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Preparing for the Post-Pandemic Economy

(March, 2020)

Only three percent of the world’s population lived in cities in 1800. In 1900, about 40 percent of the U.S. population still lived on farms. By 2000, half of us lived in cities, and mega cities were becoming the new power centers. Based on this trend-line, forecasters argue that by 2050 two-thirds of the global population will live in large cities.  

However, even prior to the COVID-19 pandemic, the great migration to large cities began to break down. In the U.S., for example, our three largest cities have recently been losing over one thousand people per week due to high cost of living and declining quality of life. Phoenix and Dallas are benefiting the most from the California exodus. Smaller cities like Boise and Nashville have emerged as favored destinations for those who have a choice of locations.[1]

If we look at the underlying real-word evidence, the assumptions supporting continuation of mega city migration have been questionable all along. The negative impacts of mega cities often outweigh the positives, including requiring sharply increased dependence on centralized government. The most extreme example is the emergence of the surveillance state in China. Although forced migration across China helped create record economic growth and wealth, the Chinese economy produced eighty percent of the global growth in emissions during the country’s peak growth period. Nearly three quarters of the global CO2 emissions are now produced by cities that house half of the world’s population. 

Consolidation of wealth and people translate to consolidation of risk. Quite apart from the obvious risks from disease transmission, terrorism, earthquakes, and other disasters, the efficiencies from density in local utilities and transportation are off-set by resource inefficiencies—though not necessarily for the same parties. Energy and water are typically acquired and transported from hundreds of miles away while 1.3 billion tons of waste created by cities each year is largely exported to others.[2]

As tragic as the homeless problem is in Los Angeles, San Francisco and Seattle, it pales in comparison to developing economies. One sixth of the world’s population now live in urban slums with little if any security, centralized water, or sewer. Rapid consolidation in cities has increased risk for both the haves and have nots.[3] Is this the best modern society can do?

Enter the COVID-19 pandemic

The good news is that COVID-19 is quite mild compared to an inevitable strain that will be 5, 10, or perhaps even 100 times more deadly. We have the ability to prevent, prepare, and even thrive, but will we? With over half of the world’s population living in cities, it seems unlikely a global pandemic will result in mass reverse migration back to rural areas. However, the underlying assumptions for forecasting a continuation of migration trends over the past two centuries should be challenged, particularly given recent micro trends prior to the pandemic. 

  • Cost of living: Many workers in the Bay area are suffering a net loss due to the high cost of living. If the market economy were functional, Bay area businesses would have been decentralizing operations years earlier, lowering costs, and allowing employees to build a more secure financial future.[4] Companies and workers are now finally relocating.[5]

  • Telecommuting: Telecommuting and telemedicine are now experiencing a spike in demand, and infrastructure appears to be holding up well. The mandatory work-from-home period due to COVID-19 is introducing the benefits of remote work to every organization. When properly managed, distributed computing enables smarter, more productive, and more competitive organizations with new business models—expect this trend to accelerate.

  • Shipping and delivery: The USPS dates back to 1775 when Benjamin Franklin was appointed the first postmaster general. Home milk deliveries began in Vermont in 1785, and by the 1960s 30% of milk was still delivered to the home. Pizza delivery started in Naples, Italy during the 1800s. UPS was launched by two teenagers in Seattle in 1907. FedEx was founded by Frederick Smith in 1971.  The Internet and web then enabled e-commerce. Home delivery can now accommodate most of our needs—a potentially radical shift.

  • Automation: I’ve been calling for wider adoption of AI systems for a variety of reasons, including risk mitigation, competitiveness, productivity growth, and ethics. We are simply not in a position to know when, where, or how this powerful technology will be needed, perhaps even to include saving our species, so we better be prepared.  

  • Sustainability and resilience: Combinations of technologies including alternative energy such as solar, the Internet, telemedicine, and automated farming have created the ability to be more resilient than ever before, particularly in vast areas of low-cost rural America within a half day’s drive to major metro areas. Two types of farms have been profitable in the past few years: the largest and smallest. A global pandemic highlights the wisdom of investing in diversification and sustainability rather than over centralization and consolidation. Rather than acquiring ever-more land in the Western U.S., a small portion of the vast public lands should be made available for sustainable, low impact settlements. 

Duration and transition of the COVID-19 pandemic

To illustrate the range of predictions in this environment, a top investment bank is forecasting an immediate depression while a leading consulting firm is expecting that the U.S. will avoid a recession in 2020. Both can’t be correct, yet they and many others are presumably making decisions based in part on these forecasts, thus demonstrating the complexity and risk inherent in decision making. The highest priority for policy makers and those with great influence over decisions should therefore be primum non nocere (first, do no harm), even if unintended consequences occur with every significant decision—it should nonetheless be the goal. 

