Consider three options:

Case 1 Case 2 Case 3
# of Infections 3,55,00,000 4,60,00,000 10,00,00,000
Healthcare Visit 1,65,00,000 2,20,00,000 5,50,00,000
Hospitalizations 4,60,000 5,65,000 15,00,000
Deaths 34,200 43,000 1,50,000

What price would we pay to avoid the above level of infections, healthcare visits, hospitalizations and deaths? The U.S Office of Management and Budget (OMB) estimated the value of a human life at $7 to 9 million in 2012. Using 38,600 deaths (average of Case 1 and Case 2) and $8,000,000 per life, we would be willing to spend $308 billion.

However, Case 1 and Case 2 are not estimated deaths from Covid-19. They are actual 2018-2019 and 2019-2020 numbers of influenza (flu) infections and deaths from the CDC (Centers for Disease Control and Prevention).

Case 3 appears to be the worst case scenario with limited Stay at Home, but smart social distancing. No other country has exhibited a level of infections and deaths likely to exceed Case 3, based on adjusting their cases to a “U.S. equivalent”, or based on adjusting for population. The U.S. should do massive testing and provides certificates of clear and not infected. Testing is much less expensive than idling 25% of the country. Many people can and should work at home for an indefinite period. Airlines are now operating at request of U.S government. Allow restaurants to operate with social distancing. Be creative. Restart hotels, restaurants, movie theatres, personal services with certificate of not infected with Covid-19 (healthcare, hair, nail, gyms, retail, service). Creatively operating with social distancing, with most workers remote, is an alternative to Stay at Home.

Alternatively, is it worth destroying 30,000,000 jobs to save 150,000 lives? Yes, dying is much more tragic than losing a job. We should not diminish the destruction to people and families due to losing 30,000,000 jobs. There will be massive emotional strain, foreclosures, bankruptcies, divorces and other non-financial costs to eliminating 30 million jobs. One job loss is a tragedy. 30 million is a calamity of millennial dimensions. This level of unemployment has not been seen since the Great Depression.

Losing 30 million jobs is realistic and perhaps low. Layoffs totaled 10 million in the first two weeks. Restaurants and hotels employ 24 million, 18 million of whom have been laid off. Healthcare employs 16 million and routine healthcare has come to a standstill. Healthcare providers have started laying off idle workers. Hospitals are idle awaiting a flood of Covid-19 patients. The flood has not materialized except in New York. Hospitals are receiving little revenue. Small rural hospitals are closing, likely permanently. Casinos, movie theatres, sports, concerts, airlines, and many other industries are at a standstill. Balance sheets are weak. Few hotels, restaurants, airlines, casinos will survive 3 to 4 months without a substantial increase in revenue. The CARES Act will help healthcare. However, it will not have a meaningful impact on hotels, restaurants, casinos and movie theatres.

The cost of Stay at Home will likely be $6 to 8 trillion, or about 19 to 26 times the cost of $308 billion for 38,600 deaths. This implies we are expecting 733,000 to 1,004,000 deaths unless we Stay at Home. Is that a valid expectation? The U.S is about 10 days into Stay at Home and deaths total 5,758 per John Hopkins website. U.S. Covid-19 infections total 238,820 (John Hopkins – all John Hopkins data as of April 2, 2020).

The cost of $6 to 8 trillion is calculated as follows: 1) assume $21 trillion GDP for U.S. economy pre-Covid-19, 2) assume 25% drop in GDP to stabilize at $16 trillion of GDP in 6 months, 3) assume slow recovery to pre-Covid-19 revenue in either 6 or 18 months. Lost GDP is $3.75 trillion with a total 12 month recovery and $6 trillion with a 24 month recovery. In addition to the lost GDP, there is “phase 1” of recovery, the CARES Act, which cost $2 trillion. Hence, $3.75 to 6 trillion of lost GDP and $2 trillion of phase 1 recovery totals roughly $6 to 8 trillion. This does not consider the emotional or financial distress of the families of 30 million workers laid off, perhaps for six to months to longer. Many jobs will never return. Many restaurants will reopen eventually, under new management. Few restaurant owners have cash reserves to operate more than one to four months without revenue, including public companies.

