While the most terrible price to be paid on account of an epidemic is measured in human lives, disease brings immense financial hardship as well. However, the true source of the economic effects of disease – and their solution – has little to do with the body count.
Economists are notorious for disagreeing about the origins of the business cycle. Which industries will receive government stimulus? Which airlines will be propped up? Which laws will be suspended? In these times of economic uncertainty, few can say. Austrian economists blame low interest rates, Keynesians turn to animal spirits, and monetarists think—you guessed it—that rapid changes in the money supply are the true cause of downturns. However, there is one thing that all economists agree upon: external shocks can turn even unprecedented growth into a historic contraction, fast.
While the external shocks of past centuries took the form of drought and war, globalization has increased the probability that pandemics will cripple economies around the world in the 21st century. In fact, World Bank estimates that the annual global cost of moderately severe to severe pandemics is roughly $570B.
As countries battle the coronavirus, it’s worthwhile to turn to the examples of previous pandemics, and see how economies adjusted. The health shocks of the past include both deadly diseases and close calls, so they run the gamut of potential outcomes for the ongoing outbreak. Interestingly enough, some lessons can be drawn from these results and applied by the businesses and governments of today.
The Spanish Flu
By far the deadliest pandemic in recent history, the Spanish Flu is thought to have infected 500 million people – one-third of the world’s population – from 1918-1919. As World War I drew to a close, at least 50 million people were killed by this invisible foe.
The modern world has never come closer to a worst-case scenario than it did during the Spanish Flu. According to some historians, it qualifies as the deadliest plague in history. As if that weren’t enough, this particular strain of influenza had a disproportionate effect on the young. In other words, the generation that had just fought—and died—in the war was subjected to an even greater threat. There is no doubt that the Spanish Flu severely limited Europe’s economic recovery.
That being said, academics have struggled to estimate the exact impact of the Spanish Flu on global economies. Many of the leading indicators now utilized to track trade and output were not in use in 1918. Comprehensive sources of reliable data are few and far between. In the absence of these sources, a study published by the St. Louis Fed scoured newspaper reports and extrapolated them to sketch the national situation. Even a small selection of these publications is enough to give one pause:
- “Merchants in Little Rock say their business has declined 40 percent. Others estimate the decrease at 70 percent.”
- “Little Rock businesses are losing $10,000 a day on average [$133,500 in 2006 dollars.] This is actual loss, not a decrease in business that may be covered by an increase in sales when the quarantine order is over. Certain items cannot be sold later.” “Fifty percent decrease in production reported by [Tennessee] coal mine operators.”
- “Coalfield, Tenn., with a population of 500, has ‘only 2 percent of well people.’”
These quotes are nothing less than frightening, and there is no doubt that many American families suffered profoundly as loved ones succumbed to influenza. Yet thankfully, research suggests that the long-term economic effects of the Spanish Flu were minimal. Once the yearlong pandemic came to its end, social and business relations resumed. While some companies lost a significant amount of revenue, others, especially those providing health services, turned a profit. Within a few years, America had launched into the Roaring Twenties.
The 21st Century – So Far
No global pandemic has equaled the Spanish Flu in the years since 1918. Yet recent decades have seen several serious scares, each of which had profound economic consequences.
From SARS to the swine flu, a number of viruses have conjured fears of a global influenza pandemic since the turn of the millennium. While humanity has been spared – for now – these brief outbreaks have done significant damage across a range of industries. For example, SARS, which killed just 774 people, is estimated to have caused an economic loss of $50 billion worldwide.
Needless to say, losses weren’t distributed evenly across sectors. Those industries most sensitive to short-term consumer demand, such as travel and retail sales, took an especially hard hit. The airline industries of East Asia, where SARS emerged, bore about 30 percent of total economic losses. Meanwhile, North American airlines lost 3.7 percent of their international traffic, even though only eight U.S. citizens were ever infected.
How could this be? Warwick McKibbin, a nonresident senior fellow at the Brookings Institute, explained: “It is not the deaths or the periods away from employment that cause economic activity to decline during a pandemic. It is the disruption to markets caused by a loss of confidence and a change in spending patterns driven by fear.” Death does not, in and of itself, lead to decreased production or consumption, but to a shift in the types of goods that consumers need.
