Here’s a little song I wrote. You might want to sing it note for note. Don’t worry, be happy. In every life we have some trouble, but when you worry you make it double. Don’t worry, be happy. Don’t worry, be happy now. There are so many wild forecasts about how the COVID-19 pandemic will destroy society as we know it, that it seems to be a good idea to start this post off with the 1988 song written and recorded by Bobby McFerrin. Interestingly, this was the first a cappella song to reach number-one on the Billboard Hot 100 chart.
What a difference a day – or a week – makes. It seems as if an entire bevy of black swans has swooped down upon the world at one time. The darkest of these swans seems to be the advent of the COVID-19, or Wuhan virus, that has not only killed a large number of people, but has led to extreme panic all across the world. In North America, travel has been disrupted, events have been cancelled, and businesses locked down. Whether or not this virus pandemic will have a meaningful public health impact is not for an economist to answer; however, we do know that this panic will have a tremendous impact on the economy, particularly if the social distancing measures being practiced around the country last for more than a couple of weeks.
Some terrible things will happen to the economic system no-matter what the President and Congress dole out in their myriad stimulus measures. This is because Keynesian measures simply do not work in an economy where demand is not the problem, but regulation is. These regulations are not only the various orders by government to close businesses, but also the anti-social measures that people are virtue checking their fellow citizens to partake in.
Regulations that have literally stopped the US economy have created a supply shock, not a demand shock, and all of the checks that the Administration hands out to people will do nothing to solve the problem. Sure, they might help many families make their rent payment our utility payment this month, but handouts like this cannot have real economic impacts.
What is more likely to happen, particularly if the shutdown lasts for months, as some have forecast, is that the production side of the economy will snap. This is particularly true of many of the Main Street service businesses like retailers, restaurants, and movie theaters. Government loans cannot help a firm that has no cash flow, since they will have no way to pay them back. Most small businesses, simply do not have the resources necessary to keep people on their payrolls with no cash coming in. Over 99 percent of America’s 28.7 million firms are small businesses, of which 80 percent are non-employer firms. The vast majority (88 percent) of the rest have fewer than 20 employees.
So why be happy. Well, there are a number of reasons. First and foremost, the COVID-19 flu appears to be no more dangerous than some of the other viral epidemics that the world has faced over the last 50 years. This means that it is highly unlikely that there will be an end to civilization like happened when smallpox ravaged the New World, or when the Plague of Justinian finally destroyed the Roman Empire. The COVID-19 flu will not kill as many as 100 million people like the H1N1 Spanish Flu did at the turn of the last century. Humanity survived these pandemics and it will survive this one.
In addition, humanity is much better equipped than it was in 541, or for that matter in 1918. Today, we understand the underlying causes of flu, and have the technologies and knowledge to develop cures, or at least vaccines, is a relatively short time. The COVID-19 pandemic will not likely last for the nearly 100 years that HIV/AIDS took to get under control (that virus was first identified in Congo in 1920).
I also believe (to the groans of the audience), that much of the supply shock is self-inflicted, a form of virtue signaling gone mad. It seems a bit extreme to quarantine the entire population, rather than the sub-population that is truly susceptible to an adverse impact from the virus. If 80 percent of people with COVID-19 are asymptomatic, even a very rapid spread of the virus will have only minor impacts, as long as the elderly and those with underlying conditions are protected. As Herb Stein’s Law states, if something cannot go on forever, it will stop. Eventually enough people will be out of work, and will demand that these draconian restrictions are lifted. In the meantime, we can act like the French and just take a month off – as long as we have sufficient toilet paper supplies.
The economy will eventually recover. It might be different. There will undoubtedly be fewer restaurants. Office space, not often at a premium, will likely now be discounted as many firms continue their work from home policies. The travel industry will likely change as well, with less business travel in the future, as more firms find that they can conduct meetings and conferences virtually. It is also very likely that supply chains all across the economy will be strengthened. Relying on a sole provider in China for necessary parts is a lot riskier than most managers believed, and just-in-time inventory can just-in-time be out. Firms with good balance sheets will emerge from the rubble, while those zombie firms that have been profligate with other peoples’ money will disappear. This is creative destruction to the max, but recession can be good for the underlying economy.
As Mr. McFerrin said, In every life we have some trouble, but when you worry you make it double. So while you sit at home and conference call, or for that matter stream some movies, don’t worry, be happy.