Coronavirus: Skepticism and Hysteria

Written by: Álvaro Martín (researcher at Fundación Civismo)

The whole world, and Spain in particular, is experiencing what is perhaps one of the toughest and most tragic moments of the last century. It might seem that we are immersed in a simulation, or that we have entered a Hollywood film set, as if we were taking part in one of those movie blockbusters about pandemics or global epidemics so often seen on the big screen. Unfortunately, the current situation is not a movie, and if it were, critics would classify it in the horror category. Covid-19 is very serious, it supposes a global health emergency against which we cannot waste a minute on anything other than trying, by all means, to prevent its spread. However, we should emphasize that the solutions cannot be found through hysteria and collective madness. Indeed, this will only cause injudicious crowds in supermarkets and pharmacies, as well as unnecessary stockpiling of health products and foodstuffs. Moreover, skepticism is even more dangerous. It leads to thinking that the measures adopted by the competent authorities are abusive and, therefore, to bypass the restrictions on movement imposed by the Government, or, worse still, to encourage other people to commit the same foolish acts.

That being said, it should be emphasized that the best way to approach the current situation is with reason and caution. We should study the day-to-day data, as well as the consequences that this pandemic will have on the social framework, not only in Spain, but also worldwide. It is undeniable that this crisis is going to leave its mark on many areas, such as the political, social and, of course, the economic spheres. All of these must be handled in the same way, with caution, analysis of the available information, and continuous monitoring of the predictions made by experts in various fields. Alarmism, prejudices and unfounded predictions will not help to overcome this crisis, nor to prevent or lessen some of the problems that will arise once the storm has subsided.

For this reason, it is important to explain the evolutionary and expansive process of Covid-19, together with its differences in relation to other more common and recurrent viral diseases in our societies. Likewise, it is also essential to disprove some related hoaxes, such as the possibility of shortages in supermarkets, hoax that, apart from being totally false, will not occur in Spain under the current circumstances of the pandemic. We will proceed to detail some estimates of internationally renowned experts on the macroeconomic effect of Covid-19, as well as some economic measures that could serve to reduce its recessive impact in Europe.

What is essential to know about the coronavirus?

According to renowned epidemiologists, when it comes to coronavirus, we should not focus only or mainly on the mortality rate, but rather on the reproduction number, also known as R. According to this, and depending on the country and time, each Covid-19 infected person will infect, on average, between 1.6 and 2.5 more people, while a common flu has an R of between 1.2 and 1.4. The fact that Covid-19 has an R close to 2, or even 2.5 in some cases, means that the number of people affected grows exponentially. Thanks to social isolation and restrictions on free movement, it is possible to reduce the number of infections and, therefore, to reduce the R to figures close to 1. At this point, the virus and its spread generally become manageable and the collapse of the health system is avoided. The goal is to flat the curve. However, this will only be achieved if the rate of infection is contained and slowed down, which depends largely on our individual will and awareness as a society.

Source: Max Roser, Hannah Ritchie and Esteban Ortiz-Ospina (2020) – “Coronavirus Disease (COVID-19) – Statistics and Research”. Published online at OurWorldInData.org. Retrieved from: ‘https://ourworldindata.org/coronavirus’ [Online Resource]

We must prevent our elderly from going out on the streets: the mortality rate rises with age. For those over 70 years of age, it is four times higher than the average, and seven times higher for those over 80 years of age. In Spain, and using official sources, it can be observed that the number of infected persons doubles every three days, which shows the great importance of the implementation and strict compliance with control measures, so as to prevent the collapse of the national health system (public and private).

The number of people affected could be underestimated due to the low number of tests being carried out (mainly because of a lack of resources and system capacity). In some countries, such as South Korea, the rapid detection of infected persons and the possibility of discerning the seriousness of the different cases has made it possible to reduce infection and the mortality rate considerably. South korea has been the scene of widespread testing of the population, including asymptomatic persons, since they can also be carriers of the virus. The importance of these tests is extremely crucial. The incubation period of the virus is around 5 or 6 days, however, it can be transmitted earlier. After the incubation period, a considerable number of people, especially children, adolescents and young people with no previous pathologies, are asymptomatic.

How to be rational and avoid acting on primal instincts in a pandemic

Given a pandemic such as Covid-19, there is no need to act in a skeptical and careless manner, however, neither should we give in to hysteria and primal instincts. The reason, intelligence and analytical capacity of human beings must be employed more than ever in such situations. In this area, behavioral economics plays a great role and, therefore, it is worth reviewing some points that, over the years, have been pointed out by experts in this branch of economic science, as they can be used to control our behavior in these situations.

