President Trump’s announcement that he plans on having the US economy re-open by Easter has proved controversial. Yet whether or not we agree, the move usefully highlights the limits of the trade-off between economic growth and containment of the COVID-19 epidemic.
With a vaccine at least 12-18 months away, keeping our economies shut down until the epidemic ends would cause not just the care of COVID-19 patients to unravel, but basic social functions as well. If we keep cranking out ever-larger stimulus packages while stopping the production of goods and services, we will eventually end up with hyperinflation, since money will grow exponentially while output will contract deeply. Hyperinflation would arrive faster in countries such with low central bank credibility, for instance Argentina, than say in Germany. But even Germany witnessed hyperinflation after World War I when its money printing spiralled out of control.
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President Trump’s announcement that he plans on having the US economy re-open by Easter has proved controversial. Yet whether or not we agree, the move usefully highlights the limits of the trade-off between economic growth and containment of the COVID-19 epidemic.
With a vaccine at least 12-18 months away, keeping our economies shut down until the epidemic ends would cause not just the care of COVID-19 patients to unravel, but basic social functions as well. If we keep cranking out ever-larger stimulus packages while stopping the production of goods and services, we will eventually end up with hyperinflation, since money will grow exponentially while output will contract deeply. Hyperinflation would arrive faster in countries such with low central bank credibility, for instance Argentina, than say in Germany. But even Germany witnessed hyperinflation after World War I when its money printing spiralled out of control.
By contrast, the response to the Spanish Flu was much more limited and consisted largely of limited forms of social distancing implemented in the US by states and local governments. This inhibited the impact of the Spanish Flu on the US economy but had horrendous human costs: 50 million deaths worldwide, including 675,000 in the US. Surely, with the progress of medicine and technology since World War I, we can do better than either an unfathomable number of deaths or the destruction of our economies.
Chart 1: Cumulated Cases
Source: John Hopkins, Macro Hive
Indeed, only a few months into the epidemic, there are already sharp differences between countries’ responses and their consequent economic and health impacts (Chart 1). The most efficient policy is clearly early intervention, as shown by Hong Kong, Singapore and Taiwan, but in most countries that is no longer an option. The least efficient policies by contrast are mass lockdowns, since they prevent both healthy and diseased individuals from contributing to the economy.
Some countries, however, have no alternative to mass lockdowns to “flatten the curve” because their healthcare systems are already at risk of being overwhelmed. But such lockdowns should be strict, countrywide, and limited in duration. Italy entered a limited lockdown at end-February (it has since tightened it repeatedly) and has only now stabilised its new cases. With strong compliance, however, a lockdown need not last much beyond two weeks, since most individuals will experience symptoms within that period. After the two weeks, individuals without symptoms should be allowed to re-join the community.
Most importantly, the slowdown in the epidemic brought by a lockdown should be used to implement more efficient containment policies. Such policies would proactively isolate those infected while allowing healthy individuals to go about their daily lives – a strategy that is working well for Korea. This requires extensive testing as well as contact tracing (Chart 2).
Chart 2: Testing Intensity and Test Results
Source: The COVID Tracking Project, Macro Hive
Testing needs to target a representative sample rather than only those most at risk. For instance, while it is well-known that mortality rates are higher for the old than the young, Korea has been able to establish through random sampling that the young were at higher risk of catching the disease than the old. By contrast, Italian testing, which remains targeted at the most exposed, is picking up a disproportionate share of older individuals. This biases measures such as the mortality rate.
In addition, testing needs to look for past as well as current infections. There is no medical evidence of reinfection, while the virus has not yet mutated. This suggests that individuals already exposed to the virus could be immune. The rate of past infection is therefore a key statistic, for instance to determine the risks of the more vulnerable members of the population.
Contact tracing and case management need to leverage the ongoing technological revolution. Hong Kong, Korea, Singapore, and Taiwan have developed apps to alert users when they come close to a source of contagion, to allow for fast contact tracing, as well as to support and check on quarantined individuals. True, these involve a loss of privacy, but they would be a small price to pay to keep our economies running while maintaining public safety. In addition, safeguards could be built, for instance by ensuring all the tracing data is discarded once the epidemic is over.
Between the Fed facilities and the fiscal package, the US economy could receive the equivalent of $6tn in new liquidity – about 30% of GDP. Other countries are also implementing mega policy packages. But no matter how large the stimulus, it will have little impact if the economy is prevented from rebooting. President Trump’s announcement could well trigger a global rethink of COVID-19 policy responses and a global recovery earlier than expected.
Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)