Life After Lockdown

  

PANDEMIC

Lost Lives: An Alternative Perspective

We judge the success of countries and states battling the COVID-19 disease by numbers of cases and deaths. But some researchers say we may be looking through the wrong end of the telescope. One country, Sweden, has 100 times New Zealand's death rate per capita but a number of research scientists are beginning to think Sweden may, in the long run, achieve herd immunity losing fewer lives than countries that sacrificed their social life and economy to quell the spread of the disease. 

The media has focused on the enemy we most fear, the coronavirus. The less-publicized enemy is the devastation caused by a strict lockdown. People die from social isolation and the stresses of a devastated economy. 

No one knows how many lives the second enemy has taken but a subjective estimate can be conceptualized from the list of reported excess deaths from lockdown: Suicide, substance abuse, missed chemotherapy appointments (down 50%), reduced cancer screenings (down 75%), domestic violence, and the list goes on. 

The World Health Organization (WHO) surveyed 155 countries to determine the extent of excess deaths from neglecting non-communicable diseases (NCDs) due to lockdowns. WHO reported the following. 

"More than half of the nations reported that services for NCDs have been partially or completely disrupted, while two-thirds said rehabilitation services were affected.

Meanwhile, a staggering 94 per cent of countries have had to partially or fully re-assign health ministry staff working on NCDs to support COVID-19 response.

Screening campaigns - for breast and cervical cancer, for example - were also postponed in more than half of countries."

Eventually, we will have statistical evidence of short and long term death rates both with and without lockdown. In the meantime, Dr. Michael Levitt provides some insight using mathematical models giving us food for thought.

Levitt readily acknowledges he is not an epidemiologist, he is a biophysicist and a professor of structural biology at Stanford University. His mathematical modeling however extends well beyond biology. More generally, he employs mathematical models to decode and better understand what we observe when something is too complicated to disentangle from what is known about a system. His mathematical skills helped him win a Nobel Prize in Chemistry in 2013.

Levitt did not set out to compare deaths due to lockdown versus allowing herd immunity to run its natural course. He started by recording daily COVID cases in January of the pandemic in China. On January 31 he noticed that there were 46 new deaths compared to 42 the day before (consistent with exponential growth). He soon recognized that the disease initially increases exponentially, then the exponential growth begins to slowly decline towards zero where the curve representing the total number of cases flattens. He then predicted China's COVID-19 cases would peak at 80,000 cases and decline thereafter. (On June 2nd China appears to have peaked at 84,102 cases and is declining, a remarkably accurate prediction.)  This pattern seemed to be consistent whether a country locked down or remained open. He applied his model to other countries including New Zealand. 



New Zealand acted "hard and early" in the words of the Prime Minister and brought the pandemic to a stop by locking down and isolating from the rest of the world. Each day the exponential growth rate declined linearly towards zero (the blue line in the graph)  at which point the curve flattens (black line) and the new cases quickly die out. Levitt later came to two conclusions. The pandemic will be over sooner than predicted and the herd immunity threshold is substantially lower than the 60% or so estimated by epidemiologists.

For a more technical understanding of Levitt's models and a discussion of his tentative predictions, view his three short video talks in order - (one, two, three).

Regarding the question whether a strict lockdown or a rapid opening loses more lives, Levitt did conclude in a recent interview expressing his current opinion: "There is no doubt in my mind that when we come to look back on this, the damage done by lockdowns will exceed any saving of lives by a huge factor."

The jury is still out on the issue but the prospect that Levitt is right cannot be ruled out. There is much we don't know about the disease but it is time to focus on how to relax lockdown restrictions while carefully navigating a path to a reasonably safe economic and social recovery. 

Whos Afraid Of The Big Bad Wolf

Whos Afraid Of The Big Bad Wolf

Preface

In a matter of weeks, the world's economies were hobbled by a microscopic foe named SARS-CoV2, more commonly called Covid-19. Unlike The Great Depression and The Great Recession, the current economic turmoil had no preceding economic conditions that created a bubble waiting to burst. The uncertain course of a novel virus, the unpredictable political environment, and the unprecedented social disruptions have triggered the most diverse economic forecasts I have witnessed in my half-century experience as an economist.  Harvard Business Review surveyed 28 institutions that publish economic forecasts. The most optimistic saw the U.S. economy declining 8.2% this year and the most pessimistic forecast saw a 65% decline. All 28 forecasts expected an upturn by year-end.

