In response to the Covid-19 pandemic, policymakers were left with few policy options to combat the spread of the virus and minimize the economic damage that it entailed. Absent the discovery of a vaccine or a cure for the virus, policymakers are limited to “non-pharmaceutical interventions” (NPIs), such as lockdowns, closing certain businesses, and recommending social distancing. Community NPIs can effectively slow the rate of new infections, but at the cost of reducing economic activity. NPIs were globally implemented to a greater or lesser extent (and for longer and shorter periods of time) in 2020 in response to Covid-19. Here we ask, under what conditions are implementing said NPIs actually desirable from a policy perspective?
In a recent study, we develop an integrated economic-epidemiological model and estimate it using real-time granular economic and epidemiological data from US counties. Our framework introduces two-way feedback between infections and the economy as individuals can mitigate their exposure to the virus at the cost of reducing their economic activity. We use the estimated model to study future policy options. We consider three potential “end game” scenarios. The pandemic ends: (i) when a sufficient number of people have become infected (so-called herd immunity); (ii) when it is possible to curtail community transmission completely—either by eradicating the virus or implementing a wide-scale test, trace, and quarantine (TTQ) program; (iii) when a vaccine (or cure) arrives.
Under the first scenario, lockdowns cannot improve welfare in the long-term compared to the laissez-faire outcome (we consider laissez-faire to be no NPIs besides recommending social distancing). Ultimately, the pandemic only ends once the population reaches the herd-immunity threshold (HIT), with a sufficiently large share of the population having been infected (roughly 70% in our model, a value within the typical range of other estimates). NPIs cannot change this threshold, but rather can only slow the path toward it and mitigate “overshoot” (i.e. the number of infections above HIT). In the standard SIR epidemiological model (a simple mathematical model of epidemics where “S” stands for susceptible, “I” for infected or infectious, and “R” for recovered), the estimated overshoot for Covid-19 is quite large, implying large scope for policy. However, in our Econ-SIR model, mitigation actions taken by private citizens imply minimal overshoot of the HIT, implying little scope for policy. We should note that even under laissez-faire, the dynamics of the pandemic are protracted and extremely costly—1.25m deaths and average output loss of 6% of GDP over the next three years in the US.
These sobering policy conclusions are reversed, however, under the other two endgame scenarios. Under the TTQ scenario, we assume community transmission is completely curtailed when the level of infections goes below a certain level (analogous to only a few reported cases per million per day). That creates a policy motive for strong lockdowns to suppress the virus quickly (a few months) and curtail community transmission. Indeed, under the TTQ scenario, there is no long-term tradeoff between wealth and health. Once community transmission is curtailed, economic activity can return to normal (as we have seen in Taiwan, S. Korea, and New Zealand).
Finally, if an effective vaccine will arrive within the next two years, it makes sense to implement a strong lockdown to get infections under control, followed by a moderate reopening until the vaccine is deployed. Vaccinated individuals (who were not previously infected) will never become infected. Hence, fewer infections occurring before the vaccine’s arrival mean a greater reduction in total infections. In this case, the short-term economic losses are more than made up for by the gains in terms of fewer total infections after the implementation of the vaccine. As the vaccine arrival horizon lengthens, the short-term losses mount and eventually exceed the gains in terms of forgone infections. Governments optimistic about the swift arrival of a vaccine would thus be well-served to lock down, at least partially, until its arrival. This conclusion casts doubt on the desirability of the current US policy stance—optimistic about the arrival of a vaccine in 2020, but not implementing a nationwide lockdown. If indeed a widely available vaccine arrives in 2020, many unnecessary deaths could be avoided at a minor economic cost.
In conclusion, our analysis suggests that the only way to avoid the massive costs associated with the Covid-19 pandemic is through the timely development of a vaccine (and optimally set lockdown policy until its arrival), or the successful implementation of a TTQ program that can effectively curtail community transmission. While abundant resources are being channeled into vaccine development, the timeline for success is highly uncertain. Given the success of TTQ in some countries, a prudent course of action would be for countries to make the necessary investment to implement their own TTQ programs both to save lives and their economies.
© Douglas Hanley and Kurt Mitman
Douglas Hanley is assistant professor of economics at the University of Pittsburgh, USA.
Kurt Mitman is associate professor at the Institute for International Economic Studies at Stockholm University, Sweden, and a Research Fellow of the IZA.
Find more IZA World of Labor coronavirus content on our curated topics pages: National responses to Covid-19 and Covid-19—Pandemics and the labor market.
We recognize that IZA World of Labor articles may prompt discussion and possibly controversy. Opinion pieces, such as the one above, capture ideas and debates concisely, and anchor them with real-world examples. Opinions stated here do not necessarily reflect those of the IZA.