Predicting post-coronavirus outcomes
Those of you who know my writing from days gone day, when Credit Writedowns was a blog, know that I gave up advocating for policy responses a long time ago. Not to be a defeatist, but the lesson I learned from the Great Financial Crisis was that blog advocacy was futile. I was on the front lines of that affair and nothing I wrote or my colleagues in the blogosphere wrote had any real influence on policy choices, in my view. I came out of the experience believing it was more important to anticipate outcomes irrespective of your preferences.
Now mind you, in predicting outcomes, it’s always clear which outcomes are inferior and which ones are superior because you’re always thinking in terms of probabilities of a range of outcomes and rank ordering them. But the goal is not to sway policy but to anticipate it, as policy outcomes have been more important than ever since the Great Financial Crisis.
So, with that in mind, let me tell you what’s on my mind regarding the coronavirus today, as briefly as I can. And here’s how I’m going to do it. Below I am going to list several reference pieces by number. And I will refer back to these numbers as explanatory or catalytic to my thinking as I go through my logic. Here are the pieces:
- Superspreader Events Offer a Clue on Curbing Coronavirus – WSJ
- The Day Coronavirus Nearly Broke the Financial Markets – WSJ
- Lockdown Delays Cost at Least 36,000 Lives, Data Show – NYTimes
- Second Waves Are Plaguing Asia’s Virus Recovery – Bloomberg
- China’s New Outbreak Shows Signs the Virus Could Be Changing – Bloomberg
- Big Banks Plan Staffing Limits, Shift to Suburbs After Lockdown – Bloomberg
- ‘Superverspreiders veroorzaken 80 procent van de besmettingen’ – De Tijd
- Five Things You Need to Know to Start Your Day – Bloomberg
Please use Google Translate for that seventh link in Dutch. It’s an important one.
Comment on non-advocacy
I am going to start the thread here with the last link, #8, because it’s important in terms of how I am thinking this through on two levels. Let me quote from the part of the article by Bloomberg’s Joe Weisenthal:
In Washington D.C., talks for a new round of stimulus are picking up. One point of focus is what happens with the expanded Unemployment Insurance provisions this time around under the CARES act, where some laid-off workers are able to temporarily get more take-home pay than they did while on the job. Critics say that this creates a disincentive to work, and that the enhanced UI will impede the economic recovery, as workers choose to stay home instead of taking job opportunities available to them.
You can understand the intuition. Rationally, some people would choose to make more money and not risk getting sick, than going to work to make less money and risk getting sick. But while it might make sense on some micro-economic level (with some individuals and some companies), this logic falls apart on the macro level when thinking about the recovery overall.
That’s because the most important thing for a robust jobs recovery is for there to be lots of jobs available. And the most important thing in ensuring that there are lots of jobs available is robust household demand for goods and services from businesses. And the most important thing in ensuring that there’s robust demand for goods and services is that household incomes remain strong. And one way the government is keeping up household incomes is via the expansion of the Unemployment Insurance program, which in normal times doesn’t fully replace lost income. As Renaissance Macro Research recently put it, “allowing this program to lapse w/o some replacement would hurt demand and in turn, reduce the need to hire more in the first place.”
Bottom line: To get people back to work in droves, we need job openings. To create job openings, we need businesses to not be worried about revenue. And to ensure they’re not worried about revenue, household income and demand needs to hold up. If the next round of fiscal stimulus does a poor job of replacing lost household income, you can forget about a return to a strong labor market.
You should recognize some of that thinking from yesterday’s newsletter, in the section I titled ‘policy fatigue’. The point here is two-fold:
- It doesn’t matter what you think. What matters is what policy makers think and, therefore, what’s likely to happen. What Joe is telling you is that many policy makers think that some people are freeloading off of government largesse and they plan to put a stop to this freeloading.
- And what I told you yesterday and Joe is voicing in the quote is that this policy goal – to stop freeloading – will hurt the economy.
How likely is it that the anti-freeloading policy makers win the day? Very likely. If I had to pick likely outcomes, I would pick the one where the US cuts back on enhanced unemployment insurance as the one most likely to occur in the near future. And what that means is that we should expect less favorable economic outcomes, slower growth and greater vulnerability to recession and crisis.
So, when I said yesterday that policy responses were key to post-coronavirus outcomes, this is the sort of thing I was thinking about. And remember, as I write this waiting for the next 2 million people to file unemployment insurance, the US economic model is the one where the greatest number of people have been left penniless and without health insurance in the developed world by this epidemic. I believe poor policy choices will have grave consequences in the US for that fact alone.
Economic friction coming
At the same time, there is likely to be economic friction in a post-coronavirus world that slows down recovery but also creates winners and losers.
Yesterday, I alluded to this, ending the post writing
Overhanging all of this is the virus. We simply don’t know how long it will be with us, what changes to the economy it will force and whether second and third infection waves will be deadly or muted.
For example, link #4 shows the difficulty even the best responders to coronavirus are having in preventing second wave outbreaks. I believe this tells you that we are going to be living with Covid-19 for some time to come, until an effective vaccine is created or we develop herd immunity.
