The economics of COVID-19

As a direct result of the ongoing global pandemic, we are living with an economic downturn whose scope and magnitude is staggering.

Governments around the world, including the Australian government, face a difficult balancing act – managing a serious public health crisis without causing economic and social devastation.

What we need is a policy roadmap that sets clear, evidence-based targets to align economic policy moves to the varying epidemiology of COVID-19.

Dealing with COVID-19 is as much an economic challenge as a health challenge.

The economic crisis we are now faced with has drawn comparisons to the Great Depression, the immediate consequences of which were mass poverty, economic devastation and, at least indirectly, the rise of fascism in Europe and World War II.

One way to appreciate the magnitude of the economic and social costs now at stake is to consider the unemployment rate in the United States.

Unemployment in the world’s largest economy stood at 4.5 per cent in March before nudging 20 per cent in April and recovering only slightly to 16.4 per cent in May.

This stark rise occurred in a matter of only months. During the Great Depression, it took two years for unemployment to rise from 3.2 per cent in 1929 to almost 16 per cent in 1931.

In Australia, unemployment is already at 7.4 per cent and the Department of Treasury expects the rate to quickly reach 10 per cent.

Prior to the introduction of the federal government’s JobKeeper scheme, the unemployment rate was predicted to reach 15 per cent in June, a figure which is again comparable to Australia’s jobless rate during the depths of the Great Depression.

The speed and size of these changes is shocking.

Of course, beyond these figures, the impacts of lockdown policies extend to a multitude of other areas; ranging from the effects of school closures, travel restrictions and social distancing measures on households, to the mental health of individuals confined to their homes.

The main reason the 1929 financial crisis turned into a severe, long-lasting social and economic disaster, was the slow and, in many instances, counter-productive policy response.

There are good reasons to be confident that, informed by past mistakes, the policy response to severe economic downturns will be better and swifter today.

However, the ongoing virulence of the current pandemic may prevent the policy reaction being as swift and as positive as it ideally could be. Until an effective vaccine becomes available, we will have to learn to live and operate with the virus – keeping its spread under control in a way that is sustainable.

To that end, it is imperative that policies complement each other in addressing simultaneously both the public health crisis and the economic crisis.

The road to recovery will require finding the balance between keeping the economy and society going, while also keeping the spread of the coronavirus under control. This is a major challenge but there are ways and means of achieving it.

We argue in our new working paper that the key to charting a course that both saves lives and averts an economic disaster is for policy makers to set a transparent and consistent objective for managing this crisis.

In particular, if eradication isn’t the goal, then policy must allow for the virus to remain present in the population – but at such a level that public health catastrophes, like that experienced by New York City or Italy’s Lombardy region earlier in the year, are averted.

A natural constraint, or guide, on economic and social policy, would be to set a target for COVID-19 management that ensures that Australia and its states and territories never reach a point where the healthcare system is overwhelmed.

Subject to this constraint, policy makers can then choose among policies that otherwise minimise the damage to the economy.

The benefit of selecting constraint like this is that it provides an explicit, unambiguous criterion for evaluating the merits of various policies, and for communicating the rationale behind these policies to the general public.

The precise constraint that is chosen involves normative criteria, which a democracy relies on elected politicians to determine.

For example, policy makers could set a target that involves the healthcare system never exceeding some fixed proportion of its capacity, like the availability of ICU beds, ventilators or dialysis machines.

The tremendous challenge with this approach isn’t understanding it, but implementing it.

Pandemics, by their very nature, involve phases of exponential growth in infection – one individual may infect 10, these 10 then infect 100, these infect 1,000, and so on.

Managing the dynamics of a dangerous pandemic isn’t a familiar or comfortable experience for economists and policy makers. But neither is it a comfortable experience for epidemiologist to entertain the idea of tolerating some level of spread for a deadly disease. This is uncharted territory for all.

Given the stakes, we need to find our path fast, and learn on the go.

This crisis is different from any other in living memory. It requires adaptive thinking that accounts for complex tradeoffs between managing the pandemic and managing economic and social well-being.

This can be achieved by targeting an appropriately chosen constraint, like the capacity of the healthcare system.

Implementing this approach requires that we build new models that combine economic and epidemiological data, and collect accurate data concerning the course of the epidemic through widespread testing.

The challenge is formidable but the concerted, whole-hearted and decisive effort defeated fascism eighty years ago – so there is no reason to believe we have to surrender to this virus, or the inevitable pandemics to come in the future.

This article is partly based on the authors’ working paper Road to recovery: Managing an epidemic.

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