As the coronavirus spreads, governments have shifted from mitigation – slowing its progress to ease pressure on healthcare systems – to outright suppression, including home isolation. But that is likely to come with significant economic costs.
To assess the economic costs of suppression we can look at China's recent experience, lessons from World War II, past pandemics, and previous economic shocks.
+ China's falling production is sufficient to turn a 6.1 per cent year-on-year GDP increase into a 6 per cent fall over just three months. Europe and the US are following. This may undermine hopes of a V-shaped Chinese recovery this year: export prospects look dire if the West enters an economic and financial tailspin.
+ World War II re-armament policies showed how economies can rise to a challenge. US GDP rose 52 per cent between 1939 and 1944 with UK and Russia close behind.
The coronavirus outbreak has exposed a global insufficiency of healthcare resources, from hospital beds to staff. Once-in-a-century pandemics cannot be anticipated. That's why both mitigation and suppression are important: they buy time to divert resources. Car makers are switching to ventilator production.
+ Epidemics such as SARS, MERS or Ebola had lower infection rates or higher mortality rates than COVID-19. The 1918/20 'Spanish Flu', which killed 50m-plus, is a better comparison. Between 1917 and 1921, UK GDP per head fell 21.0 per cent and Italy's GDP declined by 7.5 per cent – partly because of military decommissioning – but there was scant epidemiological knowledge then, no antiviral drugs and the absence of complex networks, especially flight. There was thus less to be shut down and fewer supply chains to be severed.
Poverty and the Great War had accustomed people to premature mortality. Today we prefer mitigation or suppression policies to limit mortality but the economic and financial shock is likely to be far greater.
+ The Depression of the 1930s was a US catastrophe that became a global trauma. Data from China now suggests the possibility of a similar economic contraction, but over a much shorter time.
Suppression and social distancing mean standard economic stimulus cannot operate: 'multiplier' effects require strong economic networks. The good news is that policies are changing: monetary measures include near-zero interest rates while fiscal efforts support business and workers.
Policymakers are building a bridge to when the virus goes away or is conquered. But the bridge must be paid for by future taxpayers, which implies vastly higher public-sector indebtedness now.
If financial markets cannot supply the funds, central banks must become 'buyers of last resort', possibly purchasing corporate bonds and even equities besides government debt. If that requires money printing, so be it. And if it sees a flight to dollar liquidity, Washington should stand ready to limit the risk of chaos in currency markets.
The consequences of failure are grim. If swathes of industry are wiped out there will be no V-shaped recovery. Workers would be without work and pension fund deficits would push retirement ages higher.
That is why governments have no choice other than to 'do whatever it takes'. All of this is risky: soaring government debt may lead to austerity, default or inflation. But the risks are worth taking because the alternative is economic failure on the grandest of scales.
First published 23 March 2020.
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