What follows is a synoptic sample of a wide range of economic outlooks I collected from other authors plus my view of what realistically could happen if we successfully navigate the gauntlet of conflicting global and domestic political agendas. 

The Good, The Bad, And The Ugly

The good. Our economy was healthy for the last several years except for the hangover from The Great Recession which created extraordinary national debt. However, we are well insolated from a national debt spiral; we have near-zero interest federal rates, virtually no inflation, and an arsenal of fiscal and monetary tools to prevent another Great Depression. In addition, the US dollar is, and likely will remain, the world's most stable and widely used currency. U.S. Treasury securities are considered by other countries to be the safest investment available during periods of economic turmoil. The pending recession should be minor and resolve by early 2021. 

The bad. The International Monetary Fund estimates the global debt/GDP ratio will increase from 77% to 94% as a result of the pandemic. The increase will reach the tipping point, a point where investors become concerned about the prospects of one or more countries defaulting on their national debt greatly increasing their interest rates. This will reduce global economic growth and initially damage emerging countries.

As economic problems increase in more developed countries and global trade tensions escalate, tipping points as viewed by countries like China and Japan that hold large portfolios of the U.S. government debt will begin to sell their holdings of U.S. Treasury securities. This will increase our domestic interest rates and in turn cause personal credit card, business, and mortgage interest rates to increase. Residential home prices will decline and foreclosures will precipitate a liquidity crisis reminiscent of the Great Recession. Overall rising interest rates will discourage private investment and dampen economic growth.

The Federal Reserve Board (the Fed) will attempt to tame the rise in interest rates by quantitative easing to stimulate the economy. The money supply will be increased by auctioning U.S. Treasury securities on the open market pushing interest rates even higher. The capital stock will be diminished and long term economic growth will be stunted. 

The stimulus spending temporarily will increase economic activity to help dampen the recession but the can is kicked down the road to a time when the deficit cannot be sustained requiring increased taxes and/or reduced spending. It will take the U.S. more than five years to escape from the pandemic-driven recession.

The ugly. If the embers of the first wave of the pandemic reignite a devastating second or third outbreak, and/or if the virus mutates voiding herd immunity, stimulus spending will need to double or even triple to attempt to prevent another Great Depression. Congress and the Fed will be desperate to avoid an economic collapse and would instead take the risk of substituting the bad economy for the ugly economy. The debt/GDP ratio will rise above 130% in the next few years. 

The renewed pandemic spike will be global and every country will try to borrow at the same time with few or no willing lenders. Record interest rates will be required to entice investors to buy securities, millions of additional jobs will be lost, global GDP will decline and many businesses and governments will be unable to raise enough revenues to avoid insolvency. 

Some governments will attempt to raise taxes rather than borrow but the same empty pockets that couldn't lend would not be able to pay sufficient taxes to prevent defaulting on some or all of the governments' debts. Government spending reductions will cause even more jobs to be permanently lost and the production capacity of the world will be dropped to a lower long term trajectory. It will take decades to return to our pre-pandemic level of financial security. 

An Achievable Scenario

Today the government is deploying enough fiscal and monetary firepower to avoid both the bad and ugly scenarios. But the expansionary actions of the government need to be continued and refined. We have the opportunity and ability to get back on the pre-pandemic economic trajectory within two or three years if we don't allow unproductive political bickering and ill-conceived government policies get in the way. 

Unemployment will worsen but will not reach 25% as in the Great Depression. Although employers are beginning to reopen, a growing number of businesses are insolvent or nearing insolvency; some of the job losses will need to be delayed until overall demand for products and services returns to pre-pandemic levels which may take years (it took four years for employment to recover from the dotcom bubble at the beginning of this century and six years for employment to fully recover from the Great Recession). 

Employers will need to rebuild foreign and domestic supply chains and, in many cases, adapt and transform their production processes and workforce skills to accommodate changes in the technologies and behavior caused by the pandemic. For example, there will be more work from home, more remote interaction with the public, increased attention to health and sanitation, more online business activity, and changes in the way the merchandise is moved from factories to homes (e.g., new delivery channels and transportation technologies). 

