1918 Spanish Flu: A Historical Comparison
In order to analyze an event which is considered impactful to an order of global magnitude, one must face the criteria set up by the study of similar historic circumstance. How does the reaction of today compare to the reaction historically? On the spectrum of good and bad how do global actors in the current situation today rate in their reaction? Regarding the case of this current COVID-19 pandemic, there is minimal well-established precedent on the overall handling of global or even national economic response given the rarity of pandemics.
Few comparable examples are presented in history which an analyst can reasonably draw critique—although that is not to say there are zero examples. Lack of relevant economic data also presents a challenge. In a broad sense the question the analyst must seek to ask is what exactly should nations, states, communities, and individuals do in the event of a global pandemic? In following, the question must then be asked what did previous groups do in similar occurrences and were they successful? What is overreach and what is well constructed political or economic intervention when vis-à-vis with a potential health catastrophe? What should the individual citizens’ role be in defending against such a virus? Should policy move faster than data, science, and reason or must immediate action be taken by those with the power to avoid any loss of life which may have occurred given institutional passivity. The unfortunate truth is that few of these questions get asked and far fewer are answered until a disaster begins its descent from a peak. Economic analysis allows the analyst to nimbly evade problems with public dissent and politics by remaining apolitical, mathematical, and by employing reason, granting a certain leeway in answering tough questions.
The 1918 Spanish Flu can be deemed as the most useful historical example of comparison, as it—in terms of shutdown and global reaction—remains the closest event to COVID-19. To begin the comparison, it is important to look at the impact of the pandemic on population through a quantitative metric such as mortalities. The Spanish Flu was originally identified in the United States during the spring of 1918, quickly spreading and then peaking later that year before eventually tapering off toward the eve of 1920. Experts consider a statistically safe estimate of total mortalities between 1918 and 1920 traced to the Spanish Flu influenza strain to be about 39 million people— approximately 2-percent of the global population at the time. A statistically significant analysis demonstrated the impact the Spanish Flu had on real GDP per capita by incorporating the variables of war mortalities (ratio of war deaths to total population) and flu death rate (influenza deaths to total population). The results indicated a typical country that participated on the global stage both politically and economically in this period saw a 6% reduction of GDP per capita. This number varied among countries with some nations seeing higher reductions and others less significant changes. It is important to note that a total of 12 countries saw rates above 10%, which meets the given definition constituting an economic disaster. This change is found to be entirely independent of the reduction to GDP per capita brought about by the effect of war mortalities, which is important given the conclusion of World War I at this time. A rare macroeconomic disaster is defined in the study mentioned prior as an event that directly causes a “cumulative decline over one or more adjacent years by 10 percent or more in real per capita GDP or real per capita consumption (based on data on real personal consumer expenditure).” The 1918-20 H1N1 demonstrated the Influenza outbreak caused a reduction in GDP per capita of this level, and this is notably entirely separate from the reductive effects of GDP per capita relating to the Great War. To say the macroeconomic effects of this time period should have been long lasting is truly an understatement.
Interestingly, young adults were noticeably affected by this strain of influenza at a far worse clip than any other age group—the peak mortality rate due to Spanish Flu was 28. Note that the importance of men to national productivity during the early 20th century was vastly different than today. During this period the women held a substantially smaller share of the work force. Modern day “prime-age” labor force participants are loosely defined as the segment of the labor force whose members have both finished formal schooling and are not on the verge of retirement. Today this group is typically 25-54 years of age. Given the lower rate of university and secondary school attendance, as well as the lower average age of death (approximately 53.7 years of age in 1912) the prime age labor force can be expected to be composed of both a smaller range of years and to contain a younger lower bound. A significant share of this prime age labor force was decimated due to the external factors of Spanish Flu and World War mortalities. One would expect the economic recovery of the United States to be slower and have longer lasting impacts following the Spanish Flu than what is currently expected of COVID-19 given all the characteristics previously stated about Spanish Flu devastation. Yet economists who have studied the matter conclude there is little evidence indicating any long-term macroeconomic effects. In fact, the short-term effects appear to have been completely negligible. Yet if we use the Spanish Flu’s mortality rate on the 2020 population numbers, an important piece of information can be extrapolated. In applying the 2% mortality rate of Spanish Flu to the current world population the death toll exceeds 150 million. Due to the mobilization and global nature of the present economy, it is theorized that the influenza strain would have spread even more rapidly in advanced countries today. The United States alone would have experienced in 2020 a total mortality count approximating 1.7 million. Note that as of late 2020 we have only recently surpassed 1 million registered deaths worldwide due to COVID-19.