We should not allow ourselves to be dragged along by fear or insecurity. Uncertainty about the evolution of the epidemic, its effects or risks, generates very heterogeneous individual behaviors, which in many cases limit our cognitive capacity on this point. In other words, there will be people who will take the utmost precautions, while others will believe that the measures are exaggerated and will try to avoid mobility restrictions by all means. On the other hand, the high time preference of a large part of the population, i.e., the fact that they place a higher value on present goods than on future ones, makes it very difficult to encourage preventive behavior: many people do not really think about the harm that could be caused to them and their environment if they go out on the public highway to run or walk the dog in a group, to give some practical examples.

Many people only consider the benefit our actions could have on themselves, without taking into consideration the externalities (both positive and negative) that they entail for third parties. In other words, people often conclude the only benefit they can get from confinement is not to get sick themselves, but they do not include the fact that the ultimate goal is not only to prevent individual infection, but also to slow down and interrupt the spread of the virus. Thus, some imprudent actions, such as meetings or going out in groups, have enormous negative externalities on third parties. There is a risk of infecting them (remember that many of those affected are asymptomatic), or they could infect us, and we, in turn, could infect other people, rapidly spreading the disease. In the absence of individual incentives that promote an internalization of the costs and benefits of our behaviors, which motivates us to reduce the former and increase the latter, State intervention becomes necessary (with a similar justification, but expanded, to that applicable to Pigouvian taxation). This can be achieved through measures such as confinement or forced isolation, or many others contemplated in the legal framework of the state of alarm.

Continuous monitoring and periodic analysis of data will help us to avoid both availability bias – talking too much about a subject without sufficient information, which leads to underestimation of its relevance and to drawing erroneous conclusions – and over-representation bias – giving greater importance to certain factors related to the coronavirus, and too little to others, by mistakenly applying a personal bias, due to a lack of information or insufficient or incorrect analysis of it. This will make us act much more rationally in the face of an unknown and uncertain situation such as the pandemic we are sadly experiencing.

On a more practical level, one of the greatest demonstrations of irrationality and poor or erroneous analysis of the available evidence lies in the fact of thinking that there could be food shortages in Spain under these circumstances.

Will there be food shortages in Spain?

In recent days, we have not stopped seeing images of people crowded at the door of supermarkets, waiting for them to open to access the establishment to fill their shopping carts with large volumes of all kinds of goods. But why are people stockpiling? In principle, many have decided to hoard hygiene and food products out of fear of a future shortage, thinking that they will suddenly find themselves with insufficient supply of these products. An irrational fear, unfounded and without any real basis. In times of war, countries may in many cases experience this contingency, however, not in a pandemic. Let’s see why.

The dysfunctions and distortions that occur in the productive structure in one case and in the other are very different. In the first, the food distribution sector – like so many others – loses a lot of productive potential. In other words, even when producing to the maximum of what the available means allow, the supply will not be enough to cover a constant demand. Why such a decline? Very simple: the bombardment of factories, farms, supermarkets, municipal markets… The capacity to generate goods is lost, which results in a constant shortage of supply over time and leads to shortages.

Why won’t this happen in Spain during the Covid-19 pandemic? The images of people piling up in supermarkets show nothing more than temporary demand peaks. That is, a volume of demand that is usually spread over time (consumers normally spread out over the days of the week or month to go shopping) is now concentrated in a short space of time (a greater number of consumers go on the same day, and, moreover, purchase a greater quantity of products). Such peaks will not cause a shortage situation, however, as this depends on supply levels. The supply of hygiene and food products has not only been maintained at present, but has even increased to meet customer needs. On the other hand, even though demand may be increasing over time, such peaks do not tend to last long. Thus, a family that comes in for 10 kilos of meat will not buy again until these stocks have diminished, thus distributing the peaks of demand.

Moreover, all supermarkets replenish products once a day, and in situations like the current one, we are seeing that even twice. In Spain, on average, there is a supermarket for every 840 inhabitants, a very high ratio, in addition to having 400 very fast distribution logistics platforms, which are fully active these days, allowing the warehouses and shelves to be fully stocked in less than 24 hours, as Mercamadrid reported in a press release.

The economic effects of the coronavirus: macroeconomic policies to combat them.

The coronavirus health crisis is expected to leave an economic recession in its wake. This recession may be short-lived or long-lasting, depending on the type of policies implemented and other as yet unknown factors. The economic impact will grow at the same rate as the number of infected people rises, as this will contribute to further paralyze the national economy. Uncertainty is key on the economic front, and the numbers do not bode well. If we look at the VIX index, which shows the volatility of the markets, we see that it is at its highest level since almost 2008. Some measures have already been taken, such as restricting short positions in 69 shares of the Spanish stock index. However, this does not seem to have had much effect on the levels of uncertainty and volatility. Likewise, there are still no reliable estimates of the aggregate economic impact of this health crisis, which will depend on a multitude of factors, such as the rate of contagion, mortality, the behavior of the virus in the face of temperature changes typical of spring, or the protection policies adopted by the main countries of the world.

