March 20, 2020

Our government officials in Washington as well as state and local leaders have mounted an all out effort to prevent the spread of the corona virus.  That action has stopped the economy dead in its tracks and will almost certainly result in a deep but very brief recession, and bigger budget deficits in the years ahead.  In our opinion, the government had to introduce those draconian measures to curtail the fear.  The drastic action taken should show some hints of success by early April and widespread evidence that the virus is under control by the end of April.  At that point the restrictions can be loosened gradually and the economy will begin to recover.  One thing we have learned over the years is to never underestimate the strength and resilience of the U.S. economy.

Throughout America every restaurant and bar is closed as are most retail stores.  Airlines are flying with more than half of their seats empty.  Hotel occupancy rates are falling just as sharply.  Businesses large and small are laying off workers.  Supply chains for manufacturing firms are drying up.  If they have not shut down yet they will be forced to do so before long.  The economy has come to a screeching halt.  But it will not last long.

Let’s review the China experience.  The corona virus originated there in late December.  Xi Jinping quarantined the Wuhan province in late January.  The number of new cases reported daily began to slow in early February – about a week after the quarantine was imposed.  The number of active cases peaked at 58,000 on February 19 – three weeks after the quarantine was imposed.  They have fallen every day since and are now at 6,500 – seven weeks after the quarantine was imposed.  The draconian measures imposed by China quickly stopped the spread of the virus.  There is no reason to think the pattern will be significantly different in the U.S.  Chinese-type measures to stop its spread were imposed here in mid-March.  We should see early evidence that the virus is slowing down by early April.  The number of active cases should begin to drop by mid-month.  Once that happens, we can all breathe a collective sigh of relief.

So, what have we learned?  We now know that drastic measures will quickly stop the spread of the virus.  But at what cost?  In the short-term we might experience a single-quarter GDP drop of 10%.  In the longer-term future budget deficits have just escalated from $1.0 trillion per year to $2.0 trillion.  Our initial reaction is to say that these consequences far outweigh the benefits of trying to stop the virus.

We have often wondered why all the attention of the world is on the corona virus and nobody even mentions the basic flu virus.  Through March 7 the CDC estimates that 43,000,000 Americans have contracted the basic flu – or 275,000 people per day.  As of March 20 a total of 14,350 people have contracted the corona virus.  We keep hearing the corona virus is more deadly than the basic flu.  But the grim reality is that thus far 38,500 Americans have died from the basic flu, but only 200 people have died from the corona virus.

Last year 35.5 million people contracted the flu in the U.S., and 34,200 died from it.  This year is shaping up to be somewhat worse than last year.  But a year ago nobody worried about the flu and nobody suggested that the economy had been impacted by it.  So why all the fuss?

The answer is that, justified or not, people are afraid.  They do not understand this virus.  In their mind it is unlike anything we have seen before.  Will it end by summer?  How many people will die?  The world is in panic mode.  That fear has been exacerbated by the media.  Everybody loves bad news.  Ratings go up.  Feed the fire!  So, what exactly do our policy makers do to halt a panic?

Neither the regular flu nor the corona virus have a cure.  If you get it, you have to let it run its course.  Nothing you can do will cure it. But there are things you can do to help.  The corona virus is a respiratory disease and some people that contract it could eventually experience difficulty breathing.  They need a ventilator.  But ventilators are in short supply.

Test kits are also in short supply.  If you contract flu-like symptoms a test kit is not going to cure you, but it can help determine whether you have the corona virus or the basic flu.  If it is the latter, there is no need to head to a hospital.  Making more kits available should alleviate some of the overcrowding of hospitals.

But neither ventilators nor test kits can suddenly materialize. It takes time to ramp up production.

So what else might you do to halt the panic?

The Fed tried to offer assistance by cutting rates to 0% in two increments.  It also indicated that it was prepared to make available whatever amount of credit was required to make sure that the financial markets continued to function.  It wasn’t enough.  The markets decided it was the wrong solution to the problem and sank following both cuts.

The Administration proposed a $1.0 trillion relief package.  It wasn’t enough.  The action taken treated the symptoms, not the cause.  The markets continued to fall.

The world was gripped by fear.  By early March it became apparent that measures taken by China seemed to be working and, we would suggest, that nothing short of a similar solution would be deemed acceptable to the financial markets.  Government officials were basically forced to adopt the same draconian measures that China had imposed.  They had no choice.  The consequences of a financial meltdown would have been far worse than the virus.  While there will be longer-term economic fallout, right now the goal is to restore confidence.

This seems similar to the financial panic that gripped the world after the collapse of Lehman Brothers in 2008.  Some of the biggest firms in the country were on the brink of collapse.  What to do?  A government bailout is not an ideal solution.  Somebody has to decide which firms will go under and which will not.  But sometimes you just have to hold your nose and jump.  Not doing so would have almost certainly triggered a 1930’s type of depression.  So which was the better of two lousy solutions?  Government officials chose the bailout and it worked.  The economy recovered and entered the longest period of expansion in its history.

The same thing is true now.  There are no good solutions.  The government was forced to introduce drastic measures to stop the panic.  By doing so the virus will be brought under control quickly.  The economic fallout will almost certainly result in a sharp but very brief recession and larger budget deficits in the years ahead.  But we can worry about that later.  Right now the goal is to restore confidence.

Keep an eye on the daily reports from the CDC regarding the spread of the corona virus.  By the middle of April we should see some improvement, and by mid-April it should be readily apparent that the virus is getting under control.

Hang tough.  The world has not yet ended.

Stephen Slifer


Charleston, S.C.