Prepare now for a coming COVID-19 depression

Summary: A recession is certain. Unless the epidemic breaks soon, a depression seems likely. Lessons from history tell us how to fight it. But much of our experience is irrelevant and we must improvise. Here is the brief.

Economic Crash - Dreamstime-176137308
ID 176137308 © Andrey Kiselev | Dreamstime.

Prelude

Before looking at our current ills, let us remember the dismal odds accepted and surmounted by the Founding Fathers. See this praise John Hancock gave to George Washington in his letter of 9 October 1777, following the battle of Germantown. It appeared in one of the Founders’ favorite plays, “Cato: A Tragedy” by Joseph Addison. Let our actions today deserve such praise.

“Something must still be left to Fortune. It is not in Mortals to command Success. But permit me to say, Sir, you have done more on this Occasion, You have deserved it.”

The situation

We do not know what lies ahead because we do not know the current state of infection in the US, due to the lack of testing kits. Neither expert judgment nor computer models can provide answers when we lack this basic information. Furthermore, I doubt if models or judgment can adequately reflect the results of the changing patchwork of responses to the epidemic. Then there are larger unknowns. Will COVID-19 sweep through the Third World like a scythe, as WHO fears? Will the epidemic fade with the coming of summer, as influenza does? Nobody knows.

So most of our leaders have chosen to take drastic steps to prevent worst-case scenarios that might put America itself at risk. Here is a good status report: “The Best-Case Outcome for the Coronavirus, and the Worst” by Nicholas Kristof at the NYT – “Will we endure 2.2 million deaths? Or will we manage to turn things around?”

One thing is clear: we are spiraling into a depression. How could we not, with so much of America shut down by government order, people just staying home, and both people and businesses conserving their savings? Business slows down. Businesses stop paying employees. Employees spend less. Businesses slow down. Prices drop, pushing more businesses into collapse. Repeat until people and businesses cannot make their loan payments. Then we get debt deflation (described here), which begins a steeper decline phase. This process can accelerate and quickly wreck an economy.

I wrote about this in January and February. It took a while, but suddenly everybody sees the abyss that lies ahead.

Goldman Sach’s March 24 research note provides the details.

“The global economy is not just experiencing a recession, but a sudden stop without precedent in postwar history, says Goldman Sachs Chief Economist Jan Hatzius. Unlike the more gradual effects of the global financial crisis, lockdowns and social distancing present a physical constraint (especially in face-to-face services) with more immediate economic consequences. Goldman Sachs Research now forecasts a sharp contraction in developed economies in Q2, including a 24% drop in US GDP – twice as large as the previous postwar record.”

Our leaders in Washington have heard economists’ warnings, and are discussing large and larger stimulus packages. The Fed is implementing bold monetary policies and preparing larger and bolder ones. None of these measures well fit the current crisis. That would have required planning that should have begun in January or early February. So we must muddle through – falling forward to what is hopefully a quick recovery.

Here’s the problem

First, there is a common misunderstanding of fiscal and monetary stimulus. They provide first aid to stabilize the economy at a viable level. In other words, they keep the patient alive. Hence the ignorance of right-wing guru’s announcements that stimulus “won’t cure” downturns. That is not their role. They do not maintain prosperity; they reduce the pain and preserve the economy’s core for its eventual recovery.

Next, the bad news. The standard measures are designed to keep people employed. People complain when the government funds existing programs that are frivolous in an emergency. Such as arts and education programs. Pushing money into existing programs is fast and effective, and broadly distributes the stimulus. Building bridges is nice, but funding plays by an existing community theater groups is faster. The standard stimulus keeps people at work so that they can keep spending at baseball games and restaurants.

None of that works well in an epidemic. There are many possible ways to stimulate investment during COVID-19, but such subtleties are for the future. The goal instead is to keep people and institutions from going broke and provide essential services (including medical care) to all. This has always been the government’s role during an epidemic. Always some of the rich complain of this kindness to the poor.

It can help to remember that these problems have been successfully dealt with in the past by societies with little of our knowledge or resources. I recommend reading Florence Under Siege: Surviving Plague in an Early Modern City by John Henderson (professor of Italian renaissance history at U of London). He describes how Florence was one of the most successful cities of Italy at managing the plague of 1629. See this fascinating review of it in the London Review of Books. Here is an excerpt.

