Over the coming weeks, voluntary or mandatory work-from-home quarantines, school closures, and other "shelter in place' may spread faster the the coronavirus itself as policymakers attempt to protect vulnerable populations from COVID-19. Strategists and analysis must step up to the plate to provide their ecosystems with dispassionate data-driven perspective and calm analysis regarding knock-on effects.
It is not a foregone conclusion that we will soon be living in a dystopian universe that showcases the worst aspects of human nature. Strategic action now by companies and policymakers can lay the foundation for approaches that will minimize impact while positioning for success after infection rates have peaked.
This post first provides some concrete data to help generate solid analysis. It then unpacks the main policy toolkits available to governments before closing with discussion of some wild cards.
Data -- Perspective and Policy Priorities
This, too, shall pass.
Widespread anxiety and fear multiply like proverbial rabbits in the absence of solid information. A range of actors armed with click-bait or malicious intent can amplify concerns. Analysts and strategists must be vigilant to avoid amplifying concerns.
The first, best, and easily achievable solution is to focus as much as possible on concrete data from reliable sources in order to provide perspective regarding the magnitude of the situation.
From a data perspective, it is inevitable that transmission/infection rates in the Northern Hemisphere will increase merely because detection methods and awareness have skyrocketed this week. But will infection rates parallel the rates seen in China? Increased awareness, natural self-preservation, and overall increases in personal hygiene could reasonably translate into lower infection rates as a percentage of the population compared with rates seen in China where awareness was non-existent.
High infection numbers can easily accentuate underlying concerns and drive people/companies to "shelter in place" to avoid infection. The resulting downward drag on economic activity can generate significant adverse economic impact disproportionate to aggregate infection and mortality rates
Data can help put the situation into perspective. For example, between 2010-2019, pedestrian deaths skyrocketed from 4,109 to 6,590 per year.
As we noted HERE earlier this week, the average number of U.S. flu-related deaths expected by the U.S. Center for Disease Control (CDC) for the 2019-2020 flu season was between 16,000 and 41,000. This forecast range was issued during a period in which the CDC expected a "normal" flu season. At a minimum, this original estimate provides a solid yardstick against which COVID-19 data should be evaluate.
As of 4 March 2020, the CDC indicated that only 99 people had been infected in the United States, with the highest infection rates concentrated on the West Coast.
The low volumes this week should not provide the basis either for complacency or for denial. These numbers will go up, if for no other reason than that increased detection efforts are accelerating dramatically.
Aggregate infection rates themselves may be lower than China given the aggressive action many individuals are taking to protect themselves from infection. These efforts are well-advised but, as noted below, they may generate a range of adverse economic consequences that will require policy action.
But as the total number of cases increases, then the mortality rate in the United States and other countries could easily decrease. Early detection and advanced, aggressive medical care mean that the proportion of individuals for whom COVID-19 becomes lethal will likely be lower than it was in China. As healthcare professionals and policymakers battle the virus, the question becomes whether the economic impact of the virus will be stronger than the virus itself.
Avoiding a Virus Crisis -- Policy Reaction Functions
As this blog has noted (most recently HERE), anticipating a policy trajectory for any given issue does not require a crystal ball. It just requires treating public policy on a par with other asset classes by acquiring the largest amount of solid data regarding public policy actions and evaluating those inputs rationally. The Coronavirus Outbreak response is no different.
Policymakers have four main kinds of tools to deploy when battling the impact of the virus. As the infographic on the left indicates, some of those tools are finely tuned to the nature of the crisis itself and some tools instead address the economic consequences of the crisis. Most are self-explanatory.
As noted earlier this week HERE, it seems highly likely that fiscal policy at present is a far more effective tool for countering the near-term economic impact of the virus than monetary policy. It is worthwhile noting that fiscal policy takes two main forms: direct government spending (procurement, subsidies) and tax incentives (tax rebates, tax hikes). Whether tax rebates or tax increases can impact consumer behavior remains to be seen, at least with respect to taking risks regarding a potentially life-threatening disease.
The most concerning set of tools lies in the trade policy space. Government efforts to increase supply chain disruptions through export restrictions (such as India's decision this week to ban pharmaceuticals exports) or, worse yet, by designating certain sectors as eligible for national security tariffs represent the worst case scenario for policy responses.
