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The Virus Is Teaching Everyone What Runaway Growth Really Means

The Virus Is Teaching Everyone What Runaway Growth Really Means

To make sense of the spread of Covid-19, economics—particularly black swan events and compound growth—can provide guidance. Bloomberg, By Gernot Wagner, March 20, 2020, Compound growth is relentless. Investors know that all too well: Start saving early, and even low annual growth rates will eventually yield big results.

Black swan events, too, are relentless. The existence of low-probability, high-impact events, in fact, is a powerful explanation for the long-standing “equity premium puzzle,” why equities on average return so much more than bonds and make compound growth all the more powerful.

Climate change is beset with both. I’ve spent a decade trying to explain that to anyone who’ll listen. It’s not levels; it’s growth rates. It’s not what we know— though that’s bad enough—it’s largely about the unknowns and perhaps unknowables.

Black swans need no explanation in the context of the coronavirus pandemic. Compound growth, alas, still does—or at least it did for much too long into the current crisis.

Witnessing the rapid changes in attitudes has been more than educational, to put it mildly. Watching the Trump administration—and, by extension, Fox News—turn 180 degrees almost overnight might be particularly jarring. But this time, even oft-rational leaders were caught off guard. French President Emmanuel Macron went to the theater on Friday, March 6, demonstrating normalcy. The following Tuesday, his culture minister tested positive for the virus. A week later, Macron ordered a complete shutdown of the country. ……

The first question one must ask when looking at any benefit-cost analysis is where it might be so wrong as to overturn the original results. For climate, it’s clear that standard benefit-cost calculations lead to an underestimate of the true cost of each ton of carbon dioxide emitted. Benefits of mitigation are typically higher than calculated, while cost estimates often turn out to be lower than assumed.

For Covid-19, the uncertainties also seem to point in one and only one direction: toward shutting down sooner rather than later. Given that the benefits of shutting down today include include avoiding a later shutdown, it’s hard to see how any of the many other uncertainties could dwarf the relentless compound growth of infections of roughly 33% per day.

It’s exactly this insight that reportedly convinced British Prime Minister Boris Johnson—belatedly—to pursue strong mitigation measures as well. The original U.K. strategy of “herd immunity,” after all, would have implied a significant culling of the herd.

All that points to another significant lesson that applies to the virus as much as to climate and to decision-making more broadly: Your actions inadvertently causing a death (an “error of commission”) might feel worse than the lack of one’s actions leading to that same death (an “error of omission”)  but the end result is the same. Error is error, dead is dead.

With Covid-19, the bias goes toward leaders wanting to avoid doing too much at first, lest they are seen to be causing undue economic pain. Omitting early action, meanwhile, has already proved to cause even more pain later on.

Economist Milton Friedman famously argued how actions taken in a crisis “depend on the ideas that are lying around.” In this crisis, it behooves us not to ignore one of the most powerful of economic ideas: how compound growth, in the end, dwarfs all. https://www.bloomberg.com/news/articles/2020-03-20/the-virus-is-teaching-everyone-what-runaway-growth-really-means

March 21, 2020 - Posted by Christina Macpherson | 2 WORLD, health