A MESSAGE RECEIVED FROM VICTOR CHENG via Whatsapp
In the United States, there’s a big debate going on right now. Epidemiologists urge physical distancing as the best way to avoid catastrophic loss of lives. Economists point out that the cost of shutting down the economy is unprecedented and is heading toward catastrophic economic collapse (which also has enormous human costs).
So, who is right?
I’m going to give you two answers to that question.
First, the epidemiologists and economists are both right.
I’ve spent hundreds of hours poring over the epidemiological data, COVID-19 treatment protocols in multiple hospitals, and built my own forecasting model.
I’ve also reviewed the research I did for my book The Recession-Proof Business where I looked at nearly 150 years of US economic history and the prior 13 recessions.
The uncomfortable reality is that both are right. We can’t afford to let the pandemic run unchecked. We can’t afford to close the $21 trillion economy for the next 18 months.
However, it is not an either/or decision. The two are absolutely intertwined with an interdependency between them that some people don’t grasp.
Let me explain by stepping back for a moment.
Economic cycles of growth and contraction are normal. They serve a useful function. Yes, recessions serve a useful, albeit very painful, purpose.
A recession allows an economy to address problems that were hidden beneath the surface during the economic growth cycle.
I’ll give you a simple example. In the Great Recession, the US Economy had a financial services sector (think investment banks) that grew in size until it was far larger than the economy needed to make the economy run.
Prior to 2008, the financial sector grew way beyond enabling the rest of the economy. They got into derivatives (what Warren Buffet calls “financial weapons of mass destruction”), computer-based program trading, and basically became modern-day casinos with $60 trillion in bets, globally.
(Keep in mind, the US GDP was only $14 trillion at the time.)
The investment banking sector became so big, so powerful, and so profitable that it started recruiting talent out of other industries. One sector, in particular, was “rocket scientists.”
PhDs in mathematics, physics, and astrophysics were being poached out of engineering fields to instead do financial engineering. In the months after the stock market crash of 2008, many of those rocket scientists were laid off.
So, what did they end up doing next?
Many decided to go back to being rocket scientists. I imagine SpaceX employs a number of those geniuses that would have otherwise ended up working on Wall Street. I would argue that society is better off today because of that labor shift.
The month before the crash of 2008, Las Vegas (which had a wildly speculative residential real estate market) had 40,000 mortgage brokers. When I visited CEOs in Las Vegas a year later, they had only 2,000.
Las Vegas had way more mortgage brokers than were really needed. The recession that followed fixed that.
You see, recessions exist as a natural counterbalance to the excesses and hidden problems that aren’t addressed during the preceding economic boom.
Every recession addresses an underlying issue that existed prior to the recession. What makes the current recession unique is that the underlying cause is the pandemic.
In short and to state the obvious, if there were no pandemic, there would be no recession (at least, not right now and with such severity).
This common-sense (and empirically supported) insight means that getting the economy back on track is highly dependent on getting the COVID-19 pandemic under control (or, more realistically, to a manageable level).
The purpose of a recession is to address the underlying problems that caused it. For 2020, the global cause of economic contraction is the COVID-19 pandemic. The root cause is clear.
Any sensible economic recovery plan must be based in part on a plan to manage the pandemic. The two are intertwined.
The question then becomes what to do and when.
The two long-term ways to address a pandemic are through antiviral drugs and vaccines. The former reduces the severity of or cures the illness. The latter prevents it.
In Wuhan, China, 200 clinical trials were initiated back in January 2020. Additional trials have emerged around the world. Today, there are several dozen potential vaccines being tested.
With so many human and economic consequences at stake, we are seeing the best talent in the world converge to solve this problem. (This is a good thing!) I am quite confident that there will be a pharmacological breakthrough at some point.
In the short-term, we still have to manage the pandemic well enough to bridge ourselves into a medical breakthrough. There are two reliable ways to contain a pandemic:
Geographic Quarantines and Precision Quarantines.
1. Geographic Quarantines
Most of the United States is under some form of geographic quarantine. These are highly effective. The downside is that they have an enormous cost.
US GDP was $21.44 trillion in 2019. The Federal Reserve, Morgan Stanley, and Goldman Sachs estimate that monthly GDP has declined 30% to 50% due to the economic shutdown, with unemployment likely around 30%.
If we sustain the current country-wide quarantine for the estimated 18 months needed to have a vaccine, that’s a cost of $10 trillion to $16 trillion. There’s also the humanitarian cost of 30% of working-aged individuals having no means to feed themselves.
