It didn’t have to be this way. SARS appeared in 2003. Since then there has been a lot of research, and some previous “warning shots” (MERS, 2012) that clearly said “get ready.” But it’s worse than that: after 9/11, the potential for biological warfare based terrorism was a extensively studied and considered. Money was spent, plans were suggested, little action was taken. So at least three administrations have dropped the ball on pandemic planning (and those plans that did exist were largely ignored). Even worse was what has happened this year. We had over two months of solid intel (and credible reports of more than three) that something bad was on the way. The present administration did virtually nothing. The Congress, who gets much of the same intel, did nothing. Yes, Presidential leadership would have been optimal, and President Trump’s administration Failed, but I didn’t see reports of stacks of legislation being sent to his desk, and much of a response would have had to come from the legislative end of Pennsylvania Ave. So in short, the Legislative and Executive branches of the US Government, both political parties, failed the American people. Very little can be argued about that except by die hard partisans.
Next, after the gross under-reaction, there was an arguable overreaction in some ways. Measured, targeted approaches of shutting down “high contact” activities while preserving other less risky commercial activities were not taken: a one size fits all “shut it all down” approach was the norm – cause in part by the lack of testing and/or plans. States imposed their will on municipalities, when stronger or weaker measures may have been appropriate depending on the locale. But politics aside, those kinds of targeted actions require technical things that the US just doesn’t have: a coherent and reliable testing, tracking, and isolation system.
Which once again brings us to the state of testing – especially rapid testing. It is clear by most neutral assessments that the current fast tests are not up to the task. The COVID-19 Testing Project has been evaluating various fast antibody tests that are the foundation of any assessment of where we stand with respect to the state of the pandemic. Most of these tests are seriously deficient with respect to knowing of someone has been recently infected and symptomatic. While still preliminary and undergoing peer review, within the first week of symptoms, these tests appear to have a 50% false negative rate. It takes over 20 days for these tests to consistently read positive. That is an extraordinarily dangerous situation with respect to using these tests to make decisions with respect to isolation and control – someone can be infectious for two weeks and go undetected. This is especially true given the increasing evidence for the majority of people having mild or virtually nonexistent symptoms. So while ramping up tests is great, the tests we have are not the tests we need …
So what does all that have to do with economics? Everything. The absolutely worst thing that could happen is to start to reduce restrictions and have a second wave of infections and deaths. For states to allow high contact (risk) activities at the front end of reopening, like hair salons/barbers, massage therapists, tattoo studios, etc., or even retail and potentially problematic activities like dine-in restaurants before having a handle on the recovery process is bizarre (insane). A phased in reopening that starts with child care and schools, as the Nordic countries are doing, would have been the place to start. How can you expect people to go back to work if their kids don’t have a safe place to go? This is especially critical for the most economically vulnerable, who are in an economic catch-22: have to work, what to do with the kids? Also, schools/child care are logical places for centralized monitoring and testing. This is but one example of how disjointed and irrational the US “reopening” process has become. If it hasn’t become clear by now, while there is something to be said for local control and the states as “laboratories of democracy,” in the modern world they are more often “Petri dishes of contagion” as the problems and failures of one state (be they economic, social, or biological) rapidly spread to the others because of the interconnected economies and transportation networks. If one state reopens too early, or with a process that has gaps that allows a resurgence, it will quickly spread to other states who took more measured steps.
The true impact of this episode on the economy is still to be written. As it stands now, a 20 to 30% hit to GDP is probably inevitable. As Art Berman has blogged (probably the best oil and gas analyst in the world), it’s “Game Over for Oil.” The industry is in collapse, and that has profound implications for the wider economy. As I have repeatedly expressed here, the financial system is a house of cards that is on the verge of collapse. Some on the left have expressed outrage over a bail-out of Carnival Cruse Lines. The problem is that if the bonds floated to build those cruise ships default, it will cause a ripple throughout the economy due to leveraging. By some estimates, our financial system is “over-leveraged” as much as 10:1 or more (every dollar “on loan” is related to ten other “borrowed” dollars). The current aid plans are laughably inadequate to the trillions of dollars of cascading failures once these loans start to default. There are ideas out there ranging from government investments (effectively the government buying shares in private companies) to debt relief – a “jubilee year” in effect. Some mix is probably the way to go, but whatever it needs to happen now before the collapse starts and panic ensues.
Which brings us back to epidemiology. The bottom line is that we still don’t know several key aspects of how this virus behaves and interacts with large populations, and how seasonality will factor in. As one example, why has the mortality rate been quite high in Louisiana, but is (apparently – there is reason to be a bit suspicious of these number) lower in Georgia? Population density explains NY/NJ, but Georgia, Michigan, Washington, all have similar population densities but very different mortality rates. Here is the latest mortality rate per 10,000 plot for several states:
It does look like some of the metrics are improving in the face of the mitigation measures, but others are weirdly static and imply the pandemic is “on hold” rather than waning. Why: Real virus behavior? Data and reporting issues? Testing? All of the above? Probably. We need another week or two of data – and we need better data in the form of reliable testing. The incremental negative economic impact of keeping measures in place until May 10th or so to help sort these things out would have been insignificant compared to the collapse of confidence a resurgence of the disease in June and July will cause, if the gamble of early opening is wrong. Especially given that is potentially going to hit in the early stages of a financial system crisis. And, we have to consider that this fall there will be a resurgence of SARS-COV-2 in conjunction with the normal respiratory/influenza season. Lots of things will have to go right to avoid further disruption.
Either way, the financial crisis has yet to hit. It would be nice if the political leadership would be proactive for once and take immediate confidence building measures to avoid it. But I’m not holding my breath.