Friday , April 3 2020
Home / Amol Agrawal: Mostly Economics / The perils of compounding come to fore during the Covid19 crisis

The perils of compounding come to fore during the Covid19 crisis

Summary:
Economists live the concept of compounding especially for growth and finance matters. If your economy grows by 5% for 5 years, the overall growth is not 25% but 31.25% as one also has to multiply the incremental growth. Prof Gernot Wagner who teaches climate economics at New York University says compounding runs both ways. Just like we look at its positives we should be weary of its negatives as well: With both climate change and COVID-19, the real problem is not absolute numbers (whether greenhouse-gas emissions or infections), but rather the rate of change. It is bad enough that average global temperatures have risen by 1°C (almost 2°F) above pre-industrial levels. But warming of 2°, 3°, or many more degrees would be profoundly worse. In pandemics, too, even a very small difference

Topics:
Amol Agrawal considers the following as important: , ,

This could be interesting, too:

Amol Agrawal writes How costly are pension reform reversals?

Amol Agrawal writes Why did not stock markets decline during the Spanish Flu 1918?

Amol Agrawal writes What if a digital virus hits our payment systems?

Amol Agrawal writes The Monetary Helicopters Are Coming: Friedman’s or MMT’s?

Economists live the concept of compounding especially for growth and finance matters. If your economy grows by 5% for 5 years, the overall growth is not 25% but 31.25% as one also has to multiply the incremental growth.

Prof Gernot Wagner who teaches climate economics at New York University says compounding runs both ways. Just like we look at its positives we should be weary of its negatives as well:

With both climate change and COVID-19, the real problem is not absolute numbers (whether greenhouse-gas emissions or infections), but rather the rate of change. It is bad enough that average global temperatures have risen by 1°C (almost 2°F) above pre-industrial levels. But warming of 2°, 3°, or many more degrees would be profoundly worse.

In pandemics, too, even a very small difference in the growth trajectory has stark consequences down the line. Coronavirus infections have increased by around 33% per day in most European countries (and by only slightly less in the United States, possibly owing to a relative lack of testing). At that rate, a dozen cases today will become 500 cases within two weeks, and 20,000 two weeks after that.

Italy had to shut down much of its economy after reaching just 12,000 cases. And shut down we must, before more health-care systems come anywhere close to the breaking point. Again, the top priority is to slow the rate of growth. Hong Kong and Singapore closed schools and enforced quarantines long before things could spin out of control, and their daily coronavirus growth rates appear to be close to around 3.3%.

The critical point about compound growth is that a 3.3% infection rate isn’t merely ten times better than a 33% rate; over the course of three weeks, it is 150 times better. At the lower rate, 100 cases will not quite double in that space of time, whereas at the higher rate, 100 cases will become 30,000.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

Leave a Reply

Your email address will not be published. Required fields are marked *