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.
2 comments
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March 3, 2020 at 2:19 pm
Michael Zibulevsky
This article may propose the solution:
“How to prevent economic crisis in time of external shock”,
Michael Zibulevsky, 2009
Abstract:
In the time of a crisis, consumers tend to spend less money on leisure, luxury, and durable goods, which often leads to further market deterioration. In order to treat this problem, we propose a new insurance system, which provides support for industries in crisis by their customers. It creates a possibility of moving money fast from areas of excess to areas of shortage, blocking the crisis in early stage, before the waves of instability spread over the entire economy. This instrument can greatly stabilize the economy in whole and reduce its vulnerability to sharp external shocks
See full text at http://swine-flu-israel.blogspot.com/2009/09/
March 3, 2020 at 4:13 pm
timnovate
excellent paper Michael! thank you!