“The Sanità arranged the delivery of food, wine and firewood to the homes of the quarantined (30,452 of them). Each quarantined person received a daily allowance of two loaves of bread and half a boccale (around a pint) of wine. On Sundays, Mondays and Thursdays, they were given meat. On Tuesdays, they got a sausage seasoned with pepper, fennel and rosemary. On Wednesdays, Fridays and Saturdays, rice and cheese were delivered; on Friday, a salad of sweet and bitter herbs. The Sanità spent an enormous amount of money on food because they thought that the diet of the poor made them especially vulnerable to infection, but not everyone thought it was a good idea. Rondinelli recorded that some elite Florentines worried that quarantine ‘would give [the poor] the opportunity to be lazy and lose the desire to work, having for forty days been provided abundantly for all their needs’.

“The provision of medicine was also expensive. Every morning, hundreds of people in the lazaretti were prescribed theriac concoctions, liquors mixed with ground pearls or crushed scorpions, and bitter lemon cordials. The Sanità did devolve some tasks to the city’s confraternities. The brothers of San Michele Arcangelo conducted a housing survey to identify possible sources of contagion; the members of the Archconfraternity of the Misericordia transported the sick in perfumed willow biers from their homes to the lazaretti. But mostly, the city government footed the bill. Historians now interpret this extensive spending on public health as evidence of the state’s benevolence: if tracts like Righi’s brim over with intolerance towards the poor, the account books of the Sanità tell an unflashy story of good intentions.”

But surviving a plague requires more from the community than medicine and economics. Breaking quarantines puts the community at risk, and so is a serious crime.

“But the Sanità – making use of its own police force, court and prison – also punished those who broke quarantine. Its court heard 566 cases between September 1630 and July 1631, with the majority of offenders – 60% – arrested, imprisoned, and later released without a fine. A further 11% were imprisoned and fined. On the one hand, the majority of offenders were spared the harshest penalties, of corporal punishment or exile. On the other, being imprisoned in the middle of a plague epidemic was potentially lethal; and the fines levied contributed to the operational budget of the public health system.”

We have the machinery to do all this today on a larger and more effective scale. Combinations of welfare, social security, Medicare, Medicaid, and unemployment insurance can provide a safety net for Americans, drastically enlarged from that required in a purely economic downturn. It can work quickly if we loosen the usual procedures.

Supporting our businesses is a more complex problem. As we saw in the Great Recession, corporate leaders will use their political power to enrich themselves and extend the reach of their companies. Life support and gifts to the rich and powerful look alike in press releases. Managing this will require strong pressure from the public, which might not happen during this crisis. If not, we should expect the government to be looted. For more about this, see Matt Stoller’s “Stop the Coronavirus Corporate Coup.

Another component of a solution

Surviving an epidemic is more than a technocratic program. Maintaining the intangible essentials is also essential: morale, confidence in our leaders, and social cohesion. Lose any one of these and society can fragment in an eye-blick, as history goes. That’s why bipartisanship is essential, as is clear and consistent communication from our elected leaders. Both are missing today in America today. The fracturing of society likely if this epidemic continues to spread will make these things both more important and more difficult to find.

We can help by requiring better behavior from our leaders and putting pressure on those who put America at risk for their own needs.

A reminder

Epidemics, depressions, and wars are natural aspects of life. If we become weak, one of these ills eventually will destroy our society. For America to survive, each of us must stay connected and committed to our communities and nation. As the Director-General of WHO has said since the beginning, we can survive this well if we support each other. We have the resources. We need only the standard virtues of compassion and courage plus some wit and willpower.

It’s easy to follow the COVID-19 story

The World Health Organization provides daily information, from highly technical information to news for the general public. These are the best sources of information.

Also, see the wealth of information at the CDC website, especially their situation reports.

Posts about effects of COVID-19

For More Information

Ideas! For some shopping ideas, see my recommended books and films at Amazon. Also, see a powerful and disturbing story about “Birth of a Man of Steel …for the Soviet Union.

