Americans are facing a difficult dilemma.
How long are we willing to purposefully shut down our economy to combat the coronavirus and risk losing even more people due to a great depression?
I don’t know the answer, which is why I’m turning to you to hear your input.
My gut instinct is that most of our nation is willing to go through at most a 2-month long lockdown/quarantine/shelter-in-place before we demand our local and federal governments allow most businesses to operate again, with modifications for safety.
As of March 23 ,2020, there are supposedly ~35,000 confirmed coronavirus cases in the U.S. and 458 deaths (~1.3% mortality rate so far). The number of cases will surely go up as more testing becomes available and more carriers infect others in their community. On the positive side, the mortality rate should also go down as the denominator grows. You can check the daily numbers on Worldometers.info.
To put some perspective on the number of coronavirus cases and deaths so far, please note that since 2010, the CDC estimates that from 12,000 to 61,000 Americans die annually from the flu. Roughly 31 million Americans so far caught the flu during the 2019-2020 season.
Put differently, the number of coronavirus-related deaths in the U.S. needs to increase by 35X – 175X to match the number of flu deaths that occur each year. With the California Governor saying roughly 25.5 million people in California will get the coronavirus within eight weeks if no measures are put in place, the numbers are plausible if we believe him. Some scientists have postulated that 60% of the American population will eventually get the coronavirus.
Let me be clear that I’m not saying the flu is like the coronavirus. COVID-19 looks to be at least 10X deadlier. I’m just providing some numbers so we can think about what we are doing to prevent an unknown toll on human life.
At the same time, we know that millions of Americans will file for unemployment benefits in March, and millions more will file for unemployment benefits each month we are under lockdown. We also know that the S&P 500 is down ~30% so far and that a recession is almost an inevitability.
Eventually, millions of Americans will lose everything. The unemployment rate will skyrocket. Families will break apart. Children will go hungry. Homelessness will increase. Burglary and homicides will increase. Millions more children will be trapped in a cycle of poverty.
The result will be even more strain on the government and on our community to help those who’ve been most adversely affected. If this strain becomes too great, even more people will suffer.
How Many People Died During The Great Depression?
One would think that the more people living in poverty, more people would die during a great depression. However, life expectancy actually went up during the last one. Ironically, it is actually economic prosperity that increases U.S. mortality.
Here are some interesting insights from History.com.
In the first few years after the 1929 stock market crash, the only major cause of death that increased was suicide, says José A. Tapia Granados, a professor of politics at Drexel University and co-author of a 2009 research paper in PNAS about life and death during the Great Depression.
While suicides went up, Tapia found that deaths from cardiovascular and renal diseases stabilized between 1930 and 1932, the worst years of the depression. Traffic deaths dropped in 1932. Deaths from tuberculosis, the flu and pneumonia also declined.
As a result, the average U.S. life expectancy rose from about 57 in 1929 to 63 in 1933. In both decades, people of color had a lower life average expectancy than white people. Yet when the depression hit, the average life expectancy for people of color rose more quickly than that of whites, increasing by about eight years from 1929 to 1933.
According to the Association For Safe International Road Travel, below are the following crash and death statistics for America:
- Over 37,000 people die in road crashes each year
- An additional 2.35 million are injured or disabled
- Over 1,600 children under 15 years of age die each year
- Nearly 8,000 people are killed in crashes involving drivers ages 16-20
- Road crashes cost the U.S. $230.6 billion per year, or an average of $820 per person
- Road crashes are the single greatest annual cause of death of healthy U.S. citizens traveling abroad
Given this data, a clear silver lining from the coronavirus-induced shutdowns is that fewer people will die from car accidents since fewer people will have to commute to work. Further, given more people will tighten their spending, more people will reduce unhealthy habits such as smoking, drinking, and overeating.
In another study by Bluestone, Harrison and Baker, “The Causes and Consequences of Economic Dislocation” from 1981, for every one percentage point increase in unemployment, they estimated a 37,000 increase in deaths, of which, 20,000 are from heart attacks, 920 are from suicides, 650 are from homicides, and the rest are undisclosed.
If we get to a 20% unemployment rate from 3.6% currently, according to the authors, this might result in roughly 610,500 more deaths. In this scenario, it seems that there will be more deaths in America attributable to a great depression than to the coronavirus itself.
How Much Of A Net Worth Decline Can You Endure?
The uncertainty of the lockdown period is what really hurts Americans. Because we do not know when the lockdown will end, we will have a difficult time planning for the future. As a result, we will rationally hoard as many resources as possible (food, toilet paper, water, cash, ammunition etc) in order to prepare for the worst.
If various governments can give us a detailed time-line guidance, everybody will feel much better and be able to plan and spend accordingly.
