How the world could better handle black swan events in the future
This past winter a black swan landed in Wuhan China, and its offspring spread quickly to virtually every pond around the globe.
Occasionally, something so random occurs that we are left astounded. Our whole self, including our economic being, which is focused on earning our daily bread, is shocked. Economists call these black swan events. This past winter a black swan landed in Wuhan China, and its offspring spread quickly to virtually every pond around the globe.
The COVID-19 pandemic is testing our institutions on a global scale. Since the 1918 Spanish Flu pandemic, our population grew fivefold, average life expectancies increased significantly, higher expectations paralleled standards of living, and our institutions have expanded proportionately. Despite this magnification, the role of community leaders, across sectors, remains the same when black swans land. Is it a single, rare event, or a pattern? And how far might it fly? If a pattern, leaders need to inspire an organized response with good information. If the swan can fly far and spread harm, the rest of the world needs to be warned.
Economists, for the most part, don’t study black swans. The randomness places interested researchers out of the mainstream — like a kooky Chicken Little exclaiming “the sky might fall.” Research does occur after the fact, but it often gets buried until the next black swan spotting. Looking back at the Spanish Flu, we know it spread faster and was concealed from the public, thanks to troop movements in WWI. The death toll after three waves in 1918-19 was 50 to 100 million people worldwide (about 4.5% of the population), 500,000 to 675,000 Americans (0.5%), and 7,783 Coloradans (0.85%). Many children were left orphaned. Federal Reserve economist Thomas Garrett (2008) found urban areas and the poor were more vulnerable than others. Businesses and workers were hurt in the short-term with some businesses losing 50% of revenues over the course of a year or two. Other businesses addressing key pandemic needs saw business increase. Garrett concludes the greatest negative impact on the economy will occur if medical staff become victims of the virus as “the duration and severity of the pandemic will be increased.” While it’s difficult to assess the frequency of pandemics, when they do occur there’s a 0.5% to 3% death rate with short-term economic devastation. This compares to the annual influenza virus which takes about 35,000 Americans (0.01%) annually with little economic impact. One would expect any community, especially the nation, should be able to handle this magnitude without long-term destruction, regardless of the frequency.
Success in the modern world requires a clear and rehearsed national and global plan of action. Unfortunately, despite warnings from people like President G.W. Bush in 2005, Bill Gates in 2015 and many health experts around the world, our response to this black swan demonstrates we have been acting worse than ostriches by burying our collective head in the sand just thinking of the predator. Perhaps our recent successes with viruses like Ebola, SARS and MERS in the last 20 years have lulled us into thinking we have this under control.
There is a fascinating dichotomy here. On the one hand we have crisis and disaster teams in every community planning for “the event” which is more of a white swan hurricane, tornado, earthquake or, in the U.S., a mass shooting. We spend $650 billion a year (3.2% of GDP) being prepared for hostile attacks. Yet, something as focused and as inevitable as a pandemic catches us off-guard. This does not mean we should keep an excess supply of millions of ventilators, but it does strongly suggest we need rapid supply-chain flexibility to go along with anticipatory political and economic responsiveness. It appears the awards for initial rapid response go to local distilleries switching to hand sanitizer, the health-care system adding capacity the best it could, data analysts tracking hotspots and scientists focusing on vaccines and fast, reliable tests.
To do better in the future, we need a large reserve of medical professionals who train annually and a federal response and logistic system to address emerging hotspots overnight. Economists and the Federal Reserve must know what it means to put the economy on hold for 30 to 120 days to focus on the true essentials for life. Furloughs with reduced subsistence pay from forgivable loans to all negatively impacted businesses should be the norm. Such a rehearsed global pandemic plan of action should have been triggered in January as a precaution.
Black swans are far more predictable than in the past. Frank Knight, an economist, wrote shortly after 1918 pandemic: “We must infer what the future situation would be without our interference, and what changes will be wrought by our actions. Fortunately, or unfortunately, none of these processes is infallible, or indeed ever accurate or complete.” Given the current realities, we should be documenting lessons learned at every level of decision making and mobilizing for the probable second and third waves.