In his recent article about four different futures for the evolution of the COVID-19 virus, Wharton’s Eric K. Clemons, a professor of operations, information and decisions, noted that the markets have been reacting to uncertainty rather than to expectations. Continuing his analysis in this companion piece, he examines four more potential scenarios examining the very short term social and economic dimensions of the crisis. Clemons’s bottom-line assessment: It is premature to assume that we will manage our way through the next several months successfully. It will be painful, and the key questions involve how we will respond to the pain. Different responses will have different impacts on the levels of pain we must endure. This model allows us to predict the impact of the policy decisions we observe.
It’s customary when doing a scenario analysis to assume a long-time horizon, maybe five, 10, or even 25 years. When I did the first part of my analysis of COVID-19, I assumed that both the lethality of the virus in five to 10 years and its mutation rate over the same period were unknowable today. That results in four different scenarios, ranging from benign to catastrophic. The most benign scenario, low lethality and low mutation rate, would be a minor inconvenience for which a vaccine would be available. The most catastrophic scenario would be a virus that was highly lethal and that mutated frequently, meaning it would have many fatalities among infected individuals and no vaccine would be available.
Scenario analysis is not a classification system, where you divide a population into segments — high aptitude and low aptitude and high energy and low energy — to get four groups. It’s not even a system for dividing the future into high and low probability outcomes. It’s a system that looks at the most critical things we don’t yet know, the key uncertainties that we really need to be able to evaluate. These are the things that if we could know them, we could predict the future. They help us divide the future into sets of alternative outcomes. We then assume that each of these critical things takes on one of its two most extreme values. That gives us four different futures, defined as Low1 & Low2, Low1 & High2, High1 & Low2, and High1 & High2. When we select our two key uncertainties, we get four very different futures. We sequentially assume that each of the combinations is true, and we sequentially analyze each of them.
When we pick our uncertainties correctly each of the futures is possible, they are all different from the others, and they all require different sets of strategic responses.
It is not usually necessary to perform scenario analyses for short-term uncertainties. Usually we understand the world we are in now, and usually we know how to respond to the world we are in now. We know how to predict the responses of others over the short term, and we even know how to predict the effectiveness of their responses.
But our current situation is different. We’ve never faced a threat like the coronavirus pandemic, and governments have never tried to implement the same set of responses before. It’s hard to anticipate exactly what the government policies will be, and it’s hard to predict how complex human societies will respond, so it’s hard to predict how effective government actions will be. If citizens believe that their governments’ actions are effective, if they believe their governments’ assessments and reports are honest and accurate, and if they believe that sacrifices are shared equally, communities may respond in support of the common good. But if citizens believe that their governments’ actions are ineffective, if they believe their governments are lying, and if they believe that some groups are receiving preferential treatment, our responses may be totally ineffective.
Uncertainties in Our Current Scenario
We sort of know where we are now. We are confronting a new virus. It seems to spread faster than the flu, because we have no immunity from previous infections with this virus. Likewise, we have no vaccines to slow the virus’s transmission from person to person. We have no effective anti-viral medications to treat this virus, so it can be extremely lethal, at least in the most vulnerable populations. In the absence of vaccines and medications, the most promising way to limit the damage is to slow the spread of the virus, mostly through voluntary social distancing. This can be combined when necessary with mandatory closings of businesses, bars and restaurants, theaters and sporting events, schools, and indeed almost all places where people congregate and can expose one another to the virus. In the absence of complete testing to identify carriers, and in the absence of complete self-isolation of carriers and suspect carriers, social distancing and shutting down vast segments of the economy may be the only way to slow the spread.
Why is it so important to slow the spread, or flatten the curve of growth in infection? There are two reasons. In the most pessimistic scenario, we are all going to get the virus, but we do not all have to get sick at the same time. If we can spread out the times when people get sick, we will not overload the hospital system, and there will be an adequate supply of hospital beds, intensive care doctors, and ventilators with trained operators. We will get sick, but far fewer of us will die. If we can flatten the curve even further, we may not all have to get sick. We may slow the transmission long enough to have vaccines available before most of the population is exposed.
What will the effects be when we shut down entire segments of the economy? We’ve had recessions that emerged over months or years. We’ve never had a self-imposed, instant and long-lasting recession before.
Here are the two questions that, if we could answer them, they would enable us to predict how deep and how long the recession would be. They also would allow us to predict how catastrophic the impacts of COVID-19 would be on the health of our populations.
Can We Flatten the Curve?
We need to slow the spread of COVID-19. But can we flatten the curve, and slow the spread of the virus? There is so much we cannot predict, because we have not tried this before.
Slow the Spread and Flatten the Curve: Do young people accept instructions to hunker and shelter in place voluntarily, or do they shelter in place as a result of criminal sanctions for ignoring instructions? Bavaria has recently imposed mandatory lockdown in order to eliminate Corona parties, where young people gathered to celebrate the virus. Indeed, since the risks to young people are relatively low, do they continue to congregate in groups, expose themselves, and endanger others? Does the closing of restaurants, beaches, bars and theaters adequately slow transmission? Does society provide anonymous testing for everyone, regardless of citizenship or legal resident status? Does society provide medical care for everyone, regardless of citizenship or legal resident status?
