Published March 25th, 2020 at 8:00 AM
It’s time to reintroduce the “black swan.”
Several years ago, economist Nassim Nicholas Taleb popularized the concept in terms of economics. It was defined as “an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.” It has been a staple of philosophers for years and usually refers to events that were actually predictable but greatly underestimated in terms of timing, location and impact.
The outbreak of COVID-19 seems to fit this construct perfectly.
After a decade that brought the world SARS, MERS, Avian Flu, Swine Flu, Zika, Ebola, Marburg and dozens of strains of often deadly flu, it would seem logical to assume that viral outbreaks would continue to occur and perhaps with increased regularity. In this context, there is nothing unusual about an outbreak like the one taking place now. What was not known or expected was its virulence, the vulnerability of the world and the resistance to the measures suggested for control.
The new coronavirus has been a dual threat from the very start of the outbreak. There is the health impact as a deadly virus – though not as deadly as SARS, MERS, Avian flu and others that have already killed hundreds of thousands of people every year. The other threat has been economic, and this has been a self-made impact resulting from efforts to control the outbreak. What started as a supply chain crisis as China essentially shut down has become a crisis brought on by mandated closures and enforced isolation.
The major question now is how the world rebounds from this. The most dire assessments hold that life is forever changed and global depression is certain. The optimists assert this will all be over in a month or two. The reality likely lies somewhere in between.
Given the many unanswerable questions at this stage, it is helpful to look at past “black swan” events.
Perhaps the most salient would be the 9/11 terrorist attacks. It was a complete shock to the U.S. when those hijacked airplanes destroyed the twin towers, damaged the Pentagon and attempted to attack Congress, but it was not entirely unexpected. There had been high-profile terrorist attacks for many years, but not in the U.S. and not on this scale.
The economic impact was similar to what is taking place now. For weeks people were afraid to get on an airplane or even go to work in places that might be targeted. People stayed home, shunned contact with strangers and prepared to live under siege. There was a toilet paper hoarding situation due to the attacks. It took several months before things started to return to normal as nobody knew how to declare the threat at an end – just as we struggle now to understand when an “all-clear” can be sounded for the coronavirus.
There have been many crisis situations that resemble the current COVID 19 pandemic, although few have become so global in nature. There have been references to the Spanish flu outbreak of 1918, but it seems long ago and irrelevant to the current situation. There are many who remember the terror of the polio epidemic in the 1950s. Children were mandated to remain in isolation and the health system was overwhelmed by the disease that crippled and killed thousands of kids. There also have been measles outbreaks every year that kill (140,000 in 2018) and this is despite an effective and easily obtained vaccine.
There are three phases to a “black swan” event.
The first is shock and disbelief as it seems to come from nowhere. Nobody is prepared psychologically for the impact and reactions are invariably extreme. There is no history to refer back to and no sense of when the crisis can be declared at an end. The measures taken to deal with the threat are extreme and chaotic because nobody has experience with the threat.
The second phase develops as the threat becomes more familiar and patterns emerge. Some of the strategies and tactics employed in the first phase seem to work and this provides a direction.
The third phase is one of examination and, unfortunately, an attempt to place blame. With the advantage of hindsight there are all manner of steps that might have been taken or should have been taken. It is likely true that there were ways to avoid the event, but knowledge of an unknown and unexpected threat can be hard.
It is arguable that the world has entered the beginning of phase two as some strategies are proving useful. Much of the progress has been seen in China and there has even been some return to normal patterns. There has been some attempt at evaluation but that phase will wait until more progress is made.
A look at the events surrounding 9/11 can be instructive here as well.
In phase one of the 9/11 crisis there was confusion and chaos. Security was paramount but nobody knew what to secure from whom. Aircraft were grounded, guards surrounded tall buildings, schools were closed, ammunition and gun sales soared, people were instantly under suspicion if they looked Middle Eastern in origin. The economy crashed due to the uncertainty that gripped the markets.
Phase two began to develop within a month or two as the panic dwindled. Now the responses became institutionalized as airport security ramped up and the U.S. invaded Afghanistan to end the Taliban’s support of those held responsible for the attack. The threat seemed to fade although there continue to be attacks on a smaller scale nearly every month and there have been many large-scale attacks in various parts of the world. The recriminations came soon after as the intelligence community was assailed for its failings.
In the aftermath of the 9/11 attack as in the aftermath of all the other “black swan” events there was a recovery and return to old patterns. But in every case, there was lingering and permanent change. The legacy of 9/11 was a decades-long war and the Transportation Security Administration. The legacy of polio and the measles was a mass immunization effort. Although it is too early to describe, there will be a permanent change in the U.S. due to COVID-19 as well.
At this stage, there are three likely reactions that will alter the future economic landscape.
The first is a far tighter public health safety net. Just as the 9/11 terror attacks created a need for expanded security, this pandemic will provoke an expanded health response. There will be mandatory testing for the “at-risk” population and there will be very little tolerance for people who circulate while sick with anything communicable. Human resource recommendations are already calling for policies that prohibit people from working around others if they show signs of illness. It is also likely that funding will radically improve.
The second change will be up to the business community. For years, there have been predictions that more people would telecommute, but there has been deep resistance from managers and employees. Now that millions are engaged in the practice it will become the norm for many companies. There will be far fewer in-person meetings as people get comfortable with the remote option. This will ultimately affect air travel and the hotel business as they both have depended on that business traveler.
Finally, this outbreak started with a supply chain crisis and the crisis may end with another one. The old strategy of relying on a single source for products may have been fast and efficient, but it always was fragile. This hard lesson has been learned repeatedly following earthquakes in Japan, floods in Thailand and other events. The watchwords for manufacturing and other sectors will become diversity and warehousing. The just-in-time delivery system may have passed.
Chris Kuehl is co-founder and a managing director of Armada Corporate Intelligence.