"Corona Virus and the Economy"

Sydney M. Williams

www.swtotd.blogspot.com

Thought of the Day

“Corona Virus and the Economy”

March 14, 2020

“In general, positive Black Swans take time to show their effect,

 while negative ones happen very quickly—it is much easier and much faster to destroy than to build.”

                                                                        Nassim Nicholas Taleb (1960-)

                                                                        The Black Swan: The Impact of the Highly Improbable, 2007

What impact Covid-19 will have on the global economy no one now knows, but at least two things seem clear and will have consequences, both of which have been instrumental in keeping inflation at bay. First, the benefits of globalization and, second, the process of “just-in-time” inventory. Both bear risks.

The concept of free trade is a search for an ideal, not unlike King Arthur’s Knights’ quest for the Holy Grail. However, the reality of free trade can never be. Yet the closer we get the better all are served. Free trade is based on the concept of division of labor, popularized by Adam Smith, of labor costs, and by the availability of natural resources and of the means of shipping resources and finished goods. Theoretically, each nation should manufacture for consumption and export that which it can produce most cost-efficiently – whether the product is soybeans, oil or electronics – and import what it needs.

Easier said than done. Every country has arable land. Every country has workers skilled in multiple areas, not just in those for which they are best known. No country wants to be totally dependent on another. Exploitation and subservience are, though, unfortunately, natural conditions of man. As well, intellectual property is protected in some countries, but not in others. Rule of law does not apply evenly. Nevertheless, the goal of global trade is worthy. For one, it takes advantage of efficiencies, resources availability and labor costs. But, most important, trade requires that countries communicate and come together, and gathering is better than isolating.

Trade has reduced inflationary pressures on the price of consumables, by outsourcing manufacturing and assembly to countries with low labor costs. Medicines produced by American companies in India or China would have been more expensive if produced in New Jersey or Illinois. The same could be said of automotive parts and consumer electronic gadgets. While low prices for finished products have benefitted consumers, the losers include factory workers and lab technicians – and perhaps consumers if and when supply disruptions come. In July 2019, the U.S.–China Economic Security Review Commission invoked a Department of Commerce study that found that 97% of all antibiotics come from China. The Corona Virus, originating in Wuhan, has highlighted the disadvantage of dependency on China for something as vital as antibiotics.     

Just-in-time (JIT) inventory is a management tool that dates back to the 1970s, when it was perfected by Toyota as a means of meeting consumer demands with minimum delays. JIT means that manufacturers produce to demand, distributors carry less inventory and retailers stock less goods – all result in lower costs to consumers. With plentiful goods on store shelves, JIT has been adopted by most American consumers. We tend to not stockpile, as we know if we run out of something, like bottled water or paper towels, we simply replenish what we need. However, there are times when panic causes habits to change. The oil embargo in 1973 caused a temporary gasoline shortage. Long lines at gas stations, limited purchases and lower speed limits were a consequence. There was not a spate of road trips or the purchase of gas-guzzling SUVs. In reality, inventories, instead of being held by gasoline dealers, were held by consumers who never let their gas tanks go below half. With 125 million registered vehicles in 1973, that meant approximately 1.25 billion gallons of gasoline were squirreled away in the tanks of cars and trucks. Today, we are seeing a similar demand for products like bottled water, paper towels and toilet paper. Corona Virus has some unknown effects, but one of them does not appear to be diarrhea. Yet three grocery shelves in my area were empty of toilet tissue this morning. Why? Need has not changed. People are hoarding. It will end when consumers realize they have no need to store more toilet paper.

Richard Thaler (born in 1945) of the University of Chicago and who won the Nobel Prize for Economics in 2017 is considered the father of Behavioral Economics. But the fact is all economics relate to behavior. Economics was once considered the “Dismal Science,” a term coined by Scottish essayist Thomas Carlyle, who had in mind Thomas Malthus’ theory that population growth would outstrip the ability to produce food, thus predicting a destiny of starvation and poverty. Malthus was wrong in that he underestimated man’s creativity. In truth, we react to carrots and sticks, to encouragement and fear – to real and emotional consequences. Advertisers understand this. And, just as the gas crisis ended as suddenly as it began, so will the current shortage of toilet paper. People’s needs have not changed, just their impulses.

For anyone who tries to stay on top of the news, it is impossible to determine how bad the Corona Virus will be. No one wants to underestimate its potential harm, in part because doctors know so little about it. Schools, colleges, sports arena are driven by concern for their students and patrons, but they are also conscious of liability, for we live in a time when and where tort lawyers loom large. Has it been politicized? Of course. We are in an election year, with a President popular with millions of followers, but despised by most of mainstream media. The economy has been Mr. Trump’s strongest suit. Should it falter, the advantage will accrue to his opponents. It is understandable that he does not want people to panic (and they should not), but they should be concerned, and they should be careful. Mr. Trump’s press conference on Friday was accompanied by a thousand-point rise in the DJIA, albeit from a distressed level. There is no reason to expect the rally to continue on Monday, but there is nothing to suggest it will fall off sharply.

The Corona Virus has temporarily altered views toward borders and global trade, but my guess is that the ultimate consequence is to cause people to consider more carefully the advantages and disadvantages of both. The same is true of inventories. Black Swan events are difficult, to predict and endure; but we have successfully faced formidable challenges in the past. We will face others, as well, in the future. In 1859, at the Wisconsin Fair in Milwaukee, Abraham Lincoln spoke to the crowd: “Let us hope, rather, that by the best cultivation of the physical world, beneath and around us; and the intellectual and moral world within us, we shall secure an individual, social, and political prosperity and happiness, whose course shall be onward and upward, and which, while the earth endures, shall not pass away.” Words to ponder as we stalk the aisles looking for the elusive roll of toilet paper.