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Government imposed lockdowns have proven to be an effective way of controlling coronavirus where the number of cases in the community are beyond a manageable limit. But is the economic toll worth it?
Recent research suggests that despite what we have been told, lockdowns only account for a small portion of the economic cost of COVID-19. By far the biggest economic effect – around 60% – is attributable to people voluntarily self-isolating because of fear of infection if they leave their homes.
This suggests that the best strategy for governments to limit the economic shock is to reduce people’s anxiety around going about their normal business by providing evidence-based reassurance that the risks of catching the virus are low as long as they take sensible precautions: social distancing, wearing a mask and washing hands.
The research by University of Chicago economists Austan Goolsbee and Chad Syverson used cellphone records to track customer’s visits to individual businesses across 110 different industries and comparing this to adjoining states that did not lock down.
“While overall consumer traffic fell by 60 percentage points, legal restrictions explain only 7 percentage points of this. Individual choices were far more important and seem tied to fears of infection. Traffic started dropping before the legal orders were in place; was highly influenced by the number of COVID deaths reported in the county; and showed a clear shift by consumers away from busier, more crowded stores toward smaller, less busy stores in the same industry. States that repealed their shutdown orders saw symmetric, modest recoveries in activity, further supporting the small estimated effect of policy. Although the shutdown orders had little aggregate impact, they did have a significant effect in reallocating consumer activity away from “nonessential” to “essential” businesses and from restaurants and bars toward groceries and other food sellers.”
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As the world continues to cope with the disruptive effects of the pandemic, ultimately our only hope for a return to near-normality is an effective, widespread vaccine.
According to Forbes magazine, superforecasters are more optimistic than they were that a vaccine (at least enough to inoculate 8% of the US population) could be available by the end of the year.
The downside is it would still take many more months for the vaccine to be widely available in the US and it is looking increasingly likely that regular top-ups will be required to maintain immunity.
While New Zealand is pursuing its own vaccine strategy we shouldn’t hold our breath we will have access to a widespread vaccine any time soon. Our best hope is to double-down on our elimination plan.
“The superforecasting group were asked, “When will enough doses of FDA-approved COVID-19 vaccine(s) to inoculate 25 million people be distributed in the United States?” Their answer (as August 12, 2020) is
Before 1 October 2020: 1%
Between 1 October 2020 and 31 March 2021: 44%
Between 1 April 2021 and 30 September 2021: 37%
Between 1 October 2021 and 31 March 2022: 11%
Not before 1 April 2022: 7%
The pessimistic extreme, not before April 2022, was the most common answer when the forecast begin back in April. Over time, however, members of the group have adjusted their predictions to more optimistic ranges. The current favourite, between October 2020 and March 2021, was the least favourite choice through June. This illustrates that superforecasters do not lock in to one opinion. Ego often leads people to defend their past statements even when evidence has changed. Superforecasters avoid this bias.”
Photo by BP Miller on Unsplash
There is increasing disquiet globally about the distortionary strength wielded by the big tech titans.
Contrary to United States’ robust “trust-busting” history where monopolistic companies were broken up to ensure competition in the market, US regulators are facing criticism for allowing big tech companies to freely amass market share on the narrow interpretation that “consumer welfare” is not being harmed.
Online giants like Google, Amazon and Facebook have shown that once online platforms reach critical mass it’s “winner takes all”. Even so, it’s hard to show that consumers are losing out. Users on the whole have enthusiastically embraced platforms which allow them to access stuff at no, or very low, cost.
The real concern is that these firms effectively squash competition by raising the barriers to entry for new entrants and then buying out any start-ups that look like they may offer real competition. While prices for consumers may stay low, their size and disproportionate control of labour means they are having an even more worrying effect of depressing wages and increasing the levels of inequality.
The Economist reviews the increasingly partisan agendas playing out through the anti-trust debate in the US – Republicans tend to be against and Democrats for:
“Research by the OECD, a club of mostly rich countries, finds that between 2000 and 2014 the share of sales accounted for by the top eight firms in a given industry rose by four percentage points in Europe and eight percentage points in North America.
Many antitrust experts are unconcerned: industrial concentration, they argue, does not tell you how competitive the market for a particular good is. But some economists have blamed falling levels of competition for far-reaching economic ills, such as stagnant labour markets and growing inequality. In a paper published in 2019 the late Emmanuel Farhi of Harvard and François Gourio of the Federal Reserve Bank of Chicago argued that the rising market power of big companies was linked to low interest rates and weak investment, factors shaping the whole economy.”
Central banks and governments around the world have pumped eye-watering amounts of money into their economies in an attempt to cushion the recessionary effects of the pandemic. This is leading people to worry that, as in the 1970s, high inflation is just around the corner.
However, despite all of the trillions of dollars of stimulus, demand remains weak globally as social distancing and consumer caution over future job prospects leads to money being saved rather than spent.
And it seems New Zealand businesses don’t believe there will be inflation anytime soon. According to the RBNZ, businesses expect the rate of inflation to decline over the next 1-2 years:
Source: RBNZ Survey of Expectations
And while households expect inflation to increase in the next year, it is still in line with expectations of previous few years:
Source: RBNZ Household Inflation Expectations
In addition, an article from CNBC argues that the link between money creation and consumer prices has weakened over recent years. It’s because of this that the anticipated inflation never arrived following the 2008 recession despite massive fiscal stimulus. Asset prices went up, but that’s about it:
“Banks have kept much of the cash created by the Fed’s recent purchases “on account” in the form of excess reserves, instead of lending it out into the economy.
“The experience of the last decade is that central bank balance-sheet expansion certainly need not generate a period of excess inflation, and, in fact, even with a big balance sheet, it might still be hard to get the inflation that you want,” Guha said.
While recent stimulus measures might not directly boost prices for consumers, some say it is causing inflation in other places like the stock market or housing market.
“I think we’re looking at very significant increases in asset price inflation,” Citi’s Mann said.”
Photo by BP Miller on Unsplash
While the economic destruction caused by the pandemic will be incredibly painful for many, there is a school of thought that suggests it will also open the way for new innovative firms to emerge.
“Creative destruction”, the term first coined by Austrian economist Joseph Schumpeter, is the process dismantling long-held business practices in order to make way for more efficient ways of using resources.
Derided by some as minimising the human impact of economic destruction there is no doubt that economic crises can force much needed structural change which otherwise is often blocked by the beneficiaries of the status quo. Without creative destruction many “sunset industries” from bricks and mortar retail, fossil fuel production to mass tourism would continue despite their environmental or productivity drag on society.
[According] to the theory of creative destruction derived by Austrian economist Joseph Schumpeter in 1942 from ideas proposed by Karl Marx, economic and technological progress demands that businesses must die and industries and paradigms must be swept away to make room for new ones.
Canadian economist Peter Howitt, recent winner of the Frontiers of Knowledge Award for his work proving Schumpeter's principles in the real world, said that while the creative destruction process is happening all the time, economic crises speed the process along.
"When old firms or technology or skills or whatever are hanging on, they can last a long time until things get really bad," said Howitt. "It's typically during a recession that a lot of the destruction takes place."
The implication is that while those in retail or the oil business or the real estate industry may insist that the COVID-19 lockdown has been the cause of their failure, the economic crisis may instead be a trigger, a catalyst for a process already underway.