The World is Not the Same; Everything has Changed

The world is not the same; everything has changed. The stark-terror and raw-fear caused by Covid-19 is unprecedented. It is leaving a scar affecting the social norms in ways not yet understood. Will we visit movie theatres? Will we return to restaurants? How many restaurants will still be open? When will be travel by air and return to hotels in volume? Will new habits have formed? Will we cook at home and watch Netflix instead of going to the movies? We do not understand the world after Covid-19 and Stay at Home are completed. However, habits and spending patterns will have changed; some forever.

Time is Not Our Friend

Businesses have started closing and millions will have closed by the end of April. If Stay at Home extends until the end of May, perhaps 10 million businesses will close. The first issue is cash for payroll. When the business can’t make payroll, it is generally the end. Employees can’t be expected to hang around. Millions of businesses already can’t make payroll. The second issue is cash for rent, interest, utilities and critical vendors. Weak balance sheets are not prepared for no revenue for months. This includes private and public companies. We are at the tail-end of the longest expansion during the last 120 years in the U.S.; about 11 years. At the end of the business cycle, offers for credit are most generous. Business balance sheets are weak across much of the country; heavy on debt and weak on cash. Articles suggest the cash flow reserves available for private restaurants is days, not weeks of reserves. Public companies are thought of as existing forever; many only have working capital for one to four months with little or no revenue.

Negative Multiplier Effect

Decimating the revenue of businesses means they can’t pay employees, rent, utilities and vendors. The employees are not the only ones affected. Business will not pay rent before not paying employees. Rent payments not received will cause property owners to default on mortgage payments. Owners of both equity and debt positions will be affected. The value of AMC Theatre bonds are down by 40 to 50%. Total U.S. debt (Source: 2017 Treasury Department) is about $40 trillion. It is $27 trillion excluding Treasuries. A 10 to 20% loss on the balance would total $2.7 to $5.4 trillion (in addition to $6 to 8 trillion above).

Category Amount Percentage
Treasury $13,953.6 35.16%
Corporate Debt $8,630.6 21.75%
Mortgage Related $8,968.8 22.60%
Municipal $3,823.3 9.63%
Money Markets $937.2 2.36%
Agency Securities $1,981.8 4.99%
Asset-Backed $1,393.3 3.51%
Total $39,688.6 100%

No Revenue for a Business has Never been Considered or Modeled

The writer studied at Harvard Business School (HBS) during 1981 to 1983. HBS uses solely the case method. Three cases a day, each 20 to 30 pages; five days a week. Be ready to open (present a five-minute analysis) as through you are the leader. Six-hundred cases per year; 1,200 cases over two years. In two years there were no cases on revenue going to zero. The lesson the first day was if you run out of cash, it is game over. You CANNOT run out of cash. Payroll must be met. However, the concept of cessation of business, with revenues falling 90% or more for millions (perhaps tens of millions) of business was not considered. In three cases per day, there was not one case where the businesses revenue stopped 90% overnight.

It appears the political leaders do not understand:

  1. Businesses have never encountered this type of business cessation in 200 years.
  2. Businesses are not prepared for this; balance sheets are weak. We are quite late in the economic cycle and banks have loaned liberal during the expansion. Cash balances are none to 4 months revenues at most businesses.
  3. The PPP plan does not help businesses who do not restart their revenue stream. Retaining Stay at Home through April or May will almost certainly doom entire industries such as hotel, restaurant, casino, movie theatres, and perhaps airlines (despite the government money). However, Staying at Home for two more months will also doom millions of unrelated businesses that do not have cash to make payroll for two more months.
  4. Closing an existing business is MUCH easier than opening a new business.

Six to eight trillion dollars is difficult to conceive, as is 150,000 deaths. Based on $7 trillion and saving 150,000 deaths, the cost is $46.7 million per life saved. Using $3 trillion for debt losses, and a total cost of $10 trillion, the cost is $66.6 million per life saved.

The number of deaths in other countries does not indicate more than 100,000 to 150,000 deaths if that many. There is simply no empirical data consistent with the 1 million deaths doomsday scenario. Consider the following deaths to date (4/2/2020) and the U.S equivalent (adjusted based on larger population in U.S.)