For example, if we assume that it takes up to 14 days from exposure for coronavirus symptoms to manifest and another 21 days for a person to recover from the virus, it would be helpful for the government to provide this informational guidance for a 45-day lockdown period.
The guidance can be one of several different lockdown scenarios if they want to hedge their bets.
Unfortunately, because so much is still unknown about COVID-19, this type of guidance has not been forthcoming. Instead, people like the Governor of California are saying that schools could be closed until Fall (in 5-6 months) without any clear guidance as to why. As a result, families in California are freaking out about what to do. Californians are logically extrapolating that most businesses will also be shuttered until Fall as well.
This is a failure by the California government and governments everywhere to communicate and show strong leadership. The Wuhan lockdown lasted for roughly 50 days and economic activity is returning. Why not deliver this message and use Wuhan as precedence?
If you are a deca-millionaire Governor who has aspirations of becoming POTUS one day, you can afford to wait things out for another 5-6 months. Unfortunately, tens of millions of Californians cannot. And if you bankrupt tens of millions of people in your own state, you can kiss your aspirations of POTUS goodbye.
To add some color, I decided to ask several people about how much financial pain they would be willing to endure before demanding the government allow businesses to reopen. I’ve also shared some of my own thoughts.
27-year-old preschool teacher with no kids.
I share an apartment with three other people. My rent is only $800/month. It’s a terrible apartment, but I’ve chosen to live frugally to save as much money as possible. I spend around $1,600 a month and I’ve been saving about $2,000 a month for the past six months. I’ve got about five months of living expenses saved up before I run out.
We’ve been creating videos at home for our students to watch. As of now, our school plans to pay us for the month of March and April, even though school is shut down. After that, our paychecks will probably stop unless the coronavirus goes away.
I only have about $10,000 invested in the stock market. I’m using this opportunity to buy a little bit of stock ($500), but I also want to save more more just in case I get laid off or don’t get a paycheck until the fall or longer.
I would like the government lockdown to be lifted by May 1 (~40 days). My net worth would likely be completely wiped out by the end of the year if we go much longer than a two month lockdown. Most of my friends who are teachers will likely be laid off. I have plenty of friends in the restaurant and travel industry who have already lost 50% – 100% of their income.
We need the government to provide Universal Basic Income for the duration of the lockdown ASAP. They are the ones who are forcing our schools and businesses to close for good reason. I hope they are also the ones who will help us survive during this time crunch. $1,000 a month will help me and my friends a lot.
36-year old mother of two.
I’m a freelancer who used to make about $5,000 a month doing various web design projects. I expect my business to decline by 80% next month as my clients take a wait-and-see approach. We were counting on my freelance income to help us buy a home over the next couple of years. Maybe real estate prices will finally become more affordable.
Luckily, my husband works in the medical field where demand is high. He makes about $170,000 a year. On the downside, my biggest fear is that he will catch the coronavirus at the hospital, has to self-quarantine for 14 days, and then spreads the virus to the rest of our family. We live in a 900 sqft, two-bedroom, one-bathroom apartment.
We’ve got about six months of expenses saved up in an emergency fund. But we also have about 90% of our net worth invested in the stock market. It is so painful to watch. I am very scared about our future. When the Governor said schools might not open until Fall, I had a nervous breakdown.
I’m using the decline in freelance work to homeschool my children while my husband works. I would like businesses to open up after 30 days. Based on what is being proposed in the Senate, we will not be eligible to receive any financial benefits.
Although the situation looks scary in places like Italy, they have an older demographic with different social customs. We cannot purposefully destroy our economy for longer than a month. I think the coronavirus has already been here for a while.
32-year old food delivery man.
Business is booming, but I’m not making as much as I used to because I lost my other side job as a DJ 3X a week. I’m getting 3X more tips now than I was before the lockdown. Customers who would never tip are now at least tipping me $2 – $4.
I used to make about $4,000 a month at my day job. During really good months, I was making $6,000 a month from my side hustles with a lot more freedom. Due to the coronavirus, I’m back down to about $3,000 a month. It’s enough for me to live. But I’m not saving much to get ahead.
I’m nervous about the future, but also hopeful too. I feel patriotic doing my part to help people get their food. With so few people on the streets, I feel safer.
This lockdown isn’t going to last forever and I think a lot of things will get back to normal by summer. In the meantime, I’m going to continue delivering meals and groceries because that’s where the opportunity is right now. The lockdown has to end by June 1 (70 days).
38-year old restauranteur and father of one.
Our small restaurant (14 tables) is still open during the shelter-in-place order, but only for pickup. We weren’t on the various food delivery services because they took too much in fees. But we’re going to sign up for at least one of the big ones now.
