An Infected Economy
The commonly recited statement that COVID-19 knows no bounds is not confined to its effects on individual or population health; it is also the instigator of our current and growing economic woes. Prior to COVID-19, it was well-established that an outbreak of a reemerging or novel disease with high communicability would ravage the US economy, along with global economy. A combination of industry shut downs to reduce disease transmission and panic-induced risk averse behavior among consumers and producers turns a pandemic into a pestilence for the economic health of countries and their people. Just as the high probability of a pandemic was foreseen so to were the economic effects of such an event. As the Washington Post stated, COVID-19 is no black swan, nor is it an event for which we were not given warning shots.
In September 2019, mere months before the arrival of the novel coronavirus in Wuhan, the Council of Economic Advisers published a report, which estimated the substantial health and economic losses the US would face as a result of pandemic influenza, another highly communicable virus. In 2018, the Worldwide Threat Assessment of the US Intelligence Community found that a “novel strain of a virulent microbe that is easily transmissible between humans continues to be a major threat,” and listed pathogens H5N1 and H7N9 influenza and MERS-CoV as potential culprits. Until bureaucracy-fueled abandonment in 2017, the Department of Homeland Security maintained annually updated models that estimated the infrastructural damage wrought by a pandemic. Beyond predictions, the 2019 Global Health Security Index forewarned the US, as well as the rest of the world, that pandemic preparedness is lacking.
Over the last decade, two other coronaviruses emerged in other parts of the world. The severe acute respiratory syndrome (SARS) epidemic of 2003 originated in China, but affected 26 countries and resulted in over 8,000 cases. In 2012, an outbreak of Middle East respiratory syndrome (MERS) originated in Saudi Arabia, but cases were confirmed in 27 countries. Both SARS and MERS originated from animal reservoirs and symptoms include those akin to influenza, much like COVID-19, but were very low risk to the US population. The 2014 Ebola virus disease outbreak was concentrated in West Africa; only 11 cases presented in the US. The aforementioned three epidemics barely touched the US population; however, localized outbreaks of Zika occurred in Florida, Texas, the US Virgin Islands, and Puerto Rico in the period 2014-2016. Despite witnessing these biological events that cost other countries in terms of health and economic security, the US snubbed the red flags warning that the next epidemic would likely hit our population and economy. These epidemics were used as evidence to support numerous expert recommendations that the US must strengthen its pandemic preparedness and response activities, procedures, and tools in expectation that a reemerging or novel infectious disease would breach our borders. Admittedly, comprehensive prevention of an outbreak and its damage to a public health and the economy is unlikely, but pre-existing plans and policies to position critical infrastructure, medical R&D sectors, and economic measures to detect and respond to a looming disease threat would mitigate the damage.
As we wade through the storm of COVID-19, economic triage should consider a bevy of factors that acutely impact individual and household-level economic health during the pandemic and the recovery period following its resolution. The economic health of individuals and households bear direct impacts on the economy of the nation. As gross income shrinks, so do disposable income and consumer demand. For sectors that are able to operate during the pandemic and continue to offer goods and services, the lack of spending translates into lost profits. The lack of preparation and planning for a biological event that froze many, if not most, sectors of our economy, delayed implementation of economic measures to help sustain individual and household economic security, thereby enabling spending.
Factors Impacting the Peri-Pandemic Economy
Job and wage losses, lack of savings, and reliance on credit are among the factors that continue to erode economic security across all levels. As workers (or their loved ones) become sick or fear sickness, receive layoff notifications, or experience reductions in wage hours, household and individual level income falls rapidly. According to the Washington Post, nearly 7 million Americans applied for unemployment last week, a record-setting figure. These job losses are likely concentrated in sectors that require consistent engagement with the public, but are not a component of critical infrastructure. Such income-at-risk workers include those in the retail and food service, entertainment (theatres, concert and sport venues, gambling casinos), airlines, hotels, tourism, and automobile industries. As necessary non-medical countermeasures like social distancing and shelter-in-place were encouraged and mandated, workers within these industries incurred income losses from shrunken or eliminated hourly wages and tips. Sudden losses of employment and hours leave many individuals and households without income to cover bills for housing, utilities, medical needs, and groceries. To add insult to injury, workers in the service-based sectors and others that require physical interaction with the public endured greater risk of contracting COVID-19 because their work environment necessitated consistent face-to-face interaction with potentially infected customers and coworkers.
