Should we Freeze the Economy to Stop the Virus?

Each year, the standard flu kills about 45 000 people in the USA alone. We barely talk about it. The path of the standard flu expansion and deaths in the population would look much like the coronavirus graph if we traced it. Now we are trying to “flatten the curve” of the Coronavirus expansion with various “social distancing” policies. What is the cost?

Of course the Covid-19 case has novelties relative to the standard seasonal flu and they are non-negligible:

  1. There are no vaccines.
  2. It is not fully understood.
  3. It spreads more quickly and easily.

There‘s more, like it seems to have a higher kill rate than the typical seasonal flu, but that must be taken with caution, as the “kill rate” is this:

The issue is that if you UNDER estimate the denominator (“all those infected by virus”) due to insufficient detection and testing while obviously all those who die ARE indeed reported, then you get an artificially high “kill rate”.

The same goes for the totally useless statistic displayed on worldometers for the coronavirus “closed cases”, with “% recovered” vs “% deaths”… this is a statistic based on actual declared cases, typically from hospitals and clinics. You obviously get a selection bias (or “sample bias”) in hospitals and clinics: only those in bad shape go there: the rest just say they feel a bit bad and move on… Heck, many people HAD the virus and never realized it and, more importantly for statistics, were never counted in the total cases (denominator). I am NOT saying all is well, nor that this virus is small stuff: it is serious and many people get extremely ill. But lets just think straight about this.

This means that the numbers are pretty much useless, except ONE: deaths per million population. Because virus-related deaths are almost ALL counted reliably, and we obviously know the total population, so the “virus-related deaths” per million population IS useful. Since the total population does not change much from year to year, we can just base ourselves on the total deaths per country relative to the standard seasonal flu. THAT number is useful and meaningful.

The projections for number of deaths from coronavirus is indeed much higher than the standard seasonal flu, which hovers roughly around 45 000 deaths per year in the USA. The projected deaths from coronavirus are much higher and the health systems of most countries are unable to “digest” such a surge of sick people, thus stretching everything to its limits and having negative consequences for other (non-virus-related) patients.

To completely stop the spread and freeze the number of cases going forward, the solution is “simple”: force everyone to stack up on all essentials and then force everyone to stay home for 4 weeks! Boom! Within that 4 weeks of TOTAL freeze, the people who get very ill will go to the hospital and either recover or die and others will just recover (or die at home)… and theoretically you are “done” after 4 weeks.

The issue is that this “simple” theoretical solution is not so simple for 2 main reasons: 1) forcing 330 million people to stay in their homes for 4 weeks is almost impossible to enforce without extreme measures bordering on immoral and 2) the economy would plummet so totally with a TOTAL 4-week shutdown that the shock would be unbelievably rough to handle, and I don’t just mean in pure employment and income terms, but ALSO in terms of social tension.

So what happens? We have an in-between: we kind of freeze everything by increasing “social distancing” as much as pragmatically possible AND we take an economic hit. A MAJOR hit…

Here are total demands per month for unemployment benefits in the USA for the last 25 years:

Look on the far-right. That is the impact of a very partial “lockdown” of the US economy for barely 4 weeks. It dwarfs the 2008 mega recession, which can barely be spotted on the graph due to the changed scale from the current hit. If this stretches longer than perhaps another month, it will become very nasty and dealing with the virus could become pocket change compared to the hit to the economy... and to social stability… and to the government debt… It is a fine balancing act and finding where to draw the line is very hard indeed.

Just the current economic hit is set to be quite epic. If the hit does not last long, it’s not too much of a problem, but if it stretches too much, the negative effects of the entire economy falling off a cliff will pile on exponentially, just like the virus infections… not in a linear fashion.

I know what some may be thinking: “calculating like this is not acceptable when it comes to lives of people.” The reality is that we do it ALL the time: we do not “close the economy” every Winter for flu season, and that means at least 10 000 more deaths than otherwise would be… we know there are on-the-job accidents that lead to death every year, yet we still produce and consume stuff. We know that we could bring down the total highway deaths dramatically by putting a speed limit at 30 mph, yet we choose higher limits. and on and on and on. The reality is that pretty much everything is indeed “cost-benefit” analysis.

Obviously we don’t want to intentionally cause harm in any planned way, but that is not the subject here: we are talking about a virus versus the jobs and income of tens of millions of individuals. The other issue is that if the economy REALLY crashes severely, you WILL get a “death toll”, social tensions, and a HUGE public finance price tag in the long run, which DOES also mean a “death toll”, simply not as “obvious and clear”: it is fuzzier and harder to pin-point, but mega recessions, severe social tensions, and a complete fiscal paralysis do “have a cost”… and that “cost” could be HUGE!

Where is the line between freezing the economy to prevent virus-related deaths and economic damage? Perhaps we could ask the high-risk groups to isolate and be careful about them (60+; people who have heart or lung or immune conditions, etc.), while the rest just gradually gets back to normal life? Honestly, I don’t know.

All I can say is that we can all take a short term hit without too much damage, but things could get out of hand if the economic bombs keep dropping… and I don’t mean theoretically out of hand. I mean ugly and nasty and costly. It’s a fine balancing act…

Pascal Bedard

Climb away and find that balance!

Me climbing somewhere!

Sharing thoughts on economics, finance, business, trading, and life lessons. Founder of www.PascalBedard.com

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