Over the past several days, a debate has emerged around whether the various containment measures adopted globally to slow the spread of COVID-19 are “worth it” from an economic perspective.
That might seem like a rather cold calculation – a question only a sociopath lacking any semblance of empathy would ask.
Of course, not everyone is as undiplomatic and callous as, for example, CNBC’s Rick Santelli, when it comes to posing the same basic question.
While there is never a “good” time for a pandemic, you should keep in mind that the world is coming off a year during which global growth and trade was the weakest since the crisis. Thanks in part to misguided nostalgia for the mercantilism of a bygone era, global trade volumes contracted in 2019 for the first time since the GFC.
That makes the current situation (wherein global commerce is imperiled by quarantine measures and travel restrictions associated with the virus) all the more precarious.
If economic activity across the globe grinds to a halt, that will, eventually, lead to all manner of human suffering, especially for owners of small businesses, many of which will simply fold without operating income.
Governments can act to ensure access to credit for small- and medium-sized enterprises, but if quarantine measures are in place and entire regions are locked down, it won’t matter. Fixed costs will remain. Rents need to be paid. Employees can be let go, but that just begs the question – if you have no job, you have no income to spend, and that means less revenue for the businesses where you would otherwise have spent it. Meanwhile, debt has to be serviced. And on, and on.
The waterfall effects of this were laid out painstakingly by Zoltan Pozsar in a characteristically trenchant note out last week. Of course, Pozsar looks at everything through the lens of dollar funding markets, but his latest overlapped with the IP cycle work of his colleague James Sweeney. Their exposition of that nexus as it relates to virus containment efforts made for an interesting study.
Airlines are warning on the outlook for the travel industry, giant multinationals have cautioned that both their supply chains and end consumer markets are at risk and Wall Street is now beginning to come to terms with the prospect of a global recession and accompanying steep declines in earnings and stock prices.
Then again, governments clearly cannot just let a deadly virus that’s still not well understood spread unchecked solely because closing down Starbucks is inconvenient. That’s a deliberate attempt at humor during an otherwise dark time, but it gets the point across. Saving lives has to come first, especially as it relates to protecting the most vulnerable members of society.
If, at some later juncture, health officials are able to establish proper protocols to protect the elderly and those most at risk, while simultaneously pinning down the mortality rate and determining that, for most healthy individuals, the risk of dying from the disease is minuscule, well, then it might be reasonable to start overweighting the economic considerations again. But we’re nowhere near that point yet.
With all of this mind, I wanted to present the following excerpts from a new article published in the Lancet medical journal. The gist of it is that you can’t minimize deaths and economic damage simultaneously. You have to choose what’s more important.
Excerpted from “How will country-based mitigation measures influence the course of the COVID-19 epidemic?”, The Lancet, March 6, 2020
Governments will not be able to minimize both deaths from coronavirus disease 2019 (COVID-19) and the economic impact of viral spread. Keeping mortality as low as possible will be the highest priority for individuals; hence governments must put in place measures to ameliorate the inevitable economic downturn. In our view, COVID-19 has developed into a pandemic, with small chains of transmission in many countries and large chains resulting in extensive spread in a few countries, such as Italy, Iran, South Korea, and Japan.1 Most countries are likely to have spread of COVID-19, at least in the early stages, before any mitigation measures have an impact.
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No vaccine or effective antiviral drug is likely to be available soon. Vaccine development is underway, but the key issues are not if a vaccine can be developed but where phase 3 trials will be done and who will manufacture vaccine at scale. The number of cases of COVID-19 are falling quickly in China,4 but a site for phase 3 vaccine trials needs to be in a location where there is ongoing transmission of the disease. Manufacturing at scale requires one or more of the big vaccine manufacturers to take up the challenge and work closely with the biotechnology companies who are developing vaccine candidates. This process will take time and we are probably a least 1 year to 18 months away from substantial vaccine production.
So what is left at present for mitigation is voluntary plus mandated quarantine, stopping mass gatherings, closure of educational institutes or places of work where infection has been identified, and isolation of households, towns, or cities. Some of the lessons from analyses of influenza A apply for COVID-19, but there are also differences. Social distancing measures reduce the value of the effective reproduction number R. With an early epidemic value of R0 of 2ยท5, social distancing would have to reduce transmission by about 60% or less, if the intrinsic transmission potential declines in the warm summer months in the northern hemisphere. This reduction is a big ask, but it did happen in China.
School closure, a major pillar of the response to pandemic influenza A,14 is unlikely to be effective given the apparent low rate of infection among children, although data are scarce. Avoiding large gatherings of people will reduce the number of super-spreading events; however, if prolonged contact is required for transmission, this measure might only reduce a small proportion of transmissions. Therefore, broader-scale social distancing is likely to be needed, as was put in place in China. This measure prevents transmission from symptomatic and non-symptomatic cases, hence flattening the epidemic and pushing the peak further into the future. Broader-scale social distancing provides time for the health services to treat cases and increase capacity, and, in the longer term, for vaccines and treatments to be developed. Containment could be targeted to particular areas, schools, or mass gatherings. This approach underway in northern Italy will provide valuable data on the effectiveness of such measures. The greater the reduction in transmission, the longer and flatter the epidemic curve (figure), with the risk of resurgence when interventions are lifted perhaps to mitigate economic impact.
Model-based predictions can help policy makers make the right decisions in a timely way, even with the uncertainties about COVID-19. Indicating what level of transmission reduction is required for social distancing interventions to mitigate the epidemic is a key activity (figure). However, it is easy to suggest a 60% reduction in transmission will do it or quarantining within 1 day from symptom onset will control transmission, but it is unclear what communication strategies or social distancing actions individuals and governments must put in place to achieve these desired outcomes. A degree of pragmatism will be needed for the implementation of social distancing and quarantine measures. Ongoing data collection and epidemiological analysis are therefore essential parts of assessing the impacts of mitigation strategies, alongside clinical research on how to best manage seriously ill patients with COVID-19.
There are difficult decisions ahead for governments. How individuals respond to advice on how best to prevent transmission will be as important as government actions, if not more important. Government communication strategies to keep the public informed of how best to avoid infection are vital, as is extra support to manage the economic downturn.
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