No one knows how bad the coronavirus epidemic will get. The current case count is almost certainly an underestimate, and even the reported numbers, outside China, continue to grow exponentially.
There’s a slim hope, still, that public-health authorities may contain it. Modern technology has enabled the spread of the disease, but technology – for testing, sharing data, developing a vaccine – may also help slow and then stop it.
Suppose, however, it doesn’t. Suppose the number of cases continues to increase at its current rate – roughly quadrupling every week. By the end of March, the number of cases outside China will have grown from about 21,000 today to more than three million. By the time the disease has run its course, Harvard University epidemiologist Marc Lipsitch forecasts, it could end up infecting 20 per cent to 60 per cent of the world’s adult population. At a mortality rate of even 1 per cent, that’s as many as 30 million deaths.
It’s impossible to imagine such a cataclysm not tipping the global economy, already slowing noticeably, into recession – and a recession of a particular kind. The workdays lost to illness, the disruption to global supply chains, prohibitions on transit, the sheer numbers of the dead: All these add up to a sudden, sharp reduction in the economy’s productive capacity, much as if one were to blow up a sizable number of the world’s factories. Economists call this a “supply shock.”
We’ve been here before: The OPEC-driven spikes in the price of oil in the 1970s were another instance of a supply shock. What constrains output in these situations is not a lack of demand, but of supply. Which means attempts to remedy them by traditional demand stimulus, fiscal or monetary, are not just useless – they make things worse. Boost demand, when the problem is really a shortfall in supply, and all you do is drive up prices; think of the housing market as a micro-example.
Which doesn’t mean authorities won’t try. We’ve been here before, too. In response to the oil shock, governments ran deficits and central banks ran the printing presses. The result: what became known as “stagflation.” But that was long ago and memories are short. It’s entirely possible the authorities could make the same mistake again.
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Indeed, they may already have. As it is, the world is awash in debt, public and private, made cheap by oceans of central bank liquidity – the legacy of the financial crisis. Until now, that had not seemed to matter. The old equation linking easy money and inflation seemed to have broken down. You could run an economy well below what had previously been considered the “safe” (i.e. non-inflationary) rate of unemployment, without causing either wages or prices to accelerate.
The coronavirus shock, however, could see a revival of the problem of “too much money chasing too few goods.” Suppose it does. Another equation that seemed to have broken down in recent years had to do with how much debt it was safe to carry. Although debt loads had reached astronomic levels, relative to income, there was no need to worry, it seemed, so long as interest rates remained at their historic lows. And what could possibly cause rates to rise?
Inflation, that’s what. Lenders mark up the interest rates they charge to cover the expected loss of purchasing power; the higher and more uncertain the inflation rate, the greater the premium they demand. As the cost of servicing the debt climbs, the debt compounds – and interest rates rise again, this time in response to the increased risk of default. We’ve seen that before, too. It’s not impossible we could see it again.
If so, a great many chickens are going to come home to roost, in this country as elsewhere. Maybe governments in Canada have not been quite as feckless as in the United States, where the federal deficit, 10 years into an expansion, is now at 5 per cent of GDP. Maybe our federal government is in a relatively strong position, notwithstanding its own growing deficit, with a debt-to-GDP ratio of 30 per cent.
But the provinces, some of them at least, are in much worse shape – not only in the short term but, more ominously, the long, with an aging population driving health-care costs ever skyward. Even before the coronavirus outbreak, the Parliamentary Budget Office was projecting three provinces, in particular – Newfoundland, New Brunswick and Manitoba – were heading for debt-to-GDP ratios in excess of 100 per cent by mid-century, if they did not default before then. A spike in interest rates and/or recession would surely advance that day of reckoning.
It has been a long time since Canada had a real recession, let alone a fiscal crisis. (The 2009 downturn, savage elsewhere, was relatively mild here, while the two-quarter pause in 2015 barely qualifies.) Over the years, the attitude took hold, especially in government circles, that the business cycle had more or less been abolished. Growth would go on forever, come what may.
You can see this complacency reflected not only in the deficits they have incurred, but in the tax and regulatory policies they have pursued. Higher CPP levies, higher minimum wages, higher personal and corporate income tax rates, tighter environmental regulations: All these and more could be loaded onto an economy that would bend but never break.
It was reflected, too, in our politics, no longer so preoccupied with the economy, as of old, but addressing itself to other issues, for good or ill. At best it inclined us to more idealistic concerns, long overlooked, such as the environment and Indigenous issues; at worst it permitted us to waste time chasing butterflies, and to elect leaders, whether on the right or left, to match.
But things are, as they say, about to get real. In an economic crisis – on top of a public-health crisis – politics is likely to revert to form. There will be little public patience for any party or leader who does not focus on practical proposals for relieving the crises. Politics may again become a serious business, for serious people.
If only it did not take a crisis for this to happen. What’s that line of Brecht’s? “Unhappy the land that has no heroes. Unhappier still the land that has need of heroes.”
Andrew Coyne