May 3, 2020
IT ALL STARTS WITH WHAT WE KNOW, OR THINK WE KNOW, ABOUT COVID-19
- Whereas six months ago, few of us were even familiar with the word coronavirus, today informed people have more than a lay person’s knowledge of this disease.
- When this started in the United States, we believed, like other coronaviruses, that most infections would come from symptomatic carriers. We now know that asymptomatic individuals can readily transfer the virus. This makes COVID-19 an extremely contagious disease.
- Because this is a new disease, we don’t yet have precise pharmaceuticals with which to attack it – no vaccines and no therapeutics. (Obviously, there is a huge amount of conversation and speculation about this. All the conventional rules have been broken. So dead end results will mix with good results. The new normal here is that we are willing to accept more risk and less economic efficiency this one time, to break the speed record for a new drug.)
- Our dominant defense from this disease is to avoid getting infected, by skirting contact with sick people – symptomatic or asymptomatic – and avoiding the air around them and the things they touch. (This is because right now, this instant, there is nothing else to work with. Stay away from people, period!! At least until we get systematic testing, let alone drugs.)
- We have learned new terms, such as social distancing, 6 feet (asymptomatic person) or 25 feet. (symptomatic person, but best to be nowhere near such a person.) We have developed expertise in sanitation, disinfecting, protective masks, and disposable gloves. Individual defense begins with social isolation, a term which encompasses all of these subjects.
- We are told that our body should develop immunities after we recover from a COVID-19 illness, because this is true for other coronaviruses. But we cannot be sure because we do not know very much at all about COVID-19. It is new. We have seen things like it. However, for this coronavirus, we are having our first encounter. (However, the hypothesis coming from the science world is that recovered people, even if they never really got sick, ought to be building up immunities/antibodies. Further, they think plasma from such people might help those who are really sick. This is being vigorously studied.)
- Three months of data supports the belief that COVID-19 is a much bigger threat for people over the age of 65, or people with pre-existing illness or infirmities. This group has the greatest risk of dying. The data prove it.
- Some people argue that we should not overly defend the younger and healthier population from becoming infected because 99+% of them will glide through this without risk of life. A herd immunity could develop after the infected number exceeds 50%. 60% is usually the standard.
- The counter to lifting controls from younger and healthier is that the community’s pro-rata mortality numbers would be unacceptable.
- Notwithstanding, if the United States is a year and a half or more away from having our population immunized by a vaccine, herd immunity may actually be what stops COVID-19.
Sweden may be the best example of executing a kind of hybrid herd immunity strategy. People over 70 years old are told to stay home. Social distancing is still practiced. Work from home is suggested. Non-essential travel is discouraged. Gatherings of more than 50 are banned. Colleges and High schools are still closed. But, Kindergarten to 9th grade is open. Restaurants, stores, and all businesses are open.
It is very difficult at this point to compare prorata mortality statistics. Sweden is way below New York City, but higher than the entire United States, and way higher than Denmark and Norway. Better measures might be Sweden compared to New Jersey (.00023 compared to .00082); or compared to Michigan, for which Detroit is its biggest city, with about 675,000, and Stockholm is Sweden’s, with over 2.0 million (.00023 compared to .00038), or Arizona, with a lower state population than Sweden overall, but with a city, Phoenix, that is comparable to Stockholm (.00023 compared to .00004).
Further, economic damage cannot be ignored because it will eventually lead to serious health consequences, and deaths. NYC, New jersey, Michigan, and Phoenix have been in full lockdown while Sweden’s has been only partial.
It seems that the luxury of having strategic choices depends on having identified very early that the virus has hit your community and then having acted on this information almost immediately. Then you could choose among the options.
- You could adopt Sweden’s strategy.
- Or you could lock down the community, and then gradually open it up and test, identify, and trace contacts to keep it under control. (China?) This would appear to be the post March 1 strategy of the United States. (Unfortunately, the US does not have a coordinated strategy for testing, and the test and trace model doesn’t work if you need to wait three days or more to get test results – Bill Gates.)
