Economics Lessons from the Coronavirus

Despite the political and diplomatic aspects of the coronavirus which has led to an international uproar between China and the World Health Organization on the one side and the USA supported by several global economies on the other side. It is true that the coronavirus would lead to a sharp economic shock that could reduce economic activities massively in some countries, as businesses are faced with rising cost and falling revenue, while employees suffer for the loss of jobs. In the meantime, institutions are projecting a rapid fall in the GDP growth of many countries. When compared to other worldly economic crises, such as the 1929 world recession and the 2008 financial meltdown where these crises were the results of either economic overheating or prolonged mistakes in investments, the coronavirus on the other had is a health hazard that spilled over to economic activities, causing many economies to lock down. The difference therefore is that given that the world economy has functioned with normality in 2019 and 2020, the original level of economic activities has simply been temporarily suppressed, not reduced.
However, different analysts would provide and project different economic outcomes from the coronavirus. Many analyses would look at the negative side of the coronavirus and presents a case of severe economic recession. As people are advised to practice social distancing and the “stay home” policy would mean a sharp decline in consumption and other than the retails for necessities, the demand for non-necessity goods and services is restricted. Similarly, production other than medical-related products, investments suffer as workers are advised to stop working and production lines are closed. Next, the fall in business revenue and production would mean that the cost side of the business, typically the rental and wage payments, would be problematic. The difficulty in rental payments would mean investors are faced with mortgage payments, while the fall in wage would mean breadwinners could have problem in putting food on their table and keeping up with their household activities. This is a typical case of an income multiplier in reverse, where income, consumption, employment and investment are all falling simultaneously as the risk is not only the severity of the health hazard, but how long the pandemic would impact on the economy before it can be controlled. While health ministers and officials are working hard to “flatten the curve”, scientist are working efficiently to discover the vaccine and dose.
The scale of the economic shock within a short time period would require government assistance in several dimensions, though there could be a delay in the execution of various rescue policies. While additional spending is devoted to hospitals and related medical supplies and services, government assistance would concentrate on subsidy provision to the newly unemployed, small-businesses and retail shop owners and restaurants, assistance to investors would include mortgage and interest repayments, though many central banks have lowered their interest rates to ease the financial pain of investors. However, there is no doubt that the government’s fiscal performance will be weakened with deficits and debts, the question is how much the government needs to spend and allow the debt to accumulate. For example, would the fiscal spending be one-time and cyclical which can be reduced should the economy recovers, or the fiscal deficit would become structural which would form a permanent burden on the capability of the fiscal policy. The political orientation of the government counts a lot here. A pro-welfare government would prefer to use the opportunity to enlarge government spending, or even prolong the rescue as the recession would allow them to capitalize on the pandemic by creating a larger government and the public sector. On the contrary, a business-minded political leader would minimize the provision of assistance but aims to permit the economy to return to normalcy at the earliest possible time to allow workers, businesses, and investors to conduct their private activities.
The post-pandemic economic debate is whether it will be a V-shape, U-Shape, L-shape, or W-shape performance. Conceptually, since the crisis was not originated from economic mismanagement, the recovery should be quick and rapid, though the time period involved in reopening the economy varies across countries or even within countries and how long the pandemic would last. To any region or a country, the market should swing back to normalcy quickly, but at the global level, the various delays would prolong the recovery. But once the pandemic is over, recovery should be quick. However, there is a big chance that inflation will appear as businesses could raise their price in order to replenish some of their loss during the pandemic lockdown period.
Indeed, there are quite a few economic lessons one can learn from the pandemic. One is the low marginal and average household saving rate, and the sudden economic shock made many families helpless and could turn to no one except the government. Secondly, this is the classic case in which accumulated fiscal surplus would have helped. It is unfortunate that politicians see budget surplus conveys a mean government and spending with deficit should be normal. On the contrary, should economies have accumulated fiscal surplus in the past, the economic rescue would have come from the accumulated surplus, which could at worst produce a smaller and manageable deficit rather than imposing a greater debt burden on an already deficit situation. The economic impact on and the extend of recovery from the pandemic differs among businesses and manufactures. Many personal services, such as hair dressing, would have stopped in the lockdown, but would recover speedily once the lockdown is over.
There is also a cultural aspect in dealing with the pandemic. While some Asian countries are keen to wear face mask as a simple mean of protection, western countries tend to look at the wearing of a face mask as unnecessary as the voluntary or honest social system would mean that sick people should stay home. While economic recovery shall be forthcoming, the bigger question is whether the governments would capitalize on the pandemic to restructuring their investment activities. For example, should there by more R&D, or infrastructure development to ensure balanced growth and development across the country, or a stronger focus on human capital development in addition to the need to strengthen medical personnel. Industrial restructuring is needed most as the pandemic reflected the importance and relevance of light manufacturing as a source of employment, support of manufacturing output and reliance on import at a crucial time.
Closely related to the impact on the economy should be the timing when the coronavirus was located, and efficient policies were instituted. It is true that when it was first discovered in Wuhan, China, there was political and administrative delay in raising the issue and alerting the global economy. Many western governments did not give serious consideration to the coronavirus until it had spread like a wildfire that life at the daily level is affected. Then, there was the panic as government leaders and health ministers delayed their effective action, while there was also the temporary mismatch in the supply and demand of medical equipment. Obviously, should these governments remain more alert and vigilant, the rescue could be more effective and less impactful on the economy. There is also the choice of policies to be imposed across the country or differed between regions. A blanket-type of economic lockdown may not be necessary should the pandemic had affected some regions. There is also the learning curve as the situation evolves, and whether the pandemic hurts some section of the population. In other words, policies can be targeted on a regional as well as on a population basis. As such, a nation-wide lockdown could be exaggerated, or at least the lockdown can gradually be removed should improvements appear in different regions.
In the case of Canada, the three coronavirus-affected provinces are mainly Quebec, Ontario, and British Columbia. One thing common among these three Canadian provinces is that these provinces are the destinations for foreign travels. Hence, both visitors and returnees to Canada should effectively be quarantined at the very beginning, as that would restrict the spread of the coronavirus to other areas. Although there may not be enough medical attention in the airport, but airport hotels are convenient places to be transformed into temporary medical destinations. By early April, it has become clear that elderly care homes are the problematic places where there are inadequate medical attention and supplies. Once some staffs working in these places contacted the virus, the situation would deteriorate if more workers stopped working in these care homes. The Canadian policy was to confine these workers to work in one elderly care home. A more effective and direct policy would be to stop these care workers entirely but allow these care homes to be taken over by their nearest hospital temporary so that professional medical attention would be given to the elderly in these long-term care homes.
In other words, a blanket policy across the country without any differentiation on the health impact and performance may be a simple strategy but it could be an exaggeration as it suppresses businesses and jobs unnecessarily. In a spacious country like Canada, and other than the populated downtown areas, social distancing can be eased and instead the advice would be to wear a face mask as an alternative. In such a crisis with a high degree of fluidity, both reactive and pro-active policies must be effective, dynamic, and flexible. While sympathy is a human attitude in a crisis, and one has to show gratitude to all those medical personnel and front-line workers who work to improve the situation whenever and wherever possible, a scientific approach is probably the answer to deal with the pandemic.

April 18, 2020.

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