Presidents and Pandemics: The Economic Fallout From the 1918 Flu
As preparations begin to be made for the reopening of the economy following the closures resulting from Covid-19, speculation turns to how this will affect the economy going forward. There has never been anything like this, at least since 1918-20 when the inaccurately named "Spanish Flu" ravaged the world. As has been mentioned in previous posts about that event, this was a pandemic with devastating consequences worldwide. Over 500 million people were infected by the virus, roughly about a quarter of the world's population at the time. The death toll from the pandemic was estimated to have been anywhere from 17 to 50 million, and possibly as high as 100 million. In the U.S., about 28% of the population of 105 million became infected, and somewhere between 500,000 and 675,000 Americans died (in the range of 0.5% of the population). It led to mass quarantines and a ban on public gathering in many places in the United States.
In the aftermath of the pandemic, most areas exposed to the pandemic experienced a sharp and persistent decline in economic activity. The economic consequences of that pandemic were recently explored in a paper written by three eminent economists: Sergio Correia - a member of the Board of Governors of the Federal Reserve System; Stephan Luck - of the Federal Reserve Bank of New York; and Emil Verner - from Massachusetts Institute of Technology (MIT), Sloan School of Management. The paper can be downloaded online here. These authors cite estimates that, as a result of the 1918-20 pandemic, manufacturing output was reduced by 18%. A major conclusion reached by these authors however is that it is the pandemic itself, and not efforts to reduce social interaction, that caused the economic downturn. According to the data examined by the authors, those cities that were more aggressive in enforcing quarantines and business closures fared no worse than those that were lax about enforcing similar measures.
The authors point out that many of the measures taken a century ago to curb the spread of the virus (they refer to them as "NPIs", an acronym for non-pharmaceutical interventions) resemble those used in the case of Covid-19: closing schools, theaters, churches, banning of public gatherings and quarantine of suspected cases. The authors conclude:
"[W]e find that early and extensive NPIs have no adverse effect on local economic outcomes. On the contrary, cities that intervened earlier and more aggressively experience a relative increase in real economic activity after the pandemic. Altogether, our findings suggest that pandemics can have substantial economic costs, and NPIs cannot only be means to lower mortality but may also have economic merits by mitigating the adverse impact of the pandemic."
The authors concluded that the cities that had the higher mortality rates and which were less aggressive in implementing NPI measures were the ones that suffered great negative economic consequences. These areas had higher rates of business and household defaults on bank loans and mortgages. In cities that took action and implemented NPIs earlier experienced earlier economic recovery after the pandemic was over. The data that these authors reviewed suggests that "reacting 10 days earlier to the arrival of the pandemic in a given city increases manufacturing employment by around 5% in the post period."
The authors point out that there are a number of significant distinctions between the 1918 pandemic and the current one. The earlier pandemic killed 0.66% of the total population, with the death rate primarily affecting those in the 18-44 range. That pandemic struck in three waves: the first in the spring of 1918, the second in the fall of that year, and a third wave when soldiers returned from the war in Europe. Economically, areas with a greater incidence of the flu had labor shortages and the price of labor increased as a result. Overall, GDP in countries hit by the pandemic dropped by 6 to 8%. States with the highest mortality rates included Montana and Kansas in the west, and New Jersey, Pennsylvania, Massachusetts and New Hampshire in the east.
The pandemic resulted in a decrease in labor supply, at a time when manufacturing was a labor intensive enterprise. Decrease in manufacturing capability was passed down to trade sectors of the economy, decreasing supply while increasing demand. This in turn led to widespread defaults on loans, shrinking the supply of credit available. High mortality exposure led to a significant decline in manufacturing employment and output. Bank assets declined and defaults led to banks restricting credit in order to maintain sufficient capital rations required by law.
The data from the time after the 1918 pandemic also shows a decline in spending on motor vehicles (such as they were at the time) and other discretionary items. A Wall Street Journal article cited by the authors, published on October 25, 1918, reports the following:
"In some parts of the country [the influenza epidemic] has caused a decrease in production of approximately 50% and almost everywhere it has occasioned more or less falling off. The loss of trade which the retail merchants throughout the country have met with has been very large. The impairment of efficiency has also been noticeable. There never has been in this country, so the experts say, so complete domination by an epidemic as has been the case with this one... Widespread epidemic of influenza has caused serious inroads on the retail merchandise trade during the current month. Heads of large organizations report that not only has sickness cut down the shopping crowds, but in many cities the health authorities have shut down the stores. The chain store companies have felt the effect of the sickness not a little, for in addition to the smaller business done a number of their employees are sick." (WSJ, Oct. 25, 1918.)
Interestingly, the authors found that in cities where NPIs were instituted earlier, employment was higher after the pandemic, and manufacturing experienced higher output. They authors also found that "Both a quicker reaction and a longer, more intensive implementation of NPIs are associated with stronger growth in local national banking assets from fall 1918 to fall 1919."
The authors point out that in 1918 there was no nationally centered strategy for addressing the pandemic. Measures were taken locally as opposed to nationally or even in many cases on a state-wide level. For President Woodrow Wilson, the pandemic hardly registered on his radar. Instead he was more concerned about the state of geopolitics in the aftermath of World War I and hope for a League of Nations to prevent future conflict. He did so while his own health was significantly compromised. The Federal Reserve system was in its infancy and was not as experienced or as equipped to meet an economic crisis of this nature.
