By Matthew C. Klein, Barron’s
Whether we end up calling it a “W-shaped recovery” or a “double-dip depression,” the U.S. will likely endure another severe downturn in the fall or winter as a second wave of Covid-19 infections batters fragile economies and health-care systems.
Countries that did well curtailing the spread of the disease early on — and subsequently let down their guard — such as Hong Kong, Japan, and Singapore, are now experiencing soaring infection rates. The situation in Japan has gotten so bad that the government was recently forced to declare a national state of emergency.
The Chinese government, which had been so proud of stopping the viral outbreak that originated in Wuhan and lifted many controls in the beginning of March, has since closed movie theaters and gyms across much of the country, in addition to locking down much of Manchuria.
So while America’s “reopening” may proceed smoothly in the summer, a second wave of outbreaks later in the year is a likely outcome. Should that occur, expect another sharp decline in consumer spending comparable to what’s going on now.
The impact of a second downturn would likely be compounded by the heightened fragility of the health system. The U.S. and Europe have been relatively lucky in their experiences with the novel coronavirus so far — hard as that may be to believe given the grim toll already.
After all, the first wave of Covid-19 hit after the flu season had mostly ended, allowing hospitals to focus on the surge of Covid-19 patients without having to worry about tens of thousands of Americans requiring treatment each week for seasonal flu. According to the Centers for Disease Control and Prevention, the U.S. flu season hit its peak in mid-February and was mostly over by mid-March, while the U.S. outbreak of Covid-19 didn’t begin in earnest until the second half of March.
This is why, in a recent interview with the Washington Post, CDC director Robert Redfield warned of the “possibility that the assault of the virus on our nation next winter will actually be even more difficult than the one we just went through.”
Such a renewed health crisis would make it hard for anyone to have confidence that it’s safe to go outside, even after the threat of the virus had passed. This would have severe consequences for the long-term health of the U.S. economy. Already, tens of millions of Americans have lost their jobs and many businesses have shut, which will hit workers’ earnings and entrepreneurship for years to come.
At the same time, households and companies will likely respond to the shock of the coronavirus by becoming more cautious about their spending and saving habits, which would depress consumer demand and capital expenditures at the expense of economic growth.
The magnitude of these behavioral changes depends on the length of time between the initial downturn, which began at the end of February, and the return to normalcy. If, somehow, everything were fixed soon, the long-term economic costs of the virus would be low. If, however, the economy remains in a depression into 2021, the scarring to the U.S. economy would be permanent.
There are two basic preventive measures we should start doing now:
1. We need to invest in preparing the health system
Boosting testing capacity will make it easier to isolate and quarantine the contagious without disrupting the lives of everyone else. Developing effective antiviral drugs, which would help doctors treat Covid-19 more effectively than they can now, should be a top priority for pharmaceutical companies.
The government should offer large cash prizes to any successful company in exchange for making the drug free. And most obviously, more Americans should get flu shots so that hospitals can focus on the coronavirus.
2. We need to fix the financial and economic safety net
The initial hit from the coronavirus didn’t need to be as painful as it has been. We should have “temporarily [broken] the link between income earned and output produced by having the government pay for all the transactions we would have done had there been no virus,” as I put it in a previous column.
Instead, Congress waited before putting together a time-limited grab-bag of half measures. That was a mistake, but it does not have to be repeated. The government should pass legislation now that will protect the economy from the second wave of the virus.
Even if we make progress, a second wave of Covid-19 infections is likely before year’s end. There doesn’t need to be a second wave of the economic devastation we’re experiencing today if we start preparing now.
Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in sustainable investment strategies for retirement plans that incorporate Socially Responsible Investment (SRI) factors and Environmental, Social and Governance (ESG) elements. LRPC currently has contracts in place to provide consulting services on more than a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
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