The Four Questions (Why is this Virus Different...)

Easter and Passover and are still a couple weeks off, but people across the globe are already making plans to change up this year’s observances/celebrations.  My family, like many others, is going to do a virtual Passover “Seder" over Zoom!

For those unfamiliar with the Passover Seder, one of the features is called the “Four Questions,” where a child asks four questions about “Why is This Night Different from All Other Nights of the Year?”  The entire assembled group then follows with the answer… telling the story of the Jews’ Exodus from Egyptian slavery, and how the features of the Seder symbolize aspects of that Exodus… including the Ten Plagues.

Well, that made me think of why this plague-like pandemic (both the coronavirus and its societal/economic impact) is different from all others in our lifetimes… and Four Questions which highlight some of those differences. So, with apologies to my ancestors…

WHY IS THIS VIRUS DIFFERENT FROM ALL OTHER VIRUSES?

1. With other viruses, we don’t aggressively socially distance… why do we do so for this virus?

First a word about exponential growth.  If each infected person spreads to one other person each day, that essentially doubles the number of infected people in 1 day.  If this continues for 7 days, then that initial person has indirectly infected 128 people, and in only 14 days, 16,384 people! Obviously, this ignores the idea of overlap, but it underlies why it’s critical to prevent each possible transmission.

And this is why we see the COVID-19 numbers rapidly growing.  Yes, COVID-19 has “only” killed less than 500 people in the US as of this writing, while the seasonal flu kills around 50,000 annually.  But these numbers are misleading… the flu number is a “steady state” number, while the coronavirus number is very early, and rising.

Some important notes: COVID-19 is estimated to be 20x more lethal than the flu once contracted, it’s reported to spread more quickly (lack of immunity, + asymptomatic spread + more easily transmittable), and the lack of available tests means the default assumption needs to be that each person may carry the virus.

All of these combine to create a situation where, given normal social interactions, the number of serious and critical cases would rapidly shoot up.  In fact, the number of cases (and hospitalization/deaths) have already been growing exponentially (partly revealed by increased testing), but the only way to reduce the rate of growth is by reducing the number of possible transmissions — which is why Social Distancing has been instituted.  (See here for one of the best animatics I’ve seen illustrating this effect.)

Yes, people want to (and should) avoid transmission of the flu, but greater herd immunity, widespread vaccinations, contagious primarily when symptomatic, slower spread, lower mortality rate… all prevent rapid spikes in the number of serious cases… and reduce the threat to doctors and nurses who treat them.  However, with COVID-19 — at least until we both get many more available tests and critical care resources (e.g. ventilators, protective gear) — social distancing is the only way to “flatten the curve”... buying precious time and preventing the collapse of the health care infrastructure.

2. With other recessions, a stimulus works… why won't usual policy prescriptions work this time?

Think of the economy as a car.  In a typical business cycle, the car accelerates along the road, picking up speed gradually… that’s an economic “expansion.”  Sometimes the car begins to go too fast, and begins to overheat, so the Fed taps the brakes a little. Or maybe there’s some traffic, and the car needs to slow down.  That deceleration is a “contraction” (or if too great, a “recession”). In that case, the Federal Government can usually press down on the accelerator to slowly pick up speed again.

But over the last few weeks, the car slammed into debris in the road, spun out, and got stuck in mud off on the shoulder, hanging with one wheel over the edge of a cliff.  As the Fed tried to push the gas pedal by slashing interest rates and beginning another quantitative easing, the car just spun its wheels. And the economic stimulus package likely to come out of D.C. won’t unstick the car either.  True, these measures may prevent the car from falling off the cliff, but it’s unlikely to get it back on the road yet.

Here’s why…

There are two general types of stimulus measures: "Monetary stimulus” - in which the Fed increases the money supply (largely through inducing banks to lend more money), and “Fiscal Stimulus” - in which the government spends money directly or empowers businesses and individuals to spend more through tax breaks or entitlements.  Both are intended to trigger increased economic activity — the former through increasing liquidity, the latter through direct or indirect spending.

In normal times, these stimuli will not only have a first order effect, but also a “velocity” effect, where those receiving the initial infusion pay others, who use that money to pay others, etc., fueling growth.

But these aren’t normal times, and the stimulus won’t change what caused this economic shock in the first place.  So while the emergency infusions of capital and cash are necessary to prevent mass defaults, evictions, starvation, etc., they won’t have the velocity effect required to restore economic growth.