Business is down about 80% and rent is still due. I have let go of four people. Like you, we still need to pay preschool tuition this month and next month as well. Thanks to the preschool community and the surrounding neighborhood, we are still getting orders.
I don’t think we can last longer than a 2-month lockdown. We need to be allowed to open up within two months. To make our restaurant safer, we plan to remove some tables to have a larger separation of space. We will install a hand sanitizer dispenser in the front and another one in the back. We don’t expect people to return like they used to. But at least by lifting the lockdown, more people will likely drop by for a meal and order take out.
If the Universal Basic Income proposal is based on 2018 tax returns, we won’t qualify for any help.
42-year old father of two (me).
Between December 15, 2019 – March 5, 2020, I was sick with a terrible cough. You can hear my husky voice in several previous podcast episodes. Before this incident, I had never been sick for longer than one month. My mind started to fray in February as I began wondering everyday whether I had the coronavirus. I’m sure I caught the cold from my son who caught it at preschool.
I never had a fever during this time. There might have been one or two days I felt a little achy. But I had enough energy to continue writing 3X a week and play sports two times a week. However, the three months were difficult because I also had to take care of a toddler and a newborn. Every day, I wondered whether I would get my baby daughter sick. She ultimately came down with a cough for five days.
With now roughly 25% of our net worth in equities (~21% before the selloff), we’ve so far taken a ~7% hit to our net worth with the S&P 500 down about 30%. Our real estate holdings are also in a precarious situation if the S&P 500 goes down much further and does not rebound in the second half. Overall, we expect to take up to a ~20% hit to our net worth during this bear market versus a ~35% hit during the 2008 – 2009 bear market.
Although both my wife and I don’t have jobs, we do have various sources of passive income that provides for ~160% of our existing living expenses if we don’t cut anything. With the excess investment income, we’ve been saving and reinvesting the proceeds since I left work in 2012.
As stock dividend payouts and several rental income sources gets cut, I expect our passive income to decline by ~20%. A 20% and 30% decline in our passive income will result in a reduction in expense coverage to 133% and 117%, respectively. To increase the buffer, we will cut down on extraneous expenses if things get more dire.
We also have Financial Samurai, which continues to generate online revenue despite a shutdown. Although traffic is down 16% YoY for the trailing 30 days as people work from home and shun their finances, there is little risk of Financial Samurai shutting down. Operating expenses are extremely low. For example, you can start your own website right now for less than $5/month. You can customize a free generic template. You also don’t have to pay yourself anything.
I would like California to open for business after a 45-day shelter-in-place. A 45-day shelter-in-place order should be sufficient to flatten the curve. 45 days provides for 15 days of quarantine and 30 days of recovery if you have the virus. I also expect folks who end up sick to take more time off to protect their community. In the meantime, I expect the government to provide at least $1,000 in Universal Basic Income for two months or at least a total of $2,000.
Because our government and the media have sufficiently scared us straight, when the shelter-in-place ends, the majority of Americans will be much more careful going out when sick, much more diligent washing their hands, and much more considerate in practicing social distancing.
Losing 30% of our net worth (S&P 500 down about 70%) is where I draw the line and will start protesting to get our small and large businesses open again. At this level of net worth loss, I will risk getting the coronavirus to support local businesses by getting a haircut, getting a beer at a bar, buying some flowers for my wife, getting a massage, and going to the mall. So far, we’ve been delivery-ordering 90% of our food to support our local restaurants.
I assume by the time our net worth is down 30%, our country will be safer from the coronavirus since we will have likely been shut down for longer than three months. I also assume given our relatively conservative net worth asset allocation, if we get down 30%, millions more will feel even more pain and lobby for change.
How Long Are You Willing To Suffer?
“It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.” – Harry S. Truman.
To combat the coronavirus, I’d love to know how long you’d be willing to shelter-in-place and how much of a net worth loss you’re willing to take before you demand the government open up businesses again. How do we make sure the cure is not worse than the virus?
When do you think the inflection point will be when the economic loss of a lockdown will be much more devastating than the loss incurred by the coronavirus? By answering the two survey questions below, I think we can get a decent idea of when Americans can get back to business.
The coronavirus figures coming out of China and South Korea look promising. These countries went through a serious two-month lockdown. I think most of us are willing to do the same provided our government communicates a clear plan why.
It seems like the entire world will only recover after there is a successful, concerted global effort to control the virus. Though China is mostly back in business, its stock market is still struggling. They can make all the widgets they want, but if the rest of the world isn’t buying, there’s no point.
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Update June 10, 2020: Lockdowns are easing across the country and by July 1, the majority of the country will no longer be under lockdown. The stock market has returned to an all-tim high and I think it’s worth looking for any laggard real estate listings from sellers who think the worst is yet to come.