- Or, you could immediately start to control the outbreak through testing, tracing and isolation. (Appears to be South Korean approach.)
- Or you could resign yourself to a total herd immunity strategy if you simply did not have the resources to implement any of the other strategies. (Is this India, Africa, parts of South America, really Mexico?)
Early identification and action did not happen in the United States and certainly not in New York City, and left areas like New York no choice but mitigation, which meant isolate in place until they could stop the ferocious advance of the disease. As it was, their health care system was almost overwhelmed, many health care providers have fallen to the disease, and close to 13,000 of their citizens have died. (And they are still dying. New York City has been a catastrophe.)
- Given the slow start in the US, and what was happening in New York, our leaders in medical science adopted a set of policies intended to slow down the virus as much as possible, a kind of hybrid social isolation These policies seem to be accomplishing their objective as the rate of growth of disease and death has slowed everywhere, and is starting to decline in many places.
Here’s where we are after perhaps two to three months of concentrated war against COVID-19. We have confirmed well over one million infected citizens. Over 63,000 people have died, or .00019 of our citizens. So Far. Current US models, as of this date, are forecasting 70,000 to 80,000 deaths, assuming that people assiduously practice social distancing, both at work and at play. The models extend through August.
We slowed down the virus and greatly strengthened our health care system throughout the Country. We are much better prepared for anything. We are learning a great deal about the virus and how to fight it. We have a very wide number of FDA sanctioned tests to create a vaccine and also to create therapeutics, over 100 each according to Bill Gates. There is enormous brain power being focused on COVID-19. There is optimism. And there is also historical reality. We are now hearing about small breakthroughs every week, such as Gilead’s Remdesivir, a therapeutic that may cut back the period of sickness by a third.
But, our battle plan for this war has come at a great price. A great deal of our economy was pushed into a directed shut down. Some industries, such as airlines, travel and leisure, have been temporarily crushed, dropping in some cases by 90%. The price of crude oil fell into negative territory as producers ran out of storage facilities for the overabundance of supply, as demand evaporated. Few operating companies are near 100% productivity. A better guess would be 70-75% productive.
It will be some time, probably years, before we understand the full cost of COVID-19 in sickness, deaths, and economic loss. Over 30 million people are drawing unemployment checks, which way understates the number of people not working. The Federal Government has already allocated $2 to $3 trillion dollars to replace salaries and wages with government funds and to put a floor under certain industries and large companies. The Small Business Administration has been asked to approve and distribute hundreds of billions of dollars in loans to companies with fewer than 500 employees, a gigantic execution challenge. The Federal Reserve has supplied the banking industry with trillions of dollars of liquidity on top of the hard cash that has gone out the door.
In the first quarter of 2020, the GDP dropped by about 5.0%. The real impact of the virus will show in Q2. Most do not even want to guess at that number. Economic demand has collapsed in many areas.
The polling data says that most citizens, way north of 80%, take this very seriously. Further, the Government’s quick response to push cash out the door cushioned the blow for many. But people are starting to get unsettled. The cash is running out.
So, America will start going back to work in May. Whatever the consequences. Social distancing will provide a lot of defense, if it is practiced and, indeed, enforced in the business world. Will Americans have the discipline to adopt the CDC guidelines for months to come or will they implicitly slide into a Sweden model? This is the big question. Productivity will suffer under the CDC guidelines, of course, at least until people start getting used to a new way of doing things. But we have a chance of keeping the virus under control if we can adopt this new normal, at least until the end of the year.
There is this conversation circulating, “hey, this is just a bad flu and perhaps 50 X more people have had it and did not know it or recovered without reporting it.”
In the end, the CDC said from the beginning that they hope their efforts look way over the top at the end of this because that will mean they did it right.
Consider this: the flu kills 30,000 to 60,000 Americans every year, most of them very vulnerable to disease. But we do almost nothing to stop this because healthy people don’t generally die of the flu. This COVID-19 will kill 70-80,000 Americans before the summer is over, and probably 100,000-120,000 before it is fully contained, maybe many more if we lose control of it again, and we have shut the economy down to get in front of it. We will spend probably $4 trillion in hard cash just this year to hold the death count under 100,000. 80% of Americans don’t even take the flu vaccine This is not the flu.
