🌌 Reshaped #6

Special issue: the global response to a pandemic

Mar 21, 2020

Welcome to a new issue of Reshaped, a newsletter for those who do not want to miss a thing about the huge transformations of our time.

This is the first issue I (almost entirely) dedicate to the COVID-19 pandemic. And this is also the first issue I reach (almost entirely) the email length limit. Unfortunately, I had to cut relevant information, that I will condensate in future issues.

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News

Business and Finance

💵 SoftBank may not buy $3 billion of WeWork shares as planned, deepening the current crisis of the startup (The Wall Street Journal).

⚗️ Google is ready to collect healthcare data of Americans citizens thanks to a website aimed at facilitating COVID-19 testing (Forbes).

🔎 French antitrust regulators fined Apple $1.2 billion for unfair pricing rules towards local wholesalers (The New York Times).

💰 Airlines companies all around the world claim they cannot survive without governmental support in the form of bailouts (BBC).

🔨 Companies like Amazon and Walmart are hiring thousands of workers to keep up with consumer demand, heavily influenced by the spread of the COVID-19 pandemic (MarketWatch).

Science and Technology

🔭 Italian scientists fear that persistent lockdowns could result in a longlasting damage for science, due to reduced research possibilities and funding (ChemistryWorld).

🧫 Dying cells release metabolite molecules that have anti-inflammatory and tissue-repair effects, in a sort of ghostly message to their living neighbors (Nature).

🧬 Scientists might understand who has cancer and which type from microbial DNA taken from simple blood testings (ScienceDaily).

🌋 A new study reveals that an intense global warming episode happened 56 million years ago could have implications for modern climate change, due to large stocks of carbon resulted from volcanism (Quanta Magazine).

💻 Amazon’s game-changing Graviton2 CPU is ready to battle AMD and Intel in the CPU industry (Techradar).

⚔️ How we tackle it all

The COVID-19 emergency has monopolized the attention of the media, scientists, academics, politicians, and businessmen all around the world. Things are evolving at a rate that makes it hard for a weekly newsletter to cover all the relevant aspects of the phenomenon while staying updated on it. In this special report, I will handle the toughest problem related to the coronavirus pandemic: how are we going to cope with healthcare and economic emergencies that will drastically reshape our society?

In future issues, I will deepen the relationship between this emergency and our economic system, as a growing number of people around the world are asking for a rethinking of neoliberal capitalism and a shift towards a green economy based on sustainable social wellbeing. Moreover, I will address a topic that is surprisingly not mainstream yet: how will our social and political system transform to face the pandemic? And, especially, how should democracy evolve to prevent its own death?

📈 What to do with the curve

During the last couple of weeks, two main approaches emerged to fight the spread of the COVID-19 epidemic. One is aimed at allowing the virus to spread among the population without any relevant protective measures in order to build herd immunity. This approach was first announced by UK Prime Minister Boris Johnson, but the death estimations (0.5 million people in the UK and 2.2 million people in the US) convinced him to radically change his policies. Indeed, the healthcare system would be heavily overwhelmed by the number of cases. The other approach is based on the assumption that it is possible to reduce the number of infected people so that the healthcare system could contain the disease (“flatten the curve”). In other words, the total number of cases is spread over a longer period of time.

The following graph from Vox synthesizes the two approaches.

The problem with the curves above is that mitigation is not enough to contain the disease under the horizontal line, representing the healthcare system capacity —which could also decline due to sick staff and deteriorating assets. This issue was addressed by Imperial College Professor Neil Ferguson in a paper that went viral on Monday. According to the authors, non-pharmaceutical interventions (NPIs) aimed at reducing contacts can be distinguished into two categories: mitigation and suppression.

Two fundamental strategies are possible: (a) mitigation, which focuses on slowing but not necessarily stopping epidemic spread – reducing peak healthcare demand while protecting those most at risk of severe disease from infection, and (b) suppression, which aims to reverse epidemic growth, reducing case numbers to low levels and maintaining that situation indefinitely. Each policy has major challenges. We find that that optimal mitigation policies (combining home isolation of suspect cases, home quarantine of those living in the same household as suspect cases, and social distancing of the elderly and others at most risk of severe disease) might reduce peak healthcare demand by 2/3 and deaths by half. However, the resulting mitigated epidemic would still likely result in hundreds of thousands of deaths and health systems (most notably intensive care units) being overwhelmed many times over. For countries able to achieve it, this leaves suppression as the preferred policy option.