Please like us on Facebook and follow us on Twitter. Also, see these posts about epidemics…

  1. See the ugly cost of the next big flu pandemic. We can do more to prepare.
  2. Stratfor: The superbugs are coming. We have time to prepare.
  3. Posts debunking the hysteria about the 2009 swine flu in America.
  4. Posts debunking the hysteria about the 2015 ebola epidemic in America.
  5. ImportantA vaccine against the fears that make us weak.

A medieval city defeats a plague

Florence Under Siege: Surviving Plague in an Early Modern City
Available at Amazon.

Florence Under Siege:
Surviving Plague in an Early Modern City
.

By John Henderson (2019), professor of Italian renaissance history at U of London.

I strongly recommend reading this fascinating review of it in the London Review of Books, with its great excerpts. From the publisher …

“Plague remains the paradigm against which reactions to many epidemics are often judged. Here, John Henderson examines how a major city fought, suffered, and survived the impact of plague. Going beyond traditional oppositions between rich and poor, this book provides a nuanced and more compassionate interpretation of government policies in practice, by recreating the very human reactions and survival strategies of families and individuals.

“From the evocation of the overcrowded conditions in isolation hospitals to the splendor of religious processions, Henderson analyzes Florentine reactions within a wider European context to assess the effect of state policies on the city, street, and family. Writing in a vivid and approachable way, this book unearths the forgotten stories of doctors and administrators struggling to cope with the sick and dying, and of those who were left bereft and confused by the sudden loss of relatives.”

 

28 thoughts on “Prepare now for a coming COVID-19 depression”

  1. Yes, in much of the West we are still oblivious to the implications. The UK economy was just about totally shut down last night. Here is Johnson’s speech.

    Rather a contrast with Macron.

    They are paying 90% of salaries and a bunch of other measures, probably at the high end of the European ones. But in the end there is still a giant sucking sound as the economy grinds to a halt, which those kinds of measures does not change.

    The referenced NY Times piece talks about British ‘austerity’. An empty phrase, probably picked up from the Guardian. What it was, it was reasonably prudent financial management. Anyway, whatever it was, its over now.

  2. All I can say is, “Excellent work, Larry.”

    This article is some of the best work I’ve seen on this topic so far. I’m slightly hopeful that we won’t actually tip into Depression in the US but we may fall into it because of what’s happening with our trading partners.

    A postmortem in 5-7 years on what happened after this is over will be fascinating.

    1. Pluto,

      One thing the COVID-19 crisis has demonstrated – perhaps the most fearful thing – is that American can no longer learn. This was obvious from our two-decade long mad War on Terror, but this fast brutal crisis makes this clear in a terrifying way.

      We had two months to prepare, a model of successful response (China), and clear warnings from WHO. And yet COVID-19 caught us unaware and unprepared.

      Now for the bad news – See the comment threads here and elsewhere. They obsess with China’s role. It’s China’s fault. If only China had done this or that. Most of which is ignorance on stilts, but more important is its irrelevance to understanding our errors and what we must do to move forward.

      I wonder if a postmortem in 5-7 years will focus mostly on the this as marking the shift in global leadership from West to East.

      1. Ron,

        I feel sorry for America when reading these comments – which are most of them – focusing on China’s early errors rather than America’s fantastically bad response. It’s pitiful, and marks a nation in severe decline.

        Your comment here is especially daft. What is your standard of comparison for a nation’s performance in “locking down” a city on short notice? Esp since that is something without precedent in modern history, anywhere. Five million people fled before it was effective. But it was effective, and China contained the epidemic almost entirely to Hubei Province.

        By the way, compare that action by China to when Washington State had a similar number of infections. How many left Washington to spread the epidemic before the lockdown was effective. That’s a trick question: everybody that wanted to! Because we did no lockdown. We did nothing. Not even intensive testing and quarantine, since we had so few tests.

        People evacuated from the Diamond Princess were taken to Travis AF Base and allowed to wander around, eating at the Base cafeteria.

        China is reopening for business. WHO is warning that the US is becoming the next center of the pandemic. So you keep spouting nonsense about China, and leave fighting the epidemic to others.

        China was the frontline state with a new epidemic, for which many past protocols don’t work. They screwed up big at first, which is pretty much the usual everywhere. The WOT for example. Less excusable, Hurricanes Sandy and Katrina (long-predicted events of a kind that happen every single year). What matters is how quickly and effectively institutions rally and get working.

