After four months of an economic shutdown and the continued spread of the coronavirus throughout the 50 states, it is unlikely that a miracle recovery from the virus will materialize. The primary responsibility of addressing the pandemic has been delegated to the states, which is contributing to a sense of policy uncertainty that is dampening economic activity.
Loss of income and tax revenue from the 50 million who applied for unemployment benefits contributes to the growing uncertainty.
Loss of income and tax revenue from the 50 million who applied for unemployment benefits during the 16 weeks of the economic shutdown directly contributes to the growing uncertainty and does not bode well for state finances.
Given the cost of caring for the 3 million who have been stricken by the range of COVID-19 diseases, it is clear that, absent help from the federal government, states are heading for a fiscal cliff.
Underneath it all, there has been an increase in uncertainty over the direction of public policy. Economic policy uncertainty — whether it involves aspects of national security or a discussion over taxes or health care — can lead to an increase in risk perception and a subsequent drop in the willingness to borrow or to lend.
The increase in risk leads to increased costs of doing business, with that burden ultimately transferred to households who respond with a decrease in consumption and a drop in economic growth.
Professors Nicholas Bloom, Scott Baker and Steve Davis have studied the impact of policy uncertainty, finding that “firms with greater government exposure – e.g., construction, defense and healthcare – have higher stock volatility when policy uncertainty rise” and “have about 25% lower investment and hiring when policy uncertainty rises – uncertainty cuts growth.”
Bloom, Baker and Davis also report that concerns about health care have increased over time and now account for a third of overall policy uncertainty. We show this in the figure below, where attempts to expand (or contract) the availability of health care are shown to have contributed to the level of overall uncertainty regarding the direction of public policy.
Clearly, the public has become conscious about health care issues as medical costs have increased, while union-based insurance coverage has shrunk and the gig-economy has blossomed. .
Concern over the coronavirus outbreak in the first months of 2020 is visible in the figure as an unprecedented five-fold increase in the health care uncertainty index.
We now have to come up with a way to pay for health care for the 3 million afflicted people. This leads to a discussion of the inequalities built into our system of employer-sponsored insurance coexisting alongside public assistance.
White-collar workers whose benefits include employer-subsidized health insurance will likely be unaffected, likewise for retirees who are covered by Medicare. Those caught in the middle are gig workers and those people who are employed in low-benefit jobs. The ongoing debate surrounding the repeal and replacement of the Affordable Care Act (ACA) adds further uncertainty to the health care landscape.
As part of the Affordable Care Act, Medicaid was extended to the neediest of adults, with the federal government picking up 90% of the tab. This was optional coverage for each of the states, and 15 states have yet to opt in.
As the next figure shows, those 15 states not accepting Medicaid expansion now comprise more than half of the daily cases of newly reported coronavirus victims – 28,000 versus 24,000 cases per day in the Medicaid expansion states. Where will those non-expansion states get the money to care for the newly infected?
The surge in infections throughout the South and Southwest is already showing signs of crippling the economy once again. Recent analysis of several industries by the academic-based Opportunity Insights Team shows a 10-week bump in economic activity that began in the middle of April as the initial outbreak in the major metropolitan peaked and began to subside.
But as shown in the figure below, that 10-week bubble shows signs of deflating once again.
Source: Opportunity Insights, Raj Chetty, John N. Friedman, Nathaniel Hendren and Michael Stepner
A national pandemic
The headlines each day are reminiscent of the early days of the pandemic, when the coronavirus swept through New York City and spread to the other major metropolitan areas along the East and West coasts. The governors of some of the states now afflicted are taking action and reversing some of their earlier actions to reopen their local economies.
As the first figure below suggests, however, it might be too late. There are now 54,000 new cases per day, as compared to the April peak of 32,000 per day. That implies that even if the rate of infection were to decline, the number of infected people has become so widespread, that large numbers of cases will be the norm.
For instance, the second figure suggests that even if social distancing practices were to gain traction throughout the country, then the cumulative number of cases of coronavirus infection will approach 3.4 million cases in the next week. Just four months ago in the second week of March, we hit 1,000 cases of reported coronavirus infections.
As we’ve said before, the excuse for not doing anything is that — though coronavirus infections cases are increasing — deaths attributed to the virus have been in steady decline since their peak in the third week of April.
We show this in the figure below, with the seven-day average of COVID-19 deaths dropping from 2,200 in April to only 580 per day as of July 8. The consensus is that the age of infected people has been dropping, with younger cohorts having a greater ability to survive an infection.
We should note, however, that because deaths can lag infections by weeks, it is uncertain if this downward trend will continue after the latest surge of infections, particularly after recent large indoor gatherings, the reopening of religious institutions, bars and restaurants, and the July Fourth holiday weekend. Even if young people survive, their infections will nevertheless be a danger for others.
Of the six states with major metropolitan areas that were hit hardest in the initial outbreak of the virus (New York, New Jersey, Massachusetts, Pennsylvania, Illinois and California), only California has increasing number of cases, accounting for 73% of the new infections in those six states.
Infections in all other states are being reported at 42,000 per day, while infections in the initial six states are 10,000 per day on average, as shown in the first figure below.
Nearly 70% of the states have greater rates of infection in the six weeks since the Memorial Day weekend than since the re-opening of local economies on May 1, as listed in the table below.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.