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Covid-19 trade-offs: the full story

8 May 2020

Partial accounts of the economic and health effects of Australia’s response understate its success

Right:

Ambulances lined up at the emergency entrance of Mount Sinai Hospital in Manhattan on 13 April. Mike Segar/Reuters

Ambulances lined up at the emergency entrance of Mount Sinai Hospital in Manhattan on 13 April. Mike Segar/Reuters


Imagine you’re a New Yorker and you’re experiencing severe chest pains. You manage to get an ambulance to pick you up and rush you to hospital, but there you’re met with chaos. Covid-19 patients are taking up space and equipment that would once have been available to people like you. Medical staff are tired and preoccupied.

If your encounter with this overstretched medical system proves fatal, then you’re just one more victim of the American government’s failure to react quickly and effectively to the coronavirus threat. If you’d arrived at an Australian hospital with those symptoms, on the other hand, you’d be much more likely to get undivided attention.

The difference seems obvious, and yet this clear benefit of Australia’s response to Covid-19 is often ignored in economic commentary about the trade-offs made by different countries in recent months. Some commentators assume that the cost of economic and social restrictions can be calculated simply by looking at lost production and the rise in unemployment. To get a real sense of costs, though, we need to use the full range of macroeconomic tools to compare the impact of the government’s restrictions with the counterfactual scenario of what would have happened without them.

First, it’s important to recognise that the economic fallout appears to be just as bad, and could end up being worse, in countries with fewer restrictions. The recession is a global phenomenon, and it will affect countries engaged in strong mitigation strategies (Australia and New Zealand, for example) alongside countries taking less stringent approaches (like Sweden and the United States).

In fact, it is possible, even likely, that the recession will turn out to be less severe in countries with stronger mitigation strategies. Thus, the restrictions could have relative economic benefits, not costs, in terms of output and employment.

Compounding the problem is the tendency of this commentary to take a static rather a dynamic perspective. A static trade-off uses a one-time calculation that balances, say, the value of a life against the value of a maintaining a job. It depends on a cold-hearted calculation of the statistical value of a life and the implicit side-effects of loss of employment, such as suicide and a rise in domestic violence. But it doesn’t account for the fact that the real trade-off with death is about when and how, not if, and what matters most about job losses is whether they are temporary or longer term.

What is scary about Covid-19 is that it can produce a massive spike in premature deaths and overwhelm hospital systems quickly, resulting in those further deaths that aren’t necessarily a direct result of the virus. But if a heart attack victim in New York dies because the hospital is overstretched, that death is still the result of the failure to mitigate the spread of the virus. Around the globe, hundreds of thousands of premature deaths will have huge economic consequences.

These deaths would be even more numerous if not for the fact — as macroeconomic models tell us — that people faced with a massive outbreak of a contagious disease will choose for themselves many of the precautions that governments might otherwise have imposed on them. They won’t go to restaurants; they will work from home if they can. This means that countries with less stringent restrictions will still experience a recession, but will suffer many more premature deaths in the meantime compared to countries with a strong mitigation strategy.

Effective mitigation strategies like those in Australia and New Zealand mean that activity will pick up more quickly when restrictions are eventually relaxed. More people will be willing to re-engage in spending and work than if they were warily considering their options in Wuhan, Northern Italy, Spain or New York after a much bigger death toll. The quicker pick-up will temper the severity of the recession and turn some of what might have been permanent job losses into something more temporary.

These future economic benefits, ignored in static trade-off calculations, need to be taken into account to get a complete picture of the net impact of Australia’s restrictions. Under a dynamic trade-off of the kind usually calculated by macroeconomists, the future benefits end up being large and far in excess of current costs.

The third and most important principle from macroeconomics seemingly lacking in some economic commentary is the need to use as many policy tools as there are problems needing to be solved. Economic and social restrictions are not the only tools available to governments dealing with the economic and social fallout from Covid-19. It is true that monetary policy is now severely limited by very low interest rates, but more fiscal stimulus remains a viable option.

The social costs of the restrictions are certainly very real. If lockdowns lead to higher rates of domestic violence, for instance, we can’t simply stand aside as if this is an inevitable feature of human behaviour during an economic crisis. We should use whatever educational and preventive measures we can and ramp up programs to support victims.

Importantly, if estimates of the negative social impacts of the restrictions are even partly based on past experiences in recessions, then the surest way to mitigate them is to do whatever we can to tackle the economic crisis with bridging measures and fiscal stimulus. Again, the counterfactual matters: any premature loosening of mitigation restrictions could lead to a massive outbreak, a worse economic crisis, and more social ills rather than fewer.

The trade-offs involved in responding to the Covid-19 crisis are not the ones some economists claim they are. They involve current and future costs and benefits that are relative to the cost of a recession that can’t be avoided. Tackling these trade-offs involves multiple policy tools, including fiscal policy, not just whatever restrictions our governments have imposed on economic and social activities. •

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“The only near-contemporary account is that Shakespeare died ‘of a fever’ after an afternoon drinking with fellow dramatists.” Shakespeare portrait: Science History Images/Alamy

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