Monday, September 28, 2020

The Long Term Financial Impact of COVID 19

 The rationale for the early opening of the country was economic: Our national economy could not afford to stay locked down. The actual truth is the exact opposite: Our national economy could not afford to open early.

Edward Renner

The Gross Domestic Product (GDP) of the US in 2019 was 21.747 trillion dollars. It was projected to grow by 2.2% in 2020 to 22.2 trillion dollars. That was before the economic impact of COVID 19 and the “stay at home” orders issued in March and April.

What Happened Then?

By the end of the second quarter of 2020 (June) the GDP has fallen to 19.408 trillion dollars, a direct loss of 2.4 trillion dollars to the economy, as officially compiled quarterly by the Bureau of Economic Analysis (BEA) of the US Government.

To put these numbers in perspective, the total budget for the Federal Government for the 2019-2020 fiscal year was about 4 trillion dollars. The expected revenue was about 3 trillion dollars, resulting in an anticipated deficit of about 1 trillion dollars to be added to the national debt.

The actual dollar costs of COVID to date can be estimated by adding the 3 trillion dollars stimulus to the 2.4 trillion reduction to the GDP, for a total economic cost of 5.4 trillion dollars from January to the end of June 2020.

What cannot be determined is the cost of each of the components of COVID 19 and the economic benefits of partially lifting restrictions in May and June. These impacts are imbedded in source data and could not be separately identified by the Bureau of Economic Analysis.

What we do know is the daily number of new cases occurring in the US in comparison to other countries of the world. The US chose to start reopening the economy much sooner than Canada, Europe and Asia, contrary to the criteria established by the Center for Disease Control based on scientific knowledge.

As a result, the number of new cases by the end of July swelled to the point where they are roughly double what the numbers were in May/June. The number of new cases then started to decline again once new mitigation measure were adopted in some states.

In contrast, other nations, such as Germany, stayed closed-down longer, brought the number of new cases under manageable control through mitigation measures, testing, and contact tracing. As a result, they are in the process of successfully re-opening their economies. 


Source: New York Times data base.

What Are the Financial Consequences of Re-opening too Soon?

The financial cost of COVID to the US economy before starting to reopen was about 500 billion dollars of lost GDP (CBO) and 2.5 trillion dollars of stimulus money, for a conservative estimate of 3 trillion dollars due to the first wave of new cases.

Using the costs of the first wave (3 trillion dollars) as an estimate, the surge of at least twice as many new cases after partial reopening would require a 6 trillion dollars stimulus to offset the loss of GDP, and to hopefully return us by Sept/Oct to where we were when we first started to re-open back in May/June.

However, since we started to reopen too soon, some additional amounts of costs and time would be required to stay closed down long enough to reduce the number of new cases to a manageable level to be able to safely open-up, like Europe, Canada and Asia countries have done.

The United States, at the very least, has made a 6 trillion-dollar mistake if we act immediately to bring the virus under manageable control. If we fail to do so, the cumulative costs will continue to grow. These are unnecessary, but real, cost that could have been avoided by following the scientific advice of health experts, like the other developed nations.

What Will Be the Long-term Effects of This Mistake?

 Before the virus, the Federal Government was expected to have a 1 trillion-dollar budget deficit for this fiscal year. However, with the 3 trillion stimulus the annual deficit for this finical year will be 4 trillion dollars, raising our total national debt to 101% of our GDP.

 If we add an additional 6 trillion-dollars new stimulus money to the annual deficit, the ratio of debt to GDP will be 127%. This is not sustainable, and it would require sever austerity measures that would likely push the economy into a recession.

 But, not containing the virus also has economic costs. The GDP of the US lost a record breaking 9.4% in the second quarter of 2020 (BEA). Unfortunately, as the price for our bungling, we have given our economic competitors who prevented a protracted COVID 19 impact – such as China and Germany -- a significant advantage for years to come.

 This is the unequivocal financial message we should be receiving from our Federal Government.

 Yet, beyond the unnecessary financial costs, the continued disruptions to our social and personal lives, and our deeply diminished position in the world, there are a still an undetermined number of needless deaths – perhaps in the 100’s of thousands – for our moral conscience to bear.

Our response to COVID 19 has been a collective national disgrace.

 Sources: Bureau of Economic Analysis: Table 1.1.5 Gross Domestic Product (page 5);  Gross Domestic Product, Second Quarter 2020; The Federal Budget 2020

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