As for the impact of death on production capacity, in a world of over 7.5 billion people, even a hundred million deaths would account for less than 1.5 percent of the total population. While it is true that those deaths may cause temporary dislocations if they occur in concentrated regions, so long as labor and capital enjoy a modicum of free movement, any gaps will quickly be filled.
The St. Louis Fed did find that the Spanish Flu drove up the wages of manufacturers, and similar salary hikes are to be expected if a future pandemic causes any short-term labor shortage. As a result, it seems that the greatest threat to the global economy is fear.
On the Eve of the Coronavirus
While little is yet known about the impact of the current outbreak, an economic downturn seems unavoidable. Only time will tell how severe it is.
If the Chinese numbers are any indication, this may be a short-lived crisis. Purchasing Manager Indexes (PMIs), which are compiled from surveys of firm production, employment, and new orders, came in at the lowest ever recorded for services and industry during January and February. Exports during that period were down 17 percent, while imports took a 4 percent hit. Most tellingly, pollution data recorded by NASA and the European Space Agency indicate that the mean density of nitrogen dioxide dropped to below 125 micromoles per square meter between Feb. 10 and 25, compared to 200+ micromoles per square meter from Jan. 1-20.
However, business had already kicked back into gear by mid-February. China’s Transportation Ministry reported that 110 million migrants returned to their work cities from Feb. 22-28. Meanwhile, major employers offered bonuses of $720-$1,440 to entice workers to return to work. The potential for a rapid recovery is certainly here. Yet, if the virus takes a toll on the Western countries that drive demand for Chinese goods, that recovery could be highly tenuous.
So far, predictions are hardly positive. According to a working paper published by McKibbin and Fernando for the Centre for Excellence in Population Ageing Research, global GDP would drop even if the coronavirus were contained within China. Now that we know that the virus will be a truly global phenomenon, a decline of over 2 percent seems entirely possible.
According to the model, even a low-severity shock to the labor supply would send U.S. GDP down by 2.0 percent, while the British would take a smaller 1.5 percent hit, and the Germans a slightly larger 2.2 percent drop. However, a labor supply shock of intermediate severity would send those same indexes tumbling by 4.8 percent, 3.5 percent, and 5.0 percent, respectively. In their worst-case scenario, the authors predict declines in excess of 8 percent across continents.
As with the Spanish Flu, these losses would not be distributed evenly across sectors. Travel and retail, along with live entertainment, would be sent into freefall. Early reactions also indicate that the oil industry would enter a severe contraction. However, the healthcare industry should enjoy solid profits, along with grocers and logistics firms called upon to transport both medical equipment and foodstuffs. For example, in an early sign of adjustment, Amazon signaled that it will be hiring 100,000 employees, and boosting pay through the crisis.
Lessons for Business and Public Leaders
Even industries hit hardest by the virus can hold on to a silver lining – any recession should be followed by a rapid recovery, so long as the pattern set in 1918 holds. If the impact of even the deadliest pandemic in history didn’t linger for longer than a year, businesses should focus on the short-term. On the other hand, governments must be careful not to jeopardize the long-run in a rush to shore up markets – and public opinion.
It is significant that the coronavirus appeared in a U.S. election year, if only because this makes it nigh impossible to determine whether Washington’s response to the pandemic is driven by politics, or by economic analysis. In either case, it seems that both large and small businesses will face extreme uncertainty in the coming months. Which industries will receive government stimulus? Which airlines will be propped up? Which laws will be temporarily suspended? In these times of executive discretion, few can say.
Yet, businesses can take action to minimize the risk of the current epidemic – and any future ones. Investments into virtual office technologies and video conferencing software ease the transition into remote work. By issuing directives to have employees start working from home earlier, businesses can reduce the amount of time that their employees spend sick at home. Finally, companies possessing non-specific capital can start producing medical equipment to help ameliorate shortages, and profit while doing it.
As far as monetary and fiscal policy are concerned, caution should be the rule of the day. While the impact of pandemics is short-lived, low interest rates can permanently alter the capital structure by distorting price signals. It’s likely that this played a role in the last housing crisis, which makes the Fed’s decision to approach the zero bound particularly disconcerting. As U.S. debt soars over $23 trillion, pandemics may soon be the least of our worries.
