March 1, 2020
Pandemics and Market Effects
This week’s volatility in capital markets captures some of the growing concern over Covid-19, or coronavirus. Stock markets are very poor guides to the overall economy, but that does not mean they are wrong this time. In fact, I think they are late to the game. Much of the global economy has been slowing in recent months, and Covid-19 strikes directly at supply chains for the already struggling U.S. manufacturing industry. At the very least, the next few months will see much of the globe enter recession. With those prospects, it is useful to think about the effects of viral pandemic on our economy.
Large-scale disease has long been with us, but few Americans under 70 have meaningful memory of them. Before the polio vaccine of 1955, summer polio outbreaks closed pools and fairs and delayed school openings. Americans younger than roughly age 53 don’t have smallpox vaccine scars, and mostly dodged the mumps and chicken pox, which nearly all of us older that 55 endured.
We have seasonal flu, sometimes very bad strains, but the last large-scale viral disease pandemic was the 1918-1919 Flu, which killed 685,000 Americans out of a population less than a third of the current size. The unfortunately named Spanish Flu killed four times as many Americans as did World War I, which ended in 1918. To place that experience in context, the 1918 Flu killed more Americans in one year than all the cumulative U.S. deaths from HIV/AIDS.
I understand the mathematics of epidemiology, but not the biology of the disease. There is much we don’t know about Covid-19. We don’t know how many people are infected but show no symptoms, or whether some populations will enjoy some immunity. This also means we don’t know what share of infections lead to disease or death. However, there are some aspects of this disease that may magnify its economic effect.
First, this disease appears to be spread by aerosol, which is another way of saying that it is long-lived. Instead of dying out quickly after leaving a human host, it survives moving through the air and on surfaces. There’s even evidence it can move through water or sewage systems and re-emerge as an airborne virus.
This method of transmission means that the low-cost and easily implemented methods of breaking the chain of infection don’t work well. With the common flu, schools manage to interrupt the spread of flu by closing over a long weekend. The presence of Covid-19 might mean schools, business and government offices may need to be closed for weeks. That is why Chinese officials have locked down whole provinces and are spraying disinfectant in the streets and homes.
The second big concern is the high number of severe cases. Out of those who show symptoms, one in five are severe enough that they may require hospitalization. The U.S. has fewer than 800,000 hospital beds, which means we could accommodate an infected population of perhaps 4 million persons at one time, assuming no one else got sick and the disease was evenly spread around the nation. The CDC reports that a mild flu season has some 10 million infected persons. In a bad year it is closer to 50 million.
Of course, the disease won’t hit randomly, but will be intense in one place, and then move on. In reality, even a modest outbreak would swamp local hospitals and physicians. There is no Public Health Service, National Guard or Reserve forces that could field and staff even an additional 100,000 hospital beds, a fraction of what we might need. Much like what is now happening in China, much of the care will be done at home.
The short-run economic effects will be caused by the shutdown of businesses and schools in an effort to slow transmission, and by the lost productivity of workers who are sickened or die of the disease, and the time lost to care for sick family and friends.
All of this is sufficient to usher in a recession. There is no good news in a disease that will end far too many lives, but there may be less bad news for the U.S. than other places. Few Americans lived in the extremely high-density quarters common in China and Korea. Likewise, our sanitary infrastructure is more robust. These should help slow transmission.
We are far more affluent and so have more resources to deploy against the disease. While many in public health organizations will criticize our governmental response, our ace in the hole will be our large private sector. While the Trump Administration dithers in its response, businesses are jumping to fill the demand for goods and services this disease will bring.
The great lesson from natural disasters is not that prepared governments do well, but that a robust private sector is most responsive. For example, Wal-Mart had dozens of trucks with water and other supplies entering New Orleans before there was any meaningful federal response. We are just weeks, if not days, away from special sections in drug stores catering to Covid-19 risks. Our private markets will make slowing the spread and mitigating its effects far more effective here than in authoritarian China.
About the Author
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