The Cure Has To Be Worse Than the Problem

Financial FAQs

Federal Reserve

President Trump on Sunday announced that he was extending his administrations guidelines on social distancing to April 30 during the COVID-19 pandemic . He seems to have taken the recommendation of his top scientific advisors Drs. Fauci and Brix to heart, backing away from his assertion that the virus will have diminished enough to be able to celebrate Easter Sunday on April 12 in churches.

Why did he change his tune?  Dr. Fauci said Sunday on CNN’s “Face the Nation” that the novel coronavirus could kill from 100,000 to 200,000 people while infecting millions of others, though he said that the virus was difficult to model this early in the outbreak.

Recent scientific research and mounting anecdotal evidence show the more severe the ‘cure’, including longer social isolation and business closures, the quicker the return to economic growth once it is lifted.

Researchers from the Federal Reserve in a recent study of the 1918 Spanish Influenza pandemic that killed more than 50 million people, cited recently by MarketWatch’s Steve Goldstein, found that the more draconian the ‘cure’ in tamping down the initial spread, the more lives were saved and there was a more robust economic recovery as well.

The 1918 Flu Pandemic lasted from January 1918 to December 1920, and it spread worldwide. It is estimated that about 500 million people, or one-third of the world’s population, became infected with the virus. The number of deaths is estimated to be at least 50 million worldwide, with about 550,000 to 675,000 occurring in the United States.

“Most U.S. cities applied a wide range of NPIs in fall 1918 during the second and most deadly wave of the 1918 Flu Pandemic,” said the study. “The measures applied include social distancing measures such as the closure of schools, theaters, and churches, the banning of mass gatherings, but also other measures such as mandated mask wearing, case isolation, making influenza a notifiable disease, and public disinfection/hygiene measures.”

What are the economic consequences of the 1918 influenza pandemic was the central question of the study. And given that it was a worldwide epidemic, what are the economic costs and benefits of non-pharmaceutical interventions (NPIs), such as social isolation and quarantining of the infected?

“Using geographic variation in mortality during the 1918 Flu Pandemic in the U.S., we find that more exposed areas experience a sharp and persistent decline in economic activity,” said the study.

“(Yet) We find that cities that intervened earlier and more aggressively do not perform worse and, if anything, grow faster after the pandemic is over,” said the study, “our findings thus indicate that NPIs not only lower mortality; they also mitigate the adverse economic consequences of a pandemic.”

And there are increasing signs that the most draconian measures to contain the current COVID-19 pandemic by countries such as China, Singapore, and South Korea shortened the recovery period.
Similar results are also coming in from Germany and the Netherlands that have reacted the quickest to the pandemic and are showing lower rates of infection.

Data from Germany shows just 0.4 percent of people who tested positive for the virus have died from it, much less than the 9.5 percent in Italy and 4.3 percent in France. In the Netherlands growth in transmissions of the virus have also slowed significantly.

The Fed’s Spanish flu study found that while reacting 10 days earlier to the arrival of the pandemic in a given city increases manufacturing employment by around 5 percent in the post period, the researchers said, implementing restrictions for an additional 50 days increases manufacturing employment by 6.5 percent after the pandemic abates.

The vertical line in the Fed’s graph above measured mortality rate, while the horizontal line measured employment changes. And, the lower death rate correlated with higher employment.

“…we find that early and extensive NPIs have no adverse effect on local economic outcomes. On the contrary, cities that intervened earlier and more aggressively experience a relative increase in real economic activity after the pandemic. Altogether, our findings suggest that pandemics can have substantial economic costs, and NPIs can have economic merits, beyond lowering mortality.”

President Trump first intoned “We cannot let the cure be worse than the problem,” at the beginning of the pandemic. The experts are saying just the opposite. Unless we allow a worse cure, the problem of a return to normal economic activity from an almost ground zero of business activity, can be prolonged.

Harlan Green © 2020

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