Today, unlike a century ago, the Federal Reserve has embarked on an aggressive response to the coronavirus crisis intended to prevent the economy from slipping into outright deflation, much as it did in response to the 2007-2009 recession. The Fed has rapidly cut interest rates to zero in recent weeks and launched several emergency lending facilities to ease worsening strains in credit and Treasury markets. Markets have stabilized somewhat, but the extent to which the actions of the Fed will help to soften the economic blow from Covid-19 and the measures taken in response are unclear, and will make for interesting study by future economists.
In the aftermath of the pandemic, most areas exposed to the pandemic experienced a sharp and persistent decline in economic activity. The economic consequences of that pandemic were recently explored in a paper written by three eminent economists: Sergio Correia - a member of the Board of Governors of the Federal Reserve System; Stephan Luck - of the Federal Reserve Bank of New York; and Emil Verner - from Massachusetts Institute of Technology (MIT), Sloan School of Management. The paper can be downloaded online here. These authors cite estimates that, as a result of the 1918-20 pandemic, manufacturing output was reduced by 18%. A major conclusion reached by these authors however is that it is the pandemic itself, and not efforts to reduce social interaction, that caused the economic downturn. According to the data examined by the authors, those cities that were more aggressive in enforcing quarantines and business closures fared no worse than those that were lax about enforcing similar measures.
The authors point out that many of the measures taken a century ago to curb the spread of the virus (they refer to them as "NPIs", an acronym for non-pharmaceutical interventions) resemble those used in the case of Covid-19: closing schools, theaters, churches, banning of public gatherings and quarantine of suspected cases. The authors conclude:
"[W]e find that early and extensive NPIs have no adverse effect on local economic outcomes. On the contrary, cities that intervened earlier and more aggressively experience a relative increase in real economic activity after the pandemic. Altogether, our findings suggest that pandemics can have substantial economic costs, and NPIs cannot only be means to lower mortality but may also have economic merits by mitigating the adverse impact of the pandemic."
The authors concluded that the cities that had the higher mortality rates and which were less aggressive in implementing NPI measures were the ones that suffered great negative economic consequences. These areas had higher rates of business and household defaults on bank loans and mortgages. In cities that took action and implemented NPIs earlier experienced earlier economic recovery after the pandemic was over. The data that these authors reviewed suggests that "reacting 10 days earlier to the arrival of the pandemic in a given city increases manufacturing employment by around 5% in the post period."
The authors point out that there are a number of significant distinctions between the 1918 pandemic and the current one. The earlier pandemic killed 0.66% of the total population, with the death rate primarily affecting those in the 18-44 range. That pandemic struck in three waves: the first in the spring of 1918, the second in the fall of that year, and a third wave when soldiers returned from the war in Europe. Economically, areas with a greater incidence of the flu had labor shortages and the price of labor increased as a result. Overall, GDP in countries hit by the pandemic dropped by 6 to 8%. States with the highest mortality rates included Montana and Kansas in the west, and New Jersey, Pennsylvania, Massachusetts and New Hampshire in the east.
The pandemic resulted in a decrease in labor supply, at a time when manufacturing was a labor intensive enterprise. Decrease in manufacturing capability was passed down to trade sectors of the economy, decreasing supply while increasing demand. This in turn led to widespread defaults on loans, shrinking the supply of credit available. High mortality exposure led to a significant decline in manufacturing employment and output. Bank assets declined and defaults led to banks restricting credit in order to maintain sufficient capital rations required by law.
The data from the time after the 1918 pandemic also shows a decline in spending on motor vehicles (such as they were at the time) and other discretionary items. A Wall Street Journal article cited by the authors, published on October 25, 1918, reports the following:
"In some parts of the country [the influenza epidemic] has caused a decrease in production of approximately 50% and almost everywhere it has occasioned more or less falling off. The loss of trade which the retail merchants throughout the country have met with has been very large. The impairment of efficiency has also been noticeable. There never has been in this country, so the experts say, so complete domination by an epidemic as has been the case with this one... Widespread epidemic of influenza has caused serious inroads on the retail merchandise trade during the current month. Heads of large organizations report that not only has sickness cut down the shopping crowds, but in many cities the health authorities have shut down the stores. The chain store companies have felt the effect of the sickness not a little, for in addition to the smaller business done a number of their employees are sick." (WSJ, Oct. 25, 1918.)
Interestingly, the authors found that in cities where NPIs were instituted earlier, employment was higher after the pandemic, and manufacturing experienced higher output. They authors also found that "Both a quicker reaction and a longer, more intensive implementation of NPIs are associated with stronger growth in local national banking assets from fall 1918 to fall 1919."
The authors point out that in 1918 there was no nationally centered strategy for addressing the pandemic. Measures were taken locally as opposed to nationally or even in many cases on a state-wide level. For President Woodrow Wilson, the pandemic hardly registered on his radar. Instead he was more concerned about the state of geopolitics in the aftermath of World War I and hope for a League of Nations to prevent future conflict. He did so while his own health was significantly compromised. The Federal Reserve system was in its infancy and was not as experienced or as equipped to meet an economic crisis of this nature.
Today, unlike a century ago, the Federal Reserve has embarked on an aggressive response to the coronavirus crisis intended to prevent the economy from slipping into outright deflation, much as it did in response to the 2007-2009 recession. The Fed has rapidly cut interest rates to zero in recent weeks and launched several emergency lending facilities to ease worsening strains in credit and Treasury markets. Markets have stabilized somewhat, but the extent to which the actions of the Fed will help to soften the economic blow from Covid-19 and the measures taken in response are unclear, and will make for interesting study by future economists.