If entire industries have been destroyed, we will have to either financially support 30% of American workers or tolerate mass poverty, starvation, and a humanitarian crisis of a different kind.
In a worst-case economic scenario, it’s not difficult to see total costs approaching $20 trillion. This would, of course, need to be borrowed by the government, companies, or individuals.
Let’s put that in perspective. The current national debt is $23.3 trillion. That means it took the US Government nearly 250 years to accumulate $21 trillion in debt. It’s difficult to imagine doing the exact same thing in 1.5 years — not to mention the multi-decade (if not century-long) cost to pay interest on the debt.
2. Precision Quarantines
The other approach to containing a pandemic is through precision quarantines.
The key reason why this pandemic has spread with incredible speed is that people are contagious for five to ten days before they are sick.
This is an extremely significant point.
In many ways, diseases like Ebola that have a very high death rate aren’t as big of a societal threat because Ebola patients are contagious only after they become and look violently ill.
The Ebola death rate is 50%. The COVID-19 death rate is probably around 1%. Yet there will be far more total deaths from COVID-19 because it’s far more contagious than Ebola.
20,000 people got Ebola and 50% died.
Left unchecked (by quarantines or vaccines), estimates put the number of people who could get COVID-19 at 3,000,000,000 to 5,000,000,000.
Needless to say, 1% of three to five billion is a much bigger number than 50% of 20,000.
Most people focus on the death rate, very few focus on the “contagiousness” rate. The death rate is meaningless unless you know how many people will or could get the disease.
A 100% death rate for an illness that only one person gets is a tragedy for that person’s family but not a global threat to every nation on earth. The contagiousness of a disease matters… a lot.
COVID-19 is extremely contagious. That is why it’s such a threat.
Now, let’s get into precision quarantines.
The concept of a quarantine is very simple.
Under normal circumstances, you separate the sick people from the healthy. By doing so, the sick people don’t get the healthy people ill.
The problem with COVID-19 is that contagious people don’t appear sick. They look and feel perfectly normal.
That is the core reason why COVID-19 is so contagious.
So, for COVID-19, you can’t just separate the sick from the healthy. You have to separate the highly contagious who appear and feel healthy, from the remainder of the healthy that aren’t infected.
The only way to do this is through extensive testing and something known as contact tracing — figuring out who a contagious person has been in contact with and quarantining those individuals (but not anybody else).
Precision quarantines are being done right now in South Korea and Taiwan. What you’ll notice about these countries is that they have (for the time being) contained the pandemic without geographic quarantines. People in South Korea and Taiwan are still going to work.
In other words, they’ve contained the virus’s spread, avoided a geographic quarantine, and kept their economy running by being excellent at precision quarantines.
So, the natural question is, “Why don’t we just do precision quarantines?” What did these countries do to have the best of both worlds?
Before I answer that question, I should mention that, for South Korea and Taiwan, this is not their first epidemic/pandemic. It’s their second or third. Those countries all had significant losses of life from one of the previous epidemics: avian flu, H1N1, SARS, and MERS.
In short, they took a beating on lives lost and learned their lesson.
They have done six things that we here in the United States have not:
- They were prepared (pandemic response plan, supply stockpile).
- They responded quickly.
- They tested extensively.
- They did extensive contact tracing (finding people with whom a known carrier had contact).
- They implemented precision quarantines with GPS-enabled mobile apps.
- They have members of the public wearing masks when in public.
Of these six differences, we have missed the window of opportunity to be prepared and respond to the threat quickly. However, the remaining four steps are still within our window of opportunity.
At this point, it becomes a complex math problem.
On the one hand, our capacity to do increased testing is improving literally by the day.
On the other hand, the coronavirus is so widespread in the United States right now and growing exponentially. So far, the contagiousness has been growing faster than the ability to produce, collect, and process test kits.
It is much easier to take all the prerequisite steps needed for precision quarantines when the pandemic is still quite small.
Imagine you find the first patient in your country. You figure out they interacted with ten people in the days leading up to their testing positive. You call those ten people today and by the end of the day, all of them are in self-quarantine.
If you caught it fast enough and those ten people didn’t spread it, you’ve contained the virus.
(Yes, this is a bit oversimplified, but go with me on this for a moment.)
Now imagine that there are 19,000 people who tested positive for the virus today. If they each came in contact with ten people, that’s 190,000 phone calls you need to make this morning, and 190,000 people you need to get into quarantine by tonight.
If you miss a few, those few go on to infect even more people. In addition, by tomorrow morning, there will be 20,000 more people who tested positive.
