bubble of 1719. For Newton, the investment resulted in a financial loss of today’s equivalent of many millions of pounds. Bad investment decisions aside, Newton’s interest in physics and investing was fitting, for many physics models have connections with economics. Indeed, the first Nobel Laureate in Economics, Ragnar Frisch, famously used wave dynamics to model business fluctuations.

To Robert May, one of the founders of mathematical epidemiology, the wake of the 2008 financial crisis reminded him of the way infectious diseases develop into outbreaks:

"An increasing amount of work draws analogies with the dynamics of ecological food webs and with networks within which infectious diseases spread. For the latter analogy, one can view the dodgy financial devices as newly emerging infectious agents. Indeed, the recent rise in financial assets and the subsequent crash have rather precisely the same shape as the typical rise and fall of cases in an outbreak of measles or other infection."

He went on: “One basic question, of course, is how to prevent a problem that arises in one bank from cascading through the entire banking system. Here, insights from medical epidemiology have been helpful, and indeed the word ‘super-spreader’ is now used often.” To May, the association between epidemiology and various aspects of financial crisis was clear.

It is a stretch to consider the ups and downs of financial prices and economic activity as having a similar pattern to fluctuations in the number of cases during a pandemic. There is a boom and a bust to those cases, but generally speaking, typical pandemic paths do not mimic market patterns. However, there is an interesting linkage between epidemics and financial instability. This can be described with the concept of contagion.

Optimism that leads to booms is like a contagion that can afflict even someone like Isaac Newton. Pessimism is similarly like a contagion, compelling people to suddenly change their minds about the market — sometimes like Wile E. Coyote when he has already passed the edge of a cliff. 

It is therefore tempting to think in terms of critical mass: When there are many optimistic people, those people convince others to view things the same way; when some investors turn pessimistic, it takes a while for people to realize that something is wrong and then run for the exits. We saw this play out in late 2020, with a dramatic rise (again) in the price of Bitcoin — an asset that involves such an abstract foundation that its value is often merely based on the opinions of others. This is similar to other odd bubbles in history, such as those for tulips centuries ago when single bulbs rose to prices ten times the annual income of typical workers. When that bubble burst, investors at least had a tulip in hand.

The links between pandemics and market fluctuations lead many economic policymakers to adopt the language of infectious diseases to explain financial instability. Consider what Andrew Haldane of the Bank of England said in 2009:

"These similarities are striking. An external event strikes. Fear grips the system which, in consequence, seizes. The resulting collateral damage is wide and deep. Yet the triggering event is, with hindsight, found to have been rather modest. The flap of a butterfly’s wing in New York or Guangdong generates a hurricane for the world economy. The dynamics appear chaotic, mathematically and metaphorically.

"These similarities are no coincidence. Both events were manifestations of the behaviour under stress of a complex, adaptive network. Complex because these networks were a cat’s-cradle of interconnections, financial and non-financial. Adaptive because behaviour in these networks was driven by interactions between optimizing, but confused, agents. Seizures in the electricity grid, degradation of ecosystems, the spread of epidemics and the disintegration of the financial system — each is essentially a different branch of the same network family tree."

Haldane was interested in the tendency of investors and others to engage in flight when things start to crash. They leave the system and ‘hide’ in a manner quite similar to social distancing in a pandemic. Haldane’s analogy, however, is not perfect: In the case of market crashes, when more people hide, the economic conditions grow worse, which is the opposite of what happens to health conditions during a pandemic. 

Despite that difference, Haldane’s point is valid. When assessing the probability of instability and risk of widespread contagion, both epidemiology and finance come to the same conclusion: Global interdependence is the source of risk. Therefore, we need ways to break transmission chains so as to calm the waters. Specifically, if the problem is with some institutions that engage in risky behaviours, maybe we need to put a ring around those institutions so that we can protect ‘ordinary’ activities. In other words, we need to reduce interdependencies.

Independence

The job of central banks and prudential regulation is not to prevent financial crises per se, but rather to prevent crises from spilling into other activities. In other words, the job of central banks is containment, and this role is based on one principle: independence. In normal times and during crises, central banks have had independent authority over their decisions. This includes whether to order banks and others to redress problems. 

Central banks have had independence in deciding how to engage in market interventions, how to control the money supply, and how to manage financial and economic stability. That independence was not baked-in from the start. It was established because the consequences of political and other interference were all too plain to see. Politicians are frequently subject to pressure by special interests. Those groups often want, in the financial sphere, release from regulations they perceive as unnecessary. Politicians are also subject to pressure to spend too much and tax too little. Strict constraints on spending exist at the U.S. state level, but the U.S. Congress benefits from softer constraints. The biggest temptation at the federal level is to print a little more money to cover deficits and hope that no one will notice. And then maybe the government can print a little bit more. And so on. 

Independence is, therefore, granted to the institution that is perceived to be the long-term entity — the central bank. When a central bank conducts activities with independence, there is greater confidence that it is doing so in a transparent and nonconflicted way. There is an implied recognition that a writ of confidence can only be issued if it comes from an underlying reputation of trust. This principle is familiar in public health settings. 

Indeed, to endow public health officials with independence and to empower them to manage key messaging during pandemics are regarded as best practices. These practices are based on the recognition that politicians and others may not be sufficiently resolute to deal with pandemics before they break out of control. Thus, if public health officials are not upsetting people by their actions to contain a potential pandemic, they are likely doing it wrong. 

Unfortunately, these important roles for public health officials have been confined primarily to the realm of health policy. If COVID-19 has taught us anything, it is that pandemics are also economic problems. That being true, pandemics should be handled by addressing the information problem. Not taking that into account is the primary reason why we were unprepared for COVID-19. We have been playing catch-up throughout the entire crisis. We need an institution that can act independently, and that is prepared and equipped to intervene and right the ship. That preparation, in this pandemic, was not there. 

There are different lines of defence against infectious diseases. The front line is early warning and being able to intervene locally to protect globally. Then, at the global level, there is a role for a supranational institution. We have those in various forms, such as the International Monetary Fund for finance, but the current institutions have proven to be too weak to prevent local problems from spilling into the global arena. Even so, we need other lines of defence. The financial arena shows us that local crises might spread. In those situations, the backstop defence lines are local institutions. They need to be free to intervene, and they need resources to be prepared. 

In my view, our system of central banks is a template for building local pandemic institutions. Local pandemic authorities could become a repository of public health expertise, surveillance strategies and economics. They would serve long-term, apolitical interests. They would significantly augment local public health authorities to resolve the information problem. There would be no more funding cuts to key services (as was done in Canada) just to satisfy short-term budgetary pressures. Instead, local pandemic authorities would sit beside the military and economic institutions as a core feature of responsible modern government. 

Unless dealt with quickly, viruses get out of control. The fundamental challenge is an informational one: Gather the right information and we have an arsenal for attacking pandemics. However, information is not gathered for information’s sake. It needs to be used to inform decisions, such as whether to isolate riskier individuals from others, or deciding which areas of the economy need to be locked down. The right information has to get to the right people or entities who make the tough calls, precisely because they are the ones with the complete informational picture that others do not have. When decisions are made blindly, costs are large and actions take too long. By contrast, preemptive information acquisition enables those with the authority to stop pandemics.

In regard to COVID-19, multiple failures in obtaining information and then applying the right information to key decisions led to economic and social calamity. For potential COVID-29s, we need to do better. Above all, we need to ensure that we have institutions in place with both the right information and the authority to act.