If you are a leader in business, government, academia or an NGO this is the world within which you now practice your skills. There is no new normal because we have very little idea of what the new might be. So, we have nothing yet to compare to normal.
LET’S RISK A GLANCE INTO THE FUTURE
What might the New look like?
No one knows the future. This is especially true now. Some of the wisest people, such as Charlie Munger of Berkshire, are saying do nothing for a while. This may be easy because most businesses, large or small, are frozen in the present, doing whatever they can to endure, and maybe even survive. Forecasting into an uncertain future is always daunting and yet businesspeople must do this on a regular basis. Forecasting into this future is a challenge that very few of our best, if any, have ever done.
So, we are humble, we are unsure, but we must make an attempt to understand what is happening and what it might suggest to us about the future.
Let us begin this by trying to understand what is happening right now.
Just about every business is under stress. Our larger businesses have nowhere to escape. They are interdependent with many suppliers and customers, so where there is pain out there, they feel it. This means that most everyone is feeling this economically. Consequently, economic consequences may not be the first factor we want to examine, but they will most likely be the longest lasting.
A Level Set
The positive factor is that the economy has not completely shut down. In fact, there are many parts of the economy that are operating right now with ferocious energy. An incomplete list would be banking and finance, telecommunications and mobile, Television News and Entertainment, Cable entertainment and Streaming, medical practices treating conventional illnesses, the supply-chain logistics industry, railroads, first responders and emergency personnel and about every other city, country, State, and Federal Agency, the knowledge world, the legal professions, the accounting professions, the consulting industry, the delivery industry, the Power Utilities, the water utilities, the grocery industry, the energy/fuel industry, the drive up food industry, fast food restaurants. the takeout food industry, on-line retail shopping, online purchases of many other types. Also, on-line university, high school, and elementary school education, air conditioning maintenance, maintenance of other types of installed equipment, etc. The list could go on and on. In almost all of these cases, productivity has been affected, if not deeply affected.
The industries most hit by the virus include, but are not limited to, our intensely people to people services, a big part of our 70% consumer spending annual GDP. Airline travel, Vacation travel, Hotels, Cruise Ships, the energy industry, movie theaters, all live entertainment and film production are all stymied. The fitness industry, sit down restaurants, amusement parks, manufacturing, the global supply chain, professional sports, and many others will all have to rethink their operating model. These businesses have been fundamentally damaged and many of the small businesses in this category will not be restarted, in fact, some if not many of these industries may feel permanently crippling effects.
Both of these lists are long and tedious. But it is necessary to stress that not all industries are being hit the same way and to shed some light on where to target action.
It is both extremely obvious and important to continually recognize that these businesses were instructed to shut down. No one decided that their products were risky. Consumer demand did not simply go away. Inflation did not destroy the price to value relationship. Unemployment did not rise above safe bounds. A major war did not start. A major war did not conclude. The stock market did not collapse.
This is very important because life is not just science and financial facts. Life is also human behavior, if not dominantly, human behavior. And some types of human behavior are very dangerous to the economy: a drop-in trust, feelings of guilt, a decline in self-worth, and intense anger. A typical financial collapse will usher in all of these feelings, individually and institutionally. These feelings can deeply impede adjustment and recovery. Our saving grace, generally speaking, at least as it relates specifically to the economic collapse, is that these kinds of feelings are not widespread. And this is very unusual.
Furthermore, the uniqueness in this situation is that it is not an economic collapse localized to a geography, localized to an industry, caused by misbehavior in the financial community or isolated to an at-risk demographic. This is an unprecedented health crisis and the tools being used to manage it have caused an economic crisis across the board.
So, our start position is an unmitigated economic disaster caused by an exogenous event. Just about everybody you might listen to is saying, this is different. Charlie Munger, of Berkshire fame, says this is a good time to do nothing. The level of uncertainty is unprecedented. No one is claiming to have the model.
Where can we look for hints?
