Economics Weekly: And Now for the COVID-19 Fiscal Response

Friday, March 6, 2020

There is no way of knowing how much time we will have to reach our Shangri-La next time. It will not be of much use having a wonderful estate in New Zealand if you can't get there. Long-range air travel is likely to be one of the first things to go. On the other hand, you want your sanctuary to be remote enough to be inaccessible to the dispossessed hordes.

You should assume the possibility of a breakdown of the civilized infrastructure. Your safe haven must be self-sufficient and capable of growing some kind of food. It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. Think Swiss Family Robinson. Even in America and Europe there could be moments of riot and rebellion when law and order temporarily completely breaks down. A few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage. Brigands tend to be cowards.

Wealth, War and Wisdom, Barton Biggs (February 2008)

From a macroeconomic perspective, one of the big differences between the COVID-19 viral outbreak and, for example, SARS or H1N1 (the 2009 version, as opposed to the 1918 pandemic), has been the response of the healthy segments of society and not just the ill. This includes companies canceling all foreign travel, canceled conferences, factory closures, school closures, quarantines, forcing all employees to work from home, etc.—almost none of which took place during previous viral outbreaks. Only time will tell whether such precautions are actually justified or turn out to be an overreaction to what some are calling simply a bad case of the flu. What is clear, however, is the message we are hearing from those in the medical profession and expert epidemiologists: a) it is very possible/likely that large swaths of the global population will be infected; b) encouragingly, the mortality rate is fairly low (0.1%-2%; SARS was around 10%), especially for the young and healthy; and probably c) the impact is likely to be temporary. Just about everything else outside of that is still largely unknown.

The Bank of England Governor Mark Carney this week suggested that one-fifth of the U.K. population could be off sick at the peak of the virus. The Economist cited estimates that suggest 25%-70% of the populations of infected countries will contract the virus, with the death toll amounting to many millions. At its most extreme, we have read some market analysts suggesting the best comparison is likely to be the H1N1 outbreak of 1918, where a staggering one-third of the world's population was infected, leading to 50 million deaths. If that's really the kind of scenario we're talking about, then perhaps we should all be following Barton Biggs's advice above!

As we discussed last week, while this is a supply-side shock, it is also colliding with a demand one, such that there is very much a role for central banks to play in response to this epidemic, and that process is already underway. In this week's Economics Weekly, we discuss the other avenue for policymakers, i.e., the case for a fiscal response.

For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.

Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.

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