What next after coronavirus?

It is too early, of course, to draw any definite conclusions from the worldwide public health crisis unleashed by the COVID–19 outbreak. Yet we already know that it is confronting the world economy with its greatest challenge since the Second World War, with global activity, financial markets, as well as the confidence of economic agents all in free fall. There has been concern about our inability to provide enough tests and protective equipment to the population, as well as a burgeoning debate, within the medical profession as well as government health departments, over the acceptable timeframe for clinical trials of potential cures 1While the subject has become controversial, it has to be stressed that everyone connected to pharmaceuticals and to the medical profession is doing the utmost to advance at an unprecedented, breakneck speed to get treatments and vaccines to the market. The prevalent view in those sectors is that they simply have to be tested for safety, since if a drug or vaccine comes to the market and does more harm than good, no one will ever trust the industry or the system again..

Above all, however, we are beginning to grasp that the lessons to be learned, at least in the short term, fall in two broad categories: the financial and economic response that will be required to avoid unacceptable levels of suffering, on the one hand; and the need to adopt a longer-term approach to health costs, on the other.

From a longer-term perspective, however, our outlook must, out of necessity, be both much broader, and much more radical. This is a situation without precedent, if only because world’s human population has gone from four to seven and a half billion in the last fifty years; because the colossal amounts our governments, as I write this, are pledging to fight the consequences of this crisis are, ultimately, going to be borrowed from future generations; and, above all, because unless we find and adopt radically new ways of dealing with the environment, of feeding ourselves, and of providing for our healthcare, then the world economy, in all probability, cannot durably recover, and indeed would eventually collapse.

Returning, for now, to the financial situation, Eswar Prasad and Ethan Wu, in a blog post published by the Brookings Institution, express their view such a rapid recovery is unlikely:

Demand has been ravaged, there are extensive disruptions to manufacturing supply chains, and a financial crisis is unfolding simultaneously. Unlike the 2008–09 crisis that was triggered by liquidity shortages in financial markets, the crisis now unfolding involves more fundamental solvency issues for many firms and industries beyond finance.

—Prasad, Eswar, and Ethan Wu. Update to TIGER: The Coronavirus Collapse Is upon Us.” Brookings, Brookings, 12 Apr. 2020.

The shock is worldwide, and the decision taken in most OECD countries to put the entire population on lockdown for protracted periods makes recovery unlikely. Mssrs Prasad and Wu have constructed a series of composite indexes tracking the global economic recovery.

The main difficulty we are facing is that the collapse in 2020, unlike what happened in 2008, is massive, and simultaneous in every single economy. The US, UK, Germany and France have all ground, effectively, to a halt. The impact in large developing countries like India or Brazil is going to be especially harsh, as they are not equipped to handle the massive strain on their healthcare and have no only skeleton social security nets.

Mssrs. Prasad and Wu believe that with both conventional and unconventional monetary policy tools already stretched to the limit, fiscal policy will be the only available tool to mitigate the impact.

There are also the questions opened up by the manifest inability of the international community to coordinate their response to the crisis. Especially glaring, in this connection, is the reluctance of the Northern European Union members to consent to provide financial support to cushion the impact of the crisis in Mediterranean members 2Johnson, M., Fleming, S. and Chazan, G., 2020. Coronavirus: Is Europe Losing Italy?. [online] Ft.com. [Accessed 13 April 2020]..

A major, hard-learned lesson of the crisis will unquestionably turn on the inability of several OECD countries’ health systems to cope with large numbers of simultaneously critically-ill patients. For at least twenty years, governments of both left and right have been reducing hospital-bed capacity in a bid to contain spending. Yet the unplanned surge in demand due to the COVID–19 crisis has forced those governments that had the fewest beds available to enforce lockdowns for much longer periods than those that had the most: a paper published in the Intensive Care Medicine journal that used 2012 data stated that Italy had 12.5 ICU beds per 100,000 of its inhabitants that year while Germany had 29.2 3McCarthy, N., 2020. Infographic: The Countries With The Most Critical Care Beds Per Capita. [online] Statista Infographics. [Accessed 13 April 2020].. According to the OECD, in figures quoted by the Financial Times, while the US and UK have about 2 beds per 1,000 people, Germany, by comparison has 6, and Japan has 7.8.

Critical care hospital beds statistics
Critical care hospital beds statistics. Acute care hospital beds per 1,000 people. Source: OECD.

The coronavirus crisis will also have compelled Western governments to realize that there is nothing surprising, or indeed regrettable, about rising health costs, as a percentage of GDP. As early as 2004, a study noted that:

aggregate health expenditures as a share of GDP have risen in the United States from about 5 percent in 1960 to nearly 15 percent in recent years. Why? This paper presents a model based on an explanation that has received increased attention in the last decade: technological progress. Medical advances allow diseases to be cured today, at a cost, that could not be cured at any price in the past. When this technological progress is combined with a Medicare- like transfer program to pay the health expenses of the elderly, the model is able to reproduce the basic facts of recent U.S. experience, including the large increase in the health expenditure share, a rise in life expectancy, and an increase in the size of health-related transfer payments as a share of GDP.

—Jones, C., 2004. Why Have Health Expenditures As A Share Of GDP Risen So Much?. [Accessed 13 April 2020].

As our population ages, we can expect the cost of healthcare to continue rise proportionally to GDP, and we will need to find ways of optimizing that spending—a crucial challenge here is to increase both the efficiency and the effectiveness of public spending that do not entail a fall in the standard of care, or an increase in risk 4One should, however, beware of generalizations regarding the cost of healthcare in relation to each country’s GDP. The situation varies considerably from one OECD country to another: The US, in particular, bears the brunt of the cost of research and innovation. The uncontrolled costs, however, which result from this also mean that pharmaceutical companies charge literally multiples of prices in their domestic than they do in Europe and elsewhere because there is no ‘test’ of costs against benefits. This is aggravated by the prevalence, in the United States, of high litigation and insurance costs, all of which are ultimately borne by the final consumer of healthcare. Medicare and Medicaid provide only basic cover, at best. Most people rely on the insurance cover provided by their employers, meaning that the impact of a major recession will be significant..

We will be returning to this topic in the coming months, as the consequences of the coronavirus crisis become clearer.

References   [ + ]

1.While the subject has become controversial, it has to be stressed that everyone connected to pharmaceuticals and to the medical profession is doing the utmost to advance at an unprecedented, breakneck speed to get treatments and vaccines to the market. The prevalent view in those sectors is that they simply have to be tested for safety, since if a drug or vaccine comes to the market and does more harm than good, no one will ever trust the industry or the system again.
2.Johnson, M., Fleming, S. and Chazan, G., 2020. Coronavirus: Is Europe Losing Italy?. [online] Ft.com. [Accessed 13 April 2020].
3.McCarthy, N., 2020. Infographic: The Countries With The Most Critical Care Beds Per Capita. [online] Statista Infographics. [Accessed 13 April 2020].
4.One should, however, beware of generalizations regarding the cost of healthcare in relation to each country’s GDP. The situation varies considerably from one OECD country to another: The US, in particular, bears the brunt of the cost of research and innovation. The uncontrolled costs, however, which result from this also mean that pharmaceutical companies charge literally multiples of prices in their domestic than they do in Europe and elsewhere because there is no ‘test’ of costs against benefits. This is aggravated by the prevalence, in the United States, of high litigation and insurance costs, all of which are ultimately borne by the final consumer of healthcare. Medicare and Medicaid provide only basic cover, at best. Most people rely on the insurance cover provided by their employers, meaning that the impact of a major recession will be significant.