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Loretta J. Mester

In July of 2024, the authors invited several eminently qualified readers to review a draft of The Fed and the Flu. Loretta J. Mester, former president of the Federal Reserve Bank of Cleveland and now professor of finance at The Wharton School at UPenn accepted the invitation and offered this thoroughgoing review of that draft.

Review of The Fed and the Flu: Parsing Pandemic Economic Shocks by David R. Kotok, Michael Englund, Tristan Erwin and Elizabeth Sweet
(draft as of July 20, 2024)

The Fed and the Flu: Parsing Pandemic Economic Shocks by David R. Kotok, Michael Englund, Tristan Erwin, and Elizabeth Sweet is an important compendium of the history of pandemics, their effects on societies and economies, the policy actions taken to address both the health and economic effects, and recommendations drawn from these historical experiences. David Kotok, a financial market practitioner and scholar, provides insights from his decades of interest in the effects of pandemics on people and the economy. All policymakers will benefit by considering the lessons the authors draw from the recent COVID-19 pandemic so that they are better prepared to address future pandemics.

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The book is divided into five parts, each of which could be read on its own and prove interesting to various audiences. After a brief introduction, part 2 of the book provides detailed information about seven plagues that affected regions in ancient and medieval times, including, among others, the Plague of Athens, the Antonine Plague in ancient Rome, and the Black Death in Europe. This part of the book cites extensively from scholars who have studied the plagues. It is a fascinating read, reminding this reader of some of the events we studied in high school and college, but with considerable added detail and perspective. The authors document how leaders in ancient Greece and Rome tried to address the devasting impact of disease, without the benefit of modern medicine; how leaders attempted to maintain economic order; and how people often lost confidence in their leaders (and gods) as the diseases progressed.

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The authors’ discussion of the effects of pandemics on the money supply in Greece and Rome was particularly interesting. With silver very scarce since many miners were stricken with disease during the Plague of Athens or were called on to fight in the Peloponnesian War, the Greeks produced silver-coated bronze coins and substituted gold for silver in other coins. But they restored the silver content of their currency after the plague and war were concluded, thus, defending the value of their currency. In contrast, instead of taking temporary actions, the Romans allowed coins with lower silver content to continue to circulate after the Plague of Cyprian was over, with silver content continuing to be reduced to nearly zero, undermining the currency’s use for trade. The authors point out that the monetary crisis in Rome lasted for decades until emperors Diocletian (who ruled 284-305) and Constantine (who ruled 305- 337) restored financial stability. Although the authors do not explicitly make the inference, these experiences underscore the importance of the actions that have been taken by the Federal Reserve to bring the economy back to price stability in the current post-pandemic environment.

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In several of the episodes discussed in the book, war accompanied the plagues, making parsing the economic effects of the plague vs. the war difficult. But the authors do an excellent job of discussing the interconnections. Analogies are drawn from the ancient and medieval pandemics to modern ones. As the authors note, despite modern medicine, when the COVID-19 virus first appeared, little was known about it, in particular, the best ways to stem its spread. And lack of knowledge led to disinformation filling the void, as it often does. Similar to how people began to distrust the gods in ancient time as the plagues spread, many people began to distrust science and public health officials as the COVID-19 pandemic lingered.

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Part 3 of the book discusses three modern pandemics: the 1918 Spanish flu pandemic, 1957 Asian flu pandemic, and the 2020 COVID-19 pandemic. Before discussing these pandemics, the book puts the material into context by discussing the rise of modern medicine. Again, this discussion of the discoveries made in virology, including the advent of the small-pox vaccine, are interesting independently of the rest of the book.

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The authors document the impact of the modern pandemics on health and the economy and discuss some of the actions taken by federal and local governments to mitigate the effects. For example, as the book notes, in September 1918, despite rising flu cases, Philadelphia held a Liberty Loans Parade, which was attended by 200,000 people. Cases surged after the parade, and according to the authors, over 13,000 people died in the three months following the parade. In contrast, St. Louis fared much better, having canceled their parade and having kept schools, churches, and businesses closed for longer than was done in Philadelphia. The book indicates that the death rate per 100,000 people in St. Louis was half that of Philadelphia. Drawing on the research of others, the book also discusses different nonpharmaceutical actions taken in various cities and their effects.

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Using transcripts of Federal Reserve meetings at the time and more recent research studies, the authors document that the Federal Reserve in 1918 and in 1957 did not appreciate the long-lasting effects that pandemics can have on the economy by limiting the supply of workers, reducing consumer spending, and increasing precautionary savings. The authors find no mention of the pandemic of 1918 in Fed documents and conclude that the economic effects of this pandemic were slow to be realized or studied. Similarly, minutes of the Federal Open Market Committee (FOMC) meeting in December 1957 and the Fed’s 1958 Annual Report do not mention the pandemic or acknowledge that a pandemic can be an economic shock as well as a public health shock. While the Fed did begin reducing interest rates in 1957 to help address a potential recession, it did not indicate that the pandemic might be a cause of the potential recession.

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In contrast, the Federal Reserve did take several actions to stem the economic impact of the COVID-19 pandemic and its aftermath, while the federal government took actions to mitigate the public health and economic effects of the virus. The book provides a comprehensive review of the Fed actions including easing monetary policy via reducing the policy rate, purchasing assets, and using forward guidance; setting up emergency lending programs; and encouraging commercial banks to lend by temporarily relaxing some bank regulatory requirements.

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The authors discuss the positive impacts of these actions on the U.S. economy, in particular, mitigating what might have been a severe recession. It would have been useful had the authors also pointed out some of the negative economic consequences of the fiscal and monetary policy responses to the COVID- 19 pandemic, including the persistent rise in inflation to very high levels. A discussion of the costs and benefits of alternative actions would be a useful addition to the book.

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Part 4 of the book draws on data to provide eight lessons from the experience of the COVID-19 pandemic. Here, the authors discuss a wide-ranging set of issues including rising distrust of institutions, tradeoffs that policymakers must make between maintaining public health and maintaining economic viability, changes to the workforce including labor shortages and remote work, the economic costs of long COVID, the rise of disinformation and fraud, and the governance surrounding pandemic responses. There is a plethora of information in this part of the book, which can be read alone and understood even by those who have not read the earlier parts of the book.

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The final part of the book provides a chartbook document the effects of the COVID-19 pandemic on various parts of the economy, including GDP, housing, manufacturing, the labor market, financial markets, and balance sheets. This part of the book would be of particular interest for economists or others interested in seeing the data that have been used to track the economic effects of the pandemic and policy responses.

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To conclude, this book is a comprehensive and valuable review of ancient and modern pandemics and their effects on people and the economy. The authors point out what we should learn from past experiences to make us better prepared for the next pandemic, whenever it occurs. Because the book is so comprehensive, it would benefit from having more section headings to help guide the reader and to help emphasize the authors’ valuable conclusions. An index would be very helpful as well, to allow the reader to find passages with common themes. Policymakers would surely benefit from reading this book, but any person interested in history, medicine, and better understanding of the recent pandemic will also learn much from this important book. 

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