The fallout from the “China Virus”

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The fallout from the “China Virus”
Master Investor Magazine

Master Investor Magazine 60

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Mr Trump calls it the China Virus. It has put about a third of humanity into partial lockdown, thus paralysing the global economy with extraordinary consequences. Could the cure be worse than the disease? Victor Hill is asking.

“That which does not kill us makes us stronger.”

– Friedrich Nietzsche (1844-1900)

From Trump Bump to Trump Dump

Let’s start with the New York markets which tend to be the global bellwether.

This is not a crash: it is a melt-down with a roller-coaster backflip. The Dow Jones Industrial Average (DJIA), the S&P 500 and the NASDAQ all posted their worst weekly losses last week since 2008. All eleven sectors of S&P index were down more than 20 percent from their 52-week highs. And yet Tuesday (24 March) saw the best day for the DJIA for 87 years – it rose by 11.37 percent. And it was up again more modestly on Wednesday. This was in response to Congress’s likely approval for the $2 trillion stimulus package imminently – and Mr Trump’s tweet that it would all be over by Easter.

Even seasoned traders are feeling queasy in these aerobatic markets. The Dow is on track to post its worst month since 1931. The S&P’s performance could be the worst since 1940. The NASDAQ hasn’t looked this bad since the tech bubble burst in 2001. The oil price has slumped (Brent Cruse is at below $30 as I write).

Goldman Sachs foresees a 24 percent contraction in US GDP in Q2 and no one knows how long the inevitable recession might last. The optimists think that it will all be over quite soon and that the markets will have rebounded by Q1 2021. I’m not so sure.

The epidemiology of panic

Here in the UK our Prime Minister is following, as best he can, the constantly changing advice of his scientific advisors. He has wanted this job since childhood and now a massive burden of responsibility rests on his shoulders. This job would kill 99.9 percent of other mortals. But we are entitled, indeed obliged, to question the quality of the advice.

Of course, the government is damned if it does and damned if it doesn’t. As the rate of fatalities continues to accelerate (as it will) the government will be accused of doing too little too late. But as the massive economic and fiscal consequences of the lockdown accumulate so the view will proliferate that the cure is worse than the disease.

Let’s just consider the enormity of what governments here and elsewhere are doing. The change of policy that was signalled on Monday of last week (16 March) was initiated because of the report prepared by Professor Neal Ferguson and his team of crack epidemiologists at Imperial College London. Professor Ferguson’s team has been monitoring and modelling the advance of Covid-19 since the first reports came through of cases in Wuhan, China in December last year.

(Let it be noted parenthetically that the Imperial College team’s advice on the 2001 foot-and-mouth outbreak led to what many believe to be the unnecessary slaughter of millions of healthy cattle and sheep.)

By late February the British scientific mandarinate had decided that China’s containment strategy was working. But, according to the Daily Telegraph’s brilliant health correspondent, Paul Nuki, they were reluctant to adopt the same measures here. That was partly because of the fear that, once lifted, they would incite a second outbreak in the final quarter of this year.

Fundamentally, the British civil service had not adequately war-gamed a modern pandemic (they are not alone in that). The UK’s pandemic strategy document produced in the aftermath of the SARS pandemic (UK Influenza Pandemic Preparedness Strategy, 2011) did not even envisage even a partial national lockdown. It states that:

During a pandemic the Government will encourage those who are well to carry on their normal daily lives as long as possible…The UK Government does not plan to stop mass gatherings or impose controls on public transport during any pandemic.

The UK government as a result left the way open for potentially hundreds of thousands of infected travellers to arrive in the UK without any restriction or the most basic testing such as taking body temperature. Flights were still arriving at Heathrow from Tehran, Milan and indeed Washington State (USA) as late as this week and passengers were – incredibly – just ushered through passport control and customs without so much as a medical questionnaire.

In the civil service master document there was almost no discussion of the economic impact of the pandemic. It noted that the Spanish flu of 1918-19 reduced national GDP significantly but it made no attempt to quantify the economic impact of a future pandemic.

We still don’t know the full extent of a 2-4 month lockdown on GDP in the UK, let alone the world; but the luminaries have been throwing figures around. Effectively, the hospitality industry, airlines and tourism will be reduced to near-zero revenues for part of the year. Let’s go with a 15 percent hit to GDP – though it could be 25 percent.

