A Cure Worse than the Disease? EconVue Spotlight March 2 2020

When we issued our previous newsletter a month ago When China Sneezes the World Catches A Cold, we did not envision that COVID-19 would also become the topic of our March edition. But here we are, and I am reminded of a review of a book called Contagion I wrote back in 2014 for Yale University Press. The author's thesis is that it is not the epidemic, but the surrounding panic, that causes the most economic damage. I agree with him still. 

A virus is an incredibly successful life form--bits of genetic material enclosed in a protein envelope that cannot live outside its host. Billions of them live in the atmosphere above our heads at 8200 feet, and they can travel from continent to continent as part of a living jet-stream. They cannot be contained, but their goal is co-existence, not extermination. Doubtless there will be many more reports of confirmed cases of COVID-19, likely due to the increased testing rather than increased spread of disease. In South Korea, they have even created drive-in testing centers and of course this has created a spike in positive test results. 

As Rodney Jones, a veteran China investor has recently said, we don't know what the consequences of a dead stop to an entire nation's economy might entail.  But in spite of these satellite images that show improved levels of nitrogen dioxide in China, the redoubtable Lauri Myllyvirta reports that Chinese steel plants never shut down-it is just too expensive to restart them. People are going back to work, and out to restaurants. Iran, Italy, Japan are experiencing lagging disruptions. Global meetings are being cancelled.

A lasting effect of this episode will be to accelerate the unlinking of Chinese supply chains with the rest of the world. This had already begun with the US-China trade standoff, and will continue apace. Another blow is the release today of a report by an Australian think tank that says 83 global brands have contracted with Chinese manufacturers who employ forced labor from Xinjiang. As the source of the infection China will no doubt take a hit to its soft power. Joseph Nye, who invented the term, has a must-read interview in the Nikkei "The Future is not Asian". 

So if the cure threatens to be worse than the disease, what to do next? There is a hue and cry for the Fed and other central banks to lower rates, and most market participants believe that they will do so within the next two weeks, if not today. Thank goodness for the gift of Janet Yellen's rate hikes that left Jay Powell room to do so. In the meantime, sensible people are doing sensible things. If everyone takes precautions, we might just see a lower mortality for seasonal flu as one of the unintended consequences of our newfound hyper-vigilance. 

Unprecedented scientific resources have been aimed at finding effective medications against the coronavirus and eventually, a vaccine. In the meantime, panic is expensive- $6 trillion in market losses last week alone. The $90 trillion world economy has a stall speed. In aerodynamics, the heavier the load, the higher the speed that must be maintained to avoid a nosedive. Too much of a precautionary slowdown could be catastrophic. Investors are looking to central banks to control the rudder and maintain altitude.

Related Links:

Contagion: The Cost of Panic
Lyric Hughes Hale 5/9/2014 Yale University Press

Airborne Nitrogen Dioxide Plummets Over China
NASA Earth Observatory 2/26/2020

There is evidence that the change is at least partly related to the economic slowdown following the https://www.aspi.org.au/report/uyghurs-saleoutbreak of coronavirus. (Image above)

Why Does the Smog Strike Beijing Even When the City is Closed Down?
Lauri Myllyvirta 2/25/2020 Centre for Research on Energy and Clean Air

Overall energy consumption is down about 25% compared to a year ago but pollution around Beijing remains at high levels. That is because steel mills have remained fully operational in recent weeks and cars are only a small part of pollution in the city. 

Uyghurs for sale
Vicky Xiuzhong Xu, Danielle Cave, Dr James Leibold, Kelsey Munro and Nathan Ruser 3/1/2020 Australian Strategic Policy Institute

Blockbuster report from an Australian think tank lists at least 83 global brands that contract with factories employing forced Uyghur labor. The sound of supply chains breaking, first due to the US-China trade war, then the coronavirus, has now officially reached its peak.

True Costs of Managing Pandemics
Farah Mohammed 3/1/2020 JSTOR Daily

Report of the WHO-China Joint Mission on Coronavirus Disease 2019 (COVID-19)
World Health Organization 2/2020

The WHO has a budget of $5.4B, about 57 cents per person on a global basis, and is 80% dependent on voluntary contributions.

