Why COVID-19 Will Hurt the Global Economy

 By   Shlomo Maital  

        COVID-19 Map

   The ‘new coronavirus’ dubbed boringly COVID-19 has brought to mind an insight of Charles Darwin:

   It is not the species best adapted to their environments, that thrive and prosper, but rather, those who learn fastest to adapt to changes in their environment.

     The reason? Environments are constantly changing. Living species have to adapt, and some do it far better than others.

       Viruses are an example.   Keep in mind- viruses are not actually living things, as cells are. A virus is a small infectious agent that reproduces only inside the living cells of an organism. It inserts its ribonucleic acid (RNA) into the DNA of the cell, reproduces, kills the cell, bursts out and continues with its marauding raid on the human body, like Genghis Khan’s pony-mounted fighters.

        Viruses can infect all types of life forms. And they have learned, through evolution and mutation, to defeat the human body’s antibodies – soldier cells that attack and kill foreign invaders, or antigens. Viruses learn and adapt fast.

         And we humans?  

         The damage to the global economy from the COVID-19 virus will be greater than we expect.   World capital markets, down 10% and more, are now waking up to this fact. But why?

         Most economic downturns occur on the demand side of the supply-demand nexus. Some shock occurs, people cut back, spend less, invest less, governments slash spending, exports fall – and the fall in demand slows the economy. This is standard, and it describes every single economic downturn.

         When President Reagan implemented huge tax cuts in 1981 and then again in 1984, he ascribed them to ‘suppy side economics’ – desire to boost the supply of saving and capital, by putting more income in the hands of the wealthy. It worked – but not in the way Reagan thought. The rich spent the money, there was a huge demand boom, and America had a decade-long demand-side stimulus boom.

           COVID-19 is unique, because it is the first major supply-side disaster, since the global economy’s architecture was redesigned and rebuilt at Bretton Woods, NH, in July 1944, 76 years ago. China produces a great many of the world’s manufactured goods and parts. Most of its factories have slowed or closed. This is a huge disruption to the intricate system of global supply chains.

     What can be done?   Very little, because we have neglected supply side policies, and have underestimated how fragile and delicate the global supply chain system is.

       Central banks can slash interest rates, but interest rates are already rock bottom. Governments can spend money, but they already are running big deficits.

       And anyway, these are demand-side policies. Yes, they can help soften the demand problems arising from the supply shocks – tourism is collapsing, airlines are in trouble, etc. But these are secondary symptoms.

         How to restore the global supply chain? That’s the key issue. It requires a meeting of the world’s leading countries; meanwhile global companies like Apple are scrambling to find quick temporary fixes, and there are few good ones.

           Darwin was right. Our environment changed, when a tiny virus originating in Wuhan, China, set out to spread itself. How fast we learn to adapt will determine how costly that little virus will be to the world.