Q&A with Seyed Karimi : Impact of COVID-19 on the economy

Seyed M. Karimi, PhD, an assistant professor in the Department of Health Management and System Sciences, and health economist with the Louisville Metro Department of Health and Wellness, provides insights on the current state of the economy. Q&A with Seyed Karimi : Impact of COVID-19 on the economy

Graph showing shares of individuals in poor/fair physical health statues by income and age in 2014

  • Please explain how COVID-19 is impacting the economy.

People are staying at home, and businesses are closed. Therefore, the COVID-19 is impacting the economy through consumer spending. The U.S. Department of Labor last week announced that the number of Americans filed for unemployment benefits in the past week escalated to 3.3 million, as it was predicted. Since consumer spending constitutes about two-thirds of the U.S. economy (68% in the last quarter of 2019), the impact is expected to be severe.

The sector that is most impacted by the coronavirus is the financial sector. Financial intermediates (e.g., banks, stock market, and bond market) transform savings to capital investment in businesses. Investment is very volatile because it is only justified if future production and consumption are expected to be maintained or increase. Therefore, not surprisingly, the stock market plunged. Travel and restaurant industries also are hit hard. 

  • What predictions can you make, if any?

What is not difficult to predict is an increase in the unemployment rate and a decrease in the national income in the first half of 2020. National income, measured by the gross domestic product (GDP), is going to decrease in the next two quarters. Hence a recession is inevitable―a recession is declared when the price-adjusted GDP declines for at least two consecutive quarters.

Financial institutions’ prediction of the drop in the GDP in the second quarter of 2020 ranges from 10% (Oxford Economics) to 24% (Goldman Sacks), 30% (Morgan Stanley), and 50% (Federal Reserve Bank of St. Louise). All the numbers, even the lowest, are unprecedented in recent history.  

The depth of the recession depends on when the spread of the COVID-19 is going to be controlled. That is hard to predict, and households and businesses are facing substantial uncertainties about the future.

  • How will this have a more direct impact on lower-income workers?

Low-income workers are going to disproportionately feel the direct economic and health impacts of the COVID-19.

Most low-wage jobs cannot be done remotely. According to the U.S. Private Sector Job Quality Index, the highest concentration of low-wage workers is in the foods and beverage services (~10.5 million), then are clothing and retail (~6.2 million), support and communication services (~5.9 million), and automotive services (~4.6 million). These jobs cannot be done remotely. The total number of at-risk low-wage jobs is 35.2 million, significantly greater than the total number of at-risk high-wage jobs, which 1.9 million. Also, low-wage jobs usually do not offer paid sick days.

Low-income adults are more likely to be uninsured. According to the Kaiser Family Foundation, about 17% percent of the poor (with income below the federal poverty line) were uninsured in 2018. The rate was the same for the low-income (with income as high as double the federal poverty line) but 12% for the middle-income (with income as high as four times the federal poverty line) and 4% for the high-income. The rates of uninsured in poor and low-income Kentuckians were lower than the national average at 9% and 11%, respectively.

In addition, health status is negatively correlated with income: the lower the income, the worse the physical and mental health status. The correlation is much stronger at older ages. For example, about 45% of the poor and near-poor but only about 7% of the high-income 45−64-year-old Americans reported poor or fair physical health status in 2014 (See the figure below). The rates have not changed that much recently. 

(See embedded graph on shares of individuals in poor/fair physical health status by income and age in 2014. Author’s calculations using the Medical Expenditure Panel Survey (MEPS)).

The higher rates of uninsured and poor/fair health among the low income imply that they are more vulnerable to the COVID-19.  

  • What does the public not understand that you could shed light on as a health economist?

What is important to pay attention to is how health and economic weaknesses are interconnected and feed themselves. A recession is manifested by a spike in the unemployment rate and results in a decrease in household income. Lower-income leads to lower consumer spending on all household items, including health care, to lower household savings. These result in a decrease in investment and production, hence further lowering the income.

It is imperative to control the spread of the virus to break the cycle. If businesses open and start hiring, then economic strength will feed itself. Also, federal economic stimuli such as expansionary fiscal policy (increasing government spending and tax cuts) and monetary policy (decreasing the interest rate) can help to reduce the burden and economic recovery.  

  • Can you provide an explanation of other health crises that led to a similar economic turmoil?

The effect of pandemics on human mortality kept decreasing during the 20th century (see “A History of Influenza” for a more extensive review). Therefore, pandemics lost importance in research. Warwick McKibbin, an Australian economist, is among the few researchers that have not lost interest in studying pandemics. He has extensively studied the costs of SARS and modeled its effect on the developed economies. Recently, he and his colleague have calibrated the SARS model to measure the impact of the COVID-19 on the twenty largest economies of the world (G-20), including the United States.   

They consider three different scenarios for the spread of the virus and its mortality rate in G-20 countries. They account for the spillover of the economic impacts through trade and capital flows, among other channels. The scenarios are based on epidemiological assumptions on the attack rate (the rate of infection in the population), case-fatality rate (mortality rate among the infected), and mortality rate (mortality rate in total population). 

Scenario

Attack Rate

Case-Fatality Rate

Mortality Rate

1

10%

2.00%

0.20%

2

20%

2.50%

0.50%

3

30%

3.00%

0.90%

Under their lowest pandemic scenario (scenario 1), they predict 236 thousand deaths in the United States in the first year. The death forecast rises to 589 and 1,060 thousand under scenarios 2 and 3. The death toll can be put in context if compared to the number of deaths from regular influenza in the U.S.: it is about 55 thousand. They also predict a 2% to 8% GDP loss in the first year from the start of the pandemic, under different scenarios.    

  • Other thoughts?

To summarize:

  • The impact of the virus on the U.S. economy is expected to be severe as the economy highly depends on private consumption, a dependence that has constantly been growing from the late 1960s because of the economy’s gradual movement from manufacturing towards service.
  • It is expected that the GDP (repressing both national income and national production levels) sharply drops in the second quarter of 2020. The lower and upper bounds of the predictions for the fall are 10% and 50%. The GDP is expected to drop further if the pandemic is not controlled.
  • The economic downturn is going to disproportionately affect the lower-income Americans because of the type of their jobs (which cannot be done remotely), their limited access to health care, and their underlying health problems. 
  • The expected economic downturn can create a vicious cycle and lead to further economic and health weaknesses. Hence, it is imperative to focus on containing the virus.  
  • There has been less research on the effect of pandemic recently, mainly because of their infrequency and small impact on mortality in the second half of the 20th century. Developed based on studies of the SARS, a rare study of the influence of the COVID-19 shows that its health and economic effects can be staggering if it infects more than 10% of the population.

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