This indeed begs the question as to whether government response following Spanish Flu was more appropriate than government response to COVID-19 today. Was the far less heavy-handed approach of the 1920s United States a better reaction to the pandemic? If most comparable characteristics indicate the Spanish Flu to be worse than COVID-19, then why does current policy fail to draw wisdom from the 1920s—which by all metrics appears to have played a better hand despite being given far worse cards. The United States quarantine policy of the Spanish Flu era was left largely up to the individuals and local municipalities rather than the broad sweeping restrictive policies granted by our current state and federal government. To lean on numbers of the Spanish Flu era stock market as an analogous point of comparative optimism, which will be used to obtusely contrast the opposite attitudes seen regarding the market of 2020 after nearly a year of COVID-19. The Dow-Jones not only increased during the pandemic after a brief initial fall in 1917, but in fact the year 1919 remains one of the best years of growth the Dow-Jones has ever recorded. In the 1917-1920 United States work continued in factories, shipyards, and much of industry. Churches and recreational activity were largely closed, but as a result of their own accord as responsible members of their community. In person work was not socially unacceptable as we see today. Despite this lacking shutdown, it is clear the economy had merely taken a step back in which it soon after jumped forward. Perhaps it would be wise for policy makers of today to lean more heavily on the individual's self-rationale as a tool likened to the 1920s response as opposed to the imposition of mandated restrictions. – TP
Consumer Trends In Lockdown
As COVID-19 descended upon the United States, much of the country found itself stuck at home with many of the institutions that once constituted the bulk of a normal schedule shuttered. Workplaces went remote, restaurants closed their dining rooms, and most forms of public entertainment were closed. As a result, consumers adjusted to this “new normal” and novel trends quickly sprouted out of a necessity to both meet a person’s basic needs as well as to inject a semblance of regularity into one’s daily routine. While some trends were accelerated by the virus, others were wholly brought on by the unique situation in which we find ourselves today.
One of the principal losers of the elongated lockdowns here in the U.S. has, unsurprisingly, been physical retail. While much of the segment has already been on the decline for many years, brick and mortar stores received their hardest blow at the hands of state lockdowns that prevented all but a select few stores from operating. Although the most severe restrictions have been lifted, many consumers remain wary of unnecessary public outings and have pivoted to online options in their stead. E-commerce grew over thirty percent in the second quarter of this year and made up approximately sixteen percent of U.S. sales during that time period, while segments of physical retail suffered as March sales at clothing stores dropped fifty percent month over month, furniture stores declined twenty-seven percent, and luxury goods lost thirty percent. Big name department stores and clothing retailers such as Neiman Marcus, J. Crew, and J.C. Penney have all filed for bankruptcy within the past six months as they were overtaken by brands with a stronger online presence, offering clothes more in line with the growing consumer taste for comfort and versatility. In what might be the most emblematic example of the consumers’ shifting behaviors, e-commerce giant Amazon recently entered into negotiations with the mall-owning Simon Property Group to lease vacant space in the buildings that were once occupied by large anchor tenants such as Sears and J.C. Penney. The space formerly assigned to these past giants in the world of big box retail would be turned into smaller scale distribution centers that would bolster Amazon’s ability to swiftly deliver through the last mile.
While consumers in large part shifted to e-commerce in order to maintain their basic needs, the rise of at-home fitness allowed for those in lockdown to preserve a part of their pre-COVID lifestyle, albeit in a modified manner. Closed gyms forced fitness seekers to look inside for their workout needs, and as a result at-home fitness exploded as both upstart and mainstream companies sought to take advantage of this trend. Peloton, the maker of an indoor bike that connects its users to professional instructors and other riders, was once considered an expensive luxury for a niche consumer base. However, since March the company’s stock has risen over 300 percent as it has attracted a horde of new users willing to pay for the Peloton brand of fitness as public facilities had closed. Not wanting to be left out, Apple recently announced its own fitness subscription program designed to be used in conjunction with its popular, health-focused Apple Watch. This service offers tailored, home-based fitness programs designed to make up for the gym atmosphere many consumers are currently missing.
