Health or Wealth? The Policymakers’ Dilemma

Jack Ablin Market Commentary

America’s COVID lockdown is entering its third month and plans to relax restrictions and open economies are leaving lawmakers with a difficult choice between public health and economic well-being. Those daunting decisions are largely in the hands of our nation’s governors.

This delicate US policy tradeoff played out last week when we heard from both Fed Chairman Jerome Powell, representing the economy, and Dr. Anthony Fauci, America’s public health champion. Dr. Fauci, a member of the White House Coronavirus Task Force, warned senators that states and cities could face serious consequences if they were to open up too quickly. He urged that they remain closed until they are confident that they could handle the inevitable uptick in cases. Powell issued dire warnings on the economy, arguing that without further economic stimulus the US could suffer through years of sluggish growth and meager job gains long after the pandemic passes. During an interview following his Tuesday remarks he asserted, “There is a growing sense that the recovery may come more slowly than we would like, but it will come. And that may mean that it’s necessary for us to do more.”

Lawmakers face a dilemma. Focusing exclusively on public health to flatten the curve long enough to wait for a treatment or vaccine would inflict significant damage to the economy, estimated at $1 trillion per month. Conversely, focusing exclusively on the economy, ignoring all social distancing and letting the virus run its course would lead to more than two million deaths, according to estimates.

As states and municipalities reemerge from a two-month lockdown, questions emerge from both sides of the wealth vs health debate. Public heath proponents worry that opening too quickly could spark an escalation of infections, while economists wonder how quickly economic normality can be restored, given both the lack of willingness, due to flagging confidence, and/or ability, due to unemployment, to spend.

Sweden might be the perfect case study. The country encouraged social distancing, but never locked down. Children under 16 were permitted to stay in school, because Swedish authorities believed youngsters are neither vulnerable to the virus nor the source of transmission.  Moreover, keeping children in school enabled their parents to go to work, allowing most businesses stay open. Scientists there, led by epidemiologist Anders Tegnell, argue that government shutdowns lack scientific basis, and people should maintain a normal life. By allowing young, healthy people to become infected and recover, the country’s total population would be better protected. Sweden’s laissez-faire approach could eventually lead the country toward “herd immunity,” where enough of the population gets infected and becomes immune that the virus is longer a threat. Experts estimate that herd immunity would require 60-70 per cent of the population to be infected, which would be accompanied by an expanded death toll.  Other studies estimate herd immunity could be achieved at the 10-20 per cent level. While it remains to be seen whether or not Sweden’s strategy will work, the country’s death rate peaked higher than those of the United States and their Nordic neighbors. Officials point out that half of Sweden’s deaths occurred among retirement home residents, a fact that they regret, recognizing they have done a poor job protecting the elderly.

Sweden might be well on its way toward herd immunity. To date, Sweden has reported roughly 3,700 COVID-related deaths. We estimate that just over 10 per cent of the population has been exposed, based on a 0.36 per cent mortality rate. That compares to about 7 per cent of the US population, using the same formula.

Even though protecting the economy was not a stated aim of Sweden’s COVID-19 strategy, lighter restrictions have provided some insulation. The country’s retail sales growth through March, the latest data available, slipped only 1.7 per cent as stores remained open. Sweden’s retail activity compares favorably to that of its neighboring countries, which instituted lockdowns during that month. US retail sales growth suffered the biggest decline, sliding more than 8 per cent, even though American cities didn’t lock down until the middle of the month. Regarding other sectors, Sweden’s tourism trade, understandably, has evaporated, and exports have also contracted as the country’s trading partners have shut down.

Sweden’s employment picture has also remained stable relative to other countries, particularly the United States. Stockholm-based Volvo, for example, was able to keep production facilities open in Sweden while their other European factories were closed. Keeping employees engaged throughout the COVID-19 slowdown is critical to getting the economy back on track quickly.  From that perspective, Sweden’s approach is promising. While joblessness is expected to rise, Sweden’s current claims for unemployment as a share of the workforce remains relatively tame when gauged against other developed market countries, particularly the US. Treasury Secretary Mnuchin warned Congress this week that keeping the economy closed too long risks inflicting long-lasting damage.

Ultimately, Sweden’s approach will result in a smaller, though still deep, economic contraction compared to most of the developed world. Surveys show that about half of the Swedish labor force is working from home and public transportation usage has dropped by about 50 per cent. Though shops remain open, Sweden’s finance minister estimates that her country’s annual GDP could shrink by 10 per cent, with unemployment reaching 13.5 per cent. That estimate compares favorably to what America is facing: US economists estimate that Q2/20 GDP growth could plunge more than 30 per cent on an annualized basis while unemployment could spike to 17 per cent.

By relaxing COVID-19 lockdown restrictions, many parts of the US will be imitating Sweden’s strategy, with continued school shutdown being the most notable exception. Like their Swedish counterparts, US citizens will adjust their daily routines commensurate with their confidence levels. We expect younger people will be more actively engaged while older Americans will emerge at a cautious pace. Confidence is critical in maintaining economic activity. While confidence has fallen across the board, consumer confidence among households aged 55 and up has fallen more than households under 35 years old.

All 50 states are set to lift restrictions as the Memorial Day holiday weekend approaches. To successfully orchestrate an economic reopening without a surge of infections, three key elements are necessary. First, ideally, would be a vaccine. Early results from Boston biotech company Moderna are promising: the firm reported that volunteers who received its COVID-19 vaccine showed positive early result and, if future studies go well, it hopes to have a vaccine available to the public by January. If that happens, confidence and the economy could be restored by early next year. Second, short of a vaccine, the development of effective treatments that limit COVID-19’s severity and mortality rate would shore up confidence and boost economic activity. No effective antiviral or other drug treatment options are currently available, although there are several drugs that aid in treatment – like sedatives used to help patients requiring ventilator support, analgesics for pain management, and antibiotics. Remarkably, none of these remedies are manufactured in the United States. China is the pharmaceutical supplier to the world: the second-largest economy is the main global supplier of the raw ingredients used to make penicillin, ibuprofen and aspirin, among many others. Third is testing, to help identify those Americans who are susceptible, exposed, infected or immune. After several months of frustration, virus tests are becoming more widely available. The White House estimates the nation has enough lab capacity to process at least 400,000 tests per day. While it is now possible to test people in hospitals, nursing homes, prisons and other front-line settings, a lack of personal protective equipment, nasal swabs and testing reagents is hampering efforts. We expect these issues will be resolved within a few weeks.

Judging the outcome is difficult. The equity market’s optimistic response suggests an outcome somewhere between Cresset’s “best case” and “most likely case” scenarios. The continual bombardment of troubling economic news has been somewhat offset by green shoots on the health front. Forward-looking investors see light at the end of the tunnel. Let’s hope they’re right.