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Now, the Imperial College report suggests that a no action (i.e. no lockdown) scenario would most likely result in 100,000 deaths and very possibly more. (The worst-case scenario was 250,000 deaths.) But, even with an Italian-style lockdown, there will most probably be 20,000 fatalities. So the national lockdown will save 80,000 precious lives – but at a cost of 15 percent of our roughly £2 trillion GDP. That means that each life saved will have cost the state £3.75 million.

Now please don’t get me wrong. I would pay £3.75 million (if I had the cash, which I don’t) to save my nearest and dearest. And so would you. But, as a government policy, it is pertinent to ask: if every life is worth so much, then why aren’t we spending much more on cancer research, the fight against Alzheimer’s and diabetes and so forth? And couldn’t we afford a Universal Basic Income, after all?

As a Christian, like my Jewish, Muslim and Buddhist friends, I believe that all human life is sacred. But, as an economist, I have to concede that some lives are worth more than others. The lives of the young are worth more than those of the old, not because they are more beautiful, but because they have a lifetime of earnings and achievement ahead of them. Then there is the fact that most people who die from Covid-19 have chronic underlying conditions and that many (possibly most) of them would have died in the short-term anyway – tragic though that is.

My friend the economist Felipe da Costa (also of this parish) pointed out to me this week that there is a medical aspect to the lockdown which has hardly been discussed at all in the mainstream media. That is that, as the hospitals are overrun by coronavirus sufferers, so routine medical treatments are being cancelled. As a result, mortality rates will rise for people suffering from cancer and other terminal conditions – even though their lives could have been extended.

So the state has decided that people with the most severe symptoms of CV-19 should be prioritised above all other sick people. And that was not even debated. If the medical “experts” were trained in even the most basic economics they would know that there is always an opportunity cost associated with any resource allocation decision.

Additionally, we have no idea what will be the economic cost of the lockdown in terms of lost human capital. That is, children missing exams; increased stress; more divorces; poorer mental health all round. And let’s not even get started about the erosion of civil liberties, achieved over many centuries in this country under common law. But Baroness Chakrabarti is uncharacteristically silent on that.

We are told that the lockdown is necessary in order to protect the NHS. (So the government informed me by text message on Tuesday.) If the government were to do nothing then the NHS would swiftly be overwhelmed by the number of hospitalisations of patients in a critical condition. (It will be overwhelmed anyway – but that is another issue.) But surely the NHS exists in order to provide a social good to the nation, not for the nation to sacrifice itself in order to preserve the NHS? Is this a case of the tail wagging the dog?

Quite apart from the market collapse and the fact that we shall inevitably face recession for at least a year, there is the fact that our government finances will not recover in my lifetime. When Mr Johnson was asked what would be the cost of the government’s decision to pay 80 percent of all employee salaries for affected firms, he gave a very honest answer: he didn’t know. Apparently, 500,000 new applicants have claimed Universal Credit in the past week. Many of those, particularly the over-50s, will remain on UC for the rest of their lives.

All the good work done by the Cameron-Osborne pantomime horse to restore the nation’s finances was apparently for nought.

If you want to understand what is driving the policy response to this pandemic you would do well to read a brilliant essay by the eminent sociologist, Professor Frank Furedi. He notes that during the Spanish flu pandemic of 1918-19 President Woodrow Wilson felt no need to utter a single word on the outbreak, which took hundreds of thousands of lives in the USA, let alone to initiate a government response. Today, in contrast, Professor Furedi argues, western governments are first and foremost responsible for national health and safety – safeguarding the vulnerable (two nouns which did not exist 100 years ago).

The sense of an ending

The real question is: how long will the lockdown last? Nobody thinks the initial three weeks proposed will be enough to stem the virus’s advance. The good news is that this week the daily tally of fatalities in Italy turned downwards. 793 people died in Italy of CV-19 last Saturday; 651 on Sunday and 601 on Monday. The figure was 743 on Tuesday but thankfully it subsided to 683 on Wednesday. So it looks like the lockdown has worked and that the spread of the virus has been contained in Italy – as it was in China – even though many thousands of people are yet to die of it.

