Economy and Pandemics – Is There a Lesson That History Can Teach Us?

Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street Quant trader, coined the term Black Swan to depict the meltdown after the financial crisis of 2008.

A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight

Turns out, pandemics can also be defined as the Black Swan events as they are inevitable attendants of economic progress. Throughout human history, pandemics indeed had profound economic effects.

The Black Death and the beginning of capitalism

The most destructive pandemic in history so far killed somewhere between 75 to 200 million people worldwide. It happened in the 14th century and was named the Black Death. It was a plague and it completely changed the course of both European and world history.

As a matter of fact, some historians have argued that it established what we now refer to as modern capitalism.

How is that?

The key reason lies in a significant loss of manpower. Due to a serious labor force shortage, people had to change the way they work and to upgrade their working equipment. To illustrate: before the plague, people used spears to catch fish. However, survivors had to invent new devices to catch the same amount of fish with less manpower. And with that, the big fishing net was invented and soon enough put to use.

Besides these obvious consequences, the Black Death is apparently to blame for ending feudalism, the system of service in return for a grant of land. As many peasants and artisans lost their life to the plague, those who survived became more particular about where they worked, demanding more freedom of choice for themselves.

The Spanish Flu – a modern history game-changer

The 1918 pandemic is estimated to have caused at least 50 million deaths. It lasted until 1920, spreading as far as the Arctic and remote Pacific islands.

During that time, many service-based businesses suffered double-digit losses and the economy was hit so hard that, one way or another, the Spanish Flu affected up to a billion people – half the world’s population at the time. If we add up WWI to this equation, the effects of the influenza pandemic of 1918 are crucial to know. However, the scope of research on the economic effects of the 1918 influenza pandemic is scant at best.

COVID-19 and its uncertainty

So, what is the plan? How can we predict what will happen once COVID has taken a back seat and how can we prepare for what’s next to come?

Today, there are nearly 2 million confirmed cases of COVID-19 around the globe. With a potential vaccine still a few months or even years away, we can only expect nothing but dramatic economic projections. The International Monetary Fund, or IMF, recently predicted the pandemic would incite the worst economic slump since the Great Depression.

With millions of people around the world in a virtual lockdown, a ripple effect throughout the economy is something we can’t escape. The economic shock-waves can be felt from Beijing to Madrid and the IMF recently announced its forecast for a 4.9% GDP drop in 2020. The organization, however, envisions a muted recovery next year, with GDP growth of 5.4% worldwide.

According to the latest IMF report, there are several highlights that show the true colors of the current situation:

  • Consumption and services output has dropped significantly – In most recessions, consumers rely on their savings or social safety nets and family support to help for the time being. This usually means that consumption is affected relatively less than investment. However, this time the consumption and services output has also dropped markedly. This is the result of a unique combination of factors: voluntary social distancing, lockdowns needed to slow transmission and not overwhelm healthcare, steep income losses, and weaker consumer confidence.
  • Mobility remains generally low – Lockdowns were at their most intense and widespread from about mid-March through mid-May. As economies gradually reopen, mobility has picked up in some areas but generally remains low compared to pre-virus levels. This suggests that people are voluntarily reducing contact and sticking more to basic necessities.
  • The labor market has taken a severe hit – According to the International Labour Organization, the global decline in work hours in 2020:Q1 compared to 2019:Q4 was equivalent to the loss of 130 million full-time jobs. The decline in 2020:Q2 is likely to be equivalent to more than 300 million full-time jobs.

The new reality

As expected, this lockdown is not quite the same for everybody. Developed countries are keeping the rate of infection in check, and this will significantly reduce the impact economy will have. However, nobody is immune to the possibility that the unemployment rate shoots up very dramatically in a very short period of time. In the US alone, the unemployment rate could reach 25%!

The coronavirus pandemic is the first crisis since the 1930s to engulf both advanced and developing economies. The adverse impact on low-income households is particularly worrying, undermining the significant progress made in reducing extreme poverty in the world since the 1990s

What we are facing right now — the tragic loss of lives, paralyzed global supply chains, interrupted shipments of medical supplies between allies, and the deepest global economic contraction since the 1930s — could make a series of blows that a modern globalization cycle endured recently (European debt crisis, Brexit, and the U.S.-China trade war) look like a stroll through the woods.

For economies where infections are declining, the slower recovery path reflects three key assumptions:

  • persistent social distancing into the second half of 2020
  • greater scarring from the larger-than-anticipated hit to activity during the lockdown in the first and second quarters
  • a negative impact on productivity as surviving businesses enhance workplace safety and hygiene standards

Historians tend to believe that “analogies create blind spots“. They are more likely to advocate a thesis that each epidemic takes place in its own context and it is hard to generalize about the relationship between epidemics and economies.

So, to be realistic, no amount of looking back can tell us what the economy will look like—or what COVID-19 might be capable of changing. However, we can now clearly see that there will be changes to everyday life for a prolonged period of time and that the effects of it won’t be as mild as it was first thought.

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