The coronavirus is the first true social-media “infodemic”
Karen Hao and Tanya Basu 2/12/2020 MIT Technology Review

Good and bad information about COVID-19 circulated at amazing speed, amplifying the crisis. 

I have the coronavirus. So far, it hasn’t been that bad for me
Carl Goldman 2/28/2020 Washington Post

My treatment has largely consisted of drinking gallons and gallons of Gatorade.

Coronavirus Disease 2019 and Influenza
Edward Livingston, Karen Bucher and Andrew Rekito, JAMA 2/26/2020

Of course it is early days for COVIDー19 but if China's infection rate has actually peaked, seasonal influenza will prove far more deadly in 2020. Unintended but welcome consequences: if everyone starts taking precautions, that could also drive down flu rates and fatalities.

Will the Coronavirus Derail the Global Economy? (Youtube)
Becker Friedman Institute for Economics at University of Chicago 2/21/2020 Panel Discussion

An economist, a doctor, and a political scientist, Yanzhong Huang, discuss how it might be too late for containment, but not mitigation.

How Hard Will COVID-19 Slam the Global Economy?
Michele Wucker Linkedin 2/24/2020

This crisis which is overshadowing the threat of climate change will hopefully not go to waste, and panic will give way to thoughtful and long-lasting reforms.

Economic Activity and the Spread of Viral Diseases: Evidence from High Frequency Data
Jerome Adda RePEc 2016

The link between viruses, economic growth, and the expansion of transportation networks. 

Records from Ancient China Reveal Link Between Epidemics and Climate Change
Chelsea Harvey Scientific American 11/7/2017

Hebei Province suffered a drought this past summer.

Cave full of bats in China identified as source of virus almost identical to the one killing hundreds today
Devika Desai 2/6/2020 National Post

Cave in Hubei was identified, but then funding ran out. Post-crisis, this will happen again. 

China’s early warning system didn’t work on covid-19. Here’s the story.
Dali Yang Washington Post 2/24/2020

The root cause of the spread of COVID-19 was not a lack of good doctors in China. At its root it was a communications problem. Quarantines are the backup plan when these processes fail. Fixing the system will be the key to avoiding the next epidemic.

How the Coronavirus Revealed Authoritarianism’s Fatal Flaw
Zeynep Tufekci the Atlantic 2/22/2020

Thought-provoking: listening in is not the same as listening to. As COVID19 spreads to other countries with other types of governments, we will witness a natural experiment in terms of best (or worst) responses to a catastrophe.

China Land Sales Expected to Break Record as Local Governments Fill Budget Gaps
Wang Jing and Guo Yingzhe Caixin 1/3/2020

There are no property taxes in China, so local govt's sell land for revenue. 2019 was a record year. This year fiscal needs will be greater, but sales are likely to be slower. And at some point, local officials will run out of salable land. This is the weak link in China's economy resulting from fiscal over-centralization. 

Coronavirus threatens Japan rebound as GDP falls most in 5 years
Akane Okutsu 2/17/2020 Nikkei Asian Review

Sales tax hike from 8-10% caused Japan’s GDP to contract by more than 6%—twice the annualized forecasted number. 

U.S.

What does it take to manage the world’s biggest economy? (Podcast)
The Economist 2/27/2020

Janet Yellen, the first woman to chair the Federal Reserve, talks about what it’s like to manage the world’s biggest economy and whether central banks and governments still have the right tools for the job. Also, how to ace a job interview with President Trump.

The media’s clueless coverage of the Biden candidacy
Michael Tracey 2/29/2020 Spectator 

Bitcoin 

Bitcoin Drove Half of Square’s Cash App Revenue in the 4th Quarter
Brady Dale Coindesk 2/26/2020

Half of Square's revenue is from bitcoin transactions. $178M in Q4. So no one uses bitcoin for transactions...

How the Long Tail of the Coronavirus Might Slow Bitcoin’s Hash Power Growth
David Pan 2/5/2020 Coindesk 

Our next Hale Report podcast on March 13th will be a conversation between Japanese diplomat Noriyuki Shikata, and University of Chicago political scientist John Mearsheimer.  The topic is the future of US-Japan-China relations. If you have any questions for either of them, please send them along!