But, at the same time, link #5 tells you that developing a vaccine could be tricky. The virus is mutating enough that we may not be able to develop a vaccine that is effective against all mutated strains of Covid-19. What would that mean? I believe it means that Covid-19 will be with us for longer than many believe and than our present social distancing measures are capable of handling without a large increase in viral deaths.
The corollary, then, is that we will be forced to develop more robust social distancing, quarantine and testing protocols on the fly and over a longer period of time. That introduces a level of economic friction that should slow growth over the medium term, but also create winners and losers. The winners will be sectors and companies that are predisposed to the new socially-distant lifestyles. The losers will be ones that are leveraged to the old, socially-near lifestyle we are leaving.
Link #6 shows how this is playing out even before we know whether Covid-19 strains will be in deadly circulation for years. Wall Street firms see their downtown Manhattan locations as superspreader death traps. To get to work, one needs to rely on manifold confined spaces using public transport, lifts up to a high rise workspace, and working cheek to jowl with others from disparate parts of a large metropolitan area. Any one of those experiences risks contagion and spread. So Wall Street firms are looking to move to suburban locations, at least temporarily. If Covid-19 strains of coronavirus are with us for the long term and remain deadly, these shifts could be permanent.
Think of the massive Hudson Yards complex in that context. Not only is Hudson Yards challenged by the White Elephant-style retail spaces it has. But, now the high-rise office space will be under assault as well. And all of this is occurring before they have built out full occupancy. It’s like opening the Chrysler Building or the Empire State Building in Manhattan during the Great Depression, but with people deathly afraid of elevators, confined spaces and contact with strangers. For many a commercial developer, this spells trouble.
Or think about the urban lifestyle living complexes marketed to seniors popping up everywhere in the United States. I have seen these senior-focused pods in Washington, DC, large metro suburbs and even in small towns like Lititz, Pennsylvania. If you are in a high risk group, as seniors are, would you downsize from your big suburban house and move to a multi-occupancy building? You might think twice now.
So let’s think about how this could work in practice if Covid-19 is with us for the longer-term. I don’t think full-scale lockdowns are politically viable anymore given the massive private sector economic hit and government deficits they entail. I would go so far as to say they won’t happen except in extremis.
That means the potential for epidemic levels of viral spread and death are possible in second, third and fourth waves until we build a sort of herd immunity. To me, in a no-lockdown world, that means public healthcare protocols will adjust to target vulnerabilities.
For example, the #7 link above in Dutch talks of superspreading where 80% of the viral spread is done by 10% of people. Why? That’s because specific events, locations and temperatures increase the spread. The hypothesis is that spread increases exponentially due to factors like length of time exposure to a contaminated individual, whether the exposure happens in a confined space or not, what the temperature of the location of spread is and so on.
The meat factories are perfect places for spreading Covid-19 because the temperature is so low and people are right up on top of each other for hours at a time, day after day in a confined space. You couldn’t ask for a better environment to spread this disease.
So, a post-coronavirus no-lockdown world will contain healthcare protocols that reduce or ban events and limit locations where super-spreading is possible. Link #1 on superspreader events makes that abundantly clear. This will greatly negatively impact air travel, live events and many other business lines – more than is currently discounted by share prices, by the way.
For example, can any major international airline survive this kind of environment without major government support or ownership? I don’t think so. And if the government becomes the key factor, what happens to share prices? I think they go to zero.
For companies not in public markets, this is a problem. In the UK, for example, the Premier League gets a lot of TV revenue that will help major clubs weather the storm. But what happens to Championship level clubs and lower division teams in an environment where every single event they put on is like a potential death trap for fans? I think clubs in lower tiers of international football leagues are in a world of trouble going forward. The result of these shifts is not just economic friction but bankruptcy and job loss.
It’s hard to believe we are going to get a decent recovery here given the downside risks on the policy and viral fronts. I’m not saying it can’t happen. But, the outline I just went through points to some of the challenges.
For me, the policy challenge is the most worrisome because it’s always a case of flexibility. I have a great deal of faith in human ingenuity, whether that’s in finding ways to reduce the deadliness of disease or find a vaccine. But I have also come to see human inflexibility, groupthink, and conspiratorial and political partisanship as kryptonite to that ingenuity. And there is a lot of kryptonite being used out there right now.
You may have noticed I didn’t reference links #2 or #3 in my piece. That’s because they are backward looking. Link #2 is for me a testament to the Fed’s timeliness in preventing an economy-defining financial crisis in mid- to late-March. Had it not acted, we would be in a Great Depression now. In terms of relevance, though, it’s mostly a signpost of how policy errors at critical times can make a world of difference. As we look forward, it bears reading link #2 to understand how close we came to a Great Depression and why policy errors matter.
Link #3 is of the same variety. It shows you how just a couple of weeks delay in responding vigilantly (and correctly) to the coronavirus pandemic cost tens of thousands of lives. I don’t believe it makes sense to say many of these people were old or unhealthy and would have died sooner rather than later due to Covid-19 anyway. That’s not how I think. Instead I am thinking that as we move forward, we need to keep that lesson in mind because policy errors matter. If we are left blindsided by a second post-lockdown wave or a third fall/winter coronavirus wave in the Northern Hemisphere, it’s because we didn’t prepare. The risks were there for all to see. And the deaths will have been preventable.
Policy errors matter and they cost lives.