ZURICH (Reuters Breakingviews) - Nobody expects the Spanish influenza. Or the Bubonic plague. Even so, pestilential panics like Covid-19 come along every so often, and they sometimes become full-blown levellers of humanity. Thankfully, the so-called coronavirus appears to be nothing like the 14th century’s Black Death. But going by what happened following deadlier prior outbreaks, “plague-enomics” can still lead to far-reaching structural shifts.
European economies changed dramatically in the years that followed the arrival on Genoese merchant ships in 1347 – and regular reappearance – of the Black Death. It wiped out more than half the residents of Florence, Paris and Hamburg, and took decades for the European population to recover. The ensuing major shortage of labour, however, had a lasting impact: It shifted some power to labour (peasants and serfs) away from capital (the landed aristocracy).
“The Black Death was a cataclysmic event and retrenchment was inevitable, but it ultimately diminished economic impediments and opened new opportunity,” argued David Routt, a University of Richmond professor, in a paper on the plague’s economic impact. While wages in England, for example, rose by as much as 40% from the 1340s to the 1360s, the income of English lords declined by 20% as the plague raged, according to Routt.
Similar conclusions can be drawn from the Spanish flu, which killed some 40 million people, making it the worst epidemic since the Black Death. “Some academic research suggests that the 1918 influenza pandemic caused a shortage of labour that resulted in higher wages (at least temporarily) for workers,” wrote Thomas Garrett in a 2007 paper for the Federal Reserve Bank of St. Louis. The research economist was sufficiently humane to add that “no reasonable argument can be made that this benefit outweighed the costs from the tremendous loss of life and overall economic activity.” But the benefit was clearly tangible.
Back to 2020, the obvious area for plague-enomics to impact is environmental, social and governance concerns, most notably the existential threat of global warming. Assuming “social distancing” measures to prevent the spread of the disease lead to a global travel lockdown, there will be some basic lessons transferable to carbon reduction pledges by the world’s biggest economies. If people must live in a more constrained way to slow the coronavirus - traveling less, say, or videoconferencing more - they can similarly modify their behaviour.
Covid-19 is the first big health scare since major nations agreed to keep a rise in global temperatures to 1.5 degrees Celsius with the 2015 Paris Agreement. More recent outbreaks, like SARS in 2003 or H1N1 in 2009, predated Paris and came before most voters identified climate change as a serious priority. In the world’s biggest emitter, the United States, it now ranks among the top four issues of the 2020 presidential election, according to a recent Atlantic poll conducted by Climate Nexus with Yale and George Mason University. In a similar poll from 2008, only 1% of U.S. voters labelled it their most important concern.
This means the coronavirus is landing at a moment when the general public, as well as many politicians, corporate leaders and central bankers, are searching for ways to accelerate a shift towards more environmentally sustainable economic activity. The emergence of the coronavirus also coincides with a wider rethink of capitalism taking place within the business community, as witnessed by the U.S. Business Roundtable’s redefinition of the purpose of a corporation; and in the political sphere, where an avowed socialist is contending for the Democratic Party’s race to challenge President Donald Trump. This is effectively the “social” component of ESG investing.
One of the most observable market impacts from an extended epidemic where travel, trade and transportation are curtailed and growth slowed, would be a deep and prolonged decline in the price of energy. Even today, with West Texas Intermediate crude trading at around $46 a barrel, entire swathes of the oil-production complex are likely loss-making.
These include the tar sands of Alberta, where producers need crude at about $60 a barrel to break even. Teck Resources last week pulled the plug on a $16 billion oil sands investment – a sign of how market forces will curtain more environmentally damaging energy sources. At today’s prices, many of the U.S. shale-producing regions, such as the Eagle Ford, Bakken, Niobrara and parts of the Permian look uneconomic. And below $40 a barrel, offshore and deep-water drilling activities for many producers plunge into the red.
True, it may take a deeper economic impact from a surge in fatalities before the epidemic retreats to psychologically tip the balance towards greater sustainability – both in the environmental and socio-economic sense. The best-case scenario would be that Covid-19’s damage is contained at current levels, but that the experience, coming at a moment of global introspection about mankind’s impact on the planet generally, sufficiently scares governments, companies and people into shifting to less environmentally and socially deleterious behaviour. That’s a lot to hope for – but is far from impossible.
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