Based on China’s experience with COVID-19, the fiscal cost of comprehensive compensation for lost income could reach 10% of annual GDP, and as much as 25% of GDP in the US and Europe if the epidemic turns out to be worse there, which now looks likely. These may seem like mind-boggling sums, but they can be financed in several ways.
LONDON – Contrary to my initial expectations, the spread of the COVID-19 coronavirus around the world is not following the relatively benign trajectories experienced in China outside of Wuhan and Hubei province, and in South Korea, Singapore, and the rest of Asia. Instead, across Europe – and very likely in the United States, too – the spread of the virus increasingly resembles the path it took in Hubei.
This threatens both medical and economic disaster. But while it may be too late for policymakers to avert a public-health crisis, it is still possible to implement the fiscal and monetary measures needed to prevent an economic catastrophe. To do this, they will need to go much further than the monetary steps announced by the US Federal Reserve and the Trump administration’s proposals for untargeted tax cuts and cash handouts thus far.
Initially, I expected that the number of cases in European Union countries would converge toward the 10-100 patients per million seen in Asia outside Hubei, and that the US might follow a roughly similar pattern. The fact is, however, that Italy, France, Spain, and other EU countries are not experiencing the slowdown in the rate of change of acceleration (the second derivative of velocity, or the “jolt” in mathematical parlance), seen in Wuhan and the rest of China by this stage in the epidemic.
One possible explanation is that Italy’s lockdown measures are much less rigorous than those in Asia, and that health-care systems are less prepared. For example, patients are not removed from their families as quickly, and so infect others. If so, then the acceleration in the US and the United Kingdom will be even more rapid than in continental Europe, because of the piecemeal, and plain misguided, policy responses from US President Donald Trump and UK Prime Minister Boris Johnson.
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