By Joe Yasin
Published 2020-05-13
The easing of lockdown is supposed to be the beginning of the road back to recovery, provided we socially distance at two metres apart from everyone else in every public or commercial space – in shops, in restaurants and pubs, in offices and factories, at train stations and air terminals, while walking in the streets and parks, and on buses, trains and aircraft. Yet strict social distancing, far from being the way back to normality and prosperity, maybe the route to economic collapse, impoverishment and unemployment.
Britain is about 80% a service economy, and most modern economies are similar, with less than 20-30% of the value of output being industrial. A ‘service economy’ comprises many different types of activities. But for our purposes, the most important division is between those businesses where interaction between producer and consumer is feasible virtually (insurance, internet banking, internet commerce, etc.), and those that involve physical face-to-face experiences between producers and consumers and consumers and consumers (such as butchers, hairdressers, restaurants and pubs). In virtual businesses, only the producers need physical space to operate the business, but in physical businesses, physical space is needed for both producers and consumers of the product. The utilisation of space is important for both, but more important for the latter, which is made even more important and costly because while virtual businesses are location independent, physical businesses need to be near their customers, which gives suitable property rarity value and allows higher rents.
The social distancing of 2 metres requires, for many activities, a greater minimum distance between people, both producers and consumers than is normal without it. In a crowded pub, it could expand the distance between customers from perhaps 60cm to 200cm, which – as the floor area required is dependent on the square of the distance – would need 11 times as much floor-space per person – so a pub which at busy times might hold 100 customers, now could only hold a maximum of 9. A recent article (FT Lex) suggested that a ‘full’ aircraft passenger load might be reduced to 15-20% of the capacity, where IATA estimates a breakeven utilisation for most airlines is 70-75%.
Other businesses do not operate with such a crowd at full capacity, but the effect on keeping people socially distanced might reduce the sales of many physical service businesses, perhaps of most such businesses, by 50% or more. And as most businesses operate on profit margins much lower than this, they would become unprofitable. The only solutions for survival would be either to cut costs by 50% or more of former revenue – and pass the pain onto suppliers, or to raise prices substantially.
Whether the pain of cost cuts can be passed on to a supplier depends on the ability of a supplier to continue to supply at a lower cost, which will depend on its marginal cost of production. If it depends on the physical costs of producing a physical product unit by unit, it might not be possible for the supplier to bear the cost of a lower price. In practice, this route is only feasible if suppliers can be found with low marginal costs of production. In the short-term landlords might be considered easy targets in this respect, as the premises have already been built, and maintenance in an emergency could be carried out (indeed may already be being carried out) by the tenant, so no continuous service is needed from the landlord by the tenant. But eventually, the landlord has to service the capital cost of building premises…. and if they make no profit and cannot service the loans that the banks have provided to build the premises, their pain is shared with the finance industry.
So when the utilisation of space is seriously reduced through social distancing, the value of a property, which cannot generate the same revenue, is reduced. And the value of property companies and banks is reduced.
Whether the problem can be solved by increasing prices depends on the price elasticity of the products sold. With the majority of goods, the revenue will drop from mass-market sales. The remaining higher-priced sales will only be bought by more affluent customers in a smaller volume than before. There may still be a profitable market when things stabilise, but it would be a much smaller one than before, with less overall demand for space, whether shops, trains or aircraft. Many things, where costs cannot be reduced much, such as flying, will go back to being luxuries, only for the affluent, as in the days before mass-market tourism.
Potentially social distancing could be more serious for the destruction of the worth of land, property and other assets than the crash of 2008-10. And unlike in 2008-10, when profitability was not affected after the economy started to recover, this time until social distancing can be withdrawn or ameliorated, it would be a permanent drag on the profitability of the whole ‘physical’ service sector – making recovery difficult, if not impossible for many businesses in that sector.
But, CAN we do anything to social distancing to help our economy revive?
Well actually, yes. Very simply, we can. We can just cut the required social distance from 2 metres to 1 metre. And this possible to do and stay safe.
It has already been demonstrated that it is possible to have a one-metre social distance and stay safe. In Italy, the recommended social distance is 1 metre, which makes 4 times the density of people possible. And 1 metre is the minimum social distancing recommended by the WHO. Bars could open and aircraft could fly profitably! And Italy, despite recommending half the social distance of the UK, now has a LOWER death rate per million than the UK, and this is falling FASTER than the UK’s death rate.
So why does our government recommend 2 metres when, at that distance, social distancing destroys our economy, and when 1 metre seems to be fine?
No doubt the British Government’s response will be that ‘they are following The Science’. But do they think that the Italians and the WHO have no science to follow? FACTS seem to prove that the Italian and WHO science is better than ours. The British desire to have higher standards – two metres separation rather than one is entirely unnecessary. And in this case, British science is plain wrong and is destroying our economy. The difference between one metre and two metres in social distancing is enough to ensure that the Italian economy will recover and the British economy will not. And The Facts prove that the way it is carried out in Italy, it is insignificant in terms of health. ‘The way it is carried out’ may hold some of the secrets to the Italian’s success. In a following article, we will discuss the unappreciated and surprising effectiveness of the humble face mask, and why it is not its effectiveness for the individual, but its contribution to pushing down R, the replication factor, that matters. And why the policy of the British government in denigrating the use of face masks by the public for months is also plain wrong.
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