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Market Oracle FREE Newsletter


An Investment in Life

Politics / Pandemic Mar 29, 2020 - 06:29 PM GMT

By: Patrick_Watson


If you’re following the coronavirus news from home, thank you for helping society through this hard time. Home is where we should all be, except for medical, food, public safety and other such essential workers. Please be careful if you do have to run out for necessities.

None of us have seen anything like this. Even in wartime, there are rear areas and safe zones where people can breathe easily. In this situation, we’re all vulnerable everywhere.

Virus mitigation measures, while necessary, are severely straining the economy. Places like mainland China, Taiwan, South Korea and Singapore show that early, aggressive measures can work. But they come at tremendous cost.

Every human decision is a tradeoff between cost and benefit. Is what you get worth more than what you give?

So, while it may seem cold-blooded, it’s fair to ask whether all this is really worthwhile.

Value of Life

Governments around the world have to both deal with a health crisis and manage the economic side effects. Some are doing it better than others, at least so far … but this is nowhere near over.

In any case, it’s clear the U.S. government will spend several trillion dollars in direct healthcare costs, business aid and payments to workers.

The federal budget was already over a trillion dollars in deficit. Now, it will probably be several times that amount, especially since tax revenue will probably drop.

That’s the “cost” side. We’ll spend that money to minimize the economic damage of closing businesses and keeping people home for weeks, possibly months.

The “benefit” side is harder to quantify. These measures will, experts think, greatly reduce the number of coronavirus-related deaths. But what is that number?

The real answer is unknowable. Experts assembled last month by the US Centers for Disease Control and Prevention considered various scenarios. They estimated a death toll somewhere between 200,000 and 1.7 million if we did nothing. Some people think that’s too low or too high, but let’s go with it for now.

Humans are the ultimate “natural resource.” Each of us has economic value. Every life lost is both a personal tragedy and a cost to the economy.

What is That Cost, in Dollar Terms?

This is actually a common question. It comes up in wrongful-death lawsuits where a family seeks damages. Lawmakers and regulators also have to consider it when they enact new safety requirements.

They could, for instance, impose a national speed limit to 30 miles per hour, everywhere, and greatly reduce highway deaths. But it would generate other costs, so they don’t do it.

Economists have a concept called “Value of a Statistical Life” (VSL) to help answer these questions. We can use VSL to measure how much coronavirus deaths would cost the economy.

VSL drops with age, and we know those who die from the condition tend to be older. Healthcare website STAT ran the numbers assuming the average death would be age 60. In that case, the VSL per life would be $5 million.

If that’s right, and using the CDC estimated death totals, then unmitigated coronavirus would cost the economy somewhere between $1 trillion and $8.5 trillion.

But that’s actually low because the deaths wouldn’t be the only cost. Before they die, these people would consume a lot of healthcare resources. So would many others who get sick but survive.

That’s money sucked out of the economy, too.

How much?

CDC estimated total cases (mostly non-fatal) would range from 160 million to 214 million. If we assume an average $10,000 to treat each one, the cost would be between $1.6 trillion and $2.14 trillion.

Then there’s a hard-to-pinpoint psychological cost of such a national trauma. It would affect productivity and investment for years. I think easily a few more trillion, over time.

But in any case, we can plausibly estimate the coronavirus costing the economy something like $3 trillion on the low end, and $10 trillion or more in a worst case. Keeping everyone home and shutting down much of the economy is an attempt to prevent that outcome.

Defense Spending

So now, we can look at this more intelligently.

If shutting down large parts of the economy forces the government to spend $5 trillion, but also saves the economy $5 trillion in prematurely lost lives and medical costs, did we really spend anything extra?

No, we simply offset the damage.

That’s in the aggregate. Not everyone would be made whole. Some people will lose more than they gained, and vice versa.

It’s also true that no amount of money can replace a child’s lost parent or restore a devastated community’s spirit. But we can establish economic conditions that help.

Of course, much depends on how the government conducts its repair programs. A lot could go wrong. I’m not confident they will do it well.

We should also note that maintaining these lockdowns has a cost, too. Humans are social creatures. Sure, we like solitude sometimes, but as a species, we don’t do well alone. We need each other. We need to get closer than six feet. This mass separation, if it persists, will have unpredictable effects apart from whatever the virus does to us.

But on the narrow question of whether fiscal stimulus makes sense in this situation, I think it does. This is a natural disaster in which most victims have no personal fault. Protecting people from it isn’t conceptually different than the military protecting them from foreign attack.

And the cost will probably be less than a few years of “defense” spending.

The Great Reset: The Collapse of the Biggest Bubble in History

 New York Times best-seller and renowned financial expert John Mauldin predicts an unprecedented financial crisis that could trigger in the next five years. Most investors seem completely unaware of the relentless pressure that’s building right now. Learn more here.

By Patrick_Watson

© 2020 Copyright Patrick_Watson - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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