    2. Larry: “I wonder if a postmortem in 5-7 years will focus mostly on the this as marking the shift in global leadership from West to East.”

      That is a logical fear. We’ll just have to see what happens

      1. Larry, the article you sent about Japan is pretty interesting. They seem to be letting the virus run its course, trusting that natural social distancing will delay the spread, and an excellent healthcare service will treat the worst cases.

        If this works, it could be an image of how we’ll handle future peaks in the west, given that we’ll be practicing social distance and that, hopefully, our healthcare systems will have been reinforced with thousands of IC beds…

      2. JP,

        “They seem to be letting the virus run its course”

        Absolutely false. They have erected every possible defense, from the borders to intensive contact tracing and quarantine of those infected. It is the exact opposite of “letting it run its course”.

  3. scipioafricanus114

    In a crisis all sides will naturally use the opening to advance their own unrelated goals. Certainly the big corporations are making a lunge for the public trough. But the Democratic House bill of course includes sops to their various “food groups” too. Provisions for environmental agenda items like fuel efficiency standards (not necessarily a bad idea) and, most importantly, to finally implement the Wokester dream of federal enforcement of Diversity, Inclusion and Equity (DIE) on regulated businesses. I haven’t read through enough of the bill yet to see how much teeth that has beyond “reporting” to a tribunal of race and gender inspectors but it’s another dangerous step down the road to identity politics balkanization of our society. Admittedly, you’re not going to get something like this passed so quickly without handing out favors to everybody’s special interest, but the power grab is bipartisan.

  4. For some reason, the flu never gets mentioned.

    The CDC estimates that, so far this season, there have been at least 15 million illnesses, 140,000 hospitalizations and 6,600 deaths from the flu.

    1. ron,

      “For some reason, the flu never gets mentioned.”

      Totally false. Right-wing crackpots have been nattering on about this since the start, including Trump. That US deaths in an uncontained epidemic could be hundreds of thousands – perhaps millions – does not penetrate their shields of ignorance.

    1. Steve,

      I discussed this kind of thing in some detail in this post: The info superhighway makes us stupid about COVID-19. People who have no knowledge of the field (e.g., what the numbers mean) writing for people who can’t tell if the analysis is gibberish or Nobel-prize winning.

      I can’t imagine why people read this kind of material, except as info-tainment. Certainly not to learn anything. Esp since 99.9% of those people have not read the clear material written by actual experts for the public.

  5. Larry, would the fact that many people can work from home and order from home mitigate the impacts? Many people are still earning and spending money. Also, in many European countries (including Italy until a few days ago), factories are still open and people can get out of home to work if they cannot work from home, so the system slowed down but did not shut down. Retail, tourism etc have collapsed, but distribution and online sales (electronics and, curiously, gardening stuff) has had a small boom.

    I’m asking out of ignorance, but to what extent would this be enough to mitigate the much larger problem of the large disruption to the “normal” economy?

    1. Forgot to add that many factories are retooling to make ventilators, protective gear and disinfectants.

    2. JP,

      Two answers.

      (1) That’s why Goldman says GDP will be down -25%, not down 50%.

      (2) Seriously, what fraction of workers can work from home? Construction workers, factory workers, librarians in closed libraries, retail workers in closed stores, restaurant workers in closed restaurants?

  6. Debt deflation.

    Doesn’t it depend on government reactions? They have now learned how to print money and rather than allow it, will probably lurch into hyperinflation.

    1. Henrik,

      I was describing the process. Obviously at every step along the way there is the possibility of government intervention. There is guarantee that it will work.

      I suggest avoiding those confident predictions of what the government will do. We can guess, but people act unpredictably under pressure. See Trump this year.

      1. Of course, prediction is difficult and I personally am terrible at it. But the government intervention has already started, which may make it easier.

        Isn’t the immediate economic question what the effects will be of the huge deficit spending measures, such as those being announced now in the US or those announced in the UK last week?

        We can also tell something of what they will do from their announcements. In the US there is more control from Congress. In the UK they have few or no constitutional mechanisms of control (and even fewer in France). They do really seem to be intending spending pretty much without limit.

        This approach always has had consequences, and why will it be any different this time?

      2. henrik,

        Please read the post, which discusses the nature and effect of fiscal and monetary stimulus, and the difficulties of applying it to the present circumstances.

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