The situation seems to be changing every few hours, but as of right now, you are less likely to be impacted by the virus than by the massive economic impact caused by the knee jerk responses surrounding the virus.
What does that mean?
It’s difficult to cut through the fear and analyze a situation entirely logically, but let’s try to put emotion aside for a few. It will be uncomfortable to do it, but you’ll understand toward the end.
First, I’m going to explain the anatomy of how fear drives our responses, then I’ll get into how we can prepare ourselves to survive the coming downturn and then thrive and grow on the back-end.
Fear Drives Our Decision Making
When dealing with any sort of disaster, we want to do one thing – Limit human suffering as much as possible. In this situation, there are two types of suffering we need to consider
- The actual death or injury caused by infection.
- The economic impacts to people’s livelihoods.
As humans, we accept a certain amount of suffering and death in order to work, play, travel, etc. The fact is, if we as a species cared about every single life, people would never live in cities, leave the house, etc, because this all caries risk and can spread disease.
The trade-off between human lives and prosperity might look something like this:
Explaining the Livelihood vs Deaths Chart
The slope or exact shape my vary in real life, but this captures the essence of the trade-off. In this graph you can see that if all life and economic activity stops, then deaths will plummet because there will be no transmission of diseases, Coronavirus, flu, etc.
On the other side of the graph, life can carry on as normal, maximizing livelihood but deaths reach some sort of peak based on the pathogen, environment, medical technology, or some other limiting factor.
It may not be comfortable to think that every day, as a society, we make the choice between earning a living and killing people. But, it’s a fact and there is a lot of evidence to support it.
According to this interesting chart I found on Wikipedia, 1.8 million people die yearly from Diarrhea, 1 million from Tuberculosis, 1.1 million from Malaria just in developing countries. In developed and developing countries, 3.7 million die from lower respirator infections…
Yet life continues without thinking about it.
Now, with this new virus, most economic activity is grinding to a halt.
What’s the difference between the tens of millions of people we are OK sacrificing for our convenience, and the tens of millions of people we are now NOT ok with sacrificing?
That’s fear speaking.
Humanity, as a whole, did not suddenly start caring about other people more. The difference is people now feel they may be personally impacted.
…and now they are terrified.
Choosing the Best Way to Respond to The Outbreak
When the virus first appeared, it could have been eradicated very rapidly. There are a lot of potential reasons why the Chinese government chose to hide the disease and allow it to spread for over 4 weeks, but, I think it was just the fear of looking bad as their government was woefully unprepared for it.
The evidence supporting that is the massive propaganda efforts over the last few weeks to position China is the savior of humankind, when, in fact, all this damage was caused by their lack of containment in the first place.
But, I digress. It is now a global issue and we need to take action based on how it is now, not how we wish it was.
Once the virus went global, there were essentially two ways to handle it – do nothing, or shut the entire planet down. There are a few options in the middle, which I’ll discuss later, but they either don’t work or are not feasible.
Option 1 is to save every life by shutting everything down. This may cause homelessness, hunger, maybe even famine in some places. Millions of jobs will be lost, maybe even tens or hundreds of millions of jobs worldwide will be gone. The people who need to work each day just to survive will be severely impacted.
Option 2 is the opposite. A huge number of the elderly or people with underlying conditions will die, but most people will get it and survive. Work, commerce, travel, and all aspects of life continue. Everyone still has jobs and can continue to eat, pay their bills, etc.
Which would you choose?
How Fear Drives Decisions
At the beginning of the outbreak when it was contained in China, Option 2 was the standard response.
There was some feel of exceptionalism as well, of which I am definitely guilty. Most people felt those problems don’t happen in America. That’s an Asian problem.
So, we continued life as normal, ignoring the problem.
Then it hit the USA and people rapidly flipped to the total opposite approach…and the entire economy has been grinding to a halt.
What has changed in the last month? The disease didn’t change. The world hasn’t changed. The wind still blows, the ocean waves still hit the shore. The squirrel in your front yard forages the exact same as it did last year.
What changed is your perception of the risk.
Humans make most decisions based on emotion. Fear is one of the most powerful motivating emotions we have. But here’s the problem, fear causes our perceived risks to differ from our real risks.
Then, we make decisions based on the “worst case scenario” derived from our fears. Graphically, it might look like this:
It means that for any level of life activity, the perceived risks are far higher than the real risks. This isn’t to make light of the actual risks, but that the response is based on perception and not upon reality.
I’ve been getting overwhelmed with emails and texts from everyone in a panicked state. Parents are holed up in their homes afraid to let their kids outside. Others are terrified everyone they know could die.
The evidence doesn’t support that behavior at all.
No one wants to get sick, but the evidence shows this particular virus is virtually harmless to children. So, taking your kids out of school to stop the spread of the disease may be prudent (or it may not be depending on how you perceive the risk), but locking them inside is almost definitely a fear driven response.
If you multiply this across the nation, you end up with frenzied shopping, shutting down of all businesses, supply chains get disrupted, and the economy grinds to a halt.
…and that’s exactly what’s happening.
Some More Evidence of Fear Based Decision Making
One might argue that this disease has caused people to be more altruistic and actually care about their fellow man more than before.
It’s possible. People do tend to band together in tough times. While I do see this happening on a small scale, I’m not sure our economic decisions reflect this.
One piece of evidence is the frenzied shopping for food and paper goods such as toilet paper and baby wipes.
A ton of people cannot afford to buy a 2 or 3 months supply worth of any goods. But, those who can afford it are going and buying everything.
So, the people who can only afford to buy one week at a time are left with nothing, and those who can afford it have a stockpile. If everyone were now suddenly altruistic, they would not purchase that stockpile and instead leave it for their less fortunate neighbors.
