On March 18, 2020

How bad could things get?

It depends how long the pandemic lasts

By Art Woolf

How will the coronavirus pandemic affect Vermont’s economy — with the understanding that Vermont’s economy is Vermont’s people? The simple answer is that it depends on how the pandemic unfolds in the world, the U.S. and in Vermont.

The best-case scenario is that we have seen the worst and the number of cases in the U.S. and Vermont stays roughly where they currently are.  People will be cautious and limit some of their activities, but by and large there will be no significant job losses, people will still be working and receiving their salary, and spending money as they usually do.

I give that about a 10% probability of occurring.

More realistically, the number of confirmed cases in the U.S. and Vermont will continue to rise, and people will get more and more nervous about the future, businesses will be increasingly affected by people’s perceptions, fears, and concerns, and by the reality of changing business conditions.

In a moderate scenario, conditions will worsen gradually as Americans and Vermonters take the actions that epidemiologists and medical professionals recommend — frequent hand washing, avoiding crowds, covering coughs and sneezes with arms, not hands, getting flu shots and having coronavirus test kits readily available. That would, as the epidemiologists put it, flatten the curve, allowing the health system to deal with the increased caseload of people testing positive.

That’s if a bad situation goes relatively well. My gut feeling is there’s maybe a 20% probability of that scenario playing out. When we look around the world, some countries, such as Singapore, seem to have the situation under control. Others, especially Italy, don’t.

How bad could things get?

The disease is spreading at an exponential rate. Outside of China, the number of confirmed cases worldwide doubles every 5 days — that’s what an exponential growth rate does.

And so far, that’s the Vermont story. The first Vermont case was confirmed on March 7, the second on March 11, four days later. If 80% of coronavirus cases are mild, it’s likely there are at least 10 Vermonters with the virus today, and if the number doubles every five days, by the end of March 300 Vermonters will be carrying the virus and by mid-April more than 5,000 will test positive, with 1,000 serious cases.

There are about 1,178 hospital beds in Vermont, so Vermont’s healthcare system is going to be overwhelmed with a situation it has never before experienced. Anyone hospitalized with coronavirus will be in the hospital for an extended time, so hospital resources will be severely strained in Vermont as well as nationally.

Those health-care related issues are ones for health care professionals and policymakers to deal with, although they certainly have economic ramifications.

What about the more direct economic fallout from a worsening pandemic?

Those businesses will see reduced revenues and will have to lay off workers, or at least shorten their hours. Even within the retail sector, impacts will differ.  Supermarkets will likely see minimal effects while sit-down restaurants will see much bigger declines in business than take-out places.

Other businesses — insurance agencies, law and accounting firms, and other professional offices — will not be as severely affected.

If they can, many businesses, including services firms, financial institutions, software companies, and the like, will urge, or require, their employees to work from home. With the public schools now closed, those parents will at least be able to work at home and get paid while they are watching their children.

Parents who do need to work or can’t take time off — at grocery stores, retail shops, restaurants, and professional and health care offices — will be hard pressed to figure out what to do if their children are home for weeks due to school closure.

This won’t be like a snow day.  It will be like a snow month (or months)? Some parents will have to take time off from work to take care of their kids — and they won’t want to bring their kids to work with them. That means they won’t be paid.

Vermont’s tourism sector may be spared from a worse impact, due to the season. The ski season is winding down, and mud season includes the weakest tourism months. But if the situation nationwide does not improve by summer, tourists are likely to stay home and wait things out. Vermont’s summer tourism activity — which is larger in dollar terms than winter — will suffer. That will have direct impact on revenues, profits, employment and tax dollars.

The other big question is the impact on Vermont’s manufacturing sector, which employs 30,000 people — 9% of Vermont’s workers. Employees of these firms, especially production workers, cannot work from home, although some non-production workers can.

Just as important, many of these firms rely on parts and supplies provided through global supply chains, and those supply chains are now under serious stress.

Vermont companies may have enough parts on hand to keep producing for a few weeks, but if the pandemic goes on long enough, it will have to cease production and lay off workers.

So  how long  could the pandemic last? The situation seems to have stabilized in China, where it took nearly two months for the growth curve to flatten. If the growth in new cases in the U.S. and Vermont flattens by the end of April, it’s not likely to cause a recession, but we will probably see lower GDP growth, layoffs and shortened hours, especially among lower paid workers in the most affected sectors. Any longer than that and the likelihood of a full-blown recession increases substantially.

What can the state of Vermont do?

Most actions that would help affected workers are dependent on what Washington does. Legislation that liberalizes requirements for SNAP benefits (food stamps) and unemployment insurance are two simple policies that would help laid-off workers.

Some Vermonters who are temporarily laid off will have a hard time paying their bills. Banks and financial institutions can work with those people to temporarily postpone paying their mortgages or credit card balances.

One big expense Vermonters face is property taxes. Here’s one idea: The state can borrow money short-term very cheaply. It can float a 6- or 12-month bond and use the proceeds to lend to Vermonters who are facing cash flow problems paying their property taxes. Those people would pay back the loans when their jobs return at no or low interest rates.

The state has a variety of ways to ensure repayment: it could garnish wages, use the income tax system to collect the money, or at worst put a delinquent tax lien on the property. The state could do something similar for businesses that are affected by coronavirus.

Finally, how will we know the full impact of the pandemic on Vermont’s economy? The usual way to measure an economy’s performance is by looking at the monthly job and unemployment numbers. But we won’t know the March unemployment and job numbers until mid-April and the April numbers until mid-May so there’s a pretty long lag time.

However, we do have one indicator that’s almost real-time. Each week the Vermont Department of Labor tells us how many Vermonters who are laid off apply for unemployment insurance. As of last week, there has been no increase in layoffs compared to last year. But that will not be the case this week. Stay tuned.

Art Woolf recently retired as an associate professor of economics at the University of Vermont. He is a columnist for VTDigger.

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