The problem is that we don’t know how long the tail of the bell curve will be. Neuron Capital has been working on a model which predicts a second wave of infections. It may be delayed but they regard it as inevitable. Asymptomatic infections can hide in a population for a time and then reappear, as did the 1918-19 “Spanish flu”. Many people who have contracted the virus but who do not display symptoms may turn out to be inadvertent super-spreaders.

That opens the possibility that we might experience a relaxation of the lockdown for a period, possibly in the early summer of this year – only to be followed by a second wave of lockdowns. If the markets perceive a high risk of further lockdowns then a relaxation may not necessarily result in the V-shape recovery that the optimists envisage.

The game theorist

I came across an interesting item in the online blog of that double-barrelled pantomime villain, Mr Svengali-Cummings, the Prime Minister’s Chief Advisor. He is of course a student of game theory, of which epidemiology is just one application. In March last year (before he set up shop in Number Ten) he reflected on the risk of a global pandemic caused by inadequate bio-security in laboratories. He expressed concern that pathogens that had been re-engineered to make them transmissible to mammals could be released into the community through routine errors. He thought that the risks of such an accident – or a malevolent release – were underestimated.

The Whitehall rumour mill is suggesting that Mr Cummings was opposed to a strict Chinese-style lockdown after the virus first reached Europe, and that he influenced the Prime Minister accordingly. The game-changer was the Imperial College report. That was challenged on Tuesday in a report by Professor Sunetra Gupta, Professor of theoretical epidemiology at Oxford University. She proposes that the virus was circulating in the UK by mid-January, around two weeks before the first reported case and a month before the first reported death, and that there is already widespread immunity[i].

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One theory doing the rounds is that things were left open for herd immunity to kick in as long as possible; but finally a lockdown was imposed to avoid the accusation that Government was blithely letting the oldies die. That might seem cynical – but it would be rational.

I shall comply with the Prime Minister’s instructions; and I shall refrain from criticizing him for the duration of the emergency. But please don’t expect me to stop asking questions.

***

With this glorious spring sunshine I have started to go for early morning runs through deserted country lanes, the hedgerows and verges flecked with frost. (We are still permitted in the UK to exercise outside once per day.) I exchange waved greetings only with the occasional solo tractor driver.

This morning I could see an object in the road which, as I neared, turned out to be the horribly mutilated carcass of a muntjac deer – the victim of some night-time hit-and-run. For some reason this sad sight triggered the memory of a story a Russian friend told me some years ago.

By December 1941 the German army was at the gates of Moscow. (There is a monument at the place where the Wehrmacht was finally halted on the road out of Moscow to Sheremetyevo airport which I find endlessly arresting.) It seemed very likely that Moscow would fall. My friend’s mother, aged about 16, was charged by her uncle to escort four small children to the relative safety of a sanatorium somewhere out in the forests of Tverskaya Oblast. The uncle drove them in a car through deserted frozen forest roads for hours – but then had to stop.

It seems that an advance patrol of the Waffen SS had come across a small unit of Russian infantry on this road hours, perhaps minutes, before. There had been a firefight which had left every man dead and the road was strewn with about a dozen blood-spattered corpses. The uncle got out of the car and simply pulled each body to the side of the road one by one, watched intently by the little children and my friend’s mother. And then he got back into the car and continued the journey.

People in Western Europe and America of my baby-boomer generation and our children simply have no experience of the sheer ghastliness of much of human life throughout history – with appalling suffering wrought by humankind and Mother Nature in roughly equal measure.

Now is a good moment to remind ourselves that we should never take our own good fortune for granted.


[i] See: https://www.standard.co.uk/news/health/coronavirus-half-uk-population-oxford-university-study-finds-a4396721.html?fbclid=IwAR1yuFK4lvFgQR7cOE-bqoQzfVxyeM2s1P7M1CmFdKtipVJTFcQbUCf0AjI

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Comments (1)

  • Richard Starr says:

    Regarding the report by Professor Sunetra Gupta, my wife is insistent that she has already been infected by the virus after suffering the symptoms in late January. She has the constitution of an ox but was laid low for several days with a persistent headache, sore throat etc.

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