This is a good time to examine what is working. The short answer is that location independent commerce is working, if not in overtime, at least for so long as the demand holds up. According to numbers that are floating around, 60-65% of the people who are working are working remotely.
Michael Milken looks into the future and says, “Tele-everything.” Maybe. But in the present, that seems to be very accurate. Just about every business process that can be conducted remotely, is being conducted that way. Perhaps a bigger insight is how well many businesses were positioned to make the conversion.
In general, we did not see this. In many cases, conducting regular business activities remotely was a contingency, used when certain forces – weather or very difficult economics – encouraged going remote. In perhaps fewer cases, especially for some smaller businesses, remote processes had actually made business possible. Indeed, they were at the heart of strategy. The advances in technology through software, video conferencing, and the smart phone, which is a computer with an App called telephone, prepared many businesses to rapidly shift the emphasis from location dependent to independent.
At the same time, location independent advocates sometimes assume that management and leadership just happen. Software systems lead, not humans. I guess we will find out the truth in that.
The personality and drive of a leader can make a great difference, for good or bad of course, in the management of an enterprise. And that factor in business is experienced in a very personal way, face to face, in small groups, in speeches to larger gatherings, at Board Meetings, during crisis management, in setting the annual strategic agenda, in building your business case with a prospectively new customer, in solving a small or large problem within the customer environment, within the supply chain, and so forth. What all of these location dependent moments are about is building trust. Building the bedrock people need to follow you. We will surely discover whether a Zoom conference will be able to pull that off.
But, tele-everything a lot? Everybody is talking about that. Will we return to how we did it? We won’t know the answer to that question for quite a long time because we will need to fully appreciate both the benefits and the costs of “tele-everything a lot”. Right now, we are inclined to focus on the benefits because the cost of not doing so is off the charts. Nonetheless, it is with certainty that business and life will not resume as it was and will evolve, as a shift has occurred. The duration of this change is likely the broader question.
Notwithstanding, with the fact that under these extreme circumstances, businesses have realized they can continue to operate effectively in such a remote manner, it is probably a pretty decent bet that tele-everything will end up replacing a lot of things. Certainly, many of us are getting a lot of experience with new methods and technology assists with which we were little experienced. (Bill Gates has told us recently that he was unfamiliar with Microsoft Teams.)
Given this adjustment in usage, the leading teleconferencing suppliers are seeing how their systems operate under great pressure and they are learning a lot. The immediate crisis response forced organizations to jump ahead not completely prepared and new operating models quickly emerged as not an option but rather a necessity. With these, new risks also emerge and opportunities for evolution arise, in particular in the realm of cyber security. For example, Zoom, with 300 million daily participants, which became overwhelmed with security issues, has already announced Zoom 5.0 with enhanced security, and will be switching all Zoom customers to their crypto graphic enhancements on May 30. Microsoft’s chat function on Teams has grown by 500% since the start of the crisis. All of the important remote work technologies are getting stress tested and end-user experience tested like never before. Predictably, their products will look very different from what they were offering at the end of 2019. This will also influence the permanence of change.
What trends might be getting reversed?
In the people to people businesses, it seems that the trend for decades has been to lower cost per unit being measured, and to stuff as many of those units as possible into a fixed space. This could be called the density issue. The most obvious of these, much discussed, is air travel.
How long might it be before air travelers feel comfortable sitting next to a stranger, four inches away? Will airlines be removing seats in planes, at least for a time? And how many seats? At minimum, all of the majors are cleaning the insides of airplanes like crazy, directing their employees to wear masks, handing out masks and sanitizing materials to passengers, and eliminating middle seats.
Airbus announced that they would be stopping production of the A380 in 2021. Might we now be seeing A380 flights from Los Angeles to New York, with half as many seats? If video conferencing wipes out unnecessary and carelessly planned air travel, might the value attached to a safer airline seat go up?
Congregating? Will hotels become more a place to sleep than a place to congregate? Or will congregating in hotels become much more controlled and in specific areas, leaving hotel lobbies with a fraction of the density with which we are accustomed?
