Follow the precautionary principle for health and create a sick global economy

The precautionary principle states that if faced with a weakly understood choice of high uncertainty or risk that can have catastrophic or irreversible results, policymakers should error on the side of caution. Follow a “better safe than sorry” policy. This is especially true when there is even a small probability of large failure or an infinite mean and variance with measured probabilities. The burden of proof should be on those that do not want to follow the cautious approach. 

With respect to COVID-19, the policy approach will be to use caution and take added precautionary measures given the high level of uncertainty. The health impact is unclear since it is unknown what is the correct containment policy, but the immediate economic impact is more obvious. China will be in a recession once we have the numbers, Korea and Japan will likely follow, the EU will have a slowdown, and the US will not be an engine for growth. The extent or form of these cautious policies could be debated, but there is a clear economic cost of throwing the global economy into a recession. A recession for the global economy as defined by the IMF is a fall in growth below 2.5%.

There are limited policies to offset this supply shock and the longer virus persists the more likely there will not be any V-shaped recovery. Supply shocks cannot be solved by lowering rates. Consumers cannot be enticed to buy more if they do not live their homes. Investments on the margin will not be made, sales cannot be improved, earnings cannot be jolted, and financial assets cannot be supported. As bad as the supply shock effects, the impact of consumer confidence may be even greater. Economies thrive on optimism for investment and consumer spending. If the virus threat is long and more persistent, then the impact from economic pessimism will be greater.

A high level of precaution will have an immediate negative impact on the global economy under the expectation that economies can be saved over the longer run. Less caution today, potential for greater economic threat tomorrow. More caution today, greater immediate economic impact but lower risk tomorrow.