While most consumers had first-hand experience with the shortages of toilet paper and household cleaning products earlier in the spring, a lesser known shortage occurred, and is continuing, in the bicycle industry as many people were searching for safe options to be outside amidst the lockdown. Supply chain constraints as well as an outward shifting demand curve combined to strain a market that is generally not used to disruption. Sales of bicycles in the United States increased to levels last seen only during the oil crisis in the 1970s as soaring gas prices spurred many people to make a switch to human powered transportation. This time around many consumers, tired of being confined to homes, sought out bicycles as a way to safely get out and around while simultaneously enjoying the health benefit that cycling afforded them.
As sales of bicycles this year mirror that of sales during the 1970s energy crisis, the situation in energy markets is coincidentally a reverse of what was seen almost fifty years ago. In what might be one of the strangest economic effects of the coronavirus, oil prices actually traded at negative values as a combination of factors conspired to push oil prices down significantly. While demand for oil plummeted in March and April amidst the early months of lockdown in the United States, oil production remained at elevated levels as a result of a pricing war between Saudi Arabia and Russia. The elevated supply put downward pressure on prices as severely crippled demand further ate into oil benchmarks around the globe. This situation manifested itself in a unique trading situation where the futures price of West Texas Intermediate, the U.S. oil benchmark, plunged to minus $37.63 for a barrel of oil. The largest consumers of oil in the United States, namely airlines and refineries, were generally at peak storage capacities at this time and in an effort to avoid having to take delivery and pay storage costs, traders pushed the price down until they had to pay almost forty dollars a barrel to offload their contracts. The subsequent months have seen oil prices rebound from their April lows, though they continue to lag as global demand remains far below pre-COVID levels.
As depressed U.S. oil prices pushed gasoline prices down, and lockdowns kept large amounts of traffic off the road, a potentially hazardous (and costly) trend was sparked on interstates across the country. Seeking to take advantage of the near-empty roads, a number of drivers have been caught traveling at speeds more commonly seen in Formula One racing. One example of this phenomenon is the Cannonball Run – a coast to coast time trial – which has had its record lowered five times since last year as the current titleholders claim an average speed of 112 miles per hour going from New York to LA on roads emptied of commuters and general travelers. During the early stages of lockdown, the state of California reported a year over year increase of over thirty percent in traffic tickets issued to motorists traveling in excess of 100 miles per hour. In areas usually accustomed to high congestion, speeds have also increased considerably, as New York City’s automated speed cameras doubled the number of tickets issued in March relative to the month before while overall traffic levels fell significantly.
The influence of the coronavirus extends far beyond the health measures enacted to contain the virus itself, as lockdown-inspired trends affect every facet of the modern lifestyle – pushing consumers in new directions and altering the makeup of entire industries. Whether these short-term trends embed themselves in society for the long run remains a question that is yet to be answered. – JR
Technological Progress Enhancing Development Disparities
Technical advancement has long been regarded as a key factor in economic growth and development. According to research done by Christine Qiang, a study of 120 nations between 1980 and 2006 revealed that every ten-percent increase in network and broadband penetration provides a high-income country’s GDP an increase of 1.3%, and low to middle income countries with a 1.2% addition. The evidence for this correlation between technological and economic growth relationship is proven not just in Qiang’s research, but in various other studies about the topic. It is clear that the relationship between economic growth and technology is indisputably vital to both domestic and global economies.
Perhaps no other situation in history has forced society to embrace advancements in technology like the current coronavirus pandemic. With the onset of the current global health crisis and its recurrent economic shutdown, millions of workers have had to transition from workplace to teleconferencing employment. To do so, video conferencing platforms like Zoom, Microsoft Teams, as well as a multitude of other applications have skyrocketed in their usage. While many workers have successfully transitioned into telework at home, the quick jump has left certain industries, workers, and countries behind. For people who cannot afford the necessary technology needed to telework or earn livable wages by doing so, technology has acted as a catalyst for inequality.