Rapidly Spreading: A True Pandemic: Does restriction on who qualifies for treatment result in an untreated and undiagnosed reservoir of disease circulating at all times? Do individuals who are at low risk continue activities that increase the likelihood that they will serve as transmitters of the virus? Does transmission therefore continue, overwhelming hospital beds, hospital staff and critical resources like ventilators?
Can We Share the Pain?
President Trump tried to rally America behind him in the War Against an Invisible Enemy and he may have succeeded in uniting the country in shared sacrifice. But for how long? And under what circumstances do we remain united? And under what circumstances does social cohesion begin to fall apart? Again, there is so much we cannot predict because we have not experienced this before.
Share the Pain: He Ain’t Heavy, He’s My Brother: Do we share the pain? There are several indicators that would allow us to assess if we are successfully sharing the pain of the sudden and severe downturn. We would see enormous income taxes on the truly wealthy, as we have seen in times of national crisis before, though they may never need to approach the 94% top marginal rate of 1944. Revenues are used to support small business owners and their employees, providing basic income and ensuring individual survival. We develop safe door-to-door delivery, which enables small stores and restaurants to keep operating. The bottom does not fall out of the economy, and the middle class does not become alienated, to the extent that they did in Europe in the 1930s, which accelerated the growth of fascism. The least well-off segments of society do not suffer disproportionately, and they see that they are being supported financially by the truly wealthy.
Sauve Qui Peut: We all Protect Ourselves and Our Families: Do we end up with everyone acting in their own self-interest? Do we fail to share the pain? Does rural America decide that COVID-19 is a coastal problem, a big city problem, or even a Democratic Party problem, and believe that they are safe? Do big cities understand that elderly residents are often low income, cannot afford to stockpile, and when they do venture out to purchase essentials, they find mostly empty shelves? Do some groups believe that supporting the poor is too expensive, given the current size of the national debt? Instead of funding the poor and easing the pain of the ill and the unemployed, the government relies on discredited approaches like tax cuts for the wealthy and a decrease in government services and the social safety net, believing that more money in the hands of the wealthy will lead to more investment, more hiring, and more spending. The most heavily armed segments of society rebel, and the truly wealthy accept massive government intervention, like martial law, in order to ensure order and ensure domestic tranquility at any cost.
The Resulting Scenarios
As usual, answers to these questions generate four very different scenarios:
Still Normal: Complete Recovery as After 2008: We slow the spread, flatten the curve and share the pain. We will still face a recession, but we will recover from it. There may be tens of thousands of elderly patients who never fully recover, which will increase the burden of medical costs on our society. Some expenditures are never replaced; we are not all going to go on extended drinking binges, or dining binges, or theater binges, to make up for the meals and entertainment we missed. But properly managed government aid will keep most businesses from failing. We will muddle through. The scenario is shown as green. It is not good, but it is as good as we can hope for right now.
And I Guess It’s Gonna Hurt me For a Long, Long Time: We slow the spread of the virus and successfully flatten the curve, but we do not share the pain of the recession. The poor, the elderly, and the vulnerable in general, bear the bulk of the pain. Businesses fail as the recession deepens, and businesses that provide services to the most vulnerable segments of the population fail disproportionately. The poorest regions of large cities truly become banlieues, not in the sense of suburbs, but as no-go zones of suffering and violence. This scenario is shown in cautionary amber.
One Nation, Indivisible: We can’t flatten the curve, and we can’t end the recession. But we unite as if we were facing a foreign invasion, and we share the pain equally. We endure gasoline rationing, food rationing, and possibly even rotating power blackouts. Working at home is the new normal. Text dating is the new normal. Community watch organizations emerge, patterned after the civil defense groups in London during the Blitz, to make sure that neighbors do not die at home due to lack of heat, or lack of food, or an accidental fall. The cost of medical care is staggering, especially at a time of reduced economic production, and the national debt explodes. Again, this scenario is shown as cautionary amber.
Still, the cautionary scenarios are often not only dangerous but dangerously unstable. Would we truly share the pain equally? Would we truly remain one nation, indivisible, if the suffering lasted for years? During World War II, U.S. military leaders believed that the population would not have been willing to continue the war against Japan if the Japanese had been able to resist for much longer. We are a more ethnically and economically diverse nation today, and political divisions are worse than they have been at any time since the Civil War. Would rural America, with ample local food supplies, continue to support rationing? Would the urban poor, often well-armed, continue to suffer as their wealthier neighbors appeared to continue to live the lives they had enjoyed before?
I see two halves of an unacceptable alternative shown in dangerous red.
All Fall Down: Truly the End: Social cohesion ends. Rural populations refuse to share food with the cities. The urban poor erupt in violence, pillaging wealthier communities in their cities.
Martial Law and Fascism: Social cohesion ends but the power structure has not collapsed entirely. Martial law is declared. At best, we have a temporary police state. At worst, we have fascism.
In my first piece I sketched out why it was premature to assume that COVID-19 would be a plague of biblical proportions, a biological catastrophe for decades to come. In this piece, I argue that it is also premature to assume that we are going to manage our way through the next several months successfully. It will be painful, and the key questions involve how we respond to the pain. Observing governments’ policies and societies’ responses will allow us to determine which of these scenarios will emerge. The virus was no one’s fault. But our responses, and the economic, political, and personal costs are at least partly within our control.
Stay safe. Be good to one another. Good luck. And may “God bless us, every one.”
Frontpage February 28, 2019