 Fiscal and monetary policy are being used more aggressively than during any other peacetime period. However, stimulus payments to workers currently are neither sufficient in amount nor suitably targeted to restore smaller businesses and consumer spending by late 2021 although I see some improvement by year-end. Federal policy has emphasized top-down economic stimulation; large corporations have benefited from more tax cuts and federal funding than have small businesses and workers. While large companies support large numbers of employees, direct corporate grants and loans don't stimulate demand for products and services as powerfully as the same money carefully targeted to consumers and employees if smaller businesses. 

If additional stimulus actions of the federal government agencies are refocused on the average household, the pending recession could be foreshortened but presently there is a dysfunctional lack of agreement within Congress necessary to trigger a more rapid bottom-up stimulation. 

Interest rates and inflation could be kept under control if our government prudently works to layout a predictable and carefully planned roadmap to recovery. Investors would trust the full faith and credit clause of our constitution and fiscal and monetary authorities will continue to keep both interest rates and inflation in check through next year. 

Public uncertainty about inflation and interest rates has increased dramatically. Some fear deflation which would cause people to defer purchases waiting for prices to fall and therefore depress economic activity. Others fear inflation will increase as the economy eventually recovers. Expectations about inflation often become self-fulfilling. But there has never been (in my experience) as much diversity among economists and public policymakers about long term interest rate and inflation predictions as there is today. My bet is that inflation and interest rates will be a non-issue for at least two years. 

Beyond 2021. I believe there will be a prolonged period of recovery under the best of circumstances. Bear markets will outnumber bull markets. Federal and state governments have been weakened and will be saddled with debt that the public cannot comfortably pay in taxes or fees. The aging population will require more medical and living assistance than federal, state, and local governments can provide. Fiscal and monetary authorities will be low on ammunition to combat the typical economic fluctuations of a market economy.  Basic state and federal government services will be reduced and will require increases in marginal tax rates. Mandatory spending including interest on the national debt, entitlements,  and sustaining essential government functions will become a greater share of the federal budget. However, assuming a COVID-19 vaccination is developed or the virus dies out, five years from now today's social and economic disruption will be recorded in history as the pandemic-driven recession that is most memorable as one that altered our culture and our business institutions.

Commentary

Predicting the US economic condition more than two years ahead is exceptionally difficult for two reasons. 1) The Covid-19 virus and its impact on the world's inhabitants are still unpredictable. 2)  The worst economic turmoil in almost a century is occurring during an election year which creates incentives that conflict with safe and successful navigation through a pandemic-driven storm. 

Unfortunately, we as a nation tend to short-sightedly devote our resources to resolving immediate problems rather than securing the economic and physical environment of future generations. We do this with both our physical environment and our economic policies.

The best outcome will be realized if we resist the temptation to allow self-interest, political rivalry, or apathy to deflect us from doing the very best we can to tame COVID-19 and skillfully manage the economy. In all matters affecting the comfort and security of ourselves and future generations each of us should respect the advice of knowledgeable experts and weigh their advice on the scales of our personal conscience.  We can't change human nature but we can temper it within ourselves and by practicing compassion for others. 

I called my prediction an achievable scenario but much depends on which of many paths our leadership might take. I hope and expect either my version, or the good scenario come to be. 

I strongly believe we will not experience the worst scenario, an economic collapse. No forecast I surveyed suggested an economic collapse of a developed country. I include it here because failed states do occur, especially, but not exclusively, in undeveloped countries.  

Economic Collapse

 A summary of the consequence of economic collapse is described on the website thebalance.com, a website providing financial information for the average investor. Here is an excerpt.


"If the U.S. economy collapses, you would likely lose access to credit. Banks would close. Demand would outstrip the supply of food, gas, and other necessities. If the collapse affected local governments and utilities, then water and electricity might no longer be available.

A U.S. economic collapse would create global panic. Demand for the dollar and U.S. Treasurys would plummet. Interest rates would skyrocket. Investors would rush to other currencies, such as the yuan, euro, or even gold. It would create not just inflation, but hyperinflation, as the dollar lost value to other currencies."


...As for cash, it may not be useful in a total economic collapse because its value might be decimated. Stockpiles of gold bullion may not help because they would be difficult to transport if you needed to move quickly. In a severe collapse, they may not be accepted as currency. But it would be good to have a stash of $20 bills and gold coins, just in case. During many crisis situations, these are commonly accepted as bribes."