Prior to the coronavirus pandemic, fifteen percent of the US labor force conducted their jobs from home. As of October, that percentage has increased to encompass approximately half of the American workforce. However, in lower income countries such as Brazil, an astonishing fifty-eight percent of households do not have a computer, making it nearly impossible for Brazil, or similar countries, to easily and safely transition to teleworking.
Another factor affecting the success and functionality of at-home work is job type and industry. In both developing and advanced countries alike, the International Monetary Fund estimates that one-hundred million people in thirty-five different countries are at a high risk of being laid off or taking pay-cuts. This is due to the fact that the jobs these people are employed at cannot simply “work from home.” Additionally, the jobs most severely affected are held mostly by young, female, and less educated people. The subsequent industries being hit hard by the pandemic include hospitality, construction, food services, and transportation.
As seen multiple times throughout varying historical technological developments, the lower the income of a country, the more difficult it is to adjust to changing labor force requirements. For poorer countries, telework has proven significantly harder to transition into. This tough move to telework has only added to a growing wealth inequality between countries, and with many companies looking to telework as the new normal, this gap will only widen and worsen.
With the large increase in workers’ reliance on technology to fulfill their employment duties, the fear of technology and automation replacing workers has only grown. This fear of replacement by technological counterparts is not novel and has already been seen in areas such as manufacturing in the US. With the growing strength and work power of artificial intelligence (AI), the threat of automation replacing workers has never been higher, and for good reason. Unlike previous economic cycles, the coronavirus shutdown has left no option other than to turn to AI for many companies, even in higher income occupations such as science and technology. Traditionally, these innovations at the costs of workers have been justified by the argument that technology allows new and beneficial jobs for these displaced workers to fill. But over time, these “new” jobs often do not match the skills or experience of technologically displaced workers. For example, automation in farming has greatly reduced the labor force which is traditionally required in agricultural processes but has not created new and better ways for farmers to spend their time. Instead, automation has led to a decreased number of available jobs and quality.
With the spike in telework due to coronavirus shutdowns, the question remains whether the telework transition is the world’s adaptation to the pandemic or a new normal that will extend beyond the current health crisis. The technology we use every day to successfully fulfill our employment duties has been around for quite some time but has never been utilized in such a widespread manner as it now is. While there are many benefits to this transition to telework and technological reliance, the move has increased inequality in a multitude of areas on both the domestic and global platform. To further prevent these gaps from worsening, governments, companies, and workers will have to increase their spending in the short term and find new innovations to ensure no worker or industry is left behind. To successfully exit the current recession, technological inclusion needs to be translated into conducive economic growth for all. – CS
Public Policy Response to COVID-19
When formulating an appropriate policy response to recessions, economists first seek to identify whether the recession is caused by a negative supply shock, demand shock, or both. Policies would then be designed to stimulate the necessary areas. While most economists agree that the current recession is caused by both a demand and supply shock, the coronavirus presents a unique challenge in that it may not be desirable to stimulate demand or supply if it could potentially lead to more cases. For example, despite retailers being severely affected by the shutdowns, stimulating consumption in these areas will potentially lead to more cases, longer shutdowns and slower recovery in the long term.
Jerome Powell has stated that a full economic recovery will require a vaccine. Policies employed by the Federal Reserve and Congress include a focus on providing liquidity for households and businesses to cover costs until a vaccine is created, or the pandemic can be contained. The diversity with which various states have been able to contain the virus has allowed some states to reopen their economies earlier than others. However, with the uncertainty around a possible vaccine’s timeline and the potential for outbreaks, it is unclear how fast a full recovery will be.
When the shutdowns began in March, Congress quickly passed the $2.2 trillion “CARES” Act to help ease the economic pain the shutdowns caused. The act included a wide range of policies including enhanced unemployment benefits, a $150 billion relief package to state and local governments, a one-time direct $1200 payment to individuals and the Paycheck Protection Program (PPP). The PPP provided loans to small and medium sized businesses to cover payroll costs with the aim of preventing layoffs.