Will amusement parks be letting in half as many customers? Has close contact queuing up been changed forever, or at least for a while? Will the trend toward luxury and space enhancements in movie theaters accelerate?
It seems likely that people will almost unconsciously reexamine how they spend their time. Isolation for one or two months tests a lot of habits and unexamined ways of doing things. A full paper could be written on this subject alone.
The film production industry had already stepped into about every different way of bringing movies and filmed entertainment into your homes. First it was cable, bringing HBO into the world, and then expanded to many more HBO type channels, and then independent streaming services, and now streaming services for HBO cable type channels. Perhaps the home entertainment center will be as ubiquitous as the guest bedroom?
Mainstream airports have become major retail centers worldwide. Can those retail establishments survive until normal activity restarts? Will normal activity ever restart?
What are the Financial Implications for the 2020 economy?
The normal metrics that we use to guide our evaluation of macro or micro economic performance are inapplicable. They tell us next to nothing.
Most serious investors do not pay much attention to daily moves in the stock markets. This practice has never been sounder.
Are earnings per share, per capital, per anything an applicable measure of company performance right now?
Do financial contracts carry the same legal and cultural importance that they did just three months ago? Both businesses and individuals entered into financial commitments – contracts to buy, rents, mortgages, loans, contracts to lend – under a set of historical assumptions that are now obsolete and will likely stay that way throughout 2020. Laws may not change, but norms can change. We may learn that norms were much more important than we had realized. What does that mean?
Let us start with generalities. When individuals fail to meet financial commitments, the practice is to take something away from them– their apartment, their home, their car, their college education – or to sue them. How many such civil cases could courts handle? What are lenders going to do with all of those assets? Will governments allow conventional practices, or will they judge that the social cost is too high? Might Chapter 11 bankruptcy, which clears out the dead wood to save the enterprise and the jobs, become the dominant tool to fix the most broken parts of the economy. Mitch Mc Connell is already suggesting that some of the States should file Chapter 11 bankruptcy, which is something that really caught our attention. (He is now back tracking on that comment.)
Put very simply, isn’t there a chance that a great deal of commerce and investing is up for negotiation? All of these single transactions have a huge ripple effect throughout the economy. Usually only a few sectors originated the problem, and even then, the ripples are wide. In fact, unlike waves following a tsunami receding back out to sea, these ripples effects for the short term are likely gaining in strength and have yet to present their full force and impacts. We will have to exercise patience and collaborate to weather the storm calmly. Now just about every sector is an originator. The vast percentage of companies are going to be stressed both as lenders and borrowers and also as custodians of other people’s investments, all at the same time.
We need to quickly figure out what it is that we need to measure in 2020, and probably beyond 2021. Oversight is always necessary. We need to make sure that individuals and businesses are conducting themselves intelligently, prudently, imaginatively, and with discipline. But we may need a package of new indicators.
58% to 70% of all Americans have less than $1000 in savings, according to a quick Google search. While such measures are frequently less revealing than you might think, it is safe to say that the vast majority of Americans will come out of this gut-wrenching catastrophe without a nickel in their pockets. And that assumes they come out at that point. In fact, they may come out much later than that point. The Senate Majority Leader said recently that the Federal Government’s cash machine was now closed with last week’s approval of another $500 billion in economic support. Is that so?
Many, many businesses, small and large, operate close to the economic edge. One person offered that every day in NYC, 200 food serving establishments collapse, and 200 new one’s form. “A mass filtration takes place regularly.” Last week’s newspaper reported that JC Penny’s is under great stress because of the virus. Well, J C Penny has actually been close to the edge of insolvency for a number of years. New York staple Dean & Deluca has filed for Chapter 11 and New York City landmark, Bergdorf Goodman has also declared bankruptcy protection. As Charlie Munger said a few days ago, many of Berkshire’s businesses are under a lot of stress and some of them will not be reopened.
In short, a lot of businesses, mostly small, but some quite large, will not reopen.
But what of the responsible businesses, small and large, that are under great stress? How do we measure the performance of their management teams? Or, how do lenders measure the performance of individual entrepreneurs? Well, if they do not measure them in a substantially new way, just about every business is going to get a D or F grade for 2020, which in effect means that there will be no oversight.