Suppression is a mix of home quarantine, social distancing, and closure of schools and universities. It is useful to contain the epidemic until a vaccine becomes available in one or two years. However, the authors think that it would be enough to apply rigid suppression measures only for limited time spans, as illustrated in the graph below. After an initial period of suppression measures (blue line) from March to June 2020, mitigation is applied. Then, the increase in intensive care cases over a specific threshold requires another period of suppression and so forth. The objective would be to make suppression measures more sustainable (both economically and socially) while maintaining critical patients under the healthcare capacity line. During the mitigation phases, fundamental investments should be done to improve this capacity, improving ICUs and training new staff. The paper has been subject to many reviews and comments, but nobody questions the evidence that simply flattening the curve is not enough.

🦠 Addressing the global pandemic

This is consistent with what happened in China. According to Donald McNeil, science and health reporter for The New York Times, China managed to flatten the curve and control the epidemic by applying four important measures:

All people entering a building or using public transportations had their temperature tested;
All those with abnormal temperature measurements were sent to specific fever clinics (built years ago against the SARS disease to avoid mass contagions at hospitals and doctor offices) and tested;
If no other source could explain the temperature, a COVID-19 test was performed and, if positive, sick individuals were sent to quarantine hotels or other structures like gymnasiums.
Specific measures were put in place for improving control of mass-quarantined people, like dancing activities to detect the weakest individuals and better targeting further tests.

This allowed China to avoid home quarantine, responsible for the vast majority of contagions (75-80% in the country), while preventing hospitals from being overwhelmed. China successfully managed to treat suspect, mild, severe, and critical patients in different ways, avoiding the spread of the disease. Only critical individuals had access to intensive care because totally unable to breathe autonomously, while severe individuals were strictly monitored. When possible, suspects were sent to quarantine hotels to avoid any contact with untested or potentially sick individuals.

🌪 Macroeconomic tornados

In the best scenario, mitigation and suppression measures, together with appropriate fiscal policies, will allow us to improve healthcare capacity and build a more resilient society. They would also avoid the panic that is usually linked with herd immunity strategies, which has enormous psychological and economic consequences. However, mitigation and suppression measures forcing companies to stop production for long periods entail longer economic consequences. Two important tradeoffs apply here. On one hand, individual liberty to move and work is limited to reduce the daily ICU cases and make the disease manageable. On the other hand, prolonging the time span through mitigation and suppression measures means worsening the economic conditions of people all around the world.

What might be good for healthcare might harm the world economy for years to come, only a decade after the 2008 financial crisis — and this time it could be much worse due to the global supply chain implications and the many bottlenecks caused by outsourcing. Berkeley Economics Professor Pierre-Olivier Gourinchas highlights how a 50% decrease in economic activity in one month and a 25% decrease in the following two months before returning to the baseline — a realistic estimation, due to lockdowns and the forced stop of the economy — could generate a 10% decline in global GDP growth. A recession of these dimensions would generate an economic storm leading to business failures and layoffs: indeed, the supply shock paired with the recent slow economic growth could easily transform in a demand shock caused by people cutting down spending because of rising unemployment and uncertainty.

It is fundamental to take appropriate measures and support companies to prevent mass unemployment and bankruptcy. The following graph (to consider as an economic counterpart of the flatten-the-curve model) explains why. In other words, there are two curves to flatten: this one is about economic contagion.

🧭 The road to take

Many economists have tried to outline possible measures to flatten the recession curve. The range of opinions goes from extreme neoliberalism (yes, again) to… stopping time. The vast majority of proposals, however, focus on four main objectives.

First, companies should be supported so that they do not go bankrupt because of lockdowns and supply chain chaos. Many companies will literally have no way to do business, due to severe measures that will force employees to stay at home and the impossibility to receive critical supplies. Pierre-Olivier Gourinchas proposes easier borrowing terms for private companies, temporarily waving tax or payroll payments, suspending loan payments, and providing direct financial assistance. The latter is surely necessary to overcome missing revenues at least in the first months of lockdown. However, those bailouts should follow strict rules so that national help does not benefit monopolists and financiers. In particular, no buybacks should be allowed in the future and no dividend should be distributed for five years; similarly, M&As should be prohibited for five years as well.

