Optimism: The Best Economic Medicine

Infectious Fear: Across Time & Place

“. . . . and you always fear what you don’t understand . . . ”  thunders Carmine Falcone (played by Tom Wilkinson) to an embattled Bruce Wayne (Christian Bale) in Batman Begins.

Fear spreads faster than disease. Especially when doctors don’t have cures.

The first time cholera hit New York it was 1832. When the news broke, people panicked. They withdrew money from banks. The wealthy left hastily. Boarding houses and country hotels did make a fortune though. Plus, construction workers and nurses found fresh jobs as city cleaners [1].

Cholera attacked New York for the last time in the 19^th century in 1873. By then, scientific knowhow on the disease had grown. There were no knee jerk reactions of the 1832 variety [1].

Knowledge truly is power.

At present, there is no cure for the coronavirus. Isn’t that why the COVID-19 pandemic has unleashed sheer panic? The unpredictability of an epidemic is precisely what inspires the frenzy [2]. COVID-19 has already killed thousands across the world. United Nations places the estimated loss to global economy at $1 trillion [3].

A disaster such as this wrecks havoc on lives, livelihoods, incomes, pensions, savings, investments and what not. Worse, it makes people pessimistic. For, there is nothing more atrocious than losing hope. But tides do turn as human resilience beats terror. 

Health, Wealth, & the Development Paradox

Healthy people get better education, possess greater productivity thereby making larger contributions to the economy, and save and invest greater amounts. An economy with healthy minds and bodies invites foreign investment [2]. These guys also spend and travel more, actions which stimulate trade and tourism.

Health is the genuine wealth.

But then, trade and tourism can be agents that scale up an epidemic into a pandemic of global proportions. While modern developments such as medical breakthroughs have boosted our capacity to fight infectious diseases, globalization, another product of the modern world, can accelerate the spread of diseases [2].

Epidemics & Economic Slowdowns

Epidemic-induced economic shocks tend to form a V-shaped trajectory when real GDP and %GDP change is plotted against time. Following epidemics have created a V-shaped profile [4]:

• Spanish Flu, 1918.
• Asian, H2N2 Flu, 1958.
• Hong Kong, H3N2 flu, 1968.
• SARS, 2003.

Output falls, but growth rates absorb the shock and forge ahead in the V-shaped recession [4].

COVID-19 pandemic has hit both, demand and supply. Rising pessimism will hike household savings, hit consumption and discretionary spending, and severely cut equity investment. And by forcing a lockdown, the pandemic has already halted production and supply. It can further decentralize the global value chain [4].

Epidemics, and particularly the COVID-19 pandemic that has no cure as of now, let loose the hounds of uncertainty that terrorize markets, businesses, and people alike. Now, markets operate on sentiment. So does the world. When the sentiment is “uncertainty,” even optimists may look for difficulties in opportunities.

Optimism, the Recession Antidote

Despite its causes originating in the physical world, uncertainty is largely psychological. If it begins in the mind, the mind is the place to stop it. For one, bear markets do not always indicate recession. One out of three bear markets of the United States has failed to do so. And this has happened seven times over the past 100 years [4].

Policy makers usually resort to:

• Monetary Stimulus: Lowering interest rates and/or printing more money – both expand money supply.
• Fiscal Stimulus: Tax cuts.
• Debt Moratoriums: Temporary suspension of loan repayments (EMIs).  

Now, the logic is to transfer more money in the hands of people. When they spend, it creates demand for goods and services, thereby stimulating production. Producers and suppliers also have the funds to operate. Slowly, this brings the economy back on track.

These measures may not work as expected for tackling the COVID-19 pandemic:

• Pessimists will not spend much.
• Lockdowns do not allow spending as usual.
• Social distancing and lockdowns have disrupted production and supply.    

Numerous central banks have already cut interest rates. Again, this won’t immediately make people start borrowing. Take the case of Americans post the 2008 global economic meltdown. It made them wary of borrowing. As a result, policy makers can no longer spur the economy by dropping interest rates as easily as before 2008 [4].

Shocks such as the COVID-19 create long term devastation if they seriously dent the supply side and capital formation. This cuts down productivity and workforce participation while lengthening the recovery process and triggering skill loss [5].

Considering that productivity improvement along with higher workforce participation and favourable demographic changes are the key drivers of sustained economic growth [6], this is a monumental challenge!

The sooner we eliminate the need for social distancing, the better. This will resume normal movement of people at least. Goods and services will follow. Policy makers can inspire optimism through actions:

• Publish news of genuine medical progress made in the war against the pandemic. The progress doesn’t have to be a breakthrough. Public confidence will rise even if existing procedures are able to cure/mitigate the disease.
• Extend debt moratoriums for the duration of the crisis [5].
• Provide additional credit to the financially sound companies and households. Such credit must be at zero-interest with long repayment periods [5].
• Integrate testing and treatment protocols in existing healthcare systems.
• Make public hygiene and sanitation a national priority.
• Prevent hoarding and profiteering of essential supplies – this makes people pessimistic.
• Above all, be vigilant. A rebound won’t just be bad, it will spell doom.

Look Beyond

Sometimes, long-term creation comes disguised as short-term destruction. Chinese consumers shifted to online shopping after the SARS outbreak – one reason for the spectacular rise of Alibaba [5].

Like other dark clouds, COVID-19 too shall pass. Just be ready to harness the silver lining on the other side!

Indrajeetsinh Yadav @ Falcon Words has composed this article. Falcon words offers insightful, beyond the obvious content on multiple subjects areas. Contact us at +91-9822052945 or info@falconwords.com and experience professionalism at its best.

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References

1. https://time.com/5799582/epidemics-economies-history/
2. https://cdn1.sph.harvard.edu/wp-content/uploads/sites/1288/2013/10/BLOOM_CANNINGWP9.2006.pdf
3. https://www.weforum.org/agenda/2020/03/coronavirus-covid-19-cost-economy-2020-un-trade-economics-pandemic/
4. https://hbr.org/2020/03/what-coronavirus-could-mean-for-the-global-economy
5. https://hbr.org/2020/03/understanding-the-economic-shock-of-coronavirus
6. https://courses.lumenlearning.com/boundless-economics/chapter/long-run-growth/