Maybe we are left with these measures. Did you survive? Did you treat your employees with fairness? Did you help and contribute to society? Did you make smart adjustments? Did you deploy cash as if it was coming from your own pocket? Did you spend any money you received from the government like a patriot?
We need to get working on this right away.
The Role of Government
The WSJ estimated last week that this year’s fiscal deficit will exceed $4 trillion. That’s a lot of money, even when you are printing it. Years of fiscal indiscipline left the United States immensely vulnerable from this crisis.
We had a chance to address our indiscipline with the Simpson Bowles Commission report in 2010. Both parties walked from their recommendations because no one was willing to change behavior and expectations. All seemed to agree that each party’s constituents could drink from the Federal Trough forever. So, whatever they took from expenses they found a way to replace with new expenses or reduced revenue. The sacred cows were protected – Defense and cash transfer programs. Undisciplined fiscal behavior has continued for ten more years, during which time the United States borrowed another $14 trillion, adding up to an accumulated debt close to $23 trillion. Some of that increase, maybe $2 trillion, bailed us out of the Great recession, and was necessary.
Some experts are forecasting that that debt may exceed $30 trillion before we completely pull out of this crisis. Given that we have already committed more than $3 trillion and we are less than three months fully engaged with COVID-19, that estimate may be pretty damn good and may also be necessary.
What are the implications?
Michael Milken says we can take comfort in today’s cost of funds, close to zero for the Government, compared, for example, to 1981 when even the Government was borrowing at 14%. Perhaps so, but for how long will that last?
The S/B Commission was very concerned about debt service and estimated that it might be over $800 billion by 2020. Ten years later, in the 2020 budget, interest is forecasted to be $479 billion. (Of course, that estimate has been invalidated by the virus.) The Commissions estimates of interest rates were way low because interest rates have been at historical lows since the Great Recession. This is one reason why we got away with such large deficits.
The total debt at present is about $23 trillion, and about $17 trillion is held by the public. Much of the rest is an IOU to the Social Security Trust Fund, about $2.8 Trillion, which accrues interest income, but which is immediately converted to Federal debt. Now that’s a hell of a pension program.
What could make interest rates increase? Reality! Eventually, a trillion here, a trillion there, pretty soon you are talking real money. (A play on Everett Dirksen’s supposed comment in billions.) I think we know this: The Federal Government does not have an unlimited ability to fund in debt the desires of the American people, does it?
The probabilities are pretty good that the Government is going to use its lending powers to keep many American companies in business. The airlines come to mind. Boeing comes to mind. The energy industry is facing huge challenges. These are examples of businesses that are considered essential.
In these cases, given the extraordinary amounts of money involved, one might imagine the Government partially nationalizing a good deal of essential corporate America. In fact, it may have little choice. Perhaps over time, such companies will regain value and be able to buy out the Federal Government. (Delta Airlines has already invited in the Federal Government on the equity side of its balance sheet much as Goldman Sachs and General Electric invited in Warren Buffett in 2008.)
We like to call this a war. Well, this is what happens in war.
Today, we like to divide the government into nondiscretionary and discretionary expenditures. Understand, about everything that governments do to provide collectively consumed goods and services – roads, bridges, national defense – and to install regulatory bodies to protect its citizens from the spillover costs of complex services and technologies – air traffic control comes to mind – or the unwise economic behavior of individuals or entities, for example, poisoning our food or air or streams – EPA and FDA come to mind – is called discretionary. Think about that for a moment. These areas, where new administrations tend to look for cuts, and which now amount to less than 20% of total outlays, are called discretionary. The non-discretionary activities are debt service, cash transfers – Medicare, Medicaid, Social Security, individual financial support – and national defense. There is probably a good chance that these terms will go away. The virus may have made everything discretionary. The tradeoffs will be enormous.
US Societal Implications
Put bluntly, will there be any?
The US government is dumping trillions of dollars into the US economy, not as a stimulus, but as a replacement for business revenue and employee pay checks. This has never happened. For several months, some people may actually be better off than they were before. Some failing businesses may even have been propped up. Truly, this is an investment in survival.