Understanding that this is emergency relief, not a stimulus, it’s even more important that these actions target those most vulnerable —I feel it should be a combination of transfer payments to individuals, expansion of unemployment benefits, coverage of all coronavirus-related health costs, SBA backing for interest free loans to small businesses, and higher-interest loans to large companies (along with strings attached).  I know it’s unlikely that such a bill would get through the Senate.

But the Republicans’ proposed $500B slush fund to be overseen by Trump/Mnuchin may be one of the worst ideas I could imagine. That’s like they’re buying themselves a new boat, while the car (remember, that’s the economy) is still stuck in the mud.

3. Toilet Paper and Frozen Pizza are continuing to be produced and sold… why are shelves empty?

Have you ever played musical chairs?  If there are 5 people and 4 chairs, and the music stops… you don’t want to be the one left without a chair. 

This is somewhat similar to the bank runs at the start of the depression… no one wanted to be the one to go to the bank too late.  If all the money was taken, you would be left empty-handed.

Unlike in musical chairs, where the system is designed to eliminate one person (per round), a bank run is circular logic… if there weren’t a run on the bank, the money would still be there, so there wouldn’t be a need to have a run on the bank.  The only reason there’s a run on the bank is because… well... "there’s a run on the bank!”

So it is with toilet paper, but in an even more bizarre way.  In the bank situation (at least prior to FDIC insurance), once there was a run on the bank, the bank would become illiquid, and would essentially cease to be able to function.  Thus, similar to with musical chairs, there was a consequence to not being one of the first to act… once you suspected there might be a run on the bank, the only rational move was to try to be one of the first to run on it.

But with toilet paper, Procter & Gamble isn’t going out of business.  And they’re not going to stop making Charmin. So why is everyone buying up Charmin, and every other brand of toilet paper… as if the companies were going to cease production?  (And buying up all the frozen pizzas too?!)

Well, truth is that even though there’s no terminating event, the TP and Frozen Pizza situation is very similar to a bank run — because the concern of each shopper is: “Will this product be here when I need to buy it?”  And, if you expect that everyone else will be cleaning out the supplies, you better buy some before everyone else does.  That is… there’s a run on toilet paper and frozen pizza because… well… “there’s a run on toilet paper and frozen pizza!”

Pretty soon, expect that shelves will be stocked again, but sales will be a little slower… because everyone will be working their way through the four 30-roll packs they have stacked in the dining room.  But that’s ok. Shit happens.

4. How long is this going to last?

One of the biggest challenges in this pandemic is that there is no coherent or consistent plan from the top.  If everyone knew that the social distancing and quarantining measures would be implemented for, say, 2 weeks, or 6 weeks, or even knowing it will last “at most” 12 weeks… they could plan and act accordingly.  But nothing creates chaos and anxiety more than uncertainty.

When businesses are trying to forecast their exposure, and which employees they can keep, and which they need to furlough, they don’t know how to project.  Meanwhile, laid-off individuals don’t know if anyone will be hiring in the next 4 weeks or 8 weeks. So they don’t know how long their limited savings can support them.

Granted, the virus doesn’t care about our uncertainty.  But epidemiologists can model the spread, as well as predict how, with clear distancing guidelines, combined with aggressive testing, the curve can begin a downward turn.  However, without a coherent plan, these models can short-circuit. Just today, Trump said he wants everyone back to work by Easter — despite the fact that the social distancing measures haven’t even had a chance to flatten the curve.  This just invites a reignition of the spread, and we’ll be back on the steeper exponential growth.

So, unfortunately, the short answer is that the more we can stick with the unusual right now, the better the chance we can get back to life as usual soon.  And, though I’m not a doctor (nor did I stay at a Holiday Inn Express), from speaking with doctors, and listening to infectious disease experts, it sounds like if we spend about 4 weeks “sacrificing" by staying at home, watching Netflix, hanging out with our families, meeting via Zoom, etc., and give time for the tests and ventilators to come, then we could be able to resume some normalcy (albeit with continued vigilance) by May 1.

But that’s assuming they get their $#!% together at the top.  And based on the daily briefings I’ve been hearing, we’re all going to need a lot more of that TP...

Thanks for reading! Feel free to email me your thoughts.