I am less optimistic than Pierre Lemieux:
the epidemic shows the benefits of economic growth and international trade. By strangling Chinese growth (“deepening economic damage,” says the Wall Street Journal of yesterday) and perhaps also, if it becomes a pandemic, economic growth in other countries, and by slowing down international trade, the coronavirus will give a hand to the autarkic and zero-sum-game vision of the US administration. No need for a trade war if a pandemic does the job. Trump, of course, will claim that the economic problems he has created were instead caused by the epidemic: untruth does not require coherence. Let’s hope that many people will see that the lessons of the epidemic are quite different.
The fact that I write from Milan may explain my pessimism. So far the Italian government has reacted to the coronavirus crisis with some containment measures: basically, some areas in the North of the country, apparently the hotbeds of the contamination, were locked down. The quarantined area is small but universities, schools, theaters are closed in Lombardy and Veneto, by all means the most productive regions in the country. Other Regions have followed suit, applying a precautionary principle. When you consider that Lombardy, Veneto, Piedmont, Liguri and Friuli account for about half of Italy’s GDP, you understand how serious the situation is.
So far, there seems to be a consensus that the virus brings a much more serious disease than a normal flu, but it is not as deadly as SARS or the swine flu. Out of 100 recorded cases of COVID-19, 80 seem either to show no symptoms or to recover quickly, 15 have severe consequences, and 5 end up in intensive care with breathing problems. The 14 people who have so far died in Italy (over 528 cases, as I write) had pre-existing conditions, which became unbearable with the virus. The reason for containment measures is to slow down the pace of the virus’ spread, to avoid facing a crisis of capacity on the part of hospitals able to offer intensive care. Online, it is quite easy to run into videos supposedly shared by Chinese whistle blowers, full of pictures one would rather not have seen. I suppose part of the problem lies in the fact sanitation is rather different in China than in the West, and healthcare infrastructure is not as developed as in the wealthier, Western world. Or so I hope.
By all means, the emergency is producing and will produce a less interconnected world, and so a poorer one. In this Wall Street Journal piece Joerg Wuttke, president of the European Union Chamber of Commerce in China and chief local representative for BASF SE.), comments that, “When the last ships reach our harbors in a week or 10 days, that will be it from China…Then you will see shortages on the shelves of Europe. The impact has not really been felt yet.”
The effects of shutting the North of Italy down for a month are not that different: for companies and workers here, but also for companies abroad, beginning with Germany, whose supply chain is highly integrated with the Northern Italian one. So far it is “services” that have mostly slowed down, but if people can’t send their kids to school this will affect their working time and their performance, too. Fear of contagion will drive tourists away from Italy, with strong consequences both for hotels and AirBnB owners. The Italian economy was already quite weak, with a meager +0,2% GDP growth projection and a government busy at nationalizing whatever possible, God knows what may happened to it now. There is already a consensus that Italy will have negative growth this year.
Will people learn the lesson, and realize that a closed economy is poorer, as Pierre hopes? I fear not. Though the emergency measures somehow provide us with a preview of the kind of country the economic nationalists would like us to live in, they will quickly turn the tables, blaming the virus on globalization, and making trade with China the villain of the story. Italy’s reaction to coronavirus is convincing other countries to treat Italians as we treat ourselves – limiting direct flights, imposing quarantines, etc. This will also increase the perception that reliance on international trade is a weakness, thereby fueling a renewed rhetoric of the marvels of autarky. Sure enough, when people travel they carry their diseases with them: this is not news. Prepare for a new nationalist narrative built around this idea.
READER COMMENTS
Alan Goldhammer
Feb 28 2020 at 9:43am
Another big issue is what the impact COVID-19 will have on tourism. Northern Italy gets large numbers of tourists and we already have our tickets and hotel reservations for a May trip to Milan and Lake Como. We plan on going unless all hell breaks loose (probability of this is less than 20% IMO). I don’t know what % of Italy’s GDP comes from tourism but that ought to be taken into account.
The virus will pose difficulties that are not quantifiable at this point in time. Surprising from the Chinese data coming out of Wuhan is the relative lack of documented infections in persons <20 years old (only 2% of the total). this could be a result of infections with minor symptoms that would not warrant medical intervention or diagnostic testing. Clearly we need more epidemiological data from China and other countries. Noah Feldman has a good podcast up right now where he talks with one of the epidemiologists from Harvard. It’s a well reasoned discussion.