But after we survive, the money will do no more to help us. It was consumed. In an economic sense, the best hope is that we return to the start of 2020, but with trillions of dollars of new business, personal and government debt used to float the ship while we shut down the economy. There will not be a trillion dollars of new infrastructure. These funds will not produce vaccines and therapeutics. Those will come from other dollars. Literally, these dollars kept us alive.
For months and months, many people will be scared to go back to work. Many will view any slight physical irregularity as a reason for not going to work, and there will not be a great deal of push back. CDC guidelines mean: no sick people in the workplace. Will this change future behavior with regard to individual attitudes about work?
Working from the home? What will this change? Might workers produce with equivalent efficiency and effectiveness while still taking more control over how they allocate their time between work and non-work?
Will the pandemic, and how its pain has been distributed throughout our society, change societal beliefs about the distribution of wealth and treatment of society’s essential employees, its public health apparatus, its poor people?
For sure, these are just starter questions. Future political debates will be all about these kinds of questions.
Impacts on Health care
During the pandemic the US inadvertently moved into universal health care. Will it pay the bills it publicly committed to pay? Can it move back? What was learned? What worked? What did not?
Hospitals make money on elective surgeries and other discretionary non-life threatening medical events. They maybe break even on Medicare and Medicaid. Maybe the private sector ought to do all of the discretionary work and the government take over non-discretionary?
Before this is over, hospitals that were just getting by may go out of business. Small medical practices will be revenue challenged by patients who may stay away from health care sites until they feel unthreatened by COVID-19. Only the large integrated systems are likely to pull through, and many of those won’t, without assistance. In the end, as with airlines, the government may end up owning huge pieces of health care, as an equity holder. It already pays 45%+ of all health care, when you include the medical costs of Federal Government employees, including both the civilian and uniform military.
Just in Time Supply Chains
It is shocking how we have been bitten in the butt by some of our most sophisticated practices. From a standpoint of pure economic efficiency, excess inventory of goods makes no sense. The flattened world ushered in global supply chains meaning, quite simply, that the goods we buy might come from just about anywhere. In 2018, $540 billion came from China. $664 billion came from Mexico and Canada. Just as relevant, modern supply chains assure that many of these goods, especially smaller goods like face masks, arrive just in time.
Of course, just in time is based on mathematical models which represent how the world normally operates. Not so, right now. Moreover, goods are not carefully categorized by national security items, items that could be critical during a crisis, or just items. Right now, many of the items we need to successfully fight a global pandemic are being demanded not just by the United States, but by many others as well. For how long will we remember this? Do we not need a new set of rules?
The conversation about what we import from China was already well underway. Of course, we import these goods because we want to, not because we must. The law of economic comparative advantage tells us that it is smart to buy goods from more efficient producers so that our capital can be invested in goods for which we are the most efficient producer. Global trade is based on this premise. The global pie is the largest when this rule is followed. Economic ends are at least optimized, that is, maximized within constraints.
But have we now learned that an economic calculus may not be the only measure, and in some cases may be a deficient measure? Defense and national security issues have always entered into the calculus of global trade. The debates at home and with Europe over doing business with Huawei, the huge Chinese telecommunications company, come to mind. But now debates will start over pharmaceutical products, many which come from China. Protective gear for health care workers is another category.
In short, the entire subject of global supply chains, let alone, just in time global supply chains, will now come under very careful scrutiny. After the shouting is over, economic criteria alone may lessen the long terms impacts flowing from the pandemic. But are not some adjustments surely going to happen?
Inflation
The last decade or two have taught us that forecasting inflation is a dangerous move. At the same time, it is hard to imagine that a lot of debt won’t get monetized, that is, made cheaper through a decline in the value of the dollar. About every important player in finance will be studying this subject, so we will just leave it at that.
International Relations
The pandemic has put just about everything on the table. God knows what damage the pandemic will inflict on the rest of the world. Less developed countries, with their huge populations, less testing and medical care services, cramped into close quarters, are extremely vulnerable.
