I think it’s fair to describe Charles Lane, a Washington Post columnist, as left of center. I would also describe him as a sensible guy.
In his latest op-ed, Lane argues, as we have at Power Line, that in dealing with the current public health crisis, the U.S. must be mindful of the economic side of the equation. Indeed, he notes, there is an economic prosperity side to public health. (There’s also a public health side to the economy. A virus that killed a very large number of Americans might well produce severe economic consequences as a result.)
As to the economic prosperity side of the public health equation, Lane cites economists Anne Case and Angus Deaton for the following proposition:
[A] rise in deaths linked to long-term economic hardship — suicide, overdoses and the like — has caused devastation in communities across the middle of the country, leading to a troubling recent decline in U.S. life expectancy.
Economic prosperity is a matter of public health, too — the necessary condition for it, in fact. The United States must respond to the coronavirus accordingly.
On the public health side of the equation, I don’t think anyone has come up with a reliable model for forecasting the fatalities that would result from various levels of social isolation and business cessation. Similarly, on the economic side, I’m not aware of any reliable model that forecasts the amount of economic damage that would result from various levels and duration of business cessation, or that tells us how long recovery would take.
Without reliable models on both sides of the equation, policy makers are shooting blind when it comes to deciding how to proceed against the Wuhan coronavirus.
Lane does present relevant economic information, though. He writes:
Each year, the Federal Reserve runs “stress tests” of the nation’s largest banks, as required under the Dodd-Frank law enacted after the 2008 financial panic. Experts construct a hypothetical economic disaster, then determine if banks hold enough capital to remain solvent and continue lending through it. Those who fail must fortify their balance sheets.
For 2019, the Fed’s “severely adverse scenario” posited a growth rate of -5 percent in the first quarter, followed by more negative growth through the year; unemployment spiked to 10 percent; stocks fell 50 percent; and the VIX market volatility index peaked at 70. Ten-year Treasury yields bottomed out at 0.8 percent as severe recessions swept Europe, the United Kingdom and Japan.
The good news is that the banks passed.
Not surprisingly, there is bad news, as well.
Already, some economic indicators — actual and projected — meet or exceed parameters of the severely adverse scenario outlined in the Fed’s 2020 stress test, published in February.
The VIX has hit 70, which was not quite projected to happen until the quarter ending in June, and the Dow Jones industrial average is below the Fed’s assumed 22,262-point first-quarter level. Plausible forecasts for second-quarter growth are in the negative double-digits, as opposed to the -9.9 percent in the Fed scenario.
In other words, we’re already approaching, if not exceeding, the economic scenario thought to be “worst case” just before this virus hit the U.S.
What about the prospects for recovery? Obviously, they are tied to the amount of damage we inflict on the economy. As a general matter, Lane writes:
There is a rational basis for hope: History shows that communities can absorb horrific shocks and recover, from the German postwar “economic miracle” to New Orleans’s rebound from Hurricane Katrina, or, indeed, the U.S. comeback from the Great Recession of 2008. A strong “V-shaped” recovery is still thinkable.
The sooner we can start, the better. Resolving the coronavirus threat to public health is the necessary precondition. Yet just as we shut down economically on the basis of unavoidably imperfect information about the threat, we will probably lack clear, agreed-upon criteria for when it’s safe to blow the all-clear.
This is a call we need to get right. Unfortunately, we seem to lack, and will probably continue to lack, the knowledge needed to get it right.