Buybacks are a tradeoff: instead of using their cash or profits to invest in workers or productive research and development, companies use it to buy their own stock, drive up its value, and make shareholders and executives even richer. It is time to stop asset-stripping and restore corporations’ ability to invest and ramp up production. […] Businesses that receive bailouts should have to operate as businesses, not acquisition targets—with only the narrowest of exceptions.

Focusing on stock buybacks is not a neo-Brandeisian fixation occurring in the middle of a global crisis: buybacks have a relevant responsibility in how countries are capable of responding to both the healthcare and the economic crises.

Second, it is necessary to support individuals and families through measures that prevent unemployment (or provide punctual support when layoffs cannot be avoided) and direct cash. Avoiding consequences on the demand side is probably an impossible objective, but they should be limited as far as possible. Far from being only a financial policy, helping people also include local support through community empowerment and socialization initiatives that reduce the stress caused by suppression measures.

Third, international cooperation on trade is required to overcome the worldwide effects of supply chain bottlenecks. This point is briefly analyzed by LSE professor Muhammad Ali Nasir.

It is vital that the trade war which was in the news before the COVID-19 hit be changed into trade peace and cooperation to enhance global trade. The increased movement of goods may partially compensate for the sharp reduction in the movement of people and dampen the damage to global economic activity.

Fourth, it is fundamental to support and regulate the financial sector so that the recession does not translate into a global financial crisis. It will not be enough to provide liquidity through monetary measures, though. Central banks can reduce pressures on the banking system, but this is not a remedy to the decreased revenues coming from the private sector. Specific policies should be designed so that non-performing loans do not impact the financial sector, as there would be no space for bail-ins. At the same time, a financial bailout would be the worst move possible until the shock is at least partially absorbed — and also, I think, much later on.

🗽 What happens in the US

Albert Einstein and Jeff Bezos would agree on at least one thing: changing your mind is a sign of intelligence. I do not know if this applies also in the particular case of US President Donald Trump: if it does, we probably have a genius. After months spent denying COVID-19 was a problem for the country, he has finally admitted it is. Now, the government is ready to take measures to prevent a disastrous medical and economic crisis. Nonetheless, the first move was put in place by the Federal Reserve, which cut interest rates to almost 0% in response to the unexpected bear market. The following graph from Visual Capitalist is a summary of all the major interest rate movements of the last fifteen years.

A summary of the whole set of measures implemented by the Fed is provided by The New York Times.

It has cut interest rates to near-zero, introduced a huge bond-buying program, revamped a crisis-era emergency lending program to calm the market big businesses use to raise cash, and enacted major backstops in an attempt to restore order to Wall Street’s volatile inner workings. Late Wednesday evening, the Fed said it would offer emergency loans to money market mutual funds, backed by $10 billion from the Treasury Department, following a similar lending program for banks also established this week.

Some argue that the Fed should go further and expand its power to other domains helping local governments buying short-term local bonds, supporting businesses through direct bailouts, and improving available liquidity through helicopter-like policies.

Initially, the US government had announced a plan consisting of $1T to be redistributed to citizens in the form of one-time checks, $500B to help SMEs, and a bailout of $50B for airlines. Checks would have been paid in two tranches of $500B each by the end of April. The definitive plan has been presented by Republicans at the Congress debate as follows.

On Capitol Hill, Republicans presented a bill that would offer bridge loans of up to $10 million each to small businesses, extend hundreds of billions of dollars in loans to large corporations in distressed industries and send checks as large as $1,200 per adult to individuals earning less than $99,000 per year. The payments would phase in for earners up to $75,000 — meaning lower earners would get smaller checks — and then phase out again at $99,000. Those who did not earn enough to pay income tax would receive much less: $600. […] The Senate bill also includes a raft of temporary changes to the tax code that would reduce the tax liability of large corporations, many of them overriding provisions in the 2017 tax overhaul that were meant to raise revenue to offset corporate rate cuts. It would place new limits on a paid-leave program that Congress passed and Mr. Trump signed into law this week, shielding small business owners from any costs of paid leave for workers affected by the virus — and limiting how much pay those workers could receive if they are forced to stay home.

