Hard Realities, The Coronavirus' Economic Impact

 

The whole world is freaking out about the Coronavirus, and with good cause. It’s an urgent situation that demands decisive action. To be honest decisive action isn’t always what democratic governments do best. I mean a government run by a dictator or a small group of people has an advantage when taking quick action is an imperative.  They don’t have to worry about any of that annoying consensus building. In that light it’s pretty impressive the scale of action taken by countries around the world to this new threat. 

In America, the Trump administration was slower than some to recognize the extent of the problem, preferring to think of it as a political problem they hoped they could contain rather than a health emergency that could only be delayed but not prevented. But even the Trump administration and the usually gridlocked Congress are starting to take aggressive action. Perhaps the most impressive thing is the widespread and nearly simultaneous action taking place on the state and local levels around the country.

However, in the rush to do something I think there are some harsh realities and troubling questions that have been mostly glossed over. This is particularly true with President Trump. Listening to him you get the distinct impression that he believes that this is a short-term problem. A couple of weeks of social distancing and we’ll have this thing under control. New treatments and a vaccine are just weeks away and just as fast as the stock market crashed it’ll shoot back up and we’ll be setting new records before you know it. President Trump is trying to portray is the very best-case scenario, and even at that is unrealistically optimistic.

We have computer modeling of how pathogens spread, however trying to predict the spread of this new virus is difficult due to lack of data and numerous variables that are impossible to fully account for. With that said the idea that everything will be back to normal a month from now is at odds with the facts. There are no indications yet that the spread is slowing, and a vaccine is at least a year away from being widely available, maybe longer. There’s a better chance of coming up with treatments for those who are infected and reducing the mortality rate, but even that is likely to take months.

The greatest risk with the Coronavirus is an out of control outbreak that sweeps through the country all at once, especially in the short term before effective treatments are developed and before the medical infrastructure to handle the onslaught of patients has been expanded. Imperial College London just released a report that estimated 80% of the population could contract the disease if no mitigating actions are taken with 2.2 million deaths in America alone. If 5 to 10% of those patients require hospitalization, many in intensive care, our medical system would soon be overwhelmed leading to a higher mortality rate.

The current strategy is to flatten the curve, meaning to lower the transmission rate so there are fewer infected at any one time. This isn’t expected to completely isolate the virus, it’s just too easily spread by seemingly healthy people to effectively halt transmission. Flattening is designed to prevent the medical system from becoming overwhelmed and buy more time to find effective treatments, but it’s also going to lengthen the curve. Even with everything we’re doing it’s likely that our medical system will be strained to deal with the projected number of patients. The idea that this is going to be over in a couple of weeks is unrealistic.

It’s also uncertain what role the seasons play, but initially it seems to be spreading with ease at a time when the normal flu is starting to wane. Since its spread from China the countries with the largest outbreaks are Italy, Iran and Spain, all countries with warm climates. It’s impossible to say at this point what effect temperature has on the virus, but this does suggest that we can’t count on temperature to slow it down over the next couple months. At best the heat of summer might slow it down, but that’s still months ow.

All this means the social distancing we’re all practicing now will likely be the order of the day for months to come. Beyond that it’ll depend on the development of treatments and how aggressively it spreads in the hot summer months. But even if we do get a summer lull, nearly all pandemics come through in waves meaning we could be right back where we are now next fall. Long term the combination of herd immunity and the development of a vaccine will likely mean that a couple of years from now Coronavirus will be a history rather than current events. But for the next year it’s likely to be an ongoing reality that the world will have to deal with.

The reason I’ve gone through all this is to make the point that we’ve only scratched the surface on the impact of the virus on the world’s economy. Millions are experiencing drastically reduced income, even with the possibility of checks from the government to get by temporarily. Much of the business that is being lost is gone forever. Meals that won’t be eaten in restaurants, vacations that won’t be taken, conferences that won’t be rescheduled, and on and on. All this lost income means the new car purchases they were planning, the bathroom remodels, the new TVs, are all going to be put on hold, in many cases indefinitely. This can’t help but have a ripple effect through the economy.

In many ways predicting the virus’ spread is easier than predicting economic impact. A virus is a real thing in the physical world with real properties and characteristics. Economics is much more theoretical, a weird mash up psychology, sociology and math. Congress and the administration are working on multiple stimulus/relief bills that are likely to pump trillions of dollars into the economy in a desperate effort to stave ow the worse economic effects of the current pause on economic activity. This is a reasonable thing to do given the current circumstance, but it’s likely not nearly enough to prevent a serious, possibly historic recession. The idea that we can just stop large segments of the economy, possibly for months, then just pick up were we left off is likely impractical.

It also ignores the truth that the economy wasn’t as strong as the President likes to imply. President Trump’s own Federal Reserve Chairman testified before congress last year that the huge deficits the country was running during the economic expansion “could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn.” He was ignored at the time by people who wanted to believe the expansion would continue forever. This despite the fact that 64% of supply chain executives, and 97% of corporate CFOs surveyed said an economic slow-down or recession in 2020 was likely. Trade conflicts such as the multiple trade wars started by President Trump was the most frequently cited reason for the anticipated recession. 

A responsible administration would use the economic expansion we’ve experienced over the last decade to reduce the deficit and pay down the debt to put the country’s financial footing on solid ground for the next inevitable recession. Instead of doing that the Republicans increased the deficit to pay for tax breaks for millionaires and corporations. The total of the stimulus is likely going to be between one and two trillion dollars while tax revenues are going to tank. I suspect a tripling of the deficit is likely with a quadrupling not outside the realm of possibility. The deficits for next year will almost certainly be elevated as well. The result of all this is going to be a greater share of our taxes going to debt service for the foreseeable future, which will be a long-term drag on the economy.

The intent of this article is to shed some light on the challenges we face going forward that haven’t been the focus of much attention from the media. I’m not saying anything that others haven’t said, but it seems the scale of the problem makes it difficult wrap your head around it. Not surprisingly the media is mostly focused on the here and now of this crisis. I think the result of this coverage is many are still thinking of this crisis a temporary hiccup to the system. 

Maybe we’ll get lucky and get out of this with a couple thousand deaths and a moderate recession. That’s really the best-case scenario, but like I said, predicting recessions is a tricky business. My fear is we could be looking at tens or hundreds of thousands of deaths and recession like we haven’t seen in living memory that could take years to bounce back from. Unfortunately, if this second scenario is what comes up on the roulette wheel of destiny, I don’t think there’s going to be an easy solution to getting out of that hole.