Coronapocalypse
In the past 9 weeks, events driven by the global Covid-19 pandemic have changed world forever. When things move this fast at this kind of scale, its very difficult to draw conclusions from the data. It becomes unanalyzable in the early stages. Soldiers call it the “fog of war”. Leaders do their best to react to changing circumstances and the good ones change their opinion in the face of better data. Rather than opine on a subject I knew nothing about, I chose to absorb as much information as possible before weighing in. I think the fog of war is starting to lift so it’s time to weigh in.
My opinion is that Covid-19 isn’t as dangerous to the general population as the early data suggested. Draconian estimates from flawed statistical models that assumed there would be no mitigation efforts, predicted millions of deaths and many media outlets were happy to trumpet these predictions. After all, crisis sells advertising and politicians understand that a crisis is a terrible thing to waste. Certainly any deaths are horrible and with 2.5 global million cases and a 6.8% mortality rate would represent a catastrophic loss of life if the virus just ripped through the world unabated. However, those mortality rates are calculated with a numerator-deaths- that is not in dispute, but the denominator is based on reported cases which are actually a fraction of the number of people who have been infected. One of the distinguishing features of the coronavirus is that most who are infected either have mild symptoms or none at all.
Dr. Jay Bhattacharya, professor of medicine at Stanford University and a member of a corona virus research team, is using a simple and cost-effective test to detect the antibodies in a persons blood that would indicate if they were infected with Covid-19 and recovered. This research is key to discovering the real infections denominator which affects the mortality rate. On Friday, the Stanford team released results of their preliminary study done in Santa Clara County California. With a population of nearly 2 million in the heart of Silicon Valley, Santa Clara has the largest number of confirmed cases in Northern California. They studied a representative sample of 3,300 resident to detect Covid-19 antibodies in their blood and found that between 2.5% and 4.2% of residents had antibodies against the virus. That translates into 48,000 to 81,000 infections, 50 to 85 times as high as the number of known cases. This is nearly two orders of magnitude. The study estimates that the true Covid-19 mortality rate in Santa Clara County is in the range of 0.12% to 0.2%—very close to the seasonal flu than to the original, estimates originally touted by the World Health Organization and others.
Being wrong is OK as long as you correct in the face of better data. Now time will tell what the actual infections denominator is, but common sense suggests that a virus whose distinguishing feature is that most of those infected don’t even know they have it, will result in many more people being infected than are measured. A recent study by NY Presbyterian Hospital and Columbia University Medical Center that tested 215 pregnant women for Covid-19, found 33 women tested positive (15%) and 29 of those 33 had no symptoms (88%). Extrapolating those results across the entire 8,398,000 population of NYC, that means that over 1.1 million New Yorkers were infected with Covid-19 and didn’t know it. That means the about 8,000 confirmed coronavirus deaths in NYC proper would represent a .62% mortality rate. A far cry from the 7.2% mortality rate being reported for confirmed cases. South Korea conducted more than 140,000 tests for Covid-19, and found a mortatlity rate of 0.6%. Other antibody studies with small sample sizes done in Europe confirm mortality rates as low as .37% in Germany.
The Stanford antibody test is being rolled out to a national sample (including Major League Baseball), so we could know in a few weeks whether the Covid-19 virus is the “zombie apocalypse” or closer to the 0.1% mortality rate of the typical seasonal flu. Let’s say Covid-19 proves to be 0.5% mortality rate. That’s five times worse than the normal flu season so that is serious business that still requires a vaccine, therapeutics and new workplace policies. However, .5% way less than other recent mini-pandemics like SARS (9.6%) and MERS (34%). Keep in mind the overwhelming mortality demographic is people over 65 (78.6% according to CDC) and those with preexisting health conditions like diabetes and heart problems. So this means just 16% of the US population accounts for about 79% of all Covid-19 deaths. According to an analysis of Bureau of Labor Statistics data, 20% of people over 65 still work. That means 80% of the most vulnerable cohort doesn’t work which significantly reduces a big social contagion risk. There is no doubt that we need a strategy to keep our older population safe but it shouldn’t require keeping our economy shut and risking serious long-term damage.
As NY Governor Andrew Cuomo said in a recent press conference, “Cost-benefit analysis is just part of life.” And yet, most politicians and thought leaders don’t want to be painted as callous and cruel and so fail to tell the country the truth about the trade-offs we face in this pandemic. Before you start calling me names, I’m a 60 year old guy helping care for an 87 year old father and 83 year old mother. But in less than two months, our economy has gone from one of the strongest on record, to losing over 22 million jobs causing the highest unemployment rate (15%) since the Great Depression. The federal government has rolled out a $2.2 trillion emergency stimulus program (with more promised) that covers everything from beefed up unemployment benefits, the Paycheck Protection Program (PPP) where $1,200-$2,400 checks sent to most Americans, hospital funding, airlines bailouts, and state and local government bailouts. The Federal Reserve has added more than $1 trillion in quantitative easing to buy treasury securities and has expanded to municipal bonds and mortgage-backed bonds. The Fed balance sheet has just expanded to $5 trillion for the first time in history.