Data from previous pandemics are insufficient for accurate forecasting. Even the influenza pandemic of 1918, which was the worst in U.S. history, offers little in the way of accurate economic information.[6]  One pandemic forecast by senior economists modeled a smaller pandemic with only a partial shutdown of the economy, expecting the annual inclusive cost of a pandemic to be about $570 billion per year (Fan, Jamison, Summers et al., 2016).[7]  The policy actions taken with the current COVID-19 pandemic will have much greater economic impact—perhaps $3 trillion in the first year if it persists on this trajectory for four months. 

The nature of COVID-19 with flu-like symptoms that may not appear for two weeks when combined with scarce testing essentially determined that the virus would be far more widespread at an earlier stage than understood. As testing ramps up the number of confirmed cases will grow exponentially for a period of time even if transmission were completely halted, which of course isn’t the case. 

So, let us assume that the transmission begins to reverse sometime in mid to late April (2020) in the U.S., and by the end of June restrictions begin to be lifted. Let us further assume that the virus will survive and resurface similar in this respect to the pandemic of 1918-1919, but with a much lower fatality rate (2.5 per 100,000 in Seattle - 2019, vs. 896 in Philadelphia -1918), depending on factors such as age and ICU capacity. Even if the fatality rate quadruples in current hot spots, it will pale in comparison to the hardest hit cities in 1918 and 1919.

The relevant questions then are how can the high-risk populations be protected and how rapidly can vaccines can be developed, tested, and manufactured? The low hanging fruit is clearly with innovative protective methods. For example, some grocery stores have ordered plexiglass to protect checkout workers similar to those applied for decades at late night budget motel check-ins for security reasons. We have reason to be optimistic on vaccines given the scale of this emergency and large number of top-tier teams working on this problem powered by AI systems, so let us generously assume an effective vaccine will become available by April of 2022, subject to overcoming the FDA bureaucracy. We can then begin to form a somewhat rational if admittedly rough foundation from which to make prudent business plans. Decisions must be made regardless of the level of uncertainty. 

Although the largest economic impact will likely be a sharp contraction in the second quarter of 2020, with a rebound beginning in the third quarter, some restrictions will presumably last until either a vaccine is widely distributed or new cases drop to minimal levels. Hopefully we won’t see a mutation and spike as was the case with the influenza pandemic of 1918. The second wave in the fall of 1918 was much more severe, followed by another in early 1919, representing the wild card for decision makers. Although unknowable at this point, we may see regional recurrences that morph into an endemic scenario similar to seasonal flu.[8]

Rare opportunity to revise strategy and future proof companies and regional economies

Very few executives practice what Warren Buffett considers to be among his most important competitive advantages, which is one of the key lessons Bill Gates learned from him, and that is fierce protection of his calendar. I didn’t realize it until watching the interview where this was disclosed, but this is how I have kept ahead of competitors in AI systems R&D for nearly a quarter of a century now. The advantage of thinking, learning and researching while most of my peers were traveling around the world or in meetings has been significant.

Beyond the obvious crisis management responsibilities, social distancing offers an unprecedented opportunity for management teams and boards to reconsider strategy while enjoying a bit of quiet time at home in contemplation and study.  Given the economic impact, the duration of the lockdown will likely be brief, so let’s hope the time is used well. 

The early lessons from COVID-19 are already clear, if unsurprising, for those of us in the trenches. Artificial intelligence is proving its worth in this event. Hospitals are currently applying AI systems to screen and monitor patients to contain the virus and mitigate impacts.[9]  Hundreds of teams are working to accelerate therapies and vaccines. If an early global warning system were installed for infectious disease, as a few of us have advocated for many years, the COVID-19 event would likely have been contained within the region where it was discovered. Any such network-wide AI system must of course be designed, installed, and monitored in a precise manner for optimal governance, accuracy, efficiency, and to avoid tampering. 

Many have been worried about automation replacing jobs when we should have been focused on economic and social catastrophes that occur due to failure to adopt advanced AI systems for prevention, such as 9/11, the financial crisis, and pandemics, which have cost tens of millions of jobs and tens of trillions of dollars, just in the past two decades. Most organizations are in the process of closing down operations and have shifted much of their activity to working from home. The handful of organizations with system-wide AI augmentation are much better positioned to maintain operations with a human-in-the-loop over networks. A small minority of operations are sufficiently automated to be unaffected. 

I was looking forward to attending a McKinsey conference on disruption in the first week of April, which has been canceled. We are planning to offer our own invitation-only conferences at a later date for CEOs and boards on enterprise-wide AI systems generally, and our systems specifically.[10]  In the interim I am offering a condensed version of immersive webinars for well-matched organizations. I am aware of no higher strategic or operational priority than applying advanced AI systems across networked organizations, whether for governments at all levels or businesses. If interested in setting up a private webinar for your team please send a note to markm@kyield.com, including potential time slots with a duration of one or two hours. 

Mark Montgomery is Founder & CEO of KYield, Inc.