In the medium-term, significant increases and divergences regarding phyto-sanitary standards can increase dramatically an already high and controversial set of non-tariff barriers to trade.
Longer-term adverse economic impacts that extend past two quarters might separately tempt banking regulators to relax regulatory capital and other rules in an effort to minimize the strain on bank balance sheets associated with missed loan payments or other indicators of decreased credit quality. Given that the initial OECD estimates (see the infographic on the left) indicate European economies are likely to bear the brunt of virus-related supply chain disruptions, and given that the European economy was experiencing anemic, if not slowing growth, before the virus outbreak, early indicators of economic distress associated with low consumption levels are mostly likely to emanate from Europe.
The policy toolkit is not all bad. Efforts to diversify sourcing and accelerate consumer access to agricultural and other commodities could have the positive impact of incentivizing policymakers to decrease tariffs on goods and services faster than they might otherwise have done in the absence of the crisis. First steps in this direction can be seen with the quiet and rapid implementation of the Phase I bilateral trade deal between China and the United States, which will have the effect of increasing immediately the export of American protein and other commodities to China as the government implements significant domestic restrictions on live animal markets. Cross-border scientific cooperation is set to increase as doctors and political leaders focus on working together to address issues that impact all humans.
The Wild Card -- Individual Behavior, Hysteria and Panic
Analysts and strategists may succeed in keeping a calm head when evaluating the situation, but the same cannot be said for everyone else. As we noted HERE last summer, information flows travel at historically high velocity rates, turbo-chared by social media channels. The information ecosystem effectively creates a "Greshams Law" effect in which solid, truthful information is drowned by bad information from unsavory actors seeking to mislead or manipulate public opinion.
In the meantime, policymakers continue doing their daily work. Consider the last 24 hours using data from our patented platform.
Trade and Brexit were dominated by coronavirus-related activity, effectively drowning out headlines regarding the first round of UK-EU exit negotiations. Yet the majority of the activity in the last 24 hours was non-substantive, dominated by notices regarding meeting cancellations and new but familiar efforts to ask people to wash their hands and refrain from attending meetings in person if they are unwell.
But in the banking and FinTech sectors, policymakers continued along their regularly scheduled business. The Bank of Japan pushed forward with payments and FinTech policy in a major speech. The Bank of England's Governor Carney delivered a major speech regarding macroprudential policy and Basel III. Our automated analytical system captured these moves, enabling our customers to stay on top of these developments even as they kept an eye on infection rates and economic consequence.
The situation is ripe for over-reaction. Supply chain disruptions can be mitigated and managed, if they are transitory. But even if the supply chain were to return to normal in the sense that Chinese factories could once again start churning out the goods sold to consumers in Europe and the United States, this resumption of production will do no good to the global economy if consumers in the transatlantic economy are too frightened to leave their homes.
The potential impact is not limited to consumerism of physical goods. Advanced economies are driven predominantly by the services sector, which includes a broad range of activities from tourism, travel, and restaurant dining to consulting services and medical services. People who forego discretionary travel deal a double-blow to economic growth not just in lost revenue from large-ticket travel purchases (plane tickets, hotel room); they also are not present in a different economy for small scale on-the-spot purchases from convenience stores and boutiques.
Most illnesses pass for the majority of people in a span of a few weeks. But the lingering impact on the services economy could easily stretch into 2Q2020 and 3Q2020. Beyond these transitory consumption shifts lies a potentially more important structural shift. Companies large and small will emerge from the virus crisis more aware of their vulnerability to supply chain disruptions.
CEOs everywhere will now have an incentive to diversify their sourcing in order to avoid the concentration risk experienced during 1Q2020. In addition, companies and individuals will likely accelerate their adoption of advanced technologies in order to minimize their virus exposure. Finally, manufacturing automation and 3-D printing will likely receive more attention from forward-looking CEOs seeking to ensure that their goods are increasingly insulated from becoming unwitting silent transmitters of viruses that can survive on surfaces for more than 24 hours.
At BCMstrategy, Inc., we use advanced, patented technology to help strategists and advocates access the best information regarding strategically global public policy developments. If you are interested in seeing how our 10+ layers of analytical process automation can help you read smarter and connect the dots faster, please reach out to us today using THIS FORM. If you are interested in joining our free Slack workspace where we share periodic insights regarding public policy trajectories using platform data, please reach out to us today using THIS FORM.