Country Actual Deaths U.S. Equivalent Population  Actual Population (MM)    Adj Factor (US pop/ other pop)
U.S. 5,758 5,758 327 1
China 3,322 783 1,386 0.236
Italy 13,915 75,836 60 5.45
Spain 10,096 70,628 47 6.96
Germany 1,074 4,231 83 3.94
Iran 3,160 12,766 81 4.04

Italy and Spain have peaked in deaths. Both had a weak initial response to Covid-19. It appears neither is likely to double the current number of deaths, or about 150,000 (high end with low response used for Case 3). The number of Chinese deaths, adjusted for the difference in population is less than 783. (You can see why the Chinese data is not considered credible.) Flu infections caused 34,200 deaths in the 2018 – 2019 season and are estimated to have caused 43,000 deaths this year.

The top ten leading causes of death in the U.S. are:

  • Heart disease: 647,457
  • Cancer: 599,108
  • Accidents (unintentional injuries): 169,936
  • Chronic lower respiratory diseases: 160,201
  • Stroke (cerebrovascular diseases): 146,383
  • Alzheimer’s disease: 121,404
  • Diabetes: 83,564
  • Influenza and pneumonia: 55,672
  • Nephritis, nephrotic syndrome, and nephrosis: 50,633
  • Intentional self-harm (suicide): 47,173

Each of these deaths is tragic. The normal flu does not make the list. Covid-19 will not make the list in 2020.

“Snap Back”?

There are widespread expectations of a 25% reduction in GDP in the second quarter. What is changing is the “snap back” expectation. There was an initial expectation that consumers would “snap back” and return to hotels, restaurants, airlines, casinos, movie theatres just after Stay at Home was lifted. The “Snap Back” theory is no longer credible; it will not happen. No one expects hotels, restaurants, movie theatres, casinos, etc to return to normal in six months. Hotels, restaurants, airlines, movie theatres and many other businesses may not achieve pre-Covid-19 revenue for 12 to 24 months. Initial expectations of a 6-month recovery have vanished.

V-Shaped versus U-Shaped

The type of recovery has also been described as a V-shaped recovery versus a U-shaped recovery. Any expectations of a V-shaped recovery have passed. The damage inflicted in March has eliminated the possibility of a V-shaped recovery. Continuing Stay at Home through May will make the U-shaped recovery wider and more expensive, in financial and human terms.

Too Low for Flu or Too High for Covid-19?

It appears we are paying a cost of $6 to 8 trillion to avoid a level of deaths about double the normal level of flu deaths. It seems either the level of effort to avoid the flu annually is low or the cost to fight Covid-19 is high.

Proving a Negative – That One Million Would Die without Stay at Home

It is impossible to prove a negative. What would have happened if we did not Stay at Home? Would there be 100 million infections and 1 to 2 million deaths? We will never know. However, the data from Iran, Italy and Spain, all of whom had weak or poor responses, do not support 1 or 2 million U.S. deaths. This is true even when discounting the credibility of Iranian deaths. U.S. Equivalent deaths in Iran, which is peaking, are today 12,766. I will be the first to say the Iranian data is not credible. However, it does not appear the U.S. equivalent Iranian deaths will approach 150,000.

Importance of U.S. Security

Covid-19 is a real disease. It is serious. But so is U.S. security. Destroying 25% of our economy and 30 million jobs will seriously weaken U.S. security. The Covid-19 disease is serious. The tough question is whether the cost of the treatment is excessive and self-destructive.

Why Do Models Vary from Reality?

Scientists and political leaders see the calculus different than me. Differing opinions are healthy. I’d be more excited about Stay at Home if the consequences of not Staying at Home were clearer. We can only assume our leaders our using the best “scientific models”. However, even excluding countries with unreliable data, there seems no empirical data that the consequence of not Staying at Home would be 1 million deaths or more. Is it possible the models have such an excessive safety factor that the results are not meaningful?

Note 1 [Most of the deaths are people who are elderly and have preexisting condition. That does not diminish the value of their life, but it does reduce expectations of future economic production.]