The PPP loans alongside enhanced unemployment benefits and direct checks help individuals and businesses weather the sharp drop in income and revenue in the wake of the coronavirus recession. The $150 billion relief to state and local governments also help cover fiscal deficits which may arise due to falling tax revenues. The CARES Act was followed up by the PPPHCEA, which supplemented the PPP program with $310 billion in funding. While these relief packages provided much needed aid, there have been calls from economists for further fiscal stimulus, the passage of which is uncertain due to political deadlock.
The fiscal response in 2020 differs in some ways from the response in 2008 due to the varying natures of the crises. While the Great Recession was caused by the 2007-2008 financial crisis, the 2020 recession is caused by the shutdowns in the wake of the coronavirus. The most noticeable difference is the contrast in timelines. While the values of stimulus in 2008 and 2020 are similar as a portion of GDP, the 2008 stimulus was distributed over 5 years while the 2020 stimulus was distributed over 6 months. This highlights the rapid nature of the current crisis.
On the monetary side of the response, The Fed employed its traditional recession fighting tools as well as unconventional techniques previously seen in 2008. The federal funds rate was lowered to the zero bound in April and the Fed began $700 billion in Quantitative Easing, a strategy it first employed after the 2008 crisis. Quantitative Easing entails the Fed buying government securities raising their prices and thereby lowering yields, which incentivizes investors to rebalance their portfolio’s with riskier assets with relatively higher yields. This raises investment in a wide range of assets, helping to stimulate economic activity. The employment of QE after the 2008 crisis was controversial, critics of the policy today say that it promotes excessive risk-taking behavior and may not impact growth as much as central banks believe. However, most economist do conclude that QE has a net positive impact on growth.
The Fed has also provided several lending facilities to further provide liquidity. First, The Fed created a Commercial Paper Funding Facility (CPFF) which buys corporate paper, a type of short-term debt issued by large firms and banks, in order to ease corporations’ access to debt. They also created the Primary Dealer Credit Facility (PDCF) which provides collateralized loans to large banks. The Fed further employed policies which complement the CARES Act such as the “Main Street Lending Program” which provides loans to companies that are too large for a PPP loan or too small to access other fed programs. They also established a Municipal Liquidity Facility which loans directly to municipal governments, complementing the CARES Act’s $150 billion relief to local and state governments.
Chairman Powell has noted that these lending facilities are designed to combat a liquidity crisis. The prolonged nature of the pandemic, however, risks leading to a solvency crisis as revenue continues to be subdued due to the necessary shutdowns. Powell stated that the Fed “has to believe it is lending to a solvent company”. Recognizing the limits of monetary policy, he urges congress to pass further stimulus to prevent “avoidable insolvency” amongst households and firms.
Concerns over the inflationary effect of all the stimulus and expansionary monetary policy have been voiced, however, the recent change in the Fed inflation targeting policy signifies that the Fed does not expect inflation to be a problem in the medium term. The Fed announced that they will be targeting average inflation, allowing inflation to rise above the 2% target for some time in order to counteract the years of inflation running below target. This means that the federal funds rate will remain at the zero bound for the foreseeable future. With so much uncertainty around a potential vaccine and future stimulus, no one can say for sure when and how the economy will fully recover. – AA
Source List
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1918 Spanish Flu: A Historical Comparison:
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—Gagnon A, Miller MS, Hallman SA, Bourbeau R, Herring DA, et al. (2013) Age-Specific Mortality During the 1918 Influenza Pandemic: Unravelling the Mystery of High Young Adult Mortality. PLoS ONE 8(8): e69586. doi:10.1371/journal.pone.0069586
—The Coronavirus and the Great Influenza Epidemic Lessons from the “Spanish Flu” for the Coronavirus’s Potential Effects on Mortality and Economic Activity Robert J. Barro, José F. Ursua, Joanna Weng
—Economic Effects of the 1918 Influenza Pandemic Implications for a Modern-day Pandemic; Federal Reserve Bank of St. Louis
—THE PANDEMIC INFLUENZA CHALLENGE
— The Economic Impact of Pandemic Influenza in the United States: Priorities for Intervention Martin I. Meltzer, Nancy J. Cox, and Keiji Fukuda Centers for Disease Control and Prevention, Atlanta, Georgia, USA
Consumer Trends in Lockdown:
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Technological Progress Enhancing Development Disparities:
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Public Policy Response to COVID-19:
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