Since we are seeing just about everyone in a frenzied state of stockpiling over the last couple weeks, I’d conclude that people are still focused on themselves even if it is detrimental to everyone around them.
How the Coronavirus Will Impact the Economy
Most evidence is pointing to us already being in a recession. The issue is that it’s nearly impossible to gain any data related to it because with virtually no economic activity, there are very few data points to analyze.
The first few brave souls have come out with estimates. While these will almost certainly be wrong, they give us some direction.
JP Morgan estimates we will see a GDP drop this quarter of 4% annualized and next quarter a drop of 14% annualized is expected. The definition of a recession is two consecutive quarters of negative GDP growth, so if these projections are even marginally accurate, we are in a recession.
To put it into perspective, the greatest one quarter drop during the “great recession” was 8.4% meaning The Great Corona Recession will absolutely and utterly dwarf the Great Recession in severity.
And that was just one of the first predictions.
To put that into perspective that’s about 6x worse than the worst part of the last recession.
The worst year of the great depression was a 12.9% loss to GDP for the entire year. It’s hard to compare quarterly and yearly GDP growth rates but a yearly loss of 13% is roughly equal to a single quarter loss of 50%. Two quarters loss of 25%, or 4 quarters loss of 13%.
So, our single worst quarter could be compared to the worst year of the great depression, assuming there are no other losses or gains for the remainder of the year.
But, This is Different
The great depression saw year after year of decline. The only unknown here is how long this will last. Do we move past this and get back to work in a few weeks, or does it drag on for a few months?
…or does this last 18 months as some forecasts are showing? Does the economic impact reverberate for years?
The great recession lasted a very long time and that was the major factor. It wasn’t the depth of the recession, but the… width of it. The great depression was amazingly DEEP and also amazingly WIDE.
Is the upcoming economic catastrophe going to be extremely deep but narrow? Some are predicting we are going to get crushed hard next quarter, then bounce right back the following quarter.
Or will it be wide like the last one and last for years?
Let’s take a look at two potential options…
Rapid and Hard Recession.
The first option we will discuss is if the economic impact happens rapidly and hard, then life goes back to mostly normal afterwards.
The economy would be hit massively, it would happen rapidly, and then go away as fast as it came. It might last 4 or 6 weeks, then life is back to normal.
It could happen this way for a few reasons. The first is it just works its way through the population, a lot of people die, and the rest move on. Obviously this is a terrible option as we don’t want anyone to die.
The other is that an effective treatment (hopefully the Malaria route pans out) or a vaccine is developed rapidly.
Regardless of how we get there, we would almost definitely have a severe recession. But, I think the bounce back would be massive as well. Most people and businesses can take a short hit to their income and move on. Sure, a lot of businesses will go under, but life in general would just “pause” then return to normal.
Economically, this is the best option. It may be the worst option for human life, depending on how we get there. If we get here due to a cure or vaccine, great. Otherwise, getting here would involve a lot of deaths.
Prolonged Economic Impact
The more likely option is this will last for 6-18 months in some capacity. It could be massively disruptive or just be a small drag on the economy and its really too soon to say how it will play out.
Life has been shut down for a period of time and will open up again eventually, but, the question is more about what happens afterwards.
Once life goes back to normal in the states that shut down, is the virus gone? Even if it’s gone here, will it come back?
The answer to these questions is no, it won’t be gone and yes, it will come back.
Unless every country in the planet shuts down indefinitely until the virus is gone worldwide, then it’s just a matter of time until it comes back.
That’s not what the shutdown is for. The hope is the shut downs will buy is time to figure things out. In that sense, it’s working. It’s also slowing the spread enough that everyone can get some treatment and resources can be moved or disbursed as needed.
Let’s assume that a particular city or state can end the disease within it’s borders. Unfortunately, without a cure or effective treatment, it will find its way back.
Then the city is forced to shut down again.
This is a kind of ping-pong or whack-a-mole approach as the disease spreads around from city to city around the planet.
Every time the disease hits an area, it will have to shut down for a while or else the health system will rapidly get overwhelmed.
Imagine life for 6-9 months where every month or two you get locked down for 2-3 weeks.
Or even just imagine it’s not a total lock-down, but all bars and restaurants are closed, all events canceled, all rallies, all gatherings, etc for 6+ months.
The absolutely staggering economic impact this will have is almost beyond comprehension. Under this scenario, the economic toll could easily surpass that of the Great Depression.
The worst part is… Almost the same number of people will die as in Option 1, it will just take a year longer to happen. Again, assuming no cure is found and rapidly deployed.
The Best Solution
The best solution was the stop the disease in Wuhan and spare the rest of the world.
The second best option is to rapidly find a cure or vaccine and give it to everyone.
The absolutely worst solution is what we are doing now – a haphazard approach to closing and opening cities and countries, allowing travel to happen, and few if any screenings.
We are going down the path of maximum deaths and maximum economic impact. Going down this path will force us to choose between life and economic activity. Not a good choice.
One could argue it’s better to just lift all bans and get the infection over with rather than plunge the world into the worst economic condition in hundreds of years if we partially shut down for a year+.
I’m not making that argument, but I’ve heard it and I can’t objectively say it’s wrong.
If You Remove Fear, What is The Best Option?
We know people are reacting because of fear. Fear is driving our shopping and daily habbits.
Fear is driving the political response around the world.
Also, fear is driving the rapid sell-offs and ridiculous price swings of the stock market.
If we removed fear from the equation, what is the best choice? How do we react?
My next article is going to discuss that, but I’m curious what your thoughts are?