I was bothered when a lot of research into this family of viruses was pretty much stopped following the marked decrease in cases from SARS and MERS. In the meantime money continues to be poured into HIV vaccine trials, a disease which is entirely preventable in contrast to respiratory viruses. Perhaps research organizations will make better use of the funds that will be forthcoming.
Mark
Feb 28 2020 at 6:24pm
The course of this disease seems unpredictable, but if current trends continue (where it comes under control in China but flares up elsewhere in the world), then it will be good that so many medical supply chains are in China because those will come back online as infections occur in the rest of the world. And if the worst case scenarios come true where a huge percentage of the global population is infected, then we will want to have the global capacity to produce as many masks as possible, which means taking advantage of the manufacturing economies of scale which China is very good at instead of trying to create less efficient small-scale production in different sites in every country. Hopefully, it will make people appreciate the importance of free trade when the supplies needed to fight this virus are traded across countries.
Warren Platts
Feb 28 2020 at 7:31pm
With respect: disagree. China, er, the #CCP, has forced 3M, a nominally American-owned company with headquarters in St. Paul Minnesota, to stop exporting masks to the USA.
In general, it is the duty of a national government to place the safety of its own citizens first. This, obviously, includes China. Thus, does China care that they supply 80% of the pharmaceuticals to USA? Answer: Only to the extent it generates dollars. When lives are at stake, Chinese lives will count more…
Warren Platts
Feb 28 2020 at 7:20pm
I wish people would stop equating economic nationalism with autarky. No one has ever suggested that all international trade be ended. What the latest black swan event does show is that the globalist free trade system is extremely brittle. What is happening was eminently predictable and was bound to happen sooner or later. And unless things change, it will happen again.
Jon Murphy
Feb 28 2020 at 9:54pm
Unfortunately, I think you’re right. As Bob Higgs likes to discuss, there is a ratchet effect to government action. Short term emergency actions have a nasty habit of becoming entrenched.
Robert Schadler
Mar 1 2020 at 3:20pm
Classical liberal economists tend to applaud the widest possible flow of goods, services and people across political borders. And to emphasize the negative effects of any political interference of any of these border crossings.
Economists who predict the economic effects of these political interferences should be listen to (although the overall record of economic predictions is rather modest). Their predictions of political effects should be viewed even more modestly. A good example is when liberal economists predict dire political effects of disparities in incomes and wealth — very different from forecasting the ECONOMIC effects.
Quarantines of workers reduce production. So does health issue effecting workers. So does the early deaths of workers. We know people spread the caronavirus; when those infected travel, they spread it to other countries.
But we cannot know, certainly not at this point, whether a politically imposed, hopefully temporary, quarantine, or the temporary illness of workers, or the deaths of workers — will have the greatest effect on production. Perhaps the effects will differ country to country, or industry to industry.
My (amateur) expectation is that deaths in the advanced countries will be minimal, and so, the temporary interventions by politicians (who want to look good to their voters) will be temporary. And a vaccine is likely to follow within a year. A long-term effect may be a modest shift in production chains away from China, due to both their political regime and health infratructure, to benefit other low-wage countries.
Jon Murphy
Mar 1 2020 at 3:41pm
It is true that forecasting political events is different from forecasting economic events. But since any policy inherently has a political dimension to it, we cannot ignore it either; any economist who advocates a policy without consideration of political implications is not providing a serious policy analysis.
Indeed, the great strength of public choice economics is examining how politics and political economy work.
Thaomas
Mar 1 2020 at 8:11pm
That may be the advantage in principle, but I have yet to see it applied to actually design a policy.
Take the coronovirus situation, the first best policy is straightforward: take actions that have positive cost-benefit analyses and refrain from those that do not (most of what’s been done so far! :)). How do public choice considerations refine that into policy that is most likely to be implemented?
Thaomas
Mar 1 2020 at 8:18pm
While the measures taken so far to reduce the harm from Covid-19 will certainly produces a lot of evidence of why policy divorced from cost-benefit considerations is unwise, whether and when this will be incorporated into actual decision-making is another matter. I’m less sanguine than Pierre Lemieux .
So far the great bulk of harm from the disease has not come from deaths and days lost because people are too sick to work, but from the costly and futile efforts to prevent the disease from spreading.
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