Killing the Coronavirus Behemoth

How can economies conquer the Behemoth that seems poised to drag the world and pretty much every economy in it, into a recession?

Here is the problem and the amplifiers of the problem:

The coronavirus - COVID-19 - is a respiratory disease that presently has no cure, and while it is mild in many cases, it is also lethal. Currently, of the roughly 130,000 known cases, there have been close to 4,800 deaths, while approximately 68,700 people have recovered (worldmeters.info). The behavior of the virus is still not fully known but the nature of how it spreads very quickly, in particular because those infected do not show symptoms until much later, if any, has meant that everyone is potentially at risk.

The disease originated in China which took measures eventually to clamp down on its spread, measures which meant widespread closure of factories and the disruption of a major global supply chain hub. So the original impact from the virus could be viewed as a supply side shock- reduced global output due to a massive disruption in production.

The problem has since then tacked on a demand side problem because the nature of the virus has meant that increasingly person to person contact is being restricted in a bid to curtail the spread. This has shown up in massive cancellations of many activities, all of which involve some measure of spending and production, from sport events, to conferences, to political rallies, to college classes, and to public gatherings more generally. Some communities have experienced quarantines - voluntary and imposed.

When there is both a reduction in supply and demand in the aggregate and in such large volumes within countries, and globally in general, we can realistically expect a recession on the horizon. First quarter economic contraction will happen, it is only just not certain whether we will see a second quarter contraction to formally call it a recession.

But this is all the more amplified by the following:

Increased investor pessimism in the stock market. Behavior in the face of a pandemic and one associated with uncertainty does not lead to orderly behavior. Investors panic and sell riskier assets while seeking haven in relatively safer assets, and households become very frightened and cut back on spending, that is after some of the more astute households have stocked up on basic supplies in anticipation of the need to self quarantine, and expected product scarcity in markets.

Stocks have been in a free-fall over the past two weeks and measures of consumer confidence have also shown significant decline.

Oil prices have also fallen in an awkward turn of events, as plans by the OPEC to try to bolster their economies through an agreement with Russia to cut back production fell through. While this should make energy costs cheaper and thus a benefit for net importing countries, the impact of the sharp fall in oil prices as Saudi Arabia acted to punish Russia took its toll on markets which sank in response, thus exacerbating the low market confidence problem.

Countries have tried to act with a slew of monetary and fiscal policies, usually the steps taken by governments to bolster private spending during a crisis, but markets have not found solace in these policy measures. Why?

The fear of getting infected as the disease continues to spread.

The source of the demand shocks is an uncertainty associated with the spread of a deadly virus. Bigger paychecks, lower interest rates, more projects to work on that can draw on unemployed resources will not likely bring consumers out of their homes. Even activities that can be carried out online, in some cases, still need people on ground to make deliveries of transactions feasible. How willing and available these individuals will be is another question, their value will very likely go up, as will the likelihood that that they will unwittingly become the mobile carriers of infections.

The only way out here is a cure, and that very quickly, or at least to hope that a way to isolate and kill the virus very quickly is found. Conjectures out there suggest that the low incidence of the disease in subSaharan Africa suggests that the virus might not thrive in hot climates, so perhaps hoping that summer comes a lot sooner might help North America and Europe escape the onslaught of this behemoth.

As of now, further incentivizing the pharmaceutical and biotechnology industry is what governments can do. While these companies are largely at work trying to come up with a cure, perhaps a stronger incentive - a winner takes all - type of contractual agreement with respect to market supply and profits may help speed up the process. The $8.3 billion package passed by the Trump Administration last week includes roughly $3 billion for vaccine research. Perhaps more needs to be allocated to this and a clear indication of the allocation of financial benefits for coming up with a cure.

As somewhat obscene as this might sound, as the expectation is that there should be a public spirited effort to arriving at the cure, incentives still matter and is what we need at the present moment to kill this behemoth.