For those who are able, such a situation is likely forcing them to burn through savings or accrue more debt in order to survive in the short term. According to MarketWatch, the bottom fifth by income do not have savings accounts. Middle-income households also struggle to save with the rising cost of living and debt. The days of maintaining enough savings to cover six months in expenses are behind us in an era of stagnant wages, student debt, climbing housing prices, and growing high-interest credit card debt. Debt will further rise as individuals and households rely on lines of credit and deferred payments to make ends meet throughout the pandemic. Since 2009 Financial Crisis, US consumer debt has grown almost 20%, growing to a record $14 trillion. This consumer debt includes mortgage loans, automobile loans, student loans, credit card debt, home equity lines of credit, retail lines of credit, and personal loans. Job losses, lack of savings, and reliance on credit are shrinking gross income, disposable income, and discretionary spending. These shrinkages will bleed into long-term economic effects of COVID-19.
Factors for Post-Pandemic Economic Recovery
Once the pandemic cools and the country is able to slowly resume some semblance of normalcy, we will find our economy and its trends much changed. Risk averse behavior will likely arise in both consumers and businesses, exploiting an injurious economic symbiosis, and businesses will seek to minimize costs by reducing their labor needs in innovative ways. Even in sectors with labor needs, health risks and education costs may disincentive future workers.
From the consumer side, in order to cover bills through the duration of the pandemic, many will rely on credit and savings, if available, meaning that disposable income and discretionary spending will not rebound after the pandemic. As in the peri-pandemic period, workers in the service sectors (retail, food, tourism, entertainment, etc.), who already suffered critical economic losses, will probably be the most impacted. Workers will either compete for fewer available positions and hours or they will have to convert their skills to work in another industry with greater labor needs. Will that require costly and lengthy education or training? If so, how will an individual pay for it?
From the producer side, the need to downsize and economize to survive, will continue into the recovery phase, so rehiring for all positions that existed prior to the pandemic is unlikely. Further, some business collapse altogether during periods of economic downturn. The coexistence of lower consumer spending and fewer available jobs creates an economic symbiosis that slows economic recovery. Additionally, producers and businesses may fast-track adoption of mechanization, automation, and computerization in order to lessen or eliminate the need for labor for the long-term. Investing in a technology lowers operational costs, especially labor costs to pay employees. For example, technologies that automate food ordering or in-store purchasing are long-term investments that render labor, like cashiers and waiters, obsolete and removes its cost.
Another potential long-term impact is the disincentive to enter into certain careers that the pandemic revealed to be high-risk from a health standpoint, and many of which are also costly to enter. Higher education is increasingly expensive while wages remain stagnant and cost of living swells. Indeed, from 2006 to 2017, prices for undergraduate tuition, fees, room, and board at public universities rose 31%, and prices at private nonprofit universities rose 24%, after adjustment for inflation. For an in-state student, one year of medical school at a public university costs just under $35,000, a figure that does not include cost of living; out-of-state and private school students pay considerably more. Medical professionals and other positions necessary to maintain our health system may become unattractive because of the proximity to infected patients when the next outbreak occurs. This is especially concerning because these are the jobs that comprise our critical health infrastructure, and we will need these skills and expertise in order to prepare for, prevent, detect, and respond to the next biological event. We also need, perhaps now more than ever, to bolster our scientific and medical R&D for the same reasons. In recent years, scientific research suffered major budget cuts, a serious gaffe as we now struggle to rapidly develop effective diagnostics and therapeutics for COVID-19. Is the value of scientific research better appreciated because of the pandemic? If so, will those funds be restored?
Even as we weather COVID-19, the questions remain as to when, not if, the next infectious disease will emerge. We were unprepared for COVID-19, but, hopefully, we will learn a few lessons from it. Specifically, to better prepare for the next pandemic, we need a plan to sustain our economy at the individual, household, and firm levels so that we are not forced to shut down, accrue more debt, and, perhaps, never recover from the economic losses the outbreak causes.