Coronanomics Revisited

OUCH!

I recall lining up for polio shots when I was in school.  The vaccine provided at no cost by the federal government eliminated polio from the United States over the course of two decades according to the CDC, the organization on the front lines of the battle against COVID-19.  That’s what it will take before I personally feel safe again -- safe enough to resume normal life or whatever passes for normal on the other side of this.  Best case – two years!  Am I overreacting?  Maybe.  A preliminary study of Santa Clara County, California suggests the mortality rate of COVID-19 is no worse than seasonal flu.  So, I might be at the extreme end of a spectrum whose opposite is defined by those protesting the shutdown of the economy (the Walking Dead?).  You might be somewhere in between.  

A panel of experts from the American Association for the Advancement of Science has modeled the impact over the next five years.  They assume that, like the flu, immunity may not last forever.  Vaccinations might be an annual requirement.  Further, their model assumes there will be new waves of outbreaks as we begin to reopen the economy.  History provides examples.  In the Spanish Flu pandemic of 1918, cities that reopened quickly – Denver and Philadelphia -- dealt with a second wave that decimated their workforce and disabled their local economies.  

Despite the absence of anything resembling leadership from the president, a task force has laid out a three-phase plan to reopen the economy based upon some broad and easily understood criteria.  It wisely leaves the implementation to governors and local government officials.  But it’s clear that there must be federal support for it to work.  The governors can decide when to open up businesses and scale back stay-at-home orders.  However, there are serious resource constraints on what the task force describes as “Core State Preparedness Responsibilities.”  Left on their own, the states would be competing with one another for supplies of test kits, vaccines and protective gear.  And, of course, the states lack the funds to follow through.  The New York Times has reported on a Harvard University study calling for testing at triple the current as a prerequisite for reopening the economy.  As it stands today, we have no national plan or infrastructure to support testing on that scale.  Nor can we perform contract tracing to ensure proper treatment in a more open economy.  Both are part of the strategy outlined by the presidential task force.  But a strategy without a plan is just a wish.   So, for now, we are sticking with medieval rules: isolation or risk death.  

So, what happens to the economy? Well, for starters, we’ve got a thirteen-figure hole to fill.  That’s just my back of the envelope calculation.  But I figure that a 20% unemployment rate will amount to a $3 trillion dollar drop in annual GDP.  Add the budget gap in the states most affected and the need to shore up hospitals and you’ve got another trillion or two.  The $2 trillion CARES Act won’t be enough.  

A few weeks ago, I predicted a short-term drop-in GDP or a V-Shaped recovery.  I also said, the real long-term risk was a supply disruption.  Well, that’s what we have.  There are those who suggest that weak businesses should be allowed to fail.  Corporations have loaded up on low-interest debt over the last decade.  Now, they should pay the price.  Only the stronger firms should be allowed to thrive.  In most circumstances, I would agree.  However, much like federal response to the banking crisis of the last decade, allowing global businesses to fail may be too much for the economy to bear. 

To some degree, our prosperity relies upon the efficiency of supply chains that run from raw materials to manufacture to distribution to retail to consumers. Too much disruption will result in massive unemployment that will not resolve itself when we’re all permitted to go back to work.  Products won’t get to market; companies will shut down; and, people won’t be earning paychecks.  

The one economic bright spot in all of this has been the response of the Board of Governors of the U.S. Federal Reserve System.  Having learned the hard lessons of the 2008/09 financial crisis, they have focused on ensuring liquidity not just domestically but also globally, opening lines of credit for foreign central banks.  These actions will serve us not only in the near term but also in the long term as sovereign governments as well as foreign investors continue to see U.S. Treasury Bonds as the safest of safe havens in times of crisis.

After all, how else can we fund those multi-trillion-dollar fiscal deficits?  

WHO WILL LEAD?