Donald Trump said he would accept conditionality on bailouts, banning stock paybacks for companies receiving public support. However, Senate negotiations may be more difficult than expected.

🏰 What happens in the EU

The EU is in a different situation, as interest rates are already at 0% or negative. This means that the European Central Bank cannot provide any stimulus through cutting rates. However, as argued by Olivier Blanchard, the ECB can still take the lead in saving EU countries from the upcoming recession with an OMT program — which is similar to what was successfully implemented by the Bank of Japan. Outright Monetary Transactions (OMT) were designed by Mario Draghi in 2012 in an attempt to save the Eurozone from the financial crisis. In an OMT program, the ECB buys short-term bonds of EU countries in strong economic difficulties, which in turn must accept a conditionality clause that obliges them to apply certain internal policies.

Stefano Feltri has a set of proposals to avoid a new banking crisis, starting from postponing the expiration of TLTRO loans to EU banks (€222B due in June) to prevent a liquidity crisis. This focus on liquidity is present in all his proposals and is a sign of pragmatism that should be shared by EU officials. The already mentioned Pierre-Olivier Gourinchas believes that countries will never accept the conditionality clause of OMT programs. He makes the case for an ESM Eurobond to finance all the necessary healthcare expenditures and prevent economic dislocations. This solution is courageous and would also help finance an economic reconstruction of the Union. While I am writing, EU countries are pressuring Germany to accept the Eurobond solution.

Other proposals include the involvement of the European Investment Bank (EIB), which would receive funding from the ECB and directly lend money to companies at a 0% interest rate. National tax authorities would then collect revenues to repay those loans.

Yesterday, the President of the EU Commission Ursula von der Leyen has released a declaration as follows.

The European Commission is coordinating a common European response to the outbreak of COVID-19. We are taking resolute action to reinforce our public health sectors and mitigate the socio-economic impact in the European Union. We are mobilising all means at our disposal to help our Member States coordinate their national responses and are providing objective information about the spread of the virus and effective efforts to contain it.

Specifically, the EU will suspend the Stability and Growth Pact in a historic move that will allow member states to be more flexible in debt management and public spending. In order to provide an effective stimulus to the economy, the ECB announced a €750B measure called the Pandemic Emergency Purchase Programme (PEPP). Both moves have been lauded by the governments of the member states. In the meanwhile, the UK announced a similar $424B plan to save the economy. For a detailed review of all measures announced by member states, I recommend this Financial Times report.

Alternative perspectives

👥 In an excellent article published in The Atlantic, Yasmeen Serhan states that the term “populism” is at risk of losing any meaning because of its widespread political application. According to the author, it became mainstream in 2016 after the Brexit referendum and the election of Donald Trump, with the contrast between the “pure people” and the “corrupted elite”. However, there is no clear definition of the term, which is misused to indicate far-right xenophobic movements as well as socialist political agendas.

The way populism is often applied suggests that its use is more for effect rather than explanation. Much in the same way that socialist has been bandied around to discredit politicians like Sanders in the U.S. (where the term conjures negative images of the Soviet Union and Chavismo in Venezuela), populist has its own negative baggage. As a result, neither of these terms ends up communicating an understood idea. Instead, they simply obscure.

📝 In an article on Verfassungsblog, economist Jamee K. Moudud develops a constitutional theory of the business enterprise. He starts from a piece of evidence: all companies in the real world set prices strategically to fight competition, trying to achieve economies of scale to reduce production costs. This affects labor relations, which are naturally conflictual, making the private company a political actor.

Thus, in contrast to neoclassical models, firms may not automatically reinvest savings (say from tax cuts) in long-term fixed investments and R&D activities, all of which may have unknown future rates of return. Given how capital assets are coded, the savings could equally well be invested in short-term assets such as junk bonds, derivatives, and real estate with higher rates of return. They could also be used in share buybacks. […] labor relations are conflictual and corporations are fundamentally political creatures who have always attempted to structure the legal and political foundations of the economy so as to further their investment activities. Thus, corporations will generally oppose progressive reforms, especially if they raise costs.

Reshaped