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Coronavirus - an introduction to the fickle nature of the economy

The spikey impact of coronavirus on the economy tells a fascinating story of emotion, fear and human nature


What is the economic cost of coronavirus? The UN's latest estimate on the economic cost of coronavirus (aka COVID-19) has it pegged at about $1 trillion in 2020 worldwide. That's $1,000,000,000,000. Astronomical. Out of proportion? Don't know for sure, but my gut says no. Stock markets have been bouncing around like ping pong balls posting some of the largest one day losses since Black Friday in 1987.


What sort of response is proportionate? How do we balance the economic damage with the damage of the disease? What is happening with the economy right now and why can't I find any toilet paper? You won't get a full answer to those questions in this post. What you will get however, is an invitation to consider the economic cost of fear, and human response to crises.



To kick off with - what is Coronavirus? Basically its a respiratory infection. It can be transferred between animals and people, and from person to person. Symptoms include fever, cough, breathing trouble and a variety of other things, including death. You fight coronavirus a similar way to how you fight other infections. By staying away from people exhibiting symptoms, and washing your hands. By and large, fighting it isn't that different to fighting the flu. The difference is that coronavirus is more deadly, particularly for the elderly. If coronavirus ever got into a retirement village it would be devastating.


Coronavirus has spread quickly with over 250,000 infected people worldwide. Technically we don't even know the full number of cases because of the number of undiagnosed. The disease can be hard to contain with infected people turning up to work thinking they are "a bit coldified but otherwise OK". The incubation period is typically about five days with the average infected person potentially infecting 2.1 to 4.8 other people. Scary stuff. This is why social distancing is so important.


It is very difficult to halt the spread of a pandemic. What is being done to slow coronavirus? Global authorities have responded with quarantine control, travel restrictions, social distancing measures, and recommendations to wash your hands regularly and stay home if you are sick. Countermeasures are critical to save lives. Flattening the disease uptake curve is critical though it comes at a cost. If health authorities didn't go hard up front in addressing coronavirus, the disease would spread faster, become harder to contain, and kill more people. It is important to differentiate between the sensible response of health authorities, and the broader damage of paranoia and fear.


Responding by washing your hands and staying home if need be is helpful. Buying hundreds of rolls of toilet paper is not. Nor is going to the doctor if you don't need to. If doctors are clogged with minor cases they may be unable to treat people who are genuinely sick, and this can make coronavirus even worse. The cost of the disease spirals driven by fear. Controlling fear is not easy when people expect transparency and are constantly connected. The news comes thick and fast, and with it comes the harrowing statistics and stories. Authorities can't force people to switch off their devices and hang out in a cloud of ignorance.


Fighting the disease puts pressure on public health budgets potentially displacing investment in other interventions. Cost-effectiveness is an important consideration even when we are scared. I recognise that it is imperative to spend on fighting coronavirus, but follow me on this thought experiment. Imagine you had $100,000 and could spend it all on an intervention for coronavirus that costs $10 and saves one life. Alternately, you could spend it all on a tablet that saves one life and costs $5 each. Simple math tells you the tablet is the better option saving an extra 10,000 lives. Despite the fear we need to be mindful of the opportunity cost, or risk making poor decisions.


What has been the economic response to coronavirus? At times like this it is natural for the economy to take a hit. People stay home from work, dodge social gatherings, stop flying and avoid going to restaurants, movie theaters and the like. That impact on spending takes its toll on businesses. Small businesses in particular are badly affected and may lack the cash reserves to get through the hard times. You will probably observe that while everyone suffers much of the pain is localised amongst specific industries like tourism. Supermarkets by contrast are probably doing ok with people panic buying. It is critical for governments to recognise which businesses are suffering most in an economy and offer appropriate support. The last thing we want is to have no where to party when all this is done and dusted.


For those who follow and invest in stock markets the response has been as horrifying as it is fascinating. If you ever want to see human nature at is most temperamental, watch stock markets in a crisis. What do yoyos and stocks have in common? The bouncing value of the Dow Jones is just one example of what has been happening globally with a 7.8% fall on March 9th, 10% fall on March 12th and 12.9% fall on March 16th. This was punctuated by a 9.4% rise on March 13th. Huge value has been wiped off stock markets globally, though of course someone has actually captured the value of many years of good stock returns.


Coronavirus is scary. Health authorities have been remarkable in containing the spread of coronavirus and learning how to fight it. Countermeasures are critical. In the face of a monster like this the response should be driven by smart, rational heads, not fear. I don't know exactly what the right response is, only time will tell. What I do know is that we shouldn't be complacent with many lives on the line. Early data shows that those countries who have responded rapidly with force have fared much better than those who have sought to continue business as usual.


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A New Zealand based politics and economics blog

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