The coronavirus will generate – and is already generating – a supply and demand shock, not only because of the implications of the pandemic and the measures to combat it, but also because of the reaction of economic agents to these situations. The supply shock would be produced mainly by the closure of factories, offices and workplaces. As far as manufacturing is concerned, the closure of China during the last month and a half has generated strong disruptions in international value chains, due to a severe shortage of components and intermediate goods. Logically, this has affected to a greater extent the countries most exposed to China or Southeast Asian nations, such as Germany. Spain has also been hard hit, however, especially in the automotive sector, which was already suffering from a shortage of inputs several weeks before the state of emergency was declared. In the service sector, the supply shock comes from the workers’ side. In other words, the isolation and stoppage in the activity of many companies – or at least a significant reduction in it – due to the containment measures will result in a total dependence on teleworking during the quarantine period. As this proves impossible to implement in some sectors such as the hospitality industry, they will see their revenues seriously eroded.

On the demand shock side, both uncertainty and risk aversion, together with the containment measures implemented at the government level, have contributed to a sharp reduction in consumption. In these situations, many families, especially those in the middle and lower income distribution groups, show a severe reduction in their consumption rate, compared to a significant increase in their savings rate.

Spain will suffer considerably from this health crisis, since some of the most affected sectors -also in time- are commerce, tourism, hotels and catering and transport, accounting 25% of our economy.

Both shocks (supply and demand) could lead to a financial shock in the future, since these market dysfunctions could lead to solvent companies having to close the shutters as they have to continue to face fixed costs and taxation in the face of a reduction in practically all their income. In other words, a temporary lack of liquidity in some businesses can turn into a serious solvency problem, particularly affecting SMEs with little cash hoarding.

Faced with this crisis, it has not been possible to adopt macro-prudential policies because it is clearly a “black swan“, as described by Nassim Nicholas Taleb. In other words, a hugely disruptive and unpredictable event with serious consequences for our way of life. Even so, it is absolutely reckless and shameless to face it with public debt levels of 98% of GDP, with a fiscal deficit of over 2%, and with rates previously set at 0% by the ECB. The ammunition available to combat this crisis would be much greater if, during the period of economic expansion in recent years, the opportunity had been taken to balance the public accounts, reduce the deficit-debt ratio and implement a responsible and stabilizing monetary policy.

This is as if in peacetime we had used shells to shoot at a fictitious target, and now we are trying to go to war with only a handgun and two or three bullets in the magazine.

What policies can be adopted at an economic level?

Fiscal policy will have to take precedence over monetary policy, which has seen its capacity severely reduced in recent years. With rates at zero, or even negative, the Treasury can finance itself to introduce greater spending policies and postpone, reduce or eliminate many taxes, thereby helping the self-employed and small businesses. Sectors related to commerce, tourism, the hotel and catering industry and transport must be a priority when it comes to receiving such tax relief, not only because they account for a quarter of our economy, but also because they are suffering to a greater extent the effects of the current pandemic.

While this lasts, aid policies should be studied in order to try to maintain a minimum of income for companies, aimed almost entirely at preserving workers’ incomes and employment in the near future. In the same way, reductions in working hours could be favored – even for those companies that work telematically – to prevent mass layoffs after the epidemic, and accompanied by a supplement to supplement the paychecks of the most vulnerable employees. This will minimize the contraction of aggregate demand.

The Spanish government, through the ICO, could open temporary liquidity lines for SMEs that are suffering severely from the effects of Covid-19. This will in turn contribute to debt restructuring, and will prevent a liquidity shortage from leading to insolvency and bankruptcy of many companies.

Finally, monetary policy also plays a role, albeit a much smaller and less effective one. As we have already mentioned, the capacity for action of central banks -especially the ECB– is extremely limited since, from 2008, it has been using all its resources and applying them to the maximum without respite (this includes TLTROs, QE and its prolongation, negative interest rates…).

Last week, Christine Lagarde’s statement on the subject was not too positive, nor did it sit well with the markets, which blame the lack of fiscal policy and the excesses of monetary policy, which have been committed over the last few years and which they intend to extend and encourage. On the one hand, the ECB intends to inject more liquidity to companies, focusing especially on SMEs, as indicated last Thursday, through TLTRO III. On the other hand, they intend to continue and expand the acquisition of financial assets (mainly sovereign and corporate bonds) through the already long-lived QE, trying to make it easier for companies that wish to do so to finance themselves through the markets. What Lagarde did refuse to allow the ECB to do was to do the job that corresponds to the States, which is to limit the risk premiums that have been skyrocketing during these days.

In conclusion, the Covid-19 health crisis has given rise to several other crises, both economic, social and political. These crises cannot be faced with skepticism, much less with hysteria. It is time to be and act united. When the storm passes, we will have to fight to prevent the collapse of the economy and society of the old continent. Because if both collapse, the European project will follow. We cannot and must not allow that to happen.