(By the way, these are actual rounded numbers of daily new cases in the United States.)
The sheer amount of labor and speed needed to pull off a precision quarantine when a pandemic is so large is, for all practical purposes, not possible.
So, what’s the solution?
The strategy that many epidemiological experts have converged toward is a combination approach. Looking at all the publicly available data, it is the same conclusion that I came to independently.
This is the approach:
Use geographical quarantines to shrink the pandemic until it is small enough to hopefully manage via precision quarantines. The geographic quarantines would also slow down, stall, and shrink the pandemic’s trajectory enough to buy time to catch up on testing efforts and personal protection equipment for medical providers, and prevent/minimize the number of hospitals that are overwhelmed beyond capacity.
By shrinking the magnitude of the problem while simultaneously expanding our capacity to handle the problem, we eventually cross a “sweet spot” where precision quarantines have a good chance to be effective.
This would be the ideal time to phase out of geographic quarantines (or use them only in certain hot spots) and increase precision quarantines.
As a conceptual strategy, this approach makes logical sense, aligns with global best practices, and the math seems possible. (Whether the strategy is adopted and executed effectively is another matter entirely.)
I don’t have access to the data to determine the appropriate length of nationwide geographic quarantine, nor when to transition to precision quarantines.
However, I do know it is a solvable math problem.
You would need to have data on supply chain delivery times for PPE (personal protective equipment). You’d need current and projected utilization rates for hospital beds, ICU beds, ventilators, and so forth.
You would need to know the production capacity for test kits, testing centers, and the labs that process them. You would need to verify contact-tracing capabilities nationwide.
[You would also need to do random-sample testing to develop a more accurate estimate of the number of cases you’re dealing with and where they are located (so you can focus where you ramp up your resources).
In addition, you’d want to do antibody or serology testing. This new kind of test determines if you’ve previously been sick. The current test only measures if you’re actively ill right now. Those who’ve been sick and may have immunity can likely go back to work immediately — especially in jobs that would be high-risk for others.]
Now, I promised you two answers to the question, “Who’s right — epidemiologists or economists?”
As I just explained, the first answer is that they are both right.
My second answer is this:
It doesn’t matter.
It’s very clear that things will get worse before they get better. The getting worse part will hurt. The getting better will happen.
The only unanswered questions are when and how.
But, here’s why it doesn’t really matter.
You can’t do anything about it. Whether the government does something or not, you don’t have any practical control over it.
In a time of crisis, it is essential to recognize which things you control and which things you can’t.
When you look at those who survive and even thrive in a crisis, it’s those who know to devote 90%+ of their energy to the things they control, and little to none on the rest.
Having been through several economic crises, multiple business failures, and having trained as a volunteer emergency medical responder for mass-casualty incidents, here’s what I’ve learned.
When a crisis starts, the most common mistake people make is that they freeze in disbelief that something bad is happening. The “bad” thing isn’t supposed to happen.
People freeze until they adjust to the sometimes-brutal reality of the situation. This freezing results in precious time lost.
The second mistake people make is expending far too much energy trying to control the part of a situation that’s fundamentally not controllable. This is an inefficient and unproductive use of energy.
If you’re the CEO of a company, you can’t change the fact that certain types of customers have stopped buying.
You can control looking to see which customer segments continue to buy for some unknown reason. You can control figuring out that unknown reason and seeing if you can capitalize on it. You can control looking to see who’s spending money, on what, and why. You can control looking to see if you can get into that flow of expenditures.
If you’re in a job function that is no longer valued (or legally allowed) in this economic environment (such as restaurant waitstaff, hotel room cleaners), you can control noticing who is hiring and why.
You can control noticing that Amazon is hiring 100,000 warehouse workers. You can control noticing that Walmart is hiring 150,000 people. The startup Instacart is hiring 300,000 delivery drivers (and just raised $1.8 billion in capital).
You can control noticing that the companies hiring are all in the grocery, consumable goods, and/or delivery businesses. You can control noticing that there’s a shortage of medical supplies — and it would be worth looking to see if those employers are hiring.
The key to surviving and even thriving is to focus on:
- Accepting that the world has changed.
- Figuring out what has changed and why.
- Adapting to where the world is heading, not where it used to be.
This was true in the dot com crash in the year 2000. This was true in the post-9/11 recession. This was true in the Great Recession of 2008. This is true in the COVID-19 recession that we’re in now. It will be true in the next recession too.
What are you focusing on today?
That is very much in your control.
Please visit caseinterview.com to learn more about Cheng's work.