The pandemic will give rise to some deeply moral issues. No areas of the world will need a vaccine more than the poorer areas of the world. But, the richest countries of the world will invest the capital to rapidly fund a vaccine. I imagine this will cost billions of dollars. Once a vaccine comes through all of the testing and approval stages it moves into the production and distribution stages. For sake of speed alone, some of this investment will be made before a vaccine has been proven effective, which private industry would never do. This is because some of the production investments will just be wasted. More billions.
So, how does a vaccine or vaccines get distributed throughout the world? What role will WHO play? What role might the United Nations play, or the EU. Presently, the United States has a Federal Government that is led by a set of political beliefs that the rest of the world does not count for much. Will that attitude actually carry forward in this environment? If it does, will the United States ever be thought of again as it has in the past? Will US beneficence be crushed? Will US exceptionalism be a joke?
Foreign Affairs Magazine ran a recent article that proclaimed that there is no international strategy right now, it is all tactical. And this was written before the impact of the virus.
An expectation that the US will fall economically back from the rest of the world is probably unrealistic. The United Sates is coming off of a “Golden Decade,” a full decade without suffering a single recession. “Defying the many declinists forecasts” usually relating to China “the United States actually expanded its share of global GDP during the 2010s from 23% to 25%.” (Foreign Affairs. May/June, “The Comeback Nation”) Unlike any other large country, the United States has this amazing adjustment capability, enabled by the US Constitution and our substantially market based economy. Together, these two gifts allow us to work things out. It is painful, which is why the Government may play a huge hole to lessen the pain. But it is quick.
China has many challenges. It has more debt than the United States. It has many more mouths to feed. It has a centralized government which is not guided as thoroughly by the rule of law as is the United States. It is light on freedoms and not a very open society, especially during crunch time.
The rest of the world has noticed during the pandemic the downside of having very long and distant supply chains that start in China. How many times recently have you heard a US politician or even businessperson remark that they had no idea we relied on China for this product, or that. This will not help China, at least in the short run.
Perhaps most importantly, China also won’t grow this year. But Chinese leaders rely on economic growth and the satisfaction of their middle class for political legitimacy and it has been growing at a slower pace in recent years. It has made very large financial commitments to invest in infrastructure and economic development to about 70 countries in Asia, Africa, and Europe as part of the the Belt and Road initiative (B&R). Will China now be able to afford investing an estimated trillion dollars into the B&R initiative between now and 2027 or will it come to be viewed as a non-vital overreach.
The US war in Afghanistan seems to have no end point. Prior to the pandemic, the US was having constructive discussions with the Taliban. However, the Afghan Government had not yet even entered these discussions. Now, the pandemic may truly be a game changer. Can we continue to spend $52 billion a year in the search for some solution that won’t wound US pride? Will we agree to some kind of a phony deal with the Taliban that will leave the Afghans trying to live in a modern world in the dust?
Climate Change and Environmental Issues
Predictive science can happen. The pandemic, predicted for decades, has happened. The cost to recover will be in trillions of dollars. In 2015, Bill Gates forecasted that it would take billions of dollars to protect the Nation from a pandemic; but that such investments would also save the Country trillions of dollars from the damage of a pandemic. His TED talk was prescient to the extreme. Perhaps more voters will think, hey, maybe scientist actually know what they are talking about. Does this create a new belief, a new respect for the climate threat? Will science denial subside? The US Federal Government is an outlier in terms of its climate change denial. But all of this political bunk is obscured with what the U.S. economy has achieved in now obtaining over 18% of its electrical power from renewable sources of energy. Electrification is the global goal, converting cars, trucks, and other huge energy users off of oil and onto electricity, which will be increasingly produced with renewables and nuclear.
Litigation
The government better pay attention to the litigation area before it raises its ugly head and overwhelms us. We are not going to litigate our way out of this mess. Above we argued for a sort of earnings holiday in 2020. We should add to that a litigation holiday on just about everything fundamentally caused by the COVID-19 catastrophe.
Obviously, like everything else written here, this is an opening argument.