Supporters say that this breathtaking scale of money-printing is justified given that this economic crisis was caused by government policy that upended the most robust economy in recent memory. While some level of government support is needed, history tells us that this level of government expansion into the private economy doesn’t recede quickly or easily, if at all. Already some politicians are holding up an additional $250 billion in funding for the PPP, whose initial $350 billion was exhausted in few weeks, in favor of billions more funding to shore up state finances. States like IL, CT, NJ, NY and CA, that have refused to fix unsustainable budgets for decades, now have less incentive to mend their finances and less incentive to re-open their states for business. Considering that the Fed is now buying state and local muni bonds and Congress is trying to backstop state budgets, some might question whether we have a federalist system anymore.
Like war, pandemics re-shuffle the geopolitical deck. They transform civilizations just as the Black Death that wiped out 30% of the European population in the middle ages. The coronavirus is accelerating the unraveling of the economic and political structures of globalization that had already begun before the pandemic. The virus hits hardest in densely populated cities that are linked by rapid air travel, movements of tourists and refugees, business people and all kinds of interlinked networks. When bloated centralized and authoritarian governments collapse under their own weight, local government is what remains until the predatory forces of power centralization begins to rebuild over time. Why can’t we design government that is closer to the natural order of things?
The premise of my recent book, Locally Grown: The Art of Sustainable Government, is that US government has become unsustainably top-heavy with too many functions absorbed at the federal level that were intended to be performed at state and local levels by our Constitution. Our founders built a brilliant distributed architecture focused on preserving individual liberty while providing for the common good. In the technology world that I spent most of my career in, it is settled science that distributed systems (like the internet) are far more scalable, fault-tolerant, faster than those old centralized mainframe systems. Just like the server farms in our vast distributed on-line network where billions of people are served fast and efficiently, so would trusting our 20,000 local zip codes and 50 states better serve US citizens for many government functions. Bottom-up, grass roots, less expensive government with more transparency and more citizen participation is the answer. Let Washington DC handle the things it does best just like the enumerated powers in the Constitution describe. I’m happy to see that our federal government is embracing some locally grown principles by focusing on letting governors, mayors, and the private sector rightsize key decisions that better match the diversity of the nation. Once size-fits-all solutions rarely work effectively.
One of the key indicators of our growth into a top-heavy “mainframe” government is the rapid growth of the government Debt-to-GDP ratio. It measures the ability of a country through its Gross Domestic Product, to service its debt. According to St. Louis Fed, the official federal government Debt-to-GDP ratio is 107%, a historically high level outside of wartime. But this number only considers U.S. Treasury Securities outstanding. Like the 2008-2009 Financial Crisis, this pandemic has driven the Fed to further expand the scope of debt securities it purchases to state and local municipal bonds, mortgage-backed securities (think Fannie Mae and Freddie Mac). Adding municipal bonds, mortgage-backed securities and student loans inflates total government debt to over $37 trillion or a 172% Debt-to-GDP ratio. This level puts the US right behind Japan and Greece with the worst ratios in the world. Debt levels this high have a drastic negative affect on economic growth. Japan’s economy has been in downward spiral for years and now their growth hovers between 0-1%. Do we even have to discuss the Greek economy?
Here's another fun fact. Nearly ALL of our federal income tax revenue is currently allocated to mandatory entitlement spending and interest on the national debt, which increases like clockwork by 5.5 percent every year. This means that the rest of our government spending, including defense, education, research, environmental, etc., must be financed by either higher taxes or issuing more debt, which in turn increases the mandatory interest payments on that debt.
For those that insist raising taxes will solve all our fiscal problems, I would point them to a 2007 study, The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks, by President Obama’s top economic advisor Christina Romer. Her study showed a strong statistical inverse relationship between taxes and economic health finding that each one percent (1%) increase in taxes as a percentage of GDP lowers real GDP by about three percent (3%) after two years. Let’s say we double the tax rate on the top 5% from about 24% to 50% and hike the corporate tax rate to 60% like some people are clamoring for. Since 2000, taxes as a percentage of GDP has averaged about 25% and the tax hike would raise that to 29% of GDP. The Romer model would predict a pretty bad recession one to two years after the tax increase and it would take another five years for GDP to recover to pretax hike levels. Keep in mind that government expenditures would continue to rise by 5.5% and more tax hikes and debt would be required. Hopefully you can see the downward economic spiral this would create.
The United States fiscal condition was unsustainable before this pandemic. Shutting down the economy for several months has significantly exacerbated the problem as the federal government steps up it’s money printing to finance deficits. The recent $2.2 trillion stimulus will increase interest payments to 9.7% of the federal budget, a 10% annual increase from last year. It is true that crises change societies and if that change becomes the Green New Deal, Medicare for All and free college, our debt will balloon to a level that would crush us.
The only hope for avoiding or at least mitigating future disasters like this is an unpopular idea in the world right now: free-market capitalism. Despite the criticisms of the elite-class in rich countries that free markets are immoral, we need the technological progress and economic growth that capitalism fosters. Imagine not having the amazing bio-tech companies that will produce a Covid-19 vaccine? We’d be no better off than those poor souls living during Black Death. We need economic growth to recover from this economic and cultural shock and to service the mountain of debt our country has taken on.
America will get past this crisis but the big question is “What kind of America” emerges after the dust clears. Without pro-growth policies and a return to our roots as a bottom-up society, the great American experiment is seriously at risk. After the Constitutional Convention of 1787, an observer asked Ben Franklin what kind of government they had just created. Franklin famously responded, “a republic, if you can keep it.” He was aware of the natural tendency of centralized power to become corrupt over time as it begins to serve itself at the expense of the people. There have been a couple other “if you